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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Amend. #1
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
SpectraFAX Corp.
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(Name of Small Business Issuer in its charter)
Florida 59-2412164
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3050 N. Horseshoe Dr., Suite 100, Naples 34104
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (941) 643-8700
Securities to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None
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Securities to be registered pursuant to Section 12(g) of the Act
Common Stock, $.0010 par value
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(Title of Class)
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(Title of Class)
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this Form 10-SB under the Securities
Exchange Act of 1934, as amended, contains forward-looking statements that
involve risks and uncertainties (this "Form 10"). The issuer's actual results
could differ significantly from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Item 1. Description of Business" and "Item 7. Management's
Discussion and Analysis or Plan of Operation" as well as those discussed
elsewhere in this Form 10. Statements contained in this Form 10 that are not
historical facts are forward-looking statements that are subject to the "safe
harbor" created by the Private Securities Litigation Reform Act of 1995. In
connection with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, the Company has filed Exhibit 12 which outlines cautionary
statements and identifies important factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements made by, or on behalf of, the Company. Any forward-looking statement
made within this Form 10 should be considered in conjunction with the
aforementioned Exhibit 12.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
SpectraFAX was organized under the laws of the State of Florida on
September 20, 1983. From inception to 1989 the Company was engaged in the
research and development of fax systems. In 1989, the Company commenced the sale
of fax systems to major corporations. However, in 1995, there was an industry
change in the operating systems of computers from DOS (disk operating system) to
NT (new technology). As a result, the Company had to re-engineer its products
(1995-1997) to conform to the NT computer. In 1997 the Company commenced selling
its new products. In 1998, the Company again had to re-engineer its products to
become Y2K compliant. This was accomplished and in 1999, the Company began
offering its Y2K compliant system. As a result of the aforementioned, revenues
to date have not been significant.
OVERVIEW
SpectraFAX provides high quality fax processing systems to large
corporations and Government agencies. Customers, including IBM, Hewlett-Packard,
Duracell, Bristol-Meyers, the U.S. Treasury Department, and the Executive Office
of the President use SpectraFAX's patented Fax Liaisona system to deliver
internal information to fax machine users worldwide. The Company's Fax Services
consist primarily of its Fax Information Dissemination Services (including Fax
Broadcast and Fax-on-Demand Services), Fax Transaction Processing Services, and
Fax Messaging Services. Using one of the Company's several applications,
information can be delivered to others by Fax Broadcast and can be retrieved by
the caller using Fax-on-Demand Services. Through the Fax Messaging Service,
important fax messages can be placed in a Fax Mailbox, where they are kept
confidential, until retrieved by the intended recipient from any fax-equipped
location.
Through the Company's Fax Information Dissemination Services,
information can be broadly disseminated by fax through the Fax-on-Demand or Fax
Broadcast applications. The Fax-on-Demand system allows users to call and use
touch tone keys to control the system. In response to voice prompts, callers
select the information they wish to receive. The system then delivers the
requested information by fax. The key benefit is that the user can request
information and receive an immediate printed response. This technology delivers
on the promise of computer-based information systems without requiring the user
to have, or learn how to use, a computer. Fax Broadcast, on the other hand, is
the automatic transmission of fax information to one or more recipients. The
broadcast may be as a result of a request by the recipient to be included on a
distribution list (for a newsletter, product announcement, etc.) or notification
to be sent to a defined set of individuals (sales managers, branch managers,
customers, and so forth). The Fax Broadcast service also allows centralized
control of outbound fax lines from a single control console. In addition to the
inherent speed of fax messages there are substantial savings in using fax
broadcast services over either enhanced delivery services (Fed Ex.) or the U.S.
Postal Service.
SpectraFAX has the ability to link fax processes to internal computing
environments in large organizations. This allows a fax-equipped caller to
retrieve "live data" such as current inventory levels, customer order status,
delivery notifications, and so forth by fax.
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Through the Company's Fax Transaction Processing Services, fax machines
are used to conduct and optionally confirm a transaction. A user placing an
order enters requirements by filling out an order form and sending it, by fax,
to the system. The system "reads" the fax, extracts the data and delivers the
resulting information to an order fulfillment system. After the fulfillment
system has computed pricing, delivery, and so forth, a confirmation of the
transaction is delivered by fax moments later. When the ordered item is shipped,
an invoice can be sent by fax. If the buyer fails to pay, a dunning notice can
also be faxed.
This application is aimed at reducing the costs and time delays
inherent in current sales processes. The benefits reach far beyond the hard
dollar data entry savings to the key areas of improved customer service, reduced
selling cycle time, less chance for human error, and faster payment. Exploiting
this application is the major growth opportunity for SpectraFAX.
Through the Company's Fax Messaging Services, a process very similar to
voice messaging is used but, with this application, the messages stored and
retrieved are written rather than verbal. Faxes sent to a user are digitized and
stored in a confidential "Fax Mailbox". The intended recipient can call and
retrieve the stored fax messages from any convenient fax-equipped location. The
user benefits include time savings, ability to work "on the road,"
confidentiality, and message accuracy.
An additional application under Fax Messaging is interaction between
fax messaging and Local Area Networks. Substantial interest has arisen for
providing LAN users with the ability to send and receive fax messages through
fax servers connected to the network. SpectraFAX meets this demand through their
LANFAX product offering.
The common denominator of the above applications is the requirement
that users planning to engage in the activity have easy access to a fax machine.
In a study by Davidson Consulting, it is predicted that the market for Fax
Processing Equipment will grow to more than $5 Billion by 2000. As this
explosion in the fax installed base indicates, it may be harder to avoid than to
find fax capable devices in the years to come. SpectraFAX is positioned for
rapid growth as the market expands.
SpectraFAX believes that the fax services market in general will be
larger than the equipment market (just as the market for telephone service is
larger than the market for telephone related equipment), and plans to
aggressively pursue that portion of the field in order to secure greater sales
and revenues.
Although SpectraFAX offers its Fax Services in over 20 countries
approximately 90% of the Company's revenues currently come from domestic sales.
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BUSINESS STRATEGY
The Company's strategy is to aggressively expand its fax services as
follows:
Expand Fax Services
The Company plans to expand its Fax Services market by developing new
applications for its service and expanding its service area. Among its recent
innovations, the Company introduced its Fax Transaction Processing Service,
which combines fax processing capabilities with text recognition technology. The
result is a product capable of receiving and "reading" fax documents and
forwarding the data to an order fulfillment system for further handling. In
order to establish a platform for expanding sales of its Fax Transaction
Processing Services, the Company intends to have installed its document
distribution system in several additional locations by 2002.
Launch Fax Services
The Company intends to capitalize on the multi-billion dollar market
for Fax Services by aggressively marketing its Fax Information Dissemination
Services (including Fax Broadcast and Fax-on-Demand), Fax Transaction Processing
Services, and Fax Messaging Services through its direct sales force and sales
agents, and by installing the infrastructure required for the delivery of such
services on a worldwide basis. By utilizing the SpectraFAX Network to minimize
the cost of delivering fax documents, the Company is able to offer its Fax
Services at prices which are less than the cost which would be incurred by a
customer to deliver the fax using its regular telephone service. The Company
currently offers its Fax Service over the internet.
Expand SpectraFAX Network
In order to continue to lower its fax delivery costs, the Company seeks
to expand the SpectraFAX Network by adding new Nodes and leased
telecommunications lines. The Company has expanded its Network by faxing over
the internet. The internet message comes to the SpectraFAX Service Bureau and is
delivered to a fax machine. This has allowed the Company to expand its Fax
Services on a worldwide basis.
FAX PRODUCTS AND SERVICES
The Company currently provides a wide range of Fax Services, focused
primarily on reliable electronic document distribution at affordable rates.
Fax Information Dissemination Services
The Company continues to focus on the development of its Fax
Information Dissemination Services. The Company's Fax Broadcast Service enables
a customer to rapidly distribute the same document to multiple recipients by
sending a single transmission through the Company's system to a list of fax
addresses. For example, use of the Fax Broadcast service allows a newsletter
publisher to send its newsletter to all of its subscribers in a matter of
minutes by means of a single transmission of such newsletter to the Company.
This process may save significant amounts relative to the costs of printing and
mailing or managing the fax process and documenting the delivery of
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the fax communication to addressees. Customers of the Fax Broadcast service
include financial services organizations, which use the service to disseminate
research reports; cruise lines, which use the service to send notices to travel
agents regarding fares and availability; political groups, which use the service
to transmit campaign information; trade associations, which use the service to
disseminate information to their members; and public relations firms and
investor relations groups, which use the service to disseminate press releases
and earnings reports. While the Company's typical fax broadcast is transmitted
to approximately 50 to 1000 recipients, customers have sent a single fax
broadcast to as many as approximately 50,000 to 100,000 recipients. The Company
believes that its fax broadcast service is the largest component of the enhanced
fax services market.
Fax-on-Demand, the Company's other primary Fax Information
Dissemination Service, enables a customer to receive information from the
Company's system when using a fax-equipped computer or fax machine. In contrast
to the Fax Broadcast Service, in which the same document is typically
transmitted to numerous recipients using a previously stored list of fax
addresses, the Fax-on-Demand Service typically involves the transmission of a
single document to a single recipient. The Company's Fax-on-Demand Service tends
to involve the processing of a large volume of individual communications, each
of which is in the same format but contains different information. For example,
using Fax-on-Demand, a customer could place a request for information regarding
a product into the manufacturer's mainframe computer, which would then forward
the requested information to the customer, by fax, during the same phone call.
The three main advantages to using this technology are that the customers
receive an immediate written response to their request, they receive improved
customer service, and there is no cost to the Company because the customer pays
for the call. Customers of the Fax-on-Demand Service range from hotel-motel
chains, airlines, and cruise lines, which use the service to request room
availability, to request flight schedules and ticket availability, and various
other related information and then forward this information to their customers,
who rely on this information in planning their trips, conferences, and other
business or pleasure activities.
Fax Transaction Processing Services
The Company's Fax Transaction Processing Services combines fax
processing capabilities with text recognition technology, resulting in a product
that is able to "read" and receive incoming fax documents. After the incoming
fax documents have been "read" by the system, they are forwarded to a
computer-based system for immediate and automatic fulfillment of the order.
Through the use of this type of system, a temporary employee's time card can be
faxed in, automatically "read," and a check issued without manual keying of the
data. This application is particularly useful in the areas of order entry (as
illustrated above), political polling, and survey tabulation to name a few.
Furthermore, the removal of the manual data entry process, combined with the
"paperless" fax process, avoids the labor costs, delivery expense, the element
of human error, and the delays resulting from manual processing. The use of this
type of system also leads to a reduced selling cycle time, and faster payment.
Customer Access
A key feature of the Company's Fax Services is the variety of methods
available to customers to access its services and retrieve customer service
information. The SpectraFAX Network can be accessed via fax input or input from
a sender's personal computer, mainframe, minicomputer or local
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area network ("LAN"). In addition, the Company recently implemented its XWEB
service to allow customers with internet access to subscribe to and use the
Company's fax and messaging services. The XWEB capability enables a customer to
use existing Web browser software to send fax, telex or electronic messages, and
to retrieve customer service related information, such as whether or not all of
such customer's faxes have been delivered. The Company believes the combination
of its multiple access options; proprietary software and sophisticated customer
support for all forms of computer access to the SpectraFAX Network will enhance
its ability to differentiate itself from its competitors in its markets.
Fax Liaison
The Fax Liaison system is a turnkey hardware/software multi-purpose fax
server that smoothly integrates fax and voice communications functions into
corporate information processing. Fax Liaison comes with a dedicated PC and
voice and fax cards. It runs Microsoft Windows NT 4.0, Microsoft Office
Professional, and programs written by SpectraFAX. Fax Liaison by SpectraFAX is
the "fax gateway" for Microsoft Exchange. The Microsoft Exchange Integration
system application allows Exchange clients to send and receive fax mail from the
same mailbox used to manage their e-mail. Microsoft Exchange clients are
centrally managed by the Exchange Administrator. The Company introduced the Fax
Liaison product in October of 1996.
MARKETS
Fax Services
The Company presently sells its Fax Information Dissemination Services
(including Fax Broadcast and Fax-on-Demand Services), Fax Transaction Processing
Services, and Fax Messaging Services to a wide range of businesses, Government
agencies, trade and professional associations, political organizations and other
enterprises.
Since its inception, the Company has sought to meet the demands of its
customers by developing Fax Services in response to specific needs. The Company
believes that the market for Fax Services is customer and applications-driven.
Expansion in the Fax Services market is expected to be derived from the
continued development by the Company of various new applications for such
services within particular industries ("vertical markets") and the development
of individual applications which may be used in several different industries
("horizontal markets").
Fax Information Dissemination Services
The target market for the Company's Fax Information Dissemination
Services is the global fax transmission market. The worldwide (including U.S.)
fax telephone bills for the year 2002 will be over $90 billion. It was over $80
billion in 1998 (David Consulting, 1999). The Company believes that this market
will continue to grow, fueled by growth in international trade and continued
growth in the utilization of fax machines and computer fax devices.
In the year 2000, fax traffic will be 170 billion minutes in North
America and 332 billion minutes in the rest of the world for a total of 502
billion minutes (David Consulting, 1999).
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The Fax Information Dissemination Services market has historically been
dominated by Post Telephone and Telegraph organizations (PTTS), which furnish
telecommunications services in this market at regulated rates which may be
significantly greater than the underlying cost of the transmission. The Company
believes that, using the SpectraFAX Network, it can offer high quality service
to customers in these markets at rates lower than those which are available from
such other carriers.
THE SPECTRAFAX NETWORK
The SpectraFAX Network consists of the Company's document distribution
system and the leased telecommunications lines, which connect all of these
systems. A Node is an element of the SpectraFAX Network located at a
geographically distinct point of presence, which allows access to the Company's
equipment and services.
The Company's facilities have significant capacity for future growth
and have been designed for rapid expansion. The Company also believes that it
will have excess capacity during off peak hours. As the volume of its
international fax transmission has grown, the Company has observed that the
concentration of peak hour traffic is reduced.
The Company has standardized its equipment specifications and limited
the number of its suppliers to achieve cost efficiencies. However, the Company
constantly upgrades its' proprietary software. Substantially all of the
Company's computing hardware is readily available from large, well-known
suppliers such as Dialogic, Corp. and Brooktrout Technology. The Company
continually evaluates new developments in electronic document distribution
technology in connection with the design and enhancement of its system and
development of services to be offered to customers. As the Company installs its
system in various locations worldwide, the Company through its' software
development is able to customize systems for customers needs as they are
implemented worldwide.
The Company has developed safeguards to minimize the impact of power
outages and other operational problems. The Company has installed uninteruptible
power supplies (UPS) at its headquarters in Naples, Florida to provide an
uninterrupted power supply in the event of a disruption in service provided by
the local utility. In addition, the Company uses a variety of carriers to
transmit its telecommunications traffic, and employs a variety of
telecommunications routing technologies, including "back-up" services. These
"back-up" services allow immediate re-routing of traffic in the event of a line
interruption. Based out of the Company's Naples, Florida Service Bureau, these
additional "back-up" services provide SpectraFAX's customers an additional
measure of security that their customers will not miss calls or are unable to
access their system for customer service information. The Company also maintains
business interruption insurance providing coverage of up to $75,000. The Company
has not suffered any material interruption in its business.
SALES AND MARKETING
Selling the Company's Fax Services requires a thorough understanding of
the application of the Company's services to a particular customer's business, a
focus on the identified market opportunities, and the ability to overcome
potential customers' objections to using a third party service provider to
fulfill its electronic document distribution service needs. The Company's sales
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personnel are taught to understand and use the terminology of participants in
the targeted industry and to direct their selling efforts to the executive who
benefits from the electronic document distribution service. The sales process
for Fax Information Dissemination Services in overseas markets is similar to
that used in North America.
The Company intends to use its existing sales and distribution
organization to market its Fax Services, and plans to expand its direct sales
group in order to increase such sales. Sales and marketing of Fax Services is
expected to focus on industries with substantial international trade activity
such as shipping, import/export, freight forwarders, manufacturing and financial
services. As with all of its Fax Services, the Company believes that a direct
field sales organization is the most effective distribution channel in
addressing the Fax Services market.
The Company's marketing materials typically include direct response
advertising and public relations focused on the trade periodicals relevant to
the vertical markets and horizontal markets targeted by the Company and trade
show participation.
Direct Sales
The Company employs a sales force of six persons. Direct sales by the
Company's sales personnel accounted for approximately 90% of the Company's net
revenues in both 1998 and 1999. The Company expects that a majority of its sales
growth will continue to be generated by its direct sales force.
Sales Agents
The Company's direct sales force is assisted by leads primarily from
approximately 800 sales agents of other companies, principally Siemens and
Xerox/Omnifax, with whom the Company has developed a sales relationship over the
past several years. The Company's systems are offered as a complementary product
by such companies as needed. The Company provides customer service and billing
to the customers of such sales agents. Sales agents typically receive only a
sales commission equal to a percentage of sales. Sales agents accounted for
approximately 10% of the Company's net revenues in 1998 and 1999.
COMPETITION
The Company competes based on a number of factors, such as customer
service and support, service features and price. Of these factors, the Company
believes that service and support are the most important, while price is another
critical competitive component in developed countries with high quality long
distance networks. In a service industry in which a broad range of optional
features are offered, the Company's competitive strategy emphasizes a sales and
support network that is well-versed in the capabilities of the services offered
to customers. The Company believes that, while it continues to expand its
development activity in order to add a broad range of features to its services,
it is the focus of its sales and support organizations on customers' needs that
enables the Company to compete effectively.
The competition, companies such as Right Fax and Omtool, sell fax
boards and software with a long list of hardware and additional software to be
purchased to build your own fax server.
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If there are problems with the finished system the customer must figure out the
solution. SpectraFAX sells a fully tested turnkey solution, delivers it to the
customer's site, and trains their customers technical people. If there is a
problem in the future, SpectraFAX solves the problem for the customer.
SpectraFAX also gives its customers free software upgrades whenever they are
released.
Another alternative to using the Company's services is for a potential
customer to fulfill its own needs for fax communications services. The "home
grown" solution may simply be an individual at a fax machine or may involve the
customer acquiring its own computerized fax communications system (sometimes
known as "customer premise equipment" or "CPE"). The Company believes that the
CPE solution is suitable in some applications, but is generally not feasible for
the Company's customers, who require the capacity to effect a significant volume
of electronic document deliveries in a short period of time. The Company
believes that the CPE solution for a fax broadcast application would require the
customer to obtain and maintain a large number of telephone transmission lines
which would remain idle for significant periods of time. Further, for
international fax traffic, the customer would be required to set up a worldwide
nodal network; the Company believes that this is only practical for large
multinational firms and even these firms would be unlikely to develop a network
which would reach as many countries as the SpectraFAX Network. As a fax
communications services provider with many customers, the Company is able to
spread the costs of operating the SpectraFAX Network over a large number of
users. In addition to being concerned with the irregular nature of demand, a
customer selecting a CPE solution must consider the total cost of system
acquisition, ongoing technical support, reliability, technological obsolescence
and accountability. Based on the foregoing, the Company believes that a
substantial percentage of customers in the market for fax communications
services will elect a service provider rather than CPE.
Unlike its competitors, SpectraFAX offers both fax service and Customer
Premise Equipment. If the customer is sending his information through the
Service Bureau, and decides he wants to deliver the information from his company
directly, SpectraFAX can sell him the appropriate computer-based fax equipment
and transfer all of his information and telephone numbers to him.
Similarly, electronic transmission of information via the internet
provides an alternative to the Company's fax services. However, internet
transmission does not offer prompt confirmation of receipt of information via
written fax confirmation and has the additional risks of limited security and
confidentiality of information transmitted over a worldwide network easily
accessed by third parties. Finally, while a fax transmission alerts the
recipient that information has been delivered, information transmitted via
e-mail often relies on the recipient inquiring whether information has been
delivered. Transmission by the internet cannot be an alternative if a sender or
recipient of information does not have access to the internet.
ADDITIONAL INFORMATION
Employees
The Company considers its relationship with its employees to be
satisfactory. The Company employed 21 persons as of December 31, 1999
substantially all of who were full time employees,
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and none of whom was covered by a collective bargaining agreement. Of these
employees, 6 were engaged in sales and marketing; 8 in operations and customer
support; 4 in research and development; and 3 in general and administrative
activities. Fourteen (14) of the Company's employees are located in the
Company's Naples, Florida headquarters while the Miami, FL and Haverhill, MA
offices employ the remaining personnel.
Patents and Proprietary Information
The Company regards certain of its computer software and products as
proprietary and seeks to protect such software with United States Patents,
common law copyrights, trademarks, trade secret laws and internal non-disclosure
agreements and safeguards.
The Company currently holds United States Patent No. 5,136,634
protecting the network/server architecture used in the Special Request product
line. This patent, entitled "Voice Prompted Facsimile Data Retrieval Network",
applies to Bus, Ring or Star network topologies used for voice prompted document
selection with facsimile delivery. This patent provides the Company broad
protection in the creation of large-scale network based fax processing
equipment.
The Company also holds the following proprietary trade and service
marks:
U.S. Registration
Trademark Number International Approvals
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SpectraFAX 1,645,816 France
United Kingdom
Indonesia
Australia
Japan
Singapore (pending)
Germany (pending)
Special Request 1,558,864 Australia
France
Indonesia
Japan (pending)
United Kingdom
Singapore
Germany
Liaison 1,631,355
Personal Link 1,585,389
FaxCard 1,553,522
2G0! 1,585,384
Insurance
The Company has insurance covering risks incurred in the ordinary
course of business, including general liability, special and business property
coverage (including coverage of electronic
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data processing equipment and media), and business interruption insurance. The
Company believes its insurance coverage is adequate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
TEN MONTHS ENDED OCTOBER 31, 1999 COMPARED TO TEN MONTHS ENDED OCTOBER 31, 1998
REVENUES
Net Revenues in the ten months ended October 31, 1999 were $2,181,101,
compared to net revenues of $2,484,422 for the ten months ended October 31,
1998, a decrease of $303,321 or 13.9%. The decrease was due primarily to
warranty revenue. SpectraFAX could no longer warrant the "old" Special Request
("SR") system, because only the new Fax Liaison is Y2K compliant. As the Company
replaces more SR systems with the new Fax Liaison systems, the warranty revenue
should continue to grow.
COST AND EXPENSES
Cost of revenues decreased by $89,183 or 16.6% to $536,838 for the ten
months ended October 31, 1999, from $626,021 in the ten months ended October 30,
1998, and the gross margin for the ten months ended October 31, 1999 increased
to 75.3% of net sales compared to 74.8% in the ten months ended October 31,
1998. The favorable gross margin primarily reflects a price increase in Fax
Liaison product line.
Selling, general and administration expenses, including depreciation,
decreased from $1,830,069 in the ten months ended October 31, 1998 to $1,804,501
in the ten months ended October 31, 1999, or 1.4%. Savings in salaries in
Marketing and Sales were essentially offset by the increase in expense in
Research and Development for the ten months ended October 31, 1999.
OTHER INCOME EXPENSE
Other income/expense increased by $7,946 reflecting higher interest
cost.
NET INCOME
The Company's loss $260,345 for the ten months ended October 31, 1999
compared to a loss of $63,829 for the ten months ended October 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Net Revenues in fiscal 1998 were $2,568,738, compared to net revenues
of $2,017,306 for the year ended December 31, 1997, an increase of $570,528 or
28.2% higher than the revenues for the year ended December 31, 1997.
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COSTS AND EXPENSES
Cost of revenues increased by $266,665, or 36.5%, to $731,573 for the
year ended December 31, 1998 from $464,908 in the year ended December 31, 1997
and resulting gross margin in 1998 decreased to 71.5% of net sales compared to
77.0% in 1997. The increase in cost of revenues resulting in a decrease in gross
margin in 1998 was due primarily to the writing off obsolete inventory.
Selling, general and administration expenses, including depreciation,
decreased from $2,270,266 in fiscal 1997 to $2,157,808 in fiscal 1998, by
$112,458, or 5.2%. The largest areas of decrease were in salaries in
Manufacturing, Research and Development and Marketing and Sales. This was offset
by an increase in legal and other expenses incurred in connection with the
Company's initial public offering.
OTHER INCOME/EXPENSE
Other income/expense decreased by $8,365 reflecting lower interest
cost.
NET INCOME
The Company's net loss decreased by $405,590 in fiscal 1998 to $425,410
from $831,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $12,345 at October 31, 1999, as
a result of an increase in net cash used by operations that was partially offset
by cash from financing activities. The Company experienced negative cash flows
from operations during fiscal 1998 which were offset by debt financing, issuance
of common stock and existing cash balances. For the ten months ending October
31, 1999 cash from net borrowing of $66,778 and stock issuance of $442,530 was
used to finance an increase in accounts receivable of almost $300,000 and a loss
of $260,345. As the Company expands its distribution activities it may continue
to experience net negative cash flows from operations and may be required to
obtain additional financing to fund operations through an equity offering of
common stock and bank borrowings, to the extent available.
ITEM 3. PROPERTIES
The Company leases 9,373 square feet of office space located at 3050
North Horseshoe Drive Suite Number 100, Naples, Florida 34104 for its executive
offices. The lease if for a period of three years commencing June 1, 1997 and
ending May 30, 2000. The Company has an option to renew the lease for two
additional thirty-six (36) month terms for an additional increase in the monthly
base rent of 3% on each commencement date. The base rent is $8,386 per month
plus additional rent equal to the pro rata monthly operating expenses of the
property of approximately $3,616 for a total of $12,002 per month.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information relating to the beneficial
ownership of Company common stock by those persons known to the Company to
beneficially own more than 5% of the Company's common stock, by each of the
Company's directors and executive officers, and by all of the Company's
directors and executive officers as a group. The address of each person is care
of the Company.
<TABLE>
<CAPTION>
Number Percent
Name of Beneficial Owner of Shares Owned
- ------------------------ --------- -----
<S> <C> <C>
Timeswitch Investments(1) 3,500,000 18.7%
Lions Gate Management, Ltd. 2,986,000 16.0
A. J. Pelligrino 1,800,000 9.6
Thomas J. Conwell 886,083 4.7
Eric Ekelund 36,200 *
Vicki Koopman 37,700 *
Prakash V. Patel 10,000 *
Nalin Rathod(2) 3,520,000 18.7
All Directors & Officers as a Group 4,496,483 24.0
</TABLE>
- ----------
* Less than one percent
(1) An Isle of Man company owned by P.T. Bakrie & Brothers. The company is a
holding company, which owns several Indonesian companies engaged in various
enterprises.
(2) Mr. Rathod is Timeswitch Investments' representative on the Board of
Directors.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The members of the Board of Directors of the Company serve until the
next annual meeting of stockholders, or until their successors have been
elected. The officers serve at the pleasure of the Board of Directors. The
directors and executive officers of the Company is as follows:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Thomas J. Conwell 62 Chief Executive Officer, Chairman of
the Board and Director
Eric Ekelund 56 Treasurer and Chief Financial Officer
Vicki Koopman 44 Secretary
Prakash V. Patel 49 Director
Nalin Rathod 43 Director
</TABLE>
12
<PAGE> 15
Set forth below is the business experience and other biographical information
regarding the directors and officers.
Thomas J. Conwell has been President, CEO, and a Director of the
Company since 1986. His responsibilities have included general administrative
management, marketing and sales, and research and development. Mr. Conwell is a
graduate of Northern Illinois University with a Bachelor of Science degree in
Chemistry, Mathematics and Education.
Eric Ekelund joined the Company in March of 1995 as Controller and was
appointed Treasurer in April 1996. Prior to joining the Company he served as
Controller/Treasurer of Pilot Technologies Corporation since 1991. Mr. Ekelund
holds a Bachelor of Science degree in Accounting from Sacred Heart University
and an MBA in Computer Science from the University of New Haven.
Vicki L. Koopman joined the Company in August of 1995 as Executive
Assistant to the President and was appointed Corporate Secretary in April 1996.
Prior to joining the Company she served as Manager of Sales Administrations at
Allen Systems, working with North American and International offices.
Prakash V. Patel has been the Director of the Nuclear Medicine
Diagnostic Clinic of Houston, Texas in excess of five years. His
responsibilities include administration and radiation safety.
Nalin Rathod is employed by Timeswitch Investments and represents such
company on the Board of Directors. Such company is the owner of various
industries in Indonesia, including telecommunications, gold and silver mines,
oil and rubber plantations.
ITEM 6. EXECUTIVE COMPENSATION
The following tables set forth certain information relating to the
compensation earned by the Chief Executive Officer of the Company, the only
officer who received over $100,000 for the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Awards
Compensation Salary Restricted Stock
------------------- -------------------
<S> <C> <C>
Thomas J. Conwell $129,000 58,300shs(a)
Chief Executive Officer
</TABLE>
- ---------
(a) The market price for the shares on the date of issuance (8/25/99) was
$.625.
13
<PAGE> 16
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 17, 1995, Thomas J. Conwell, CEO of the Company loaned the
Company $44,010 with interest payable at the rate of 12% per annum. In 1995,
$10,000 was paid on note and in 1998, $5,000 was paid on note leaving a balance
of $29,010. In 1998, Thomas J. Conwell loaned the Company $55,000 with interest
payable at the rate of 14% per annum. In 1999, $38,000 was paid on note leaving
a balance of $17,000. In 1999, Thomas J. Conwell loaned the Company $45,000 with
interest payable at the rate of 12% per annum. All of the above notes are demand
notes. As of December 31, 1999 there were loans outstanding from Mr. Conwell
totaling $91,010 bearing an average interest rate of approximately 12% per
annum.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles of Incorporation authorizes the issuance of up
to 20,000,000 shares of Common Stock, $.001 par value. The holders of the shares
of Common Stock are entitled to one vote for each share held of record on all
matters on which stockholders are entitled or permitted to vote. Such holders
may not cumulate votes in the election of directors. The holders of Common Stock
are entitled to receive such dividends as may lawfully be declared by the Board
of Directors out of funds legally available therefor and to share pro rata in
any other distribution to the holders of Common Stock. The holders of Common
Stock are entitled to share ratably in the assets of the Company remaining after
the payment of liabilities in the event of any liquidation, dissolution, or
winding up of the affairs of the Company. There are no preemptive rights,
conversion rights, redemption or sinking fund provisions or fixed dividend
rights with respect to Common Stock.
PREFERRED STOCK
The Company's Articles of Incorporation authorizes the issuance of up
to 200,000 shares of Series A Cumulative Non-Participation 12% par value
Preferred Stock, $25.00 per share ("Preferred Stock").
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is the
Pacific Stock Transfer Company, Las Vegas, Nevada.
14
<PAGE> 17
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is quoted on the OTC Electronic Bulletin
Board and traded under the symbol "SRFX." The high and low market price
by quarters since 1998 have been as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998:
First Quarter.............................. $1.125 $0.750
Second Quarter............................. 1.031 0.500
Third Quarter.............................. 0.750 0.250
Fourth Quarter............................. 0.563 0.313
1999:
First Quarter.............................. 0.510 0.218
Second Quarter............................. 2.750 0.531
Third Quarter.............................. 0.781 0.438
Fourth Quarter............................ 0.500 0.280
2000:
First Quarter (through February 15)......... 1.375 0.300
</TABLE>
(b) Approximate Number of Equity Security Holders.
As of December 31, 1999 the approximate number of record holders of
common Stock of the Company was approximately 378.
(c) Dividend History and Policy.
The Company has paid no dividends to date and does not anticipate
paying any for the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal matters
incidental to its business. Management believes that the resolution of such
matters will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
15
<PAGE> 18
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
(a) The Company consummated a Regulation D 504 offering in March 1999,
selling 477,507 shares at a price of $.73.
(b) (i) In 1997, the Company issued 24,125 shares of common stock
for cash at $3.00 per share to 5 purchasers; 1,000 shares of common stock for
cash at $2.00 per share to 1 purchaser; 189,421 shares of common stock upon
conversion of notes at $2.00 per share to 20 purchasers; 1,000 shares of common
stock for services at $2.00 per share to 1 purchaser; 5,000 shares of common
stock for services at $3.00 per share to 1 purchaser; 10,000 shares of common
stock for services at $1.00 per share to 1 purchaser; 79,206 shares of common
stock were given at no charge to existing IPO shareholders to make the price of
their IPO shares equal to $3.00 per share for the 40 shareholders (the Company
received no money).
(ii) In 1998, the Company issued 5,000 shares of common stock for
cash at $1.00 per share to 1 purchaser; 27,000 shares of common stock for cash
at $.37 per share to 1 purchaser; 30,000 shares of common stock for cash at $.43
per share to 2 purchasers; 14,313 shares of common stock for services at $.59
per share to 1 purchaser; 34,125 shares of common stock for conversion of debt
to equity at $2.00 per share to 3 purchasers; 25,000 shares of common stock for
conversion of debt to equity at $1.00 per share to 1 purchaser; 48,852 shares of
common stock for consulting services at $.75 per share to 3 purchasers.
(iii) In 1999, the Company issued 15,625 shares of common stock
for cash at $.32 per share to 1 purchaser; 150,000 shares of common stock for
cash at $.30 per share to 1 purchaser; 100,000 shares of common stock for cash
at $.45 per share to 1 purchaser; 1,500 shares of common stock for cash at
$.6667 per share to 1 purchaser; 3,000 shares of common stock for cash at $.65
per share to 1 purchaser; 4,500 shares of common stock for services at $.44 per
share to 1 purchaser; 5,000 shares of common stock for services at $.32 per
share to 1 purchaser.
In December 1999, the Company issued 398,000 shares of common stock to
seventeen (17) employees upon exercise of outstanding stock options.
In connection with the shares issued in (b) above, the Company relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 in that the purchasers acquired the shares for investment and a
restrictive legend was placed on the certificates issued.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority under applicable provisions of the Florida
Business Corporation Act to indemnify its directors and officers to the extent
provided under such Act. The Company's Bylaws provide indemnification provisions
for the benefit of the Company's directors and officers as follows:
"Each director and officer of the Corporation, whether or not then in
office, shall be indemnified by the Corporation against all costs and expenses
reasonably incurred or imposed upon him in connection with or arising out of any
claim, demand, action, suit or proceeding in which he may be involved or to
which he may be made a party by reason of his being or having been a
16
<PAGE> 19
director or officer of the Corporation (said expenses to include attorney's fees
and the costs of reasonable settlements made with a view to curtailment of costs
of litigations), except in relation to matters as to which he finally shall be
adjudged in any such action, suit or proceeding to have been derelict in the
performance of his duty as such director or officer. Such right of
indemnification shall not be exclusive of any other rights to which he may be
entitled as matter of law; and the foregoing rights of indemnification shall
inure to the benefit of the heirs, executors and the administrators of any such
director or officer."
17
<PAGE> 20
PART FS
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................................................ 19
Balance Sheet at December 31, 1999 and 1998............................................................. 20
Statement of Operations For The Years Ended December 31, 1999 and 1998.................................. 21
Statement of Stockholders' Equity (A Deficit) For The Years Ended
December 31, 1999 and 1998............................................................................ 22
Statement of Cash Flows For The Years Ended December 31, 1999 and 1998.................................. 23
Notes to the Financial Statements........................................................................ 24
</TABLE>
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
18
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
Board of Directors
SpectraFAX Corp.
Naples, Florida 34104
We have audited the accompanying balance sheet of SpectraFAX Corp. (the
Company), as of December 31, 1999 and 1998 and the related 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998
and the results of its operations and its cash flows for the periods then ended,
in conformity with generally accepted accounting principles.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
March 30, 2000
19
<PAGE> 22
SPECTRAFAX CORP.
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current Assets
Cash $ 0 $ 29,262
Accounts Receivable 375,590 321,612
Inventory (Note 3) 25,360 71,073
Prepaid Expenses 11,950 2,507
------------ ------------
Total Current Assets 412,900 424,454
Property and Equipment, Net (Note 4) 174,588 218,045
Other Assets
Deposits 10,658 10,658
------------ ------------
Total Assets $ 598,146 $ 653,157
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities
Checks Issued in Excess of Cash $ 14,031 0
Notes Payable (Note 5) 849,500 830,500
Accounts Payable 247,773 312,401
Notes Payable, Bank Current Portion (Note 6) 10,067 22,398
Due to Related Party (Note 7) 144,478 140,343
Accrued Interest Payable (Note 5, 7) 271,978 250,211
Accrued Liabilities 124,142 188,872
------------ ------------
Total Current Liabilities 1,661,969 1,744,725
Long-Term Liabilities
Notes Payable, Bank Non-current Portion (Note 6) 12,726 11,455
------------ ------------
Total Liabilities 1,674,695 1,756,180
Commitments and Contingencies (Note 9, 10)
Stockholders' Equity
Preferred Stock: $25.00 Par Value, 200,000 Shares
Authorized Series A Cumulative, Non Participating
12%; Issued and Outstanding, NONE 0 0
Common Stock: $0.0001 Par Value, 20,000,000
Shares Authorized; Issued and Outstanding
18,598,322 and 17,324,300 1,859 1,732
Additional Paid in Capital 8,581,578 8,024,953
Less Treasury Stock, at Cost, 4,000 Shares Outstanding (4,000) (4,000)
Accumulated Deficit (9,655,986) (9,125,708)
------------ ------------
Total Stockholders' Equity (A Deficit) (1,076,549) (1,103,023)
------------ ------------
Total Liabilities and Stockholders' Equity $ 598,146 $ 653,157
============ ============
</TABLE>
The accompanying notes are an integral part of these financial
20
<PAGE> 23
SPECTRAFAX CORP.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Revenues $ 2,417,981 $ 2,568,738
Cost of Sales 602,532 731,573
------------ ------------
Gross Profit 1,815,449 1,837,165
Selling, General and Administrative Expenses
Marketing and Sales 727,322 749,039
Production and Manufacturing 79,907 81,682
General and Administrative 837,526 746,842
Research and Development Expenses 579,265 580,245
------------ ------------
Total Selling, General and Administrative Expenses 2,224,020 2,157,808
------------ ------------
Net Operating Loss (408,571) (320,643)
Other Expense
Interest Expense (121,707) (104,767)
------------ ------------
Net Loss Available to Common Stockholders $ (530,278) $ (425,410)
============ ============
Basic Loss Per Common Share $ (0.03) $ (0.02)
============ ============
Basis Weighted Average Number of
Common Shares Outstanding 18,003,300 17,217,370
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 24
SPECTRAFAX CORP.
STATEMENT OF STOCKHOLDERS' EQUITY (A Deficit)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid In Treasury Accumulated
Shares Amount Shares Amount Capital Stock Deficit Total
------ ------ ------ ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <S> <C> <C>
Balance, December 31, 1997 0 0 17,105,260 $1,710 $7,804,580 $ (4,000) $ (8,700,298) $ (898,008)
Correction of Prior Years Issuance (37,250) (4) 4 0
Issuance of Stock For Cash at $0.75 Per
Share During 1998 72,000 7 53,993 54,000
Issuance of Stock For Cash at $1.00 Per
Share During 1998 5,000 1 4,999 5,000
Issuance of Stock For Cash at $0.37 Per
Share During 1998 27,000 3 9,997 10,000
Issuance of Stock For Cash at $0.43 Per
Share During 1998 30,000 3 12,997 13,000
Issuance of Stock For Services at $0.59
Per Share 14,313 1 8,505 8,506
Conversion of Debt to Equity at $2.00
Per Share 34,125 3 68,247 68,250
Conversion of Debt to Equity at $1.00
Per Share 25,000 3 24,997 25,000
Issuance of Stock For Consulting
Services at $0.75 Per Share 48,852 5 36,634 36,639
Loss, Year Ended December 31, 1998 (425,410) (425,410)
----------- ------------
Balance, December 31, 1998 0 0 17,324,300 8,024,953 (4,000) (9,125,708) (1,103,023)
1,732
Correction of Prior Years Issuance 29,000 2 (2) 0
Issuance of Stock For Cash - 1999 747,632 75 438,875 438,950
Issuance of Stock For Services - 1999 497,390 50 117,752 117,802
Loss, Year Ended December 31, 1999 (530,278) (530,278)
----------- -----------
Balance, December 31, 1999 0 $ 0 18,598,322 $1,859 $8,581,578 $ (4,000) $ (9,655,986) $ 1,076,549
===== ==== ========== ====== ========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 25
SPECTRAFAX CORP.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (530,278) $ (425,410)
Adjustments to Reconcile Net Loss to Net Cash Used
In Operating Activities
Depreciation 91,256 88,303
Conversion of Notes Payable for Common Stock 0 93,250
Issuance of Common Stock for Services 117,802 45,145
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable (53,978) (156,236)
(Increase) Decrease in Inventory 45,713 110,073
(Increase) Decrease in Prepaid Expenses (9,443) 29,914
Increase (Decrease) in Checks Issued in Excess of Cash 14,031 0
Increase (Decrease) in Accounts Payable (64,628) (2,488)
Increase (Decrease) in Accrued Interest Payable 21,767 29,878
Increase (Decrease) in Accrued Liabilities (64,730) (29,371)
------------ ------------
Total Adjustments 97,790 208,468
------------ ------------
Net Cash Used In Operating Activities (432,488) (216,942)
Cash Flows From Investing Activities
Capital Expenditures (47,799) (76,131)
------------ ------------
Net Cash Flows Used In Investing Activities (47,799) (76,131)
Cash Flows From Financing Activities
Net Proceeds (Repayments) Notes Payable 19,000 115,650
Net Proceeds (Repayments) Notes Payable, Related Party 4,135 12,000
Net Proceeds (Repayments) Notes Payable, Bank (11,060) 33,853
Net Proceeds From Sale of Common Stock 438,950 82,000
------------ ------------
Net Cash Provided By Financing Activities 451,025 243,503
------------ ------------
Decrease in Cash and Cash Equivalents (29,262) (49,570)
Cash and Cash Equivalents, Beginning of Year 29,262 78,832
------------ ------------
Cash and Cash Equivalents, End of Year $ 0 $ 29,262
------------ ------------
Supplemental Information
Cash paid for:
Interest $ 143,474 $ 132,079
============ ============
Income taxes $ 0 $ 0
============ ============
Non-cash Activities:
Exchange of Note Payable for Common Stock $ 0 $ 93,250
============ ============
Common Stock Issued for Services $ 117,802 $ 45,145
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
23
<PAGE> 26
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - ORGANIZATION
SpectraFAX Corp. (the Company) (formerly known as LaserFAX, Inc.) was
incorporated under the laws of the State of Florida on September 20,
1983, and has an authorized capital of 20,000,000 shares of par value
common stock at one/hundredth of a cent ($0.0001) per share and 200,000
shares of preferred series A cumulative, nonparticipating 12% par value
preferred stock at $25.00 per share.
The Company markets and distributes proprietary (patented) automated
facsimile management systems.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting.
B. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a
maturity of three months or less when acquired to be cash and cash
equivalents.
C. Accounts Receivable
Accounts Receivable consist of sales to business customers on a
contract basis, principally in the United States. The majority of the
accounts are paid within a 60 day period. The Company considers all of
its accounts to be collectible. The allowance for uncollectible
accounts has a zero balance at this time as a result of the type of
contracts with businesses, customers and the federal government.
Accounts Receivable are stated net of the allowance for uncollectible
accounts. Management reviews this process annually. No single customer
provides 10% or more of the Company's revenues.
D. Revenue Recognition
Revenue from sales to distributors and resellers is recognized when
related products are shipped.
E. Cost Recognition
Cost of Sales includes all direct material and labor costs and those
indirect costs of bringing raw materials to sale condition. Selling,
general and administrative costs are charged to operating expenses as
incurred. Research and Development costs are charged to operations as
incurred, and are included in selling, general and administrative
costs. The amounts charged during 1999 and 1998 were $579,265 and
$580,245, respectively.
24
<PAGE> 27
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Inventory
The inventory is valued at the lower of cost or market, determined on a
first-in first-out basis.
G. Property and Equipment
Expenditures that increase asset lives are capitalized at cost. Normal
maintenance and repairs are expensed as incurred. The cost and
accumulated depreciation of assets retired or disposed of are removed
from the accounts and any resulting gain or loss is included in the
statement of operations. Depreciation is reported on a straight-line
basis over the estimated useful lives of the assets ranging from three
to ten years.
H. Long-Lived Assets
The Company's long-lived assets consists of patents, that are being
amortized over the estimated useful lives of the patents, but not
longer than 17 years. The current value of patents, net of
amortization, is equal to its current book value.
I. Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under SFAS 109, deferred tax liabilities are determined
based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse. See Note 8.
J. Per Share of Common Stock
Basic earnings or loss per share has been computed based on the
weighted average number of common shares outstanding. All earnings or
loss per share amounts in the financial statements are basic earnings
or loss per share, as defined by SFAS No. 128, "Earnings Per Share."
Diluted earnings or loss per share does not differ materially from
basic earnings or loss per share for all periods presented.
K. Stock Issuance Costs
Costs and fees incurred in the sale of the Company's common stock are
recorded as a direct reduction of additional paid-in capital in the
period incurred.
25
<PAGE> 28
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L. Capital Structure
The Company has implemented SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998, which requires companies to
classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid in capital in the equity section of a statement of financial
position. The implementation of SFAS No. 130 had no effect on the
financial statements.
M. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock
options, if any, is measured as the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method
of accounting for stock-based employee compensation plans. The Company
has elected to continue its current method of accounting as described
above, and has adopted the disclosure-only requirements of SFAS No.
123, effective January 1997. The implementation of SFAS No. 128 had no
effect on the Company's financial statements.
N. Business Segment Information
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective January 1, 1998. The
Company operates in one industry segment, that being the marketing and
distribution of proprietary (patented) automated facsimile management
systems. The implementation of SFAS No.
131 had no effect on the Company's financial statements.
O. Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
26
<PAGE> 29
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
P. Pending Accounting Pronouncements
It is anticipated that current pending accounting pronouncements will
not have an adverse impact on the financial statements of the Company.
Q. Presentation
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 3 - INVENTORY
Inventory at December 31, 1999 and 1998 of $25,360 and $71,073,
respectively, consists of computer parts and accessories used in the
assembly and further enhancement of computer applications and parts for
repairs and replacement.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and Equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Machinery and Equipment $ 170,397 $ 157,424
Computer Equipment 473,050 438,224
Furniture and Fixtures 36,544 36,544
Display Booth 8,076 8,076
Software 121,539 121,539
--------- ---------
Total 809,606 761,807
Less Accumulated Depreciation (635,018) (543,762)
--------- ---------
Net Book Value $ 174,588 $ 218,045
========= =========
</TABLE>
Depreciation expense charged to operations during 1999 and 1998 was
$91,256 and $88,303, respectively.
27
<PAGE> 30
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5 - NOTES PAYABLE
The following is a summary of Notes Payable at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
(1) 15% Demand Note $ 50,000 $ 50,000
(2) 12% Convertible Notes at $2.00 Per Share 225,500 261,500
(3) 10% Convertible Notes at $2.00 Per Share 0 8,000
(4) 12% Short Term Notes 24,000 24,000
(5) 10% Convertible Subordinated Debentures
Due October 31, 1990 - Scheduled Redemption
Subordinated to Other Senior Obligations 108,000 125,000
(6) 18% Secured Factoring Promissory Notes 442,000 362,000
--------- ---------
Total $ 849,500 $ 830,500
========= =========
</TABLE>
(1) A demand note in the amount of $50,000, dated April, 1995, with
interest at 15 percent per annum. The note was renewed on May 3, 1996,
and is currently in default. Accrued interest at December 31, 1999 and
1998 was $15,021 and $12,521, respectively.
(2) The 12% convertible notes at $2.00 per share represent a series of
notes from individuals dated from April 1990 through October 1993. The
notes were for one year with interest payable annually. All of the
notes are due in full. The notes carry a conversion, that on maturity,
in lieu of receiving the stipulated principal and interest at maturity,
the holder may elect to apply said principal and accrued interest as
payment in full for the purchase of the Company's common stock at $2.00
per share. For the years ended December 31,1998, the 12% convertible
notes were reduced by $62,500. Payments on 12% convertible notes were
$36,000 and $3,000 during 1999 and 1998, respectively. Accrued interest
at December 31, 1999 and 1998 was $170,980 and $150,920, respectively.
(3) The 10% convertible notes represent a series of notes from
individuals dated from March 1992 through November 1993. The notes were
for one year with interest payable
annually. All of the notes are due in full. The notes carry a
conversion, that on maturity, in lieu of receiving the stipulated
principal and interest at maturity, the holder may elect to apply said
principal and accrued interest as payment in full for the purchase of
the Company's common stock at $2.00 per share. For the year ended
December 31, 1999, the 10% convertible notes were repaid in full.
(4) The 12% short term notes represent a series of notes from
individuals dated December 1990 through March 1991. The notes are one
year notes that rollover automatically. The holder has the option after
one year to demand payment in full. Accrued interest at December 31,
1999 and 1998 was $14,400 and $11,520, respectively.
(5) The 10% convertible subordinated debentures are a series of notes
from individuals dated October 31, 1985 and had a maturity date of
October 31, 1990. The notes are con-
28
<PAGE> 31
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
vertible at the rate of $2.00 per share of the Company's common stock.
For the year ended December 31, 1998, the notes were reduced by
$12,000. Payments on the 10% convertible notes were $17,000 and $8,000
during 1999 and 1998, respectively. Accrued interest at December 31,
1999 and 1998 was $57,675 and $45,387, respectively.
(6) The 18% secured factoring promissory notes are a series of notes
from individuals at various dates during the last three years. These
notes are secured by U.S. government receivables. Payment of principal
and interest is due in full to each individual upon payment of invoices
under contract. For the year ended December 31, 1998 and 1997, total
payments were $144,617 and $225,000, and additional notes issued
totaled $224,617 and $429,000, respectively. Accrued interest at
December 31, 1999 and 1998 was $5,004 and $5,114, respectively.
NOTE 5 - NOTES PAYABLE (CONTINUED)
All of the notes are due at December 31, 1999.
NOTE 6 - NOTES PAYABLE, BANK
During 1998, the Company obtained financing from a local bank for
$36,275, with interest at prime plus one percent (9.75% at December 31,
1999 and 1998) per annum, due September 01, 2001, and secured by all
Company assets. Total principal payments during 1999 and 1998 were
$11,060 and $2,422, respectively.
<TABLE>
<S> <C>
Total $ 22,793
Less Current Portion 10,067
---------
Long-Term Debt $ 12,726
=========
</TABLE>
Future minimum maturities of long-term debt are as follows at December
31:
<TABLE>
<S> <C>
2000 $ 10,067
2001 $ 12,726
</TABLE>
NOTE 7 - RELATED PARTIES
The President loans the Company funds whenever necessary and is paid
with interest, due on demand. Total loans outstanding due the President
is $91,010 at December 31, 1999. The loan activity is as follows
through December 31, 1999:
On April 17, 1995, the President loaned the Company $44,010 with
interest payable at the rate of 14% per annum, due on demand. In 1995,
$10,000 was paid on the note leaving a balance of $34,010. During 1996,
the note was increased by $10,000, leaving a balance of $44,010 at
December 31, 1996 and 1997. During 1998, the note was decreased by
$15,000, leaving a balance due of $29,010 at December 31, 1999 and
1998.
29
<PAGE> 32
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
During 1996, the President loaned the Company an additional $98,000 at
10% per annum, due on demand. The note was reduced by $70,000 during
1997. The balance at December 31, 1998 and 1997 is $28,000 and $28,000,
respectively.
During 1998, the President loaned the Company an additional $27,000 at
18% per annum, due on demand. The balance at December 31, 1999 and 1998
is $27,000.
During 1999, the President loaned the Company an additional $45,000 at
12% per annum, due on demand. The note was reduced by $38,000 during
1999. The balance at December 31, 1999, is $7,000.
Accrued interest on all the related party loans at December 31, 1999
and 1998 was $7,434 and $8,948, respectively.
NOTE 7 - RELATED PARTIES (CONTINUED)
LFX Associates, Ltd., a related Company, is due $53,468 and $56,333 at
December 31, 1999 and 1998, respectively, in royalty payments under
agreements that it has with the Company.
NOTE 8 - INCOME TAXES
There is no current or deferred tax expense for the years ended
December 31, 1999 and 1998, due to the Company's loss position. The
benefits of timing differences have not been previously recorded.
The deferred tax consequences of temporary differences in reporting
items for financial statement and income tax purposes are recognized,
as appropriate. Realization of the future tax benefits related to the
deferred tax assets is dependent on many factors, including the
Company's ability to generate taxable income within the net operating
loss carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial
reporting purposes. The income tax effect of temporary differences
comprising the deferred tax assets and deferred tax liabilities on the
accompanying balance sheet is a
result of the following:
<TABLE>
<CAPTION>
Deferred Taxes 1999 1998
-------------- ---- ----
<S> <C> <C>
NOL Carryforwards $3,377,054 $3,188,642
Valuation Allowance (3,377,054) (3,188,642)
--------- ---------
Net Deferred Tax Assets $ 0 $ 0
========= =========
</TABLE>
A reconciliation between the statutory federal income tax rate (35%)
and the effective rate of income tax expense for each of the years
during the period ended December 31 follows:
30
<PAGE> 33
SPECTRAFAX CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Statutory Federal Income Tax Rate (35.0%) (35.0%)
Increase in Valuation Allowance 35.0% 35.0%
--------- ---------
Effective Income Tax Rate 0.0% 0.0%
</TABLE>
The Company has available net operating loss carry-forwards of
approximately $9,600,000 for tax purposes to offset future taxable
income, and expire principally in the year 2014.
NOTE 9 - OPERATING LEASES
Property Lease - The Company leases 9,373 square feet of office space
located at 3050 North Horseshoe Drive, Suite Number 100, Naples,
Florida, 34104, for its executive offices. The lease is for a period of
three years commencing June 1, 1997 and ending May 30, 2000. The
Company has an option to renew for two additional thirty-six (36) month
terms for an additional increase in the monthly base rent of 3% on each
commencement date. The base rent is $8,386 per month plus additional
rent equal to the pro rata monthly operating expenses of the property
of approximately $3,616, or $12,002 at December 31, 1999.
Lease expense for the years ended December 31, 1999 and 1998 was
$131,860 and $138,925, respectively.
Future minimum annual lease obligations at December 31 are as follows:
<TABLE>
<S> <C>
1999 $ 144,024
2000 $ 60,010
</TABLE>
Equipment Lease - The Company leases various equipment under
noncancelable operating leases for five year terms. The lease expense
for the year ended December 31, 1999 and 1998 was $7,702 and $6,808.
Future minimum annual lease obligations are as follows:
<TABLE>
<S> <C>
2000 $ 11,328
2001 $ 8,416
2002 $ 6,960
2003 $ 3,480
</TABLE>
NOTE 10 - CONTRACTS/BACKLOG
Total backlog at December 31, 1999 and 1998 was approximately $55,000
and $265,000, respectively.
31
<PAGE> 34
PART III
ITEM 1. INDEX TO EXHIBITS
2.1 Articles of Incorporation*
2.2 By-laws*
3.1 See Exhibits 2.1 and 2.2 for provisions of the Articles of
Incorporation and Bylaws of the Company defining rights of holders of
the Company's Common Stock*
3.2 Specimen Stock Certificate*
10 Consent of Independent Auditor
12 Cautionary Statements for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995*
- -----------
* Previously Filed
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this to be signed on its behalf by
the undersigned, thereunto duly authorized as of this 4th day of April, 2000.
SpectraFAX Corp.
By: /s/ Thomas Conwell
------------------------------
Name: Thomas Conwell
Title: Chief Executive Officer
32
<PAGE> 1
Exhibit 10
CONSENT OF INDEPENDENT AUDITOR
I hereby consent to the use in this Registration Statement on Form
10-SB of my report dated March 30, 2000 relating to the financial statements of
SpectraFAX Corp. appearing in such Registration Statement.
/s/ Clancy and Co., P.L.L.C.
- -------------------------------------
Clancy and Co., P.L.L.C.
Phoenix, Arizona
April 4, 2000
