<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): December 10, 1999
9278 COMMUNICATIONS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Nevada 333-84845 98-0207906
- ---------------------------- -------------------- -------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
</TABLE>
1942 Williamsbridge Road, Bronx, New York 10461
-----------------------------------------------------------
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (718) 792-5150
iLink Telecom, Inc.
---------------------------------
(Former name or former address if changed since last report.)
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
On December 10, 1999, the Registrant entered into an Agreement and Plan
of Merger among the Registrant, 9278 Acquisition Corp., a wholly-owned
subsidiary of the Registrant ("Acquisition Corp."), and 9278 Distributor Inc., a
New York Corporation ("9278"), pursuant to which 9278 was merged with and into
Acquisition Corp., thereby becoming a wholly-owned subsidiary of Registrant. As
a result of such Merger, the shareholders of Acquisition Corp. were issued an
aggregate of 14,900,000 shares of common stock of the Registrant, as well as
$1,000,000 and a promissory note in the amount of $2,000,000. Of such shares,
13,205,125 were issued to Sajid Kapadia, President and Chief Executive Officer
of 9278. In addition to such shares, Mr. Kapadia has been granted proxies to
vote an aggregate of 2,150,000 additional shares of common stock of the
Registrant. As a result of such shareholdings and proxies, Mr. Kapadia
currently has the right to vote approximately 78% of the outstanding common
stock of the Registrant. In connection with the Merger, certain members of
management agreed to forgive 1,750,000 shares of common stock of the
Registrant which were subject to vesting under existing agreements with
the Registrant. As a result of such transactions, the aggregate number of
issued and outstanding shares of the Registrant increased to 19,659,629
shares.
The cash portion of the Merger consideration was obtained by the
Registrant through a private placement of its common stock and a private
placement of Series B Convertible Preferred Stock, as described below under Item
5.
The Registrant plans to discontinue a substantial portion of the prior
business operations of iLink Telecom, Inc.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
See Item 1 and Item 5.
ITEM 5. OTHER EVENTS
On December 10, 1999, the Registrant completed two private
placements. The Registrant sold 500,000 shares of its common stock at a purchase
price of $2.00 per share to one investor. In addition, the Registrant sold an
aggregate of 1,500 shares of Series B Convertible Preferred stock at a purchase
price of $1,000 per share. The Series B Convertible Preferred Stock is
convertible into shares of common stock of the Registrant based on a per share
conversion price equal to 75% of the prevailing market price of the common stock
for the ten trading days prior to conversion; provided however that through
January 24, 2000, the holders of the Series B Convertible Preferred Stock will
have the right to convert such shares using a conversion price of not more than
$3.7031 per share.
1
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
(a) Financial Statements of Business to be Acquired
Balance Sheet at September 30, 1999 (unaudited) and December
31, 1998
Statement of Income for the nine months ended
September 30, 1999 and 1998 (unaudited), the year ended
December 31, 1998 and the period April 17, 1997 (date of
inception) to December 31, 1997
Statement of Cash Flows for the nine months ended September
30, 1999 and 1998 (unaudited), the year ended December 31,
1998 and the period April 17, 1997 (date of inception) to
December 31, 1997
Statement of Changes in Shareholder's Equity for the nine
months ended September 30, 1999 (unaudited), the year ended
December 31, 1998 and the period April 17, 1997 (date of
inception) to December 31, 1997
Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Balance Sheet at September 30, 1999
Pro Forma Statement of Operations for the nine months ended
September 30, 1999
Pro Forma Statement of Operations for the year ended
December 31, 1998
Notes to Pro Forma Balance Sheet
Notes to Pro Forma Statement of Operations
2
<PAGE>
(c) Exhibits
2.1 Agreement and Plan of Merger among the Registrant, 9278
Acquisition Corp. and 9278 Distributor Inc.*
4.1 Certificate of Designation setting forth rights and
preferences of Series B Convertible Preferred Stock*
4.2 Form of Subscription Agreement for Common Stock*
4.3 Form of Subscription Agreement for Series B Convertible
Preferred Stock*
- -----------------------
* Previously filed
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 21, 2000 9278 COMMUNICATIONS, INC.
(Registrant)
By: /s/ Amar Bahadoorsingh
--------------------------------
Amar Bahadoorsingh
President
-4-
<PAGE>
TABLE OF CONTENTS
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report 1
Financial Statements
Balance Sheet at September 30, 1999 (unaudited) and
December 31, 1998 2
Statement of Income for the nine months ended
September 30, 1999 and 1998 (unaudited), the year
ended December 31, 1998 and the period April 17, 1997
(date of inception) to December 31, 1997 3
Statement of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited), the year ended
December 31, 1998 and the period April 17, 1997
(date of inception) to December 31, 1997 4
Statement of Changes in Shareholder's Equity for the
nine months ended September 30, 1999 (unaudited), the
year ended Decembr 31, 1998 and the period April 17, 1997
(date of inception) to December 31, 1997 5
Notes to Financial Statements 6-13
Pro Forma Financial Data 14
Pro Forma Balance Sheet at September 30, 1999 15
Pro Forma Statement of Operations for the nine months
ended September 30, 1999 16
Pro Forma Statement of Operations for the year ended
December 31, 1998 17
Notes to Pro Forma Balance Sheet 18-19
Notes to Pro Forma Statement of Operations 20
</TABLE>
<PAGE>
[FRIEDMAN ALPREN & GREEN LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF 9278 COMMUNICATIONS INC.
We have audited the accompanying balance sheet of 9278 COMMUNICATIONS
INC. (formerly 9278 Distributor Inc.) as of December 31, 1998, and the related
statements of income, cash flows and changes in shareholder's equity for the
year ended December 31, 1998 and the period April 17, 1997 (date of inception)
to December 31, 1997. 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 financial statements referred to above present
fairly, in all material respects, the financial position of 9278 COMMUNICATIONS
INC. as of December 31, 1998, and the results of its operations and its cash
flows for the year ended December 31, 1998 and the period April 17, 1997 (date
of inception) to December 31, 1997 in conformity with generally accepted
accounting principles.
Friedman Alpren & Green LLP
New York, New York
January 24, 2000
-1-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash $ 346,124 $ 364,968
Accounts receivable, less allowance for
doubtful accounts of $125,000 and $95,000 5,642,278 2,650,466
Inventories 830,302 384,384
Prepaid expenses and other current assets 8,000 --
---------- ----------
Total current assets 6,826,704 3,399,818
Property and equipment - at cost, less accumulated
depreciation 302,296 132,831
Other assets 15,339 10,000
---------- ----------
$7,144,339 $3,542,649
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable $6,303,638 $3,160,067
Current maturities of loan payable, automobile 10,750 --
Current maturities of capital lease obligations 45,678 34,991
Income taxes payable 21,551 8,551
Loan payable, shareholder 234,567 --
---------- ----------
Total current liabilities 6,616,184 3,203,609
---------- ----------
Loan payable, automobile, less current maturities 45,340 --
---------- ----------
Capital lease obligations, less current maturities 73,798 66,440
---------- ----------
Commitments and contingencies - --
Shareholder's equity
Common stock, $.001 par value; 25,000,000 shares
authorized, 14,900,000 shares issued and outstanding 14,900 14,900
Additional paid-in capital 185,100 185,100
Retained earnings 209,017 72,600
---------- ----------
409,017 272,600
---------- ----------
$7,144,339 $3,542,649
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
April 17,
1997
(Date of
Nine Months Ended Year Ended Inception) to
September 30, December 31, December 31,
1999 1998 1998 1997
--------------- --------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 66,998,662 $ 14,369,454 $ 22,169,108 $ 160,000
Cost of sales 65,571,268 14,058,045 21,486,747 142,000
--------------- --------------- --------------- ---------------
Gross profit 1,427,394 311,409 682,361 18,000
--------------- --------------- --------------- ---------------
Operating expenses
Selling 236,216 -- -- --
General and administrative 1,028,599 43,341 598,608 16,980
Interest expense 10,162 1,311 3,469 --
--------------- --------------- --------------- ---------------
1,274,977 44,652 602,077 16,980
--------------- --------------- --------------- ---------------
Income before
income taxes 152,417 266,757 80,284 1,020
Income taxes 16,000 28,000 8,551 153
--------------- --------------- --------------- ---------------
Net income $ 136,417 $ 238,757 $ 71,733 $ 867
=============== =============== =============== ===============
Income before income taxes
as reported above $ 152,417 $ 266,757 $ 80,284 $ 1,020
Pro forma income taxes 73,000 132,000 40,000 300
--------------- --------------- --------------- ---------------
Pro forma net income $ 79,417 $ 134,757 $ 40,284 $ 720
=============== =============== =============== ===============
Basic and diluted earnings
per share $ .01 $ .01 $ -0- $ -0-
=============== =============== =============== ===============
Shares used in the
calculation of earnings
per share 14,900,000 14,900,000 14,900,000 14,900,000
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
April 17,
1997
Nine Months Ended (Date of
September 30, Year Ended Inception) to
----------------------------------- December 31, December 31,
1999 1998 1998 1997
--------------- --------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 136,417 $ 238,757 $ 71,733 $ 867
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation 40,579 -- 22,139 --
Provision for doubtful accounts 519,962 -- 489,087 --
Changes in assets and liabilities
Accounts receivable (3,511,774) (1,191,095) (3,084,553) (55,000)
Inventories (445,918) (375,270) (334,384) (50,000)
Prepaid expenses and other
current assets (8,000) -- -- --
Other assets (5,339) (10,000) (10,000) --
Accounts payable 3,143,571 1,303,905 3,079,234 80,833
Income taxes payable 13,000 28,000 8,551 --
------------ ------------ ------------ -----------
Net cash provided by (used in)
operating activities (117,502) (5,703) 241,807 (23,300)
------------ ------------ ------------ -----------
Cash flows from investing activities
Acquisition of property and equipment (107,104) (14,000) (14,000) --
------------ ------------ ------------ -----------
Cash flows from financing activities
Loan payable, shareholder 234,567 -- (29,300) 29,300
Principal payments on debt obligations (28,805) (31,529) (39,539) --
Issuance of common stock -- 199,000 199,000 1,000
------------ ------------ ------------ -----------
Net cash provided by financing
activities 205,762 167,471 130,161 30,300
------------ ------------ ------------ -----------
Net increase (decrease) in cash (18,844) 147,768 357,968 7,000
Cash, beginning of period 364,968 7,000 7,000 --
------------ ------------ ------------ ------------
Cash, end of period $ 346,124 $ 154,768 $ 364,968 $ 7,000
============ ============ ============ =============
Supplemental cash flow disclosures
Interest paid $ 10,162 $ 1,311 $ 3,469 $ --
Income taxes paid 3,000 -- -- --
Noncash investing and financing activities
Transportation and other equipment
acquired under capital leases 45,000 140,970 140,970 --
Automobile partially financed with
loan payable 57,940 -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in Retained
Shares Amount Capital Earnings
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Initial capital contribution 200 $ 1,000 $ -- $ --
Net income for the year ended
December 31, 1997 -- -- -- 867
------------ ----------- ----------- ----------
Balance, December 31, 1997 200 1,000 -- 867
Capital contributions, including
adjustment for change in par value 14,899,800 13,900 185,100 --
Net income for the year ended
December 31, 1998 -- -- -- 71,733
------------ ----------- ----------- ----------
Balance, December 31, 1998 14,900,000 14,900 185,100 72,600
Net income for the nine months ended
September 30, 1999 (unaudited) -- -- -- 136,417
------------ ----------- ----------- -----------
Balance, September 30, 1999 (unaudited) 14,900,000 $ 14,900 $ 185,100 $ 209,017
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
9278 Communications Inc. is the successor consolidated entity formed
by the merger, on December 10, 1999, of 9278 Distributor Inc. (the
"Company") and iLink Telecom, Inc. ("iLink"). iLink was originally
incorporated in Colorado on December 10, 1997 and was reincorporated in
Nevada on July 14, 1998. The Company was incorporated in New York on April
17, 1997.
Concurrent with the merger, iLink, a publicly held company and the
legally surviving parent company, changed its name to 9278 Communications
Inc. For accounting purposes, the merger will be treated as a reverse
acquisition, with the Company as the acquiror, and will be accounted for as
a purchase.
The Company sells telephone cards to small retail establishments and
distributors, primarily in the New York, New Jersey and Connecticut areas.
Use of Estimates
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could
differ from those estimates.
Interim Financial Statements
The financial statements as of September 30, 1999 and for the nine
months ended September 30, 1999 and 1998 have been prepared without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
as of September 30, 1999 and the results of operations and cash flows for
the nine months ended September 30, 1999 and 1998 have been made. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or eliminated.
The results of operations for the nine months ended September 30, 1999
are not necessarily indicative of the results to be expected for any future
interim period or for the year ended December 31, 1999.
(Continued)
-6-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories, which consist of telephone cards, are stated at the lower
of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
depreciation on assets held under capital leases, is computed on
accelerated methods over the estimated useful lives of five to seven years.
Revenue Recognition
Revenue is recognized at the time of sale.
Income Taxes
The Company had elected S Corporation status for Federal and New York
State income tax purposes. Under these elections, the Company's taxable
income or loss is reportable by the shareholder on his individual income
tax returns, and the Company makes no provision for Federal income tax.
Provisions are recorded for New York State S Corporation tax and New York
City General Corporation tax.
Concurrent with the merger with iLink on December 10, 1999, the S
Corporation elections terminated and the Company became subject to all
Federal, state and city corporation income taxes. The statement of income
reflects a pro forma adjustment for the income taxes that would have been
incurred had the Company been a C Corporation for all periods from its
inception.
Concentrations of Credit Risk
At December 31, 1998, the Company maintained cash balances in one
bank. Balances are insured for up to $100,000 by the Federal Deposit
Insurance Corporation.
(Continued)
-7-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per common share is calculated by dividing net income
by the average number of common shares outstanding during the year. Diluted
earnings per common share is calculated by adjusting outstanding shares,
assuming conversion of any potentially dilutive securities, such as stock
options or warrants. The Company has no potentially dilutive securities
outstanding.
2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Transportation and other equipment
under capital leases $ 185,970 $ 140,970
Furniture and equipment 42,778 14,000
Automobile 136,266 --
--------- ---------
365,014 154,970
Less - Accumulated depreciation 62,718 22,139
--------- ---------
$ 302,296 $ 132,831
========= =========
</TABLE>
Accumulated depreciation on equipment held under capital leases was $8,131
and $2,000 at September 30, 1999 and December 31, 1998, respectively.
3 - LOAN PAYABLE, AUTOMOBILE
In August 1999, the Company entered into a 60-month automobile loan
for $57,940. The loan requires monthly payments of $1,404, including
interest at 10%.
(Continued)
-8-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
4 - CAPITAL LEASE OBLIGATIONS
The Company leases transportation and other equipment under capital
leases. Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
--------------------
<S> <C>
1999 $ 47,041
2000 47,041
2001 27,441
------------
Total minimum lease payments 121,523
Less - Amount representing interest 20,092
------------
Present value of minimum lease payments 101,431
Less - Current maturities 34,991
------------
Long-term capital lease obligations $ 66,440
============
</TABLE>
5 - LOAN PAYABLE, SHAREHOLDER
The loan to the shareholder was repaid in December 1999, concurrent
with the merger with iLINK.
6 - RELATED PARTY TRANSACTIONS
Sales to a customer who is related to an officer were approximately
$9,075,000, $38,000 and $2,208,000 for the nine months ended September 30,
1999 and 1998 and the year ended December 31, 1998, respectively. The
amount receivable from this related party at September 30, 1999 and
December 31, 1998 was approximately $807,000 and $880,000, respectively,
all of which had been subsequently collected as of January 24, 2000.
(Continued)
-9-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
7 - LITIGATION WITH MAJOR SUPPLIER
For the nine months ended September 30, 1999, purchases from one
telephone card supplier were approximately 63% of total purchases. In
November 1999, the Company commenced an action against this supplier to
recover damages resulting from cancellation of telephone cards purchased by
the Company. The supplier subsequently countersued. In the Company's
opinion, with which its legal counsel concurs, no material liability will
result from the countersuit. The Company estimates that as a result of the
improper cancellation, it incurred a loss of approximately $500,000, which
will be reflected in the fourth quarter of 1999. The Company is uncertain
as to the prospects for recovery against such loss. The Company
subsequently mitigated, in substantial part, its reliance on this supplier
by increasing its purchases from other vendors.
8 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company is obligated under a noncancelable operating lease for
warehouse and office space. Approximate future minimum rentals at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
--------------------
<S> <C>
1999 $ 60,000
2000 63,000
2001 66,000
2002 70,000
2003 73,000
Thereafter 423,000
------------
$ 755,000
------------
</TABLE>
Rent expense for the nine months ended September 30, 1999 and 1998 was
$47,100 and $3,408, respectively. Rent expense for the year ended December
31, 1998 and the period ended December 31, 1997 was $16,708 and $-0-,
respectively.
(Continued)
-10-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
8 - COMMITMENTS AND CONTINGENCIES (Continued)
Contracts
The Company has various commitments with certain vendors requiring
minimum periodic purchases. Such contracts are common in the Company's
industry.
9 - INCOME TAXES
The Company's historical income tax provision reflects state and local
taxes on income. As an S Corporation, the Company was not subject to
Federal income taxes. For pro forma income statement purposes, the Company
has reflected the C Corporation taxes that would have been incurred had the
Company been subject thereto:
<TABLE>
<CAPTION>
April 17,
Nine Months Ended 1997 (Date of
September 30, Year Ended Inception) to
--------------------------------- December 31, December 31,
1999 1998 1998 1997
------------ ------------ ------------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
Federal $ 49,000 $ 87,000 $ 26,000 $ --
State and local 24,000 45,000 14,000 300
------------ ------------ ------------ -----------
$ 73,000 $ 132,000 $ 40,000 $ 300
============ ============ ============ ===========
</TABLE>
(Continued)
-11-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
10 - SUBSEQUENT EVENTS
Issuance of Common Shares
On November 17, 1999, the Company's sole shareholder sold 22.75 of his
common shares in the Company to three new shareholders. Of these, 14.75
shares were issued to affiliates of two providers of advisory services.
Such services were in large part related to the Company's general merger
and business development activities, but had no specific connection to the
merger with iLink. The remaining eight shares were issued to a creditor of
iLink as consideration for services directly related to the merger (This
creditor subsequently converted $300,000 of loans payable to 300,000 shares
of iLink.). The issuance of all of these shares furthered the Company's
interest to varying degrees; accordingly, their issuance has been
attributed directly to the Company, as if they had first been contributed
to the Company by the sole shareholder. These shares were recorded as
treasury stock at their fair value and reissued to the three
new shareholders. The Company recognized $227,391 of advisory fee expense
for the 14.75 shares. The remaining eight shares with a fair value of
$123,330 have been added to the Company's acquisition cost for the merger.
Reverse Acquisition
As discussed in Note 1, the Company consummated the reverse
acquisition of iLink on December 10, 1999. The Company's shareholders were
issued 14,900,000 iLink shares in exchange for the 200 shares of the
Company. For accounting purposes, the shares retained by the original
shareholders of iLink, subject to certain adjustments, are treated as being
issued by the Company to effect the merger, hence the term "reverse
acquisition". These shares were valued at $155,000 based upon an
independent valuation of iLink. In addition to the value of these shares,
the Company's acquisition cost includes the eight shares (post split
equivalent of 596,000 shares) issued to the creditor of iLink valued at
$123,330 and legal fees of $42,450, for total acquisition costs of
$320,780.
Private Placements
Concurrent with the closing of the merger, iLink completed two private
placements pursuant to which it sold 500,000 new common shares for
$1,000,000 and 1,500 convertible preferred shares for $1,500,000.
(Continued)
-12-
<PAGE>
9278 COMMUNICATIONS INC.
(FORMERLY 9278 DISTRIBUTOR INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
10 - SUBSEQUENT EVENTS (Continued)
Dividends
On November 30, 1999, the Company paid a dividend of $325 per share,
or $65,000 in the aggregate.
On December 10, 1999, concurrent with the closing of the merger, the
Company declared a $3,000,000 dividend ($15,000 per share), of which
$1,000,000 was paid in cash and the balance of $2,000,000 in the form of a
two-year promissory note. The payment of $1,000,000 was funded by the
private placements consummated as of that date.
Other Share Transactions
Contemporaneous with the merger, iLink issued 300,000 shares in
satisfaction of $300,000 in debt; issued 190,000 shares for services upon
the achievement of certain vesting provisions; and also issued 200,000
shares for advisory and related services in connection with the private
placement.
At the close of the merger, there were 19,659,629 shares outstanding,
of which 14,304,000 were owned by the Company's officers (excluding the
596,000 shares issued in the exchange to the creditor of iLink.
The effective split of 74,500 shares for 1 has been retroactively
recognized in the financial statements.
Employment Agreement
On December 10, 1999, the Company entered into a three-year employment
agreement with its chief executive officer. Base salary for each of the
three years will be $200,000, $225,000 and $250,000, respectively. At the
end of the three-year period, the employment agreement will automatically
be extended for an additional year without any action by the Company or the
chief executive officer, unless there is a submitted written notice four
months prior to expiration of the agreement by either party. In addition to
the base salary, iLink will compensate the chief executive officer with
cash bonuses and stock option grants based on iLink's economic performance.
-13-
<PAGE>
Pro Forma Financial Data
The following Pro Forma Balance Sheet at September 30, 1999 combines
the September 30, 1999 unaudited balance sheet of the Company (or "9278") with
the November 30, 1999 unaudited Balance Sheet of iLink Telecom, Inc. ("iLink"),
a development stage enterprise. The 1999 Pro Forma Statement of Operations
combines the nine months ended September 30, 1999 unaudited Statement of Income
for the Company with the nine months ended November 30, 1999 unaudited
historical Statements of Operations of iLink as if the acquisition was
consummated on January 1, 1999. The Pro Forma Statement of Operations for the
year ended December 31, 1998 combines the year ended December 31, 1998 audited
Statement of Income of the Company with the year ended February 28, 1999 audited
historical Statement of Income of iLink as if the acquisition was consummated on
January 1, 1998. The pro forma financial data are not necessarily indicative of
the actual operating results that would have occurred or the future operating
results that will occur as a consequence of such transactions. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the Company's results of operations to be expected for the full
year.
-14-
<PAGE>
Pro Forma Balance Sheet
<TABLE>
<CAPTION>
9278 iLink Pro Forma Adjustments Pro Forma
September 30, November 30, -------------------------------- September 30,
1999 1999 DR CR 1999
--------------- ----------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 346,124 $ 29,815 $ 2,600,000 (2) $ 1,299,567 (3) $ 1,676,372
Accounts receivable 5,642,278 106 -- -- 5,642,384
Inventories 830,302 -- -- -- 830,302
Other current assets 8,000 4,000 -- -- 12,000
------------- ----------- ------------ ------------ --------------
Total current assets 6,826,704 33,921 2,600,000 1,299,567 8,161,058
Property and equipment 302,296 29,320 -- -- 331,616
Goodwill -- 104,060 268,021 (1)
165,780 (5b) -- 537,861
Other assets 15,339 -- -- -- 15,339
------------- ----------- ------------ ------------ --------------
$ 7,144,339 $ 167,301 $ 3,033,801 $ 1,299,567 $ 9,045,874
============= =========== ============ ============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 6,303,638 $ 80,322 $ -- $ 42,450 (5b) $ 6,426,410
Current debt maturities 56,428 -- -- -- 56,428
Income taxes payable 21,551 -- -- -- 21,551
Loan payable shareholders 234,567 200,000 200,000 (2) -- --
234,567 (3)
Total current liabilities 6,616,184 280,322 434,567 42,450 6,504,389
------------- ----------- ------------ ------------ --------------
Long-term debt obligations 119,138 -- -- 2,000,000 (3) 2,119,138
------------- ----------- ------------ ------------ --------------
Shareholders' equity (deficiency)
Preferred stock 1,500,000 (2) 1,500,000
Common stock 14,900 5,509 1,940 (1) 800 (2) 19,659
390 (4)
Additional paid-in capital 185,100 824,243 250,000 (4) 269,961 (1) 2,361,062
1,472,773 (7) 1,299,200 (2)
779,610 (4)
350,721 (5a)
375,000 (6)
Retained earnings (deficit) 209,017 (942,773) 3,065,000 (3) 1,472,773 (7) (3,458,374)
530,000 (4)
227,391 (5b)
375,000 (6)
Treasury stock 350,721 (5a) 350,721 (5b) -
------------- ----------- ------------ ------------ --------------
409,017 (113,021) 6,272,825 6,399,176 422,347
------------- ----------- ------------ ------------ --------------
$ 7,144,339 $ 167,301 $ 6,707,392 $ 8,441,626 $ 9,045,874
============= =========== ============ ============ ==============
</TABLE>
See accompanying notes to pro forma financial statements.
-15-
<PAGE>
Pro Forma Statement of Operations
<TABLE>
<CAPTION>
9278 iLink Pro Forma
For the Nine For the Nine For the Nine
Months Ended Months Ended Months Ended
September 30, November 30, Pro Forma September 30,
1999 1999 Adjustments 1999
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 66,998,662 $ 30,959 $ -- $ 67,029,621
Cost of sales 65,571,268 -- -- 65,571,268
------------- ---------- ------------- ---------------
Gross profit 1,427,394 30,959 -- 1,458,353
------------- ---------- ------------- ---------------
Operating expenses
Selling expenses 236,216 -- -- 236,216
General and administrative 1,038,761 875,276 105,690 (2) 1,995,576
(24,151) (4)
Amortization of goodwill - 34,686 99,779 (1) 134,465
Loss on lease termination - 40,056 (40,056) (3) --
------------- ---------- ----------- -------------
1,274,977 950,018 141,262 2,366,257
------------- ---------- ----------- -------------
Income (loss) before
income taxes 152,417 (919,059) (141,262) (907,904)
Income taxes (benefit) 73,000 - (73,000) --
------------- ---------- ----------- -------------
Net income (loss) $ 79,417 $ (919,059) $ (68,262) (907,904)
============= ========== ===========
Preferred stock dividend (375,000) (5)
---------------
Loss attributable to common
stock $ (1,282,904)
===============
Basic and diluted loss
per share $ (.07)
===============
Shares used in the calculation
of loss per share 19,659,629 (6)
===============
</TABLE>
See accompanying notes to pro forma financial statements.
-16-
<PAGE>
Pro Forma Statement of Operations
<TABLE>
<CAPTION>
9278 iLink Pro Forma
For the Year For the Year For the Year
Ended Ended Ended
December 31, February 28, Pro Forma December 31,
1998 1999 Adjustments 1998
------------------ ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 22,169,108 $ -- $ -- $ 22,169,108
Cost of sales 21,486,747 -- -- 21,486,747
---------------- ---------------- --------------- ---------------
Gross profit 682,361 -- -- 682,361
---------------- ---------------- --------------- ---------------
Operating expenses
General and administrative 602,077 18,314 176,000 (2) 796,391
Goodwill - -- 179,287 (1) 179,287
---------------- ---------------- --------------- ---------------
602,077 18,314 355,287 975,678
---------------- ---------------- --------------- ---------------
Income (loss) before
income taxes 80,284 (18,314) (355,287) (293,317)
Income taxes (benefit) 40,000 -- (40,000) --
---------------- ---------------- --------------- ---------------
Net income (loss)
attributable to
common stock $ 40,284 $ (18,314) $ (315,287) $ (293,317)
================ ================ =============== ================
Basic and diluted loss
per share $ (.01)
===============
Shares used in the calculation
of loss per share 19,659,629 (6)
===============
</TABLE>
See accompanying notes to pro forma financial statements.
-17-
<PAGE>
9278 COMMUNICATIONS INC.
NOTES TO PRO FORMA BALANCE SHEET
1. This adjustment records goodwill based on the values inherent in the
reverse acquisition as of November 30, 1999. (Subsequent transactions
of both companies related to the merger are accounted for separately.)
The fair value of iLink at November 30, 1999 of $155,000 as determined
by independent appraisal is effectively substituted for iLink's deficit
book equity at that date, resulting in additional goodwill of $268,021.
In accordance with reverse acquisition accounting, the fair value of
the shares retained by the accounting acquiree are treated as the
consideration paid by the accounting acquiror to effect the
acquisition. This adjustment also reverses the par value of unvested
common shares previously issued by iLink. The offset to both of these
adjustments is additional paid-in capital.
2. This adjustment records (i) the conversion to equity of $200,000 of
loans outstanding at November 30, 1999, (ii) the conversion to equity
of an additional $100,000 from the same lender borrowed on December 6,
1999, and (iii) the two private placements which were consummated on
December 10, 1999, one for $1,000,000 for 500,000 shares of common
stock and one for $1,500,000 for 1,500 shares of preferred stock.
3. This adjustment records two dividends, one for $65,000 and one for
$3,000,000, applicable to 9278 Distributor Inc. as well as the
repayment of a loan payable to the majority shareholder of 9278. The
$3,000,000 dividend was actually part of the consideration for the
legal acquisition of 9278 by iLink. However, since 9278 is the
accounting acquiror, such $3,000,000 transaction is recorded as a
dividend of which $1,000,000 was paid in cash and the balance of
$2,000,000 evidenced by a two-year promissory note.
4. This adjustment records the following common stock issuances: (i) a
total of 190,000 shares which vested as a result of the merger with
compensation expense to two employees recognized at $2.00 per share,
the cash price paid in the common stock private placement, (ii) 200,000
common shares issued as compensation expense for advisory and related
services in connection with the merger and the private placements.
These shares were valued at the cash price for the common stock private
placement with $250,000 treated as a direct cost of raising capital
equivalent to a 10% underwriting fee and the remaining $150,000
expensed as professional advisory or investment banking fees.
-18-
<PAGE>
9278 COMMUNICATIONS INC.
NOTES TO PRO FORMA BALANCE SHEET
5a. This adjustment records the deemed contribution of 22.75 shares of
common stock by the sole shareholder of 9278 to the Company although
such shares were actually sold by him to three new stockholders. As
such sale was in significant part in furtherance of the Company's
interests, the sale is attributed to the Company and the fair value is
recorded as treasury stock and additional paid-in (contributed)
capital. The shares are valued based on the acquisition value of iLink
increased by the $2,500,000 of cash proceeds raised in the two private
placements.
5b. This adjustment records the re-issuance of the 22.75 shares at the same
values as those recognized when contributed to the Company. Of the
shares issued, eight were issued to a creditor of iLink and are
treated as additional direct consideration to effect the acquisition
and are accordingly recorded as goodwill arising from the merger. The
other shares issued were recorded as compensation expense to two
consulting service providers. Such issuances were only peripherally
related to the merger and are not considered a cost of the
transaction requiring recognition of goodwill. Legal costs directly
related to the merger and payable in cash are added to aggregate
acquisition cost, resulting in additional goodwill of $42,450.
6. This adjustment recognizes a preferred stock dividend deemed to arise
from the beneficial conversion feature of the Company's convertible
preferred stock equal to the conversion discount of 25% below market
times the preferred stock proceeds of $1,500,000. The effect on
earnings per share is only reflected for the nine months ended
September 30, 1999 since the stock was issued on December 10, 1999 and
would only impact earnings per share in one period.
7. This adjustment sets the retained earnings (deficit) of the accounting
acquiree to zero. It consists of iLink's deficit at November 30, 1999
of $942,773 plus the expense recognized at the vesting of 190,000
shares plus the expense recognized from the issuance of 75,000 of the
200,000 shares issued by iLink in connection with the merger and the
two private placements. The value of the remaining 125,000 shares was
charged directly to additional paid-in capital as a direct cost of
raising capital.
-19-
<PAGE>
9278 COMMUNICATIONS INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
1. To adjust goodwill amortization to reflect a three-year life for the goodwill
recognized in the merger.
2. To adjust the salary of 9278's chief executive officer to $150,000 and
$200,000, respectively, for the applicable periods, reflecting his new
employment agreement.
3. To exclude the nonrecurring loss on lease termination.
4. To reverse the expense for the lease which began in 1999, but which was
terminated as a direct result of the merger.
5. To reflect a preferred stock dividend for the beneficial conversion feature
of the preferred stock (equal to the 25% discount from the market price upon
conversion) on the $1,500,000 proceeds thereof. (Adjustment applicable to
1999 only)
6. The 19,659,629 shares outstanding at the completion of the merger are treated
as outstanding throughout both periods.
-20-
