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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number: 333-84845
9278 COMMUNICATIONS, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 98-0207906
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1942 Williamsbridge Road, Bronx, New York 10461
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(Address of Principal Executive Offices)
(718) 792-5150
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common Stock, $.001 par value - 20,554,772 shares as of May 1, 2000
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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ITEM 1. FINANCIAL STATEMENTS
9278 COMMUNICATIONS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
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<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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(Unaudited)
<S> <C> <C>
Current assets
Cash $ 327,792 $ 26,192
Accounts receivable, less allowance for doubtful accounts
of $340,000 and $125,000 4,087,170 3,820,503
Inventories 927,302 1,302,171
Prepaid expenses and other current assets 74,201 30,749
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Total current assets 5,416,465 5,179,615
Property and equipment - at cost, less accumulated
depreciation and amortization 629,255 349,869
Goodwill, less accumulated amortization of $30,724 and $11,205 203,501 593,857
Other assets 28,099 15,339
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$ 6,277,320 $ 6,138,680
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 2,467,213 $ 2,805,579
Current maturities of note and advances payable, shareholder 1,136,328 1,633,521
Current maturities of debt obligations 67,766 69,102
Income taxes payable 2,000 2,000
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Total current liabilities 3,673,307 4,510,202
Note payable, shareholder, less current maturities 1,000,000 1,000,000
Debt obligations, less current maturities 167,798 108,002
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4,841,105 5,618,204
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Commitments and contingencies -- --
Shareholders' equity
Convertible preferred stock
Class B, $.001 par value; 5,000,000 shares authorized,
1,075 and 1,500 shares issued and outstanding 1,075,000 1,500,000
Common stock, $.001 par value; 25,000,000 shares
authorized, 20,554,772 and 19,659,629 shares issued and
outstanding 20,554 19,659
Additional paid-in capital 4,193,487 2,361,382
Accumulated deficit (3,852,826) (3,360,565)
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1,436,215 520,476
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$ 6,277,320 $ 6,138,680
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
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9278 COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Net sales $ 16,882,918 $ 10,532,611
Cost of sales 16,181,991 10,159,319
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Gross profit 700,927 373,292
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Operating expenses
Selling 7,967 21,570
General and administrative 481,650 105,493
Depreciation and amortization 31,703 8,574
Provision for doubtful accounts 263,474 --
Loss attributable to sale of equipment 363,367 --
Interest expense 45,027 3,464
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1,193,188 139,101
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Net income (loss) $ (492,261) 234,191
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Basic and diluted earnings (loss) per share $ (.02) $ .01
============ ============
Shares used in the calculation of earnings per share 20,003,337 14,900,000
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
2
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9278 COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash flows used in operating activities $(546,097) $ (19,425)
Cash flows used in investing activities (76,843) (6,800)
Cash flows provided by (used in) financing activities 924,540 (8,294)
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Net increase (decrease) in cash 301,600 (34,519)
Cash, beginning of period 26,192 364,968
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Cash, end of period $ 327,792 $ 330,449
========= =========
Supplemental cash flow disclosures
Interest paid $ 5,027 $ 3,464
Noncash investing and financing activities
Equipment acquired under capital leases 75,000 --
Common stock issued in exchange
for advances payable, shareholder 500,000 --
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
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9278 COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1999.
The unaudited condensed consolidated financial statements included herein
reflect, in the opinion of management, all adjustments (consisting primarily
only of normal recurring adjustments) necessary to present fairly the results
for the interim periods. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of results to be expected for the
entire year ending December 31, 2000.
2 - 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, and reincorporated in Delaware
on May 2, 2000.
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 has been treated as a reverse acquisition, with
the Company as the acquiror, and is accounted for as a purchase.
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. 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 a creditor of iLink valued at $123,330,
legal fees of $42,455, and investment banker fees of $13,226, for total
acquisition costs of $334,011.
(Continued)
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9278 COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The accompanying consolidated balance sheet as of March 31, 2000 includes
the accounts of the Company and iLink. The related accompanying consolidated
statements of operations and cash flows include the results of operations and
cash flows of the Company for the entire year and of iLink for the periods
beginning December 11, 1999. All significant intercompany transactions and
balances have been eliminated.
The Company sells prepaid telephone cards to distributors and small retail
establishments, primarily in the New York, New Jersey and Connecticut areas.
Goodwill
Goodwill represents cost in excess of fair value of net assets acquired in
the merger transaction, and is being amortized over 3 years. The Company
periodically re-evaluates its recoverability.
On February 28, 2000, the Company sold the assets acquired in the
acquisition of iLink and recognized a loss on the sale of $363,367, primarily
attributable to the write-off of the related goodwill.
Income Taxes
Prior to the merger with iLink, 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 was reportable by the shareholders on their
individual income tax returns, and the Company made no provision for Federal
income tax. Provisions were 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.
(Continued)
5
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9278 COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per common share is calculated by dividing net income (loss)
available to common stockholders 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. Potentially dilutive securities
have been excluded from the calculation of diluted loss per share for the three
months ended March 31, 2000, as their effect would have been antidilutive.
3 - CAPITAL STOCK TRANSACTIONS
Between January 7, 2000 and February 7, 2000, certain holders of the
Company's Series B convertible preferred stock converted 425 shares into 191,143
shares of common stock.
During March 2000, the Company issued an aggregate of 154,000 shares of its
common stock to seven different investors at a price of $2.00 per share, for
gross proceeds to the Company of $308,000.
During March 2000 the Company exchanged 250,000 shares of Common Stock for
$500,000 of advances from a shareholder.
On March 15, 2000, the Company issued an aggregate of 300,000 shares of its
common stock to six different investors at a price of $2.00 per share, for gross
proceeds to the Company of $600,000.
4 - RELATED PARTY TRANSACTIONS
Sales to a customer who is related to an officer were approximately
$1,200,000 and $1,300,000 for the three months ended March 31, 2000 and 1999,
respectively. On March 2, 2000, the Company entered into a letter of intent to
acquire this customer's business. The acquisition is contingent upon execution
of a definitive agreement, obtaining financing and completing due diligence
review.
(Continued)
6
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9278 COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5 - LITIGATION WITH TELEPHONE CARD SUPPLIERS AND DISTRIBUTORS
In November 1999, the Company commenced an action against a former major
supplier to recover damages resulting from cancellation of telephone cards
purchased by the Company. The loss totaled $553,547, which was reflected in the
fourth quarter of 1999. The Company is doubtful as to the prospects for recovery
against such loss. 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 subsequently mitigated, in substantial part,
its reliance on this supplier by increasing its purchases from other vendors.
In November 1999, a distributor of the Company's prepaid phone cards
commenced an action claiming approximately $600,000 based on a purported breach
of oral contract by the Company. The Company filed an answer and counterclaimed
against the distributor for approximately $600,000 of unpaid invoices due and
owing from such distributor to the Company. The Company believes it has
meritorious defenses to the claims of the distributor and plans to pursue its
claim for unpaid invoices.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of new communication products, the impact of competitive products and services,
and other risks and uncertainties. These forward-looking statements speak only
as of the date hereof and should not be given undue reliance. Actual results may
vary significantly from those projected.
OVERVIEW
To date, the Company's principal source of revenue has been the marketing
and distribution of prepaid phone cards. The Company markets and distributes
branded prepaid phone cards produced by a variety of telecommunications long
distance carriers and resellers, as well as private label proprietary prepaid
phone cards produced exclusively for the Company by various long distance
carriers and/or resellers.
Prepaid phone cards are distributed through a vast network of retail
outlets, including convenience stores, newsstands, grocery stores and discount
stores. The retail outlets are serviced by independent distributors, which often
distribute newspapers or other items to the retail outlets. The Company
purchases large volumes of branded prepaid phone cards from the long distance
carrier or reseller and sells the cards in smaller quantities, together with
cards from other carriers and/or private label cards distributed by the Company,
to the independent distributor, for ultimate distribution to retail outlets.
Branded cards are purchased by the Company at a discount from the face value
of the card, and resold to the distributor at a slightly lower discount. The
difference between the two discount rates, typically from 1% to 3%, represents
the gross margin retained by the Company. Purchases of branded cards by the
Company are made on varying terms, from C.O.D. to a net 30 basis, although the
majority of the Company's purchases are made on credit terms of 10 days or less.
Sales by the Company of its product are generally made on a net 30 basis.
Private label cards are generally designed and produced by the Company,
utilizing card numbers and PINs provided by the telecommunications' carrier or
reseller providing the long distance service for the card. The Company incurs
the upfront expense of printing the phone cards. However, the Company does not
pay the long distance carrier until it activates the cards, which occurs upon
the sale by the Company to the distributor. Accordingly, through the use of
private label cards, the Company's cost of inventory is significantly reduced,
as purchases are effectively made on an as-needed basis. In addition, private
label cards generally provide the Company with the ability to achieve a greater
gross margin percentage, typically ranging from 3% to 6%.
The Company is seeking to develop and acquire rights to additional prepaid
telecommunications services and other prepaid products or services to diversify
its product offerings and increase its overall gross margin.
8
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RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
Net sales for the three months ended March 31, 2000 rose 60.2% to
$16,882,918, from net sales of $10,532,611 during the three months ended March
31, 1999. Gross profit increased 87.9% during the 2000 period to $700,927 from
$373,292 for the 1999 period. The increase in gross profit was due to higher
gross profit margins achieved by the sale of private label phone cards, which
increased during the current period. Total expenses increased 758% to $1,193,188
in the 2000 period, as compared to $139,101 for the 1999 period. Included in the
current period expenses are $363,367 of expense attributable to the sale of the
assets of iLink Telecom, a company with which 9278 Communications merged in
December 1999. Also included in total expenses was a $263,474 provision for
doubtful accounts, which are due from a distributor of the Company with whom the
Company is in litigation. In addition, general and administrative expenses for
the three months ended March 31, 2000 increased to $481,650, as compared to
$105,493 for the period ended March 31, 1999 as a result of the addition of new
management personnel and increased legal and accounting costs resulting from the
Company becoming a publicly traded company. As a result of the foregoing, the
Company generated a net loss of $492,261 during the three months ended March 31,
2000, as compared to net income of $234,191 for the period ended March 31, 1999.
Absent the expenses for the provision for doubtful accounts and the expenses
attributable to the sale of the iLink assets, the Company would have generated
net income for the three months ended March 31, 2000 of $134,580.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 and December 31, 1999, the Company had total current
assets of approximately $5,416,000 and $5,180,000, respectively. At March 31,
2000, this included $328,000 in cash, $927,000 of inventory and $4,087,000 of
accounts receivable. At December 31, 1999, cash, inventory and accounts
receivable were $26,000, $1,302,000 and $3,821,000, respectively. The Company's
cash balances vary significantly from day-to-day due to the large volume of
purchases and sales made by the Company from the various prepaid phone card
companies and the numerous distributors to whom the Company sells cards. Due to
the shorter credit terms made available to the Company from the
telecommunications companies from whom it buys branded cards, as compared to the
credit terms made available by the Company to its customers, the Company, from
time-to-time, requires infusions of cash in order to maintain its preferential
buying/purchasing terms with its carriers. Such cash flow needs are also
affected by the timing of large purchases by the Company, which are made by the
Company from time-to-time to take advantage of favorable pricing opportunities.
To date, the Company has satisfied such cash requirements by loans from its
principals and/or private sales of the Company's equity securities. The Company
is seeking to secure financing to provide the Company with liquidity to meet its
future needs. There can be no assurance that the Company will be able to obtain
such financing on commercially reasonable terms, or otherwise, or that it will
be able to otherwise satisfy it short-term cash flow needs from other sources in
the future.
9
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) On January 7, January 18, January 19 and February 7, 2000, holders of the
Company's series B convertible preferred stock converted 200, 100, 100 and 25
shares into 94,604, 42,496, 42,839 and 11,204 shares of the Company's common
stock, respectively. These transactions were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933 (the "Act").
b) On March 15, 2000, pursuant to its non-qualified stock option plan, the
Company granted non-qualified options to purchase 25,000 shares of its common
stock, at an exercise price of $4.00 per share, to Raymond Akwule, the Company's
newly appointed director. The options vest 50% on September 15, 2000 and 50% on
March 15, 2001 and are exercisable for a period of ten years from the date of
the grant.
c) On March 15, 2000, the Company issued an aggregate of 300,000 shares of
its common stock to six different investors at a price of $2.00 per share for
gross proceeds of $600,000. This transaction was exempt from registration
pursuant to Rule 506 of Regulation D of the Act.
d) On March 21, 2000, the Company issued an aggregate of 154,000 shares of
its common stock to six different investors at a price of $2.00 per share for
gross proceeds of $308,000 and exchanged 250,000 shares of its common stock for
$500,000 of advances from a shareholder. Two of these individuals are officers
and directors of the Company. This transaction was exempt from registration
pursuant to Section 4(2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2000 the Company held a special meeting of stockholders to
consider an agreement and plan of merger between the Company and it's
wholly-owned subsidiary, 9278 Communications, Inc., a Delaware corporation (the
"Delaware Company"), pursuant to which, among other things, (i) the Company's
state of incorporation would change from Nevada to Delaware, (ii) all of the
authorized shares of the Company would be converted into an equal number of
similar shares of the Delaware Company, and (iii) certain changes in the
Company's Certificate of Incorporation would be effectuated, including an
increase in the number of authorized shares of common stock of the Company from
25,000,000 to 40,000,000. At the meeting 13,205,425 votes were cast for the
merger and no votes were cast against the merger. The merger became effective
upon filing of a certificate of merger on May 2, 2000.
ITEM 5. OTHER INFORMATION
On April 24, 2000 the Company entered into an Agreement and Plan of Merger
with its wholly-owned subsidiary, 9278 Communications, Inc., a Delaware
corporation (the "Delaware Company") providing for the Company to merge with and
into the Delaware Company. The merger became effective upon filing of a
Certificate of Merger on May 2, 2000. Upon effectiveness of the merger, among
other things, (i) the Company's state of incorporation was changed from Nevada
to Delaware, (ii) all of the authorized shares of the Company were converted
into an equal number of similar shares of the Delaware Company, and (iii)
certain changes in the Company's Certificate of Incorporation took effect,
including and increase in the authorized shares of common stock of the Company
from 25,000,000 to 40,000,000. At the time of the merger, the Company ceased to
exist and
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the Delaware Company took ownership of all of the Company's assets and assumed
all of its liabilities. The surviving company is governed by the Delaware
General Corporation Law and the Certificate of Incorporation and Bylaws of the
Delaware Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits
The exhibits in the following table have been filed as part of this
quarterly report on Form 10-QSB.
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Agreement and Plan of Merger between the Company and its wholly-owned
subsidiary, 9278 Communications, Inc., a Delaware corporation*
3.1 Articles of Incorporation of 9278 Communications, Inc., a Delaware
corporation*
3.2 Bylaws of 9278 Communications, Inc., a Delaware corporation*
27.1 Financial Data Schedule*
- ---------------------
* Previously filed
b). Reports on Form 8-K
1) On January 10, 2000, the Company amended its Current Report on Form
8-K, dated December 28, 1999. It had filed the December 28, 1999 report
to report that it had (i) dismissed Ernst & Young LLP as its
independent certified public accountant, effective December 28, 1999,
(ii) engaged Friedman Alpren & Green LLP to act as it independent
certified public accountant, effective December 28, 1999, (iii) filed
an amendment to its Certificate of Incorporation on December 23, 1999,
changing its name from iLink Telecom, Inc. to 9278 Communications,
Inc., and (iv) changed its fiscal year end from February 28 to
December 31.
2) On February 22, 2000, the Company amended its Current Report on Form
8-K, dated December 10, 1999. iLink Telecom, Inc. had filed the
December 10, 1999 report to report a change in control of iLink as a
result of iLink consummating a merger among iLink, 9278 Acquisition
Corp., a wholly-owned subsidiary of iLink and 9278 Distributor, Inc.
For accounting purposes, the merger was treated as a reverse
acquisition, with 9278 Distributor as the acquiror. Included with the
report filed on February 22, 2000, were the Financial Statements of
9278 Distributor Inc. for the year ended December 31, 1998 and
nine-month period ended September 30, 1998 and 1999.
11
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
9278 COMMUNICATIONS, INC.
Date: May 17, 2000 /s/ Amar Bahadoorsingh
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President
(Principal Financial and Accounting Officer)
12
