SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR QUARTER ENDED JANUARY 31, 1997 COMMISSION FILE NO. 33-19324
LOGIPHONE GROUP, INC.
(Exact name of registrant as specified in charter)
DELAWARE 75-0223079
(State or other jurisdiction (IRS Employer Identification No.)
at incorporation)
607 WEST BROADWAY, SUITE 247
FAIRFIELD, IOWA 52556
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (515) 469-3044
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of May 1, 1997, there were outstanding 9,000,000 shares of common stock,
$.0001 par value.
Transitional Small Business Disclosure Format (check one)
YES NO X
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LOGIPHONE GROUP, INC.
January 31, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at January 31, 1997 and
April 30, 1996.......................................................................F-1
Consolidated Statement of Operations for the three and
nine months ended January 31, 1997 and 1996..........................................F-2
Consolidated Statement of Cash Flows for the three and
nine months ended January 31, 1997 and 1996..........................................F-3
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended January 31, 1997...........................................F-4
Summary Financial Information Schedule........................................................F-5
Notes to Financial Statements.................................................................F-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................3
PART II. OTHER INFORMATION.......................................................................................8
Item 1. Legal Proceedings...............................................................................8
Item 2. Changes in Securities...........................................................................8
Item 3. Default Upon Senior Securities..................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.............................................8
Item 5. Other Information...............................................................................8
Item 6. Exhibits and Reports on Form 8-K................................................................8
SIGNATURES.......................................................................................................10
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LOGIPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) JANUARY 31, 1997 AND APRIL 30, 1996
ASSETS
------
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
CURRENT ASSETS 1997 1996
- -------------- ----------------------- -----------------------
<S> <C> <C>
Cash $ 36,457 $ 26,345
Accounts Receivable (Net) 70,057 86,480
Accrued Interest Receivable 5,569 -
Prepaid Expenses 33,191 -
Other Current Assets 45,081 -
----------------------- -----------------------
TOTAL CURRENT ASSETS 190,355 112,825
PROPERTY AND EQUIPMENT
Equipment 673,357 78,280
Furniture 11,052 924
Vehicles 2,880 3,074
Less: Accumulated Depreciation (166,794) (5,131)
----------------------- -----------------------
TOTAL PROPERTY AND EQUIPMENT 520,495 77,147
Loans Receivable - Long Term 97,224 -
TOTAL ASSETS $ 808,074 $ 189,972
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 483,725 $ 42,379
Loans Payable 6,716 -
Accrued Interest Payable 5,986 -
Convertible Notes Payable 550,000 -
----------------------- -----------------------
TOTAL CURRENT LIABILITIES 1,046,427 42,379
LONG TERM LIABILITIES
Capital Leases 5,855 -
Long-Term Debt - 218,347
----------------------- -----------------------
TOTAL LONG TERM LIABILITIES 5,855 218,347
----------------------- -----------------------
TOTAL LIABILITIES 5,855 218,347
STOCKHOLDERS' EQUITY
Common Stock
20,000,000 shares authorized 9,000,000 shares issued and
outstanding, par value $0.0001 at January 31, 1997 900 -
Additional Paid-in-Capital 1,370,657 -
Retained Deficit (1,615,765) (70,754)
----------------------- -----------------------
TOTAL STOCKHOLDER'S EQUITY (244,208) (70,754)
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 808,074 $ 189,972
======================= =======================
</TABLE>
See accompanying notes to financial statement.
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LOGIPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1996 1997 1996
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
SALES $ 263,355 $ - $ 417,642 $ -
COST OF SALES
Cost of goods sold 288,962 360 507,291 360
----------- ------------- ----------- ---------------
GROSS PROFIT (25,597) (360) (89,649) (360)
OPERATING EXPENSES
Auto Expenses 16,121 - 45,704 -
Bad Debt 3,687 - 3,687 -
Bank Charges 710 - 3,044 -
Commissions 22,982 - 25,750 -
Consulting 41,433 - 41,433 -
Depreciation 82,826 - 158,989 -
Dues & Subscriptions 3,676 52 6,186 52
Fees 41,298 - 205,783 -
Insurance 1,358 - 1,358 -
Legal & Accounting 36,148 - 70,676 -
Marketing 18,119 810 55,792 810
Meals & Entertainment 274 - 274 -
Human Resource Expense 2,315 - 2,315 -
Office Expenses 10,475 - 38,184 -
Payroll Taxes 1,869 - 1,869 -
Postage 7,446 - 14,642 -
Printing 1,650 766 3,942 766
Rent - Equipment 7,597 - 7,597 -
Rent 8,693 1,200 33,146 1,200
Repairs & Maintenance 1,250 - 1,925 -
Salaries 149,607 2,754 223,672 2,754
Telephone 20,497 - 38,114 -
Travel 16,636 241 82,160 241
Utilities 28 - 28 -
----------- ------------- ----------- ---------------
TOTAL OPERATING EXPENSES 496,695 5,823 1,066,270 5,823
Interest Income 2,170 - 2,170 -
Interest Expense (6,319) - (6,319) -
NET LOSS $ (526,441) $ (6,183) $ (1,160,068) $ (6,183)
----------- ------------- ----------- ---------------
WEIGHTED AVERAGE LOSS
PER SHARE $ (0.0585) $ - $ (0.1289) $ -
----------- ------------- ----------- ---------------
</TABLE>
See accompanying notes to financial statement.
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LOGIPHONE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1996
---------------------- ------------------------
CASH FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (1,160,068) $ (6,183)
Adjustment to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Add back non cash expenses
Depreciation and Amortization 158,989 -
Change in Certain Working Capital Items:
Accounts Receivable 16,424 -
Accrued Interest Receivable (5,569) -
Loans Receivable - (22,917)
Prepaid Expenses and Other Current Assets (78,272) -
Accounts Payable and Accrued Expenses 447,332 -
Loan Payables 6,716 -
------------------ ---------------------
Net Cash Used by Operating Activities (614,449) (29,100)
------------------ ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds used for equipment, furniture and vehicles (602,337) -
Proceeds used in issuance of long term note receivable (97,224) -
Currency translation adjustment in acquisition (300,692) -
------------------ ---------------------
Net Cash Used for Investing Activities (1,000,253) -
------------------ ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt 69,192
Proceeds from long-term capital leases 5,855 -
Addition to paid-in-capital 550,000 -
Conversion of long-term debt to paid-in-capital 1,068,959 -
------------------ ---------------------
Net Cash Provided by Financing Activities 1,624,814 69,192
------------------ ---------------------
Net Increase (Decrease) in Cash 10,112 40,092
CASH AT BEGINNING OF PERIOD 26,345 -
------------------ ---------------------
CASH AT END OF PERIOD $ 36,457 $ 40,092
------------------ ---------------------
</TABLE>
See accompanying notes to financial statement.
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LOGIPHONE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED FOR THE NINE MONTHS ENDED JANUARY 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT STOCKHOLDERS'
EQUITY
-------------- ---------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance January 31, 1996 - $ - $ - $ (6,183) $ (6,183)
Net loss for the quarter
ended April 30, 1996 - - - (64,571) (64,571)
-------------- ---------------- ------------------- ---------------- -------------------
Balance April 30, 1996 - - - (70,754) (70,754)
Issuance of Stock 400 24,400 - - 24,400
Net loss for the quarter
ended July 31, 1996 - - - (316,286) (316,286)
-------------- ---------------- ------------------- ---------------- -------------------
Balance July 31, 1996 400 24,400 - (387,040) (362,640)
Issuance of Stock 10,000 590,000 - - 590,000
Net loss for the quarter
ended October 31, - - - (374,768) (374,768)
1996
-------------- ---------------- ------------------- ---------------- -------------------
Balance October 31, 1996 10,400 614,400 - (761,808) (147,408)
Effect of consolidation
with ICA, BV (10,400) (614,400) - 761,808 147,408
Acquisition of ICA, BV 4,500,000 450 1,371,107 (1,089,324) 282,233
Stock Dividend 4,500,000 450 (450) - -
Net loss for the quarter
ended January 31, - - - (526,441) (526,441)
1997
-------------- ---------------- ------------------- ---------------- -------------------
Balance January 31, 1997 9,000,000 $ 900 $1,370,657 $(1,615,765) $ (244,208)
============== ================ =================== ================ ===================
</TABLE>
See accompanying notes to financial statement.
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SUMMARY FINANCIAL INFORMATION SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM LOGIPHONE GROUP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1997 1996
---------------------- ----------------------
<S> <C> <C>
Cash and cash items $ 36,457 $ 26,345
Notes and accounts receivable-trade 73,744 91,032
Allowances for doubtful accounts 3,687 4,552
Total current assets 190,355 112,825
Property, plant and equipment 687,289 82,278
Accumulated depreciation 166,794 5,131
Total assets 808,074 189,972
Total current liabilities 1,046,427 42,379
Common stock 900 -
Other stockholder's equity (245,108) (70,754)
Total liabilities and stockholder's equity 808,074 189,972
Total revenues 265,535 25,727
Total costs and expenses applicable to sales and revenues 785,657 96,481
Interest expense (6,319) -
Loss before taxes and other items (526,441) (70,754)
Income tax expense - -
Loss from continuing operations (526,441) (70,754)
Net loss (526,441) (70,754)
Loss per share-primary $ (0.0585) $ -
Loss per share-fully diluted $ (0.0410) $ -
</TABLE>
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LOGIPHONE GROUP, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
January 31, 1997
Note 1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation have
been included. Operating results for the three months and nine months ended
January 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending April 30, 1997.
On November 1, 1996, ICA Marketing, L.C. acquired 4,000,000 shares (the
"Shares") of common stock, par value $.0001 per share (the "Common Stock"), of
Logiphone Group, Inc. (formerly Star Resources, Inc.), which constituted
approximately 89% of the issued and outstanding shares of Common Stock of
Logiphone Group, Inc. in exchange for all of the stock of International Callers
Association, B.V. ("ICA BV") as well as an assignment of all the debt issued by
ICA BV to ICA Marketing, L.C. Prior to the acquisition of the Shares, Logiphone
Group, Inc., effective as of October 25, 1996, (i) reduced the number of
authorized shares of Common Stock from 120,000,000 to 20,000,000; (ii)
effectuated a 1:82.85 reverse stock split (the "Reverse Stock Split") with any
fractional shares resulting from the Reverse Stock Split being rounded up to the
nearest whole share of Common Stock; and (iii) changed its name to Logiphone
Group, Inc. from Star Resources, Inc. In connection with the Reverse Stock
Split, the President and principal stockholder of Logiphone Group, Inc. prior to
the acquisition of the Shares, contributed to Logiphone Group, Inc. such number
of post-split shares of Common Stock necessary to reduce the number of
outstanding shares of Common Stock immediately after the Reverse Stock Split
(but prior to the acquisition of the Shares) to 500,000 shares of Common Stock.
The acquisition of the Shares and the Reverse Stock Split have been accounted
for as a reverse merger whereby ICA BV is deemed to have acquired Logiphone
Group, Inc. Accordingly, the results of operations and financial position of the
Company for periods and dates prior to the acquisition of the Shares are the
historical results of operations and financial position of ICA BV for such
periods and dates. The acquisition of Logiphone Group, Inc. (for accounting
purposes) is not expected to have a material impact on the Company's results of
operations or financial position.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Activity:
Logiphone Group, Inc. is a reseller of long distance services through its
own series of telephone switches. Currently, the Company is operating in the
Netherlands through its wholly owned subsidiary ICA BV.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Company
considers cash in bank accounts, cash on hand, and marketable securities due
within 30 days as cash and cash equivalents.
Property and Equipment:
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated lives, which for U.S. assets are five
years for office equipment, automobile and computers, and seven years for
furniture and fixtures. ICA BV property and equipment estimated lives are two
years for routers and lines, three years for telephone equipment, hardware,
software, and automobile, and five years for furniture.
Principles of Consolidation:
The consolidated financial statements include the financial information of
Logiphone Group, Inc. and its wholly owned subsidiary ICA BV, accounted for as a
pooling of interests. All material intercompany transactions have been
eliminated.
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Use of Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Foreign Currency Translation:
Financial statements of ICA BV have been converted from Dutch Guilders to
US Dollars using the exchange rates of 0.543 Dollars per Guilder at January
31,1997, 0.58 Dollars per Guilder at April 30, 1996, and 0.60 Dollars per
Guilder at January 31, 1996.
Note 3. MERGER AND ACQUISITION:
On November 1, 1996 Logiphone Group, Inc. (formerly Star Resources, Inc.)
acquired from ICA Marketing, L.C. all of the capital stock of International
Callers Association, B.V. ("ICA BV") and certain assets of ICA Marketing, L.C.
Logiphone Group, Inc. issued 4,000,000 shares (the "Shares") of common stock,
par value $.0001 per share (the "Common Stock"), to ICA Marketing, L.C. ICA
Marketing, L.C. was then liquidated, and the Shares were distributed to its
members.
Prior to the acquisition of the Shares by ICA Marketing, L.C., Logiphone
Group, Inc., effective as of October 25, 1996 (i) reduced the number of
authorized shares of Common Stock from 120,000,000 to 20,000,000; (ii)
effectuated a 1:82.85 reverse stock split with any fractional shares resulting
from the reverse stock split being rounded up to the nearest whole share of
Common Stock; and (iii) changed its name to Logiphone Group, Inc. from Star
Resources, Inc. In connection with the reverse stock split, the President and
principal stockholder of Logiphone Group, Inc. prior to the acquisition of the
Shares, contributed to Logiphone Group, Inc. such number of post-split shares of
Common Stock necessary to reduce the number of outstanding shares of Common
Stock immediately after the reverse stock split (but prior to the acquisition of
the Shares) to 500,000 shares of Common Stock.
On November 15, 1996, the Board of Directors of the Company declared a 1:1
stock dividend to stockholders of record on November 29, 1996.
Note 4. RELATED PARTY TRANSACTIONS:
An officer, director and stockholder of the Company received loans from the
Company in the amount of $97,224. These loans bear interest at 10% per annum,
are secured by 100,000 shares of Common Stock of Logiphone Group, Inc., and are
due with interest on January 5, 1999.
The Company has a contingent obligation to provide under certain
circumstances debt financing to Logiphone Israel of up to $1 million with
interest at 10% per annum in exchange for the development of certain equipment
[and the use of the Logiphone name]. Logiphone Israel has the right of repayment
at any time or, at its option, may convert the debt to equity. There were no
such loans outstanding at January 31, 1997 and April 30, 1996.
Note 5. DEBT OBLIGATIONS:
Loan Payable:
The Company owes an employee $6,716 on an open account basis, unsecured,
with interest at prime rate plus 2%.
F - 7
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Capital Leases:
The Company has lease obligations for office equipment with payments
including interest of $275.22 per month. Lease obligations for certain telephone
routing equipment equals 3% of monthly sales from the use of that equipment for
a period of 36 months ending July 31, 1999.
Future minimum lease payments under capitalized lease obligations are as
follows at January 31, 1997
4/30/97 $ 826
4/30/98 3,303
4/30/99 2,261
4/30/00 638
Note 6. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company currently maintains an allowance for doubtful accounts which
was $3,687 at January 31, 1997 and $4,552 at April 30, 1996.
Note 7. STOCK OPTION PLAN
Each director and executive officer of the Company has been granted an
option to purchase 100,000 shares of Common Stock at an exercise price of $10
per share during a two-year exercise period. A total of 600,000 options have
been granted pursuant to and subject to a Stock Option Plan to be considered by
the Board of Directors.
The majority stockholder of the Company has additional options to acquire
1,400,000 shares of Common Stock at a price of $25.00 per share, and options to
acquire 1,500,000 shares of Common Stock at a price of $50.00 per share. All of
these options expire on November 11, 1998.
Note 8. CONTINGENCY
A vender to ICA BV of certain dialers has made a claim in the approximate
amount of $100,000 against ICA BV for non-payment of approximately 1,000 dialer
units. In addition, such vendor has made a claim against ICA BV for additional
damages for an alleged breach of contract.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVERSE ACQUISITION
On November 1, 1996, ICA Marketing LLC purchased 4,000,000 shares (the
"Shares") of common stock, par value $.0001 per share of Logiphone Group, Inc.
(formerly Star Resources, Inc.), representing approximately 89% of the Company's
outstanding shares, in exchange for all the issued and outstanding equity in
International Callers' Association, B.V., a Dutch limited liability company.
("ICA BV") In connection with this transaction, Star Resources, Inc. amended its
Certificate of Incorporation to change its name to Logiphone Group, Inc. ICA
Marketing then dissolved and distributed the Shares to its members. The purchase
was treated as a reverse acquisition so all information prior to November 1,
1996 refers to ICA BV, and all information from and after November 1, 1996
refers to the Company or the Registrant and ICA BV on a consolidated basis.
OVERVIEW
The Company currently sells international long distances services to
small to medium sized businesses in the Netherlands through its subsidiary in
Holland, ICA B.V. The European telecommunications market is undergoing a radical
transformation. The United Kingdom was the first European country to introduce
competition in this market in 1984. Competitive activity on the European
continent is beginning to develop, and the Company has chosen to start its
European service activity in the Netherlands. Today, PTT Netherlands still
enjoys a dejure monopoly on international transmission, but a number of new
telecommunications service providers are now competing with it.
Access to the Company's service is, in the main, over the domestic
public switched telephone network requiring the customer to dial a local number,
an authorization code, and the number he is calling. The Company uses either
dialers or programmable PBXs with least cost routing capability in order to
minimize this inconvenience. The Company has purchased three switches, which are
installed in Amsterdam, Rotterdam and Raamsdonksveer, to process its customer's
calls. These switches are connected by leased lines to large switches provided
by Esprit Telecom whose services the Company uses to complete calls.
The Company plans to expand its long distance business into Belgium in
the third (3rd) quarter of 1997. The Company has investigated relationships with
PBX dealers near Brussels in order to establish a relationship similar to the
Company's Dutch marketing plan.
The Company is currently developing a relationship(s) with one or more
technology suppliers in order to provide fax service using the Internet and/or
intranet on a real time basis. The Company's prior relationship with RadLinx,
Ltd. of Tel Aviv, Israel described in the Company's Report on Form 8-K, filed on
November 13, 1996, was terminated.
RESULTS OF OPERATIONS
From its inception ICA B.V. has been developing and implementing its
Dutch business plan, which has included establishing a relationship with a Dutch
Telecom provider, locating an office and hiring staff in the Netherlands,
installing switches, developing a telemarketing operation and negotiating of
agreements necessary to its proposed business operations.
Initial sales activities were accomplished and tested by three sales
representatives who were hired to test this market for acceptance of the
Company's product and to fine tune the marketing approach. The Company hired a
salaried telemarketing sales staff in September 1996, and currently there are
eight telemarketers working thirty-two hours per week. The Company also sells
its services through PBX dealers to the dealers customers. The Company pays a
commission to the dealers on these sales for as long as the customer remains on
the service. The Company's customer base doubled in the third quarter, and the
Company had 790 customers billing on January 31, 1997.
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The Company has experienced network failures in the past quarter which
resulted in a loss of customers. While there is no assurance that there will not
be network or switch failures in the future, the network has improved in this
quarter and is currently working at acceptable levels. The Company is working to
develop a relationship with an outside party to provide seven day a week, 24
hours a day facilities management. Until such service is provided, the inside
technical personnel are managing the network.
COMPARISON OF RESULTS
In the three months and nine months ending January 31, 1996, there were
no sales and only minimal expenses associated with preparing to commence a
business. In the three month and nine months ending January 31, 1997, there were
sales and associated operation expenses as service began in September, 1996.
Cost of sales consists of the wages of the telemarketers, manager for
telesales and phone costs for telemarketing. Cost of sales exceeded revenues in
the third quarter but costs of sales as a percentage of revenues are starting to
come down as the telemarketers mature in their sales skill levels.
OPERATING EXPENSES
Auto expenses include the leasing of eight automobiles in Holland along
with fuel costs. Approximately five of the automobiles are used by employees who
install dialers at customer sites. It is customary and normal business practice
in Holland to provide auto's and fuel for employees.
Commissions are paid to PBX dealers for customers they provided to the
network.
Consulting includes money paid to Managing Director and one outside
consultant.
Fees and salaries cover the costs for 25 people working within the
company, including the Chief Executive Officer, President, Chief Operations
Officer, Engineering, Accountant, Secretarial, Customer Services and dialer/PBX
installers.
Legal and Accounting cover legal costs of SEC filings and services,
corporate legal, and costs of outside accountants.
Marketing covers telephone costs of telemarketers and postage/supplies
for sales marketing.
Office Expenses include the costs of a computer and necessary office
network expansion in Holland Office.
Rent includes cost of office space in United States and Holland. It
also includes rental of office equipment in the United States office and
phone/lease line rentals in Holland.
Travel is primarily the costs of airfare and hotels incurred in
conjunction with the development of a new fax service.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded operations to date primarily through private
sales of securities, convertible notes, loans and cash flow from operations. The
Company's cash and cash equivalents at January 31, 1997 were $36,457. As of
January 31, 1997, the Company had outstanding payables of $483,725. The Company
has outstanding $550,000 principal amount of convertible notes (the "Notes")
that bear interest at the annual rate of nine percent (9%). The Notes matured on
May 1, 1997 and are in default. Holders of $275,000 in principal amount of Notes
have elected to convert their Notes into 165,000 shares of Company common stock,
par value $.0001. In addition, the Company's agreement with Logiphone Israel
contemplates that the Company under certain circumstances will make a loan of up
to $1 million to Logiphone Israel.
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Accordingly, the Company will not be able to pay its existing
obligations and to implement its business plan, including the expansion of its
European international long distance business and start-up, development and
marketing costs for real time Internet services without raising substantial
additional funds.
During the next 12 months, the Company's international
telecommunications business will likely require approximately $7 million to
cover operational/marketing/and administrative costs, to pay certain payables,
to purchase additional dialers and other equipment and to expand its business to
new countries.
During the next 12 months, the Company's Internet fax business will
likely require approximately $3 million to commence its Internet fax business,
to expand this business to a number of countries and to cover operating,
marketing and administrative costs.
The Company is currently exploring the possibility of a private
placement that will be used to pay existing debt, fund the Company's operations
and administration and fund expansion for its European long distance business
and start-up costs for real time Internet fax services for the remainder of
calendar 1997. In addition, pending such private placement, the Company is
actively pursuing bridge financing consisting of convertible debentures in the
approximate amount of $1 million to be used, depending on the amount raised, to
pay certain existing obligations to creditors, to purchase equipment and to
expand its customer base, to advance funds to Logiphone Israel, and to fund the
operation of the Company while it pursues a major financing intended to provide
long term funding for the Company. There is no assurance that the Company will
be able to raise the necessary funds at all or on terms favorable to the
Company.
Forward Looking Information
This document includes "forwarding looking" statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although the Company
believes that the expectations reflected in such forward looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Important factors ("Cautionary Disclosures") that
could cause the actual results to differ materially from the Company's
expectations are set forth below. Subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
The Company's operating subsidiary, ICA BV, was only formed in early
1995 and only acquired its first customers in May 1996. Accordingly, the Company
has only a short history of providing long distance services. The Company has
never provided a fax over the Internet services.
The telecommunications industry is competitive and is significantly
affected by the introduction of new discount concepts and the marketing
activities of industry participants. Some of the Company's competitors have
greater name recognition, greater marketing capability, and have, or have access
to, substantially greater financial and personal resources than is available to
the Company. The largest participant in the international telecommunications
resale business in the Netherlands market is the Dutch Post, Telegraph and
Telephone organization ("PTT"), which controls over ninety-five percent (95%) of
the market. In response to recent competition the PTT has begun offering
discount services. The second largest provider in the Netherlands is Esprit
B.V., which has been operating in the Netherlands for over three (3) years and
also operates in at least four (4) other European countries. Other competitors
are subsidiaries of telephone companies of other countries. These include Global
One, a consortium of Deutsche Telekom, France Telecom and Sprint; British
Telecom; and Telegate, a subsidiary of Telecom Finland. While to date these
companies have targeted different markets than the Company has targeted, there
is no assurance that they will not pursue the Company's target market. There are
also competitors who are targeting the same markets as the Company. These
include Worldom B.V., Versatel and Viatel. These companies are affiliated with
large companies and are substantially better financed than the Company. There
are also smaller switched and switchless resellers who operate in the Company's
target market. The Company can expect to face similar competition in other
European countries. Since the Company's equipment can be programmed to direct
calls to the least expensive carrier for that call, it can be used to direct
traffic away from the Company and to a competitor. Accordingly, the Company will
need to be very sensitive in responding to competitive offerings. The ability of
the Company to compete effectively in the telecommunication industry will depend
on its ability to provide high quality, market-driven services at effective
prices,
CORPDAL:64592.5 26308-00002
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<PAGE>
generally less than those charged by the competitors. There can be no assurance
that the Company will be able to compete successfully with existing or future
companies.
The Fax over the Internet business will compete with established long
distance carriers who provide conventional fax services, as well as existing Fax
over the Internet services. These services are provided by companies that are
substantially larger and more financially secure than the Company. Management is
not aware of any barriers to other persons creating a real time Fax over the
Internet business similar to that the Company plans to establish. In addition,
fax service competes with e-mail as a form of document delivery. To the extent
e-mail is perceived as a better method of transmitting documents, the use of the
Company's services can be expected to decline.
The telecommunication industry has been characterized by rapid
technological change, frequent new service introductions and evolving industry
standards. New competitors may enter the telecommunications industry with new or
add-on technology.
Competition has only recently been introduced in European countries.
Consequently, there is no history of European consumers changing the long
distance companies to which they subscribe. As in the early days of competition
in the United States long distance market, the main factor that the Company
intends to use to attract customers is lower prices. There is no history that
confirms that lower prices alone will convince large numbers of European
consumers to use a new long distance carrier. There are other factors that
consumers may consider in choosing to remain customers of the PTT. These include
the need to dial additional digits to make a telephone call using services of a
competitive provider and the poorer quality of service afforded by the
connections that the Company is required to use. While the Company users dialers
and PBXs to offset the dialing disadvantage and while the growing use of digital
connections reduces quality problems, there is no assurance that European
consumers will embrace competitive long distance services.
The Company's fax business is a new business. The Company has no
historical basis on which to judge consumer acceptance of an international fax
product. It is always difficult to persuade consumers to change from a product
that works, traditional faxing, to a new product.
The Company is dependent on its suppliers, The Company uses its own
switches and access equipment and other international carriers to provide
telephone service to small to medium-sized customer. The Company can offer
competitive rates to most international destinations by using its carriers and
equipment programmed for least cost routing. The Company is dependent upon the
PTT, its largest competitor, for connections between its customers and its
switches. While the PTT is not expected to be permitted to refuse
interconnection, it may seek to price its services in a way that makes the
Company's cost structure disadvantageous vis-a-vis the PTT's long distance
offerings.
The Company is also dependent upon Esprit Telecomp Benelux B.V.
("Esprit") to carry calls from its switches to their international destinations.
While other international carriers are available, the Company could face
increased costs in completing its customers' calls in the event that its
agreements with Esprit were terminated for any reason.
Rather than maintain a staff to perform back office functions such as
billing, collection and providing certain management reports, the Company out
sources these services. Presently, these are provided by Intertech Management
Group, Inc. ("Intertech"), a St. Louis-based company that provides similar
services to several long distance resellers in the United States. In the event
that these services were interrupted for any reason, the Company would provide
those services itself, but there could be disruption during any transition.
The Company's fax business is entirely dependent on obtaining software
licenses and a piece of proprietary equipment from RapidNet, Inc., a Bahamian
corporation ("RapidNet") located in New York. The Company does not have a
written license agreement with RapidNet. The software is licensed under license
from CMR Communications Ltd. of Israel ("CMR"), which developed the reindeer
technology the Company will use. If for any reason RapidNet or CMR was unable or
refused to supply the proprietary equipment software to the Company, or if the
software did not work as expected, the Company's business would be adversely
affected. In addition, the Company will rely on RapidNet to manage its global
network of providing fax over the Internet services. If RapidNet were to fail to
do its job, the Company would be slow to learn of and correct problems on its
network, which would cause customer dissatisfaction.
CORPDAL:64592.5 26308-00002
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<PAGE>
Changes in the regulatory or political environment in those places
where the Company conducts or plans to conduct its business could adversely
affect the Company and its ability to implement its business plan. The
regulatory climate in the Netherlands and in other European countries is subject
to change. While the Company is not at this time subject to price regulation in
the Netherlands, it may face price regulation in other countries. Similarly,
while the PTT is currently regulated in its offerings, the level of regulation
may be reduced and in other countries the dominant carrier may face less
regulation. There is not assurance that a regulatory climate unfavorable to the
Company will not develop in one or more countries into which it may seek to
expand.
In addition, regulatory agencies could take other actions that could
adversely affect the fax business by, for example, imposing sensitive access
charges for calls to Internet service providers, which may be considered by the
Federal Commuications Commission and which would increase the cost of providing
the fax service.
In order for the Company to implement its business plan, it needs to
raise substantial funds within 12 months and additional funds thereafter. The
ability and costs of such financing will depend on a variety of factors,
including macroeconomic forces beyond the Company's control, and the Company's
performance during the period in which it is seeking financing. There is not
assurance that such financing will be available at all or on terms favorable to
the Company.
CORPDAL:64592.5 26308-00002
7
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
(a) None
(b) None
(c) On November 1, 1996, the Company completed a sale of
4,000,000 shares (the "Star Shares") of common stock, par value $.0001
per share (the "Common Stock"), to ICA Marketing Company, L.C., an Iowa
limited liability company ("ICA-Iowa"), in exchange for all of the
issued and outstanding equity in International Callers Association,
B.V. ("ICA BV"), a Dutch limited liability company, as well as an
assignment of all of the debt owed by ICA BV to ICA-Iowa. This sale was
exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to Section 4(2) of the Securities Act.
In the quarter ended January 31, 1997, the Company sold
$550,000 in principal amount of 9% Convertible Notes (the "Notes"). The
Notes were sold in a transaction exempt from registration under the
Securities Act pursuant to Section 4(2) thereunder and Regulation D
thereunder. The Notes were sold to twenty (20) accredited investors
without any public solicitation. The Notes were sold by officers and
directors of the Company without any sales compensation being paid to
them or to any other person. The Notes are convertible into shares of
Common Stock at the rate of three (3) pre-Stock Dividend (as
hereinafter defined) shares of Common Stock for each $10 invested.
After the Stock Dividend (as hereinafter defined), the Notes are
convertible into shares of Common Stock at the rate of six (6) shares
of Common Stock for each $10 invested. See Item 5.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
On November 15, 1996, the Board of Directors of the Company
declared a one-for-one stock dividend (the "Stock Dividend") payable to
stockholders of record as of the close of business on November 29,
1996.
On March 7, 1997, Mr. Bert Cornelisse, the Managing Director
of ICA BV, was elected to the Board of Directors of the Company.
Effective March 19, 1997, Michael Hilsenrath resigned as an
officer of the Company and ICA BV.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS. The following exhibits are furnished in accordance with Item 601 of
Regulation S-B.
10.1 Strategic Alliance Agreement, dated as of November 10, 1996, by and
between Logiphone Telephone Communications, Ltd.; Logiphone Group,
Inc., and ICA B.V. (Filed with the SEC on November 13, 1996 as Exhibit
10.2 to the Company's Form 8-K and incorporated herein by reference).
27 Financial Data Schedule
CORPDAL:64592.5 26308-00002
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<PAGE>
Form 8-K: The following reports on Form 8-K have been filed with the Securities
and Exchange Commission in the quarter ended January 31, 1997:
1. The Company filed a Report on Form 8-K (the "Initial Report") on
November 13, 1996 reporting that the Company completed a sale of
4,000,000 shares of Common Stock, (the "Common Stock"), par value
$.0001, to ICA Marketing Company, L.C., an Iowa limited liability
company, in exchange for all of the issued and outstanding equity in
ICA BV, Dutch limited liability company, as well as an assignment of
all the debt owed by ICA BV to ICA-Iowa.
2. The Company filed a Report on Form 8-K/A on November 20, 1996
correcting the address and telephone number for the Company following
the acquisition of ICA BV.
3. The Company filed a Report on Form 8-K on November 27, 1996 reporting
the declaration of a one-for-one stock dividend with respect to the
Common Stock payable to stockholders of record as of the close of
business on November 29, 1996.
4. The Company filed a Report on Form 8-K on January 30, 1997 reporting
the termination of the Strategic Alliance Agreement between ICA BV and
RadLinx, Ltd.
5. The Company filed a Report on Form 8-K/A on April 3, 1997 containing
the financial statements required by the Initial Report.
CORPDAL:64592.5 26308-00002
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Quarterly Report to be signed on its behalf
by the undersigned thereunto duly authorized.
LOGIPHONE GROUP, INC.
(Registrant)
Date: May 23, 1997 By:/s/Marc Schechtman
--------------------------------------
Marc Schechtman, Chairman and
Chief Executive Officer (Principal
Executive Officer)
Date: May 23, 1997 By:/s/ Ronald D. Gardner
--------------------------------------
Ronald D. Gardner, Treasurer
(Principal Financial Officer)
CORPDAL:64592.5 26308-00002
10
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