UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 333-37654
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9278 COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4165136
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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) 887-9278
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(Registrant'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)
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 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:
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 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 registrant's classes
of common equity, as of the latest practicable date:
Common Stock, $.001 par value - 22,932,912 shares issued and outstanding as
of November 12, 2001
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2001 2000
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(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 7,031,313 $ 4,114,651
Marketable Securities -- 20,962
Accounts receivable, less allowance for doubtful accounts of $165,000
and $675,000 at September 30, 2001 and December 31, 2000, respectively 15,456,796 6,844,833
Inventory 8,485,434 3,582,040
Prepaid expenses and all other current assets 140,306 --
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Total Current Assets 31,113,849 14,562,486
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Furniture and Equipment - Net of accumulated depreciation of $301,386 and
$133,378 at September 30, 2001 and December 31, 2000, respectively 1,196,253 653,597
Intangible Assets, net of accumulated amortization of $216,759 and $17,154
at September 30, 2001 and December 31, 2000, respectively 3,784,555 3,884,159
Other Assets 58,694 40,743
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$ 36,153,351 $ 19,140,985
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 31,078,201 $ 14,594,273
Current maturities of notes payable 856,302 904,936
Current maturities of Debt obligations 41,790 48,023
Income taxes payable 40,125 24,255
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Total Current Liabilities 32,016,418 15,571,487
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Notes payable, shareholder, less current maturities -- 2,000,000
Debt obligations, less current maturities 69,942 103,071
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32,086,360 17,674,558
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Commitment and Contingencies
Shareholders' equity
Convertible preferred stock
Class B, $0.001 par value, 5,000,000 shares authorized
0 and 505 issued and outstanding, at September 30, 2001
and December 31, 2000, respectively -- 505,000
Common Stock, $0.001 par value; 40,000,000 shares
authorized, 22,932,912 and 23,166,969 issued and outstanding,
at September 30, 2001 and December 31, 2000, respectively 22,933 23,166
Paid in capital 8,248,458 7,743,252
Accumulated Deficit (4,204,400) (6,804,991)
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Total Shareholders' Equity 4,066,991 1,466,427
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$ 36,153,351 $ 19,140,985
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The accompanying notes are an integral part of these financial statements
2
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 55,736,568 $ 20,032,204 $142,754,197 $ 53,772,717
Cost of Sales 52,645,216 18,891,100 133,748,186 50,893,501
------------ ------------ ------------ ------------
Gross Profit 3,091,352 1,141,104 9,006,011 2,879,216
Operating Expenses
Selling 404,257 189,915 968,034 344,428
General and administrative 1,964,447 748,130 4,653,488 1,875,818
Depreciation and amortization 133,500 42,834 367,612 130,277
Loss on Disposition of Assets -- -- -- 363,367
Provision for (Recovery) of Bad and Doubtful Debts (48,277) -- 73,340 303,474
Interest expense 19,332 50,000 89,671 137,559
Litigation Settlement 207,000 -- 207,000 --
------------ ------------ ------------ ------------
2,680,259 1,030,879 6,359,145 3,154,923
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Income/(Loss) from Operations Before Income Taxes 411,093 110,225 2,646,866 (275,707)
Provision for Income Taxes 46,275 8,000 46,275 8,000
------------ ------------ ------------ ------------
Net Income / (Loss) attributable to common stock 364,817 102,225 $ 2,600,591 (283,707)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ 0.02 $ 0.00 $ 0.11 $ (0.01)
============ ============ ============ ============
Shares used in the calculation of earnings (loss) per share 23,942,982 20,561,849 23,491,922 20,301,374
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
3
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2001 2000
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Cash Flows From Operating Activities
Net Income / (Loss) $ 2,600,591 $ (283,707)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 367,612 137,748
Provision for Doubtful Accounts 73,340 303,474
Issuance of stock for services rendered -- 55,000
Loss attributable to sale of equipment -- 363,367
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable (8,537,400) (1,936,002)
Inventory (4,835,379) (784,171)
Prepaid expenses (140,306) 14,087
Other Assets (17,951) (12,760)
Accounts payable 16,370,251 1,833,087
Income taxes payable 15,870 --
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Net Cash provided by (used in) Operating Activities 5,896,628 (309,877)
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Cash flows From Investing Activities
Acquisition of property and equipment (705,164) (279,031)
Acquisition of businesses (207,741) --
Disposition of Marketable Securities 20,962 --
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Net Cash used in Investing Activities (891,943) (279,031)
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Cash flows From Financing Activities
Notes and Advances Payable, shareholder (1,148,634) (62,192)
Notes Payable - Other (900,000) --
Notes Payable - leases -- 75,000
Principal payments on debt obligations (39,362) (61,945)
Repurcahse of Shares and Retired (27) --
Issuance of common stock -- 923,000
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Net cash (used in) provided by Financing Activities (2,088,023) 873,863
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Net Increase in Cash and Cash Equivalents 2,916,662 284,955
Cash and Cash Equivalents - Beginning of Period 4,114,651 26,192
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Cash and Cash Equivalents - End of Period $ 7,031,313 $ 311,147
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 89,671 $ 17,559
Cash paid for taxes 31,406 15,120
Noncash Investing and Financing Activities:
Equipment acquired under capital leases -- 75,000
Conversion of notes and advances payable, shareholder
for common stock -- 500,000
Conversion of preferred stock to common stock 505,000 525,000
Common stock issued for services rendered -- 55,000
The accompanying notes are an integral part of these financial statements
4
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Common Stock
Preferred -------------------------- Retained
Stock Number Additional Earnings
Amount of shares Amount Paid-in Capital (Deficit) Total
------------ ---------- ------------ --------------- ------------ ------------
Balance at January 1, 2001 $ 505,000 23,166,969 $ 23,166 $ 7,743,252 $ (6,804,991) $ 1,466,427
Conversion of preferred stock
to common stock (505,000) 776,013 777 504,223 -- --
Repurchase of Common Stock and
Retired--Note 5 (1,010,000) (1,010) 983 (27)
Net income for the six months
ended June 30, 2001 -- -- -- -- 2,600,591 $ 2,600,591
------------ ---------- ------------ ------------ ------------ ------------
$ -- 22,932,982 $ 22,933 $ 8,248,458 $ (4,204,400) $ 4,066,991
============ ========== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
5
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1 - BASIS OF PRESENTION
The accompanying condensed consolidated unaudited financial statements of
9278 Communication Inc. and subsidiaries (collectively, the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for quarterly reports on Form 10-Q and do not include all of
the information and footnote disclosures generally required by accounting
principles generally accepted in the United States and should be read in
conjunction with our consolidated financial statements and notes thereto for the
fiscal year ended December 31, 2000, included in the Company's Form 10-KSB as
filed with the SEC. The accompanying condensed consolidated unaudited financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and reflect all adjustments (consisting of normal
recurring accruals) which are, in the opinion of the management, considered
necessary for a fair presentation of results for these interim periods.
Operating results for the three and nine month periods ended September 30, 2001
and 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2001. Certain prior period amounts have been
reclassified to conform to the current period presentation.
2 - NATURE OF BUSINESS
The Company markets and distributes prepaid telephone cards to small retail
establishments and distributors through its various sales locations nationwide.
Inventories
Inventories consist of prepaid telephone cards that are stated at the lower
of cost (first-in, first-out) or market.
Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting of Income Taxes" (SFAS 109). Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The provision for income taxes for the nine months
ended September 30, 2001 reflects the utilization of the Company's net operating
loss carryforwards in the amount of approximately $2,685,000.
3 - EARNINGS PER SHARE
Basic earning per common share is calculated by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share for the three and nine
months ended September 30, 2001 and 2000 excludes all potentially dilutive
securities, as the effect of the related incremental shares (235,000 and 25,000
shares in 2001 and 2000, respectively) would be antidilutive.
6
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
4 - ACQUISITIONS
On January 23, 2001, the Company purchased certain assets of two of its
distributors in an asset purchase transaction, wherein the Company acquired all
the accounts receivables, inventories, fixed assets and customer lists of the
distributors net of accounts payable. The Company paid $100,000 in excess of
their net assets for the customer lists. A summary of the transactions is as
follows:
Assets purchased:
Accounts receivable $ 147,904
Inventories 68,015
Other assets 5,500
Customer Lists 100,000
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321,419
Liabilities assumed:
Accounts payable (113,667)
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Net assets acquired $ 207,742
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Cash Paid $ 207,742
Pro-forma results of operations are not presented, as they are not material
to the historical results presented herein.
5 - INVESTMENTS AND OTHER TRANSACTIONS
On January 29, 2001 the Company acquired, for a nominal amount, a 27%
equity interest in DMS Acquisition Corp., (a Delaware Corporation), as an
inducement to enter into a long-term distribution agreement with DMS Acquisition
Corp. DMS Acquisition Corp. is a facility-based carrier of long distance
telephone service. On February 8, 2001 DMS Acquisition Corp. was a party to a
triangular merger with Capital One Ventures Corp. (an OTC publicly traded
company) with Capital One Ventures Corp. as the surviving entity. DMS
Acquisition Corp. became a wholly owned subsidiary of Capital One Ventures Corp.
Simultaneous with the merger Capital One Ventures Corp. changed the corporate
name to Cirus Telecom, Inc. ("Cirus"). As a result of the merger, the Company's
equity interest of 10,800,000 shares of Cirus was diluted to 18%. The Company's
investment in Cirus was restricted and subject to other conditions pursuant to
the distribution agreement. The investment in Cirus is accounted for at cost and
is not material to the Company's financial position.
On September 26, 2001, under the terms of an agreement between Rapid
Release Research LLC ("RRR") and the Company, RRR forfeited to the Company
200,000 vested shares of the Company it had earned pursuant to a Management
Consulting Agreement dated as of September 1, 2000, and an additional 600,000
unvested shares of the Company held by them in escrow, in exchange for 600,000
shares of Cirus stock held by the Company. As an additional consideration, the
two parties mutually agreed to declare the Management Consulting Agreement as
null and void and of no further force and effect. The Company also delivered
60,000 shares of Cirus to a consulting firm, for its services in negotiating
this settlement agreement. The Company has recorded no gain or loss from this
transaction.
On September 26, 2001, the Company transferred the balance of 10,140,000
shares of Cirus back to Cirus in exchange for (i) Cirus' consent to the
September 26, 2001 transaction between the Company and
7
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
RRR; (ii) 210,070 shares of the Company held by certain shareholders of Cirus;
and (iii) an unconditional release from the Distribution Agreement dated
February 6, 2001, signed between Cirus and the Company, from the day of its
inception.
On September 30, 2001, the Company retired 1,010,070 shares its received
from the above settlements.
6 - NOTES AND ADVANCES PAYABLE, SHAREHOLDER
On December 10, 1999 the Company declared $3,000,000 in dividends, of which
$1,000,000 was paid at that time. On December 13, 1999, the Company executed a
promissory note for the benefit of the shareholders in the amount of $2,000,000,
payable to the Company's chief executive officer, who is also a shareholder. A
principal payment of $1,000,000 was originally due on June 13, 2000, and the
second payment was originally payable on December 13, 2001. In consideration for
deferring these payments, on June 13, 2000, the Company issued warrants to
purchase 200,000 shares of common stock at an exercise price of $1.625 per
share. The warrants vested immediately and are exercisable until 2010.
Further, on March 22, 2001, the Company amended the terms of these
promissory notes to defer the payments to March 31, 2002 and December 31, 2002,
respectively, reserving the right to prepay on the note prior to the due date.
As of September 30, 2001, the Company had repaid $1,142,500 on this note.
Interest on the note is payable at a rate of 8%. For the nine months ended
September 30, 2001, interest expense on this note was $77,500 and was paid in
full as of that date.
7 - RELATED PARTY TRANSACTIONS
Sales of inventory to a customer who is related to an officer were
approximately $18,953,000 and $4,567,000 for the nine months ended September 30,
2001 and 2000 respectively. The Company also purchased inventory from this
customer during this period in the amount of $8,865,000 in 2001 and $0 in 2000.
Included in accounts receivable and accounts payable at September 30, 2001 is
$1,866,574 and $193,286 respectively from this customer.
8 - LITIGATION
For the year ended December 31, 1999, purchases from one telephone card
supplier were approximately 55% of total purchases. In November 1999, the
Company commenced an action against this supplier to recover damages resulting
from cancellation of the telephone card purchases by the Company. The supplier
subsequently counter sued for unpaid bills for such telephone cards. The Company
incurred a net loss of $553,547, which was reflected in the fourth quarter of
1999. The Company subsequently mitigated, in substantial part, its reliance on
this supplier by increasing its purchases from other vendors. On September 30,
2001, in order to avoid protracted litigation and mounting legal fees, the
Company decided to settle the case wherein it agreed to pay $250,000 to the
supplier over a period of four years beginning in August 2001. This amount is
payable in four monthly installments of $7,500 and 44 subsequent monthly
installments of $5,000 each exclusive of interest. During the three months
period ended September 30, 2001, the Company has recorded a $207,000 charge
representing the net present value of the settlement amount.
In November 1999, a distributor of the Company's prepaid telephone cards
instituted an action for approximately $575,000, based on a purported breach of
oral contract by the Company. The Company filed an answer and counterclaim
against the distributor for approximately $575,000 of unpaid invoices. On
September 30, 2001, the Company settled its case against this distributor and
received $50,000, writing off
8
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
approximately $525,000 as uncollectible receivables. In previous years the
Company had provided an allowance for this doubtful account equal to the total
of unpaid invoices.
9 - PREFERRED STOCK
During the three months ended March 31, 2001 and June 30, 2001, the Company
converted 225 and 280 preferred shares of Class B, $.001 par value convertible
preferred stock into 426,184 and 349,829 shares of common stock, respectively.
10 - EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 141- "Business Combinations" and SFAS 142- "Goodwill and
Other Intangible Assets." The new standards require that all business
combinations initiated after June 30, 2001 must be accounted for under the
Purchase Method. In addition, all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives will no longer be
subject to amortization, but will be subject to, at least, an annual assessment
for impairment by applying a fair value based test.
The company will continue to amortize goodwill existing under its current
method until December 31, 2001. Thereafter, annual and quarterly goodwill
amortization of $266,756 and $66,689 respectively will no longer be recognized.
The company will perform a transitional fair value based impairment test at
March 31, 2002 and if the fair value is less than the recorded value at January
1, 2002 the company will record an impairment loss in the March 31, 2002 quarter
as a cumulative effect of a change in accounting principle.
In August 2001, the FASB issued statement of Financial Accounting Standard
No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets," ("SFAS
144"). This statement is effective for the fiscal years beginning after December
15, 2001. This supercedes SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of", while retaining many of the
requirements of such statement. The Company is currently evaluating the impact
of the statement.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
AND OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto set forth in Item 1 of this
Quarterly Report. In addition to historical information, this discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions, which could cause actual results to differ materially from
Management's expectations. Factors that could cause differences include, but are
not limited to, expected market demand for the Company's products, fluctuations
in pricing for products distributed by the Company and products offered by
competitors, as well as general conditions of the telecommunications
marketplace.
OVERVIEW
To date, our principal source of revenue has been the marketing and
distribution of prepaid phone cards. We market and distribute private label
proprietary prepaid phone cards produced exclusively for the Company by various
long distance carriers and/or resellers, as well as branded prepaid phone cards
produced by other telecommunications long distance carriers and resellers.
Prepaid phone cards are distributed through a vast network of retail
outlets, including convenience stores, newsstands, grocery stores and discounts
stores. The retail outlets are serviced by independent distributors, which often
distribute newspapers or other items to them. Beginning July 2001, we have
started selling prepaid cards to end users via the Internet through
www.9278.com.
Private label cards are generally designed and produced by us, utilizing
card numbers or Personal Identification Numbers provided by the
telecommunications' carrier or reseller providing the long distance service for
the card. We incur the upfront expense of printing the phone cards with the
Personal Identification Numbers already printed on the cards. However, we do not
pay the long distance carrier until it activates the cards, which occurs upon
our sale to the distributor. In certain instances, we do not pay the carrier
until the end user first uses the card. Accordingly, through the use of private
label cards, our 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 6% to 10%.
In order to better serve our distributors, we also resell branded prepaid
calling cards of other companies and resellers along with our private label
cards. We purchase branded cards 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 6%, represents the gross
margin we retain. We purchase branded cards on varying terms, from C.O.D. to "as
used" basis. Sales of our product are generally made on a net 14 days basis.
We are continually seeking to develop and acquire rights to additional
prepaid telecommunications services and other prepaid products or services to
diversify our product offerings and increase our overall gross margin.
10
HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales increased $35,704,000 to $55,737,000 for the three months ended
September 30, 2001, up 178.2% from net sales of $20,032,000 for the three months
ended September 30, 2000. The increase in net sales was primarily due to our
acquisitions and geographic expansion since the third quarter of calendar year
2000 and continuing in the first three quarters of 2001. In September 2000 we
acquired two businesses (in Yonkers, New York and Silver Springs, Maryland) that
accounted for $7,973,000 of sales in the three months ended September 30, 2001.
In December 2000, we acquired Reliable Networks, Inc., a competitor of ours
located in Queens, New York, which accounted for $9,329,000 of sales for the
three months ended September 30, 2001. In January 2001, we acquired two separate
operations in Connecticut and opened an office in Connecticut, which accounted
for an aggregate of $2,295,000 in sales for the three months ended September 30,
2001. In May 2001, we opened a new office in Los Angeles, California, which
accounted for $5,351,000 in sales for the three months ended September 30, 2001.
In August 2001, we opened two new locations, one in Brooklyn, New York, which
accounted for $1,562,000 in sales since its inception, and, the second in
Chicago, Illinois, which accounted for $1,583,000 in sales since its inception
in August 2001. For the three months ended September 30, 2001, same location
sales increased by approximately $6,528,000 or 34.3% to $25,587,000 in 2001 from
$19,059,000 in the prior year due to the Company primarily selling private label
cards as opposed to primarily distributing branded cards. Starting July 2001, we
began actively selling phone cards over the Internet. Internet sales accounted
for $2,056,000 for the three months ended September 30, 2001.
Gross profit increased to $3,091,000 for the three months ended September
30, 2001, as compared to $1,141,000 in same period in 2000, as a result of
increased volume. As a percentage of sales, gross profit decreased to 5.55% for
the three months ended September 30, 2001 as compared to 5.70% for the three
months ended September 30, 2000. This decrease in gross profit was attributable
to change in rates by the long distance carriers and increasing competition from
additional cards entering the marketplace.
Operating expenses for the three months ended September 30, 2001 increased
by $1,649,000 to $2,680,000, an increase of 160% over operating expenses of
$1,031,000 for the three months ended September 30, 2000. Selling expenses
increased by $214,000 to $404,000 for the three months ended September 30, 2001
from $190,000 for the same period in 2000, as a result of our utilizing
commissioned sales staff to make bulk sales and promotional campaigns organized
in connection with introduction of new products in the market. In addition,
general and administrative expenses increased by $1,216,000 to $1,964,000 for
the three months ended September 30, 2001, as compared to $748,000 for the same
period in 2000. This increase was primarily due to the increase in salaries of
$345,000 that is directly related to our growth and adding new locations, an
increase in professional and consulting fees of $150,000 due to the retention of
certain financial consultants and advisors, and an increase in trade publication
advertising of $210,000. Credit card charges paid for processing credit card
sales transactions over the Internet amounted to $85,000 for the three months
ended September 30, 2001. The remainder of the increase in general and
administrative expenses of approximately $426,000 reflects the normal escalation
of overhead required to support our growth.
Depreciation and amortization for the three months ended September 30, 2001
amounted to $134,000, an increase of $91,000 compared to the same period in
2000. The increase is comprised of $44,000 in increased depreciation of fixed
assets and $47,000 in increased amortization of goodwill. In the three months
ended September 30, 2001 we reduced our allowance for bad debts by $50,000 since
we received $50,000 from a customer for whom we had set up an allowance in full.
11
We had been involved in litigation with one of our suppliers since November
1999. The supplier had sued for non-payment of its outstanding bills. We
counter-sued the supplier for canceling service on the telephone cards supplied
by them. In order to avoid protracted litigation and additional legal costs, we
agreed to settle the lawsuit. Under the term of the agreement, we will pay the
supplier an aggregate amount of $250,000 over a period of four years in 4
monthly payments of $7,500 and 44 successive monthly payments of $5,000
beginning August 2001. We had not anticipated this settlement, and therefore had
not provided for the payment in previous years. During the three months ended
September 30, 2001, we have taken a charge of $207,000 representing the net
present value of the settlement amount.
We had a net profit before taxes of $411,000 for the three months ended
September 30, 2001 as compared to $110,000 for the three months ended September
30, 2000. The increase in net income was due to the increase in sales volume and
gross profit margins, improved control of overhead, reduced bad debts and lack
of any other significant losses. For purposes of earnings per share, net
income/loss attributable to common stock reflects net income of $375,000 for the
three months ended September 30, 2001 as compared to $102,000 for the three
months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales increased $88,981,000 to $142,754,000 for the nine months ended
September 30, 2001, up 165.5% from net sales of $53,773,000 for the nine months
ended September 30, 2000. The increase in net sales was primarily due to our
acquisitions and geographic expansion since the third quarter of calendar year
2000 and continuing in the first three quarters of 2001. In September 2000 we
acquired two businesses (in Yonkers, New York and Silver Springs, Maryland) that
accounted for $19,858,000 of sales in the nine months ended September 30, 2001.
In December 2000, we acquired Reliable Networks, Inc., a competitor of ours
located in Queens, New York, which accounted for $31,217,000 of sales for the
nine months ended September 30, 2001. In January 2001, we acquired two separate
operations in Connecticut and opened an office in Connecticut, which accounted
for an aggregate of $6,358,000 in sales for the nine months ended September 30,
2001. In May 2001, we opened a new office in Los Angeles, California, which
accounted for $8,796,000 in sales for the nine months ended September 30, 2001.
In August 2001, we opened two new locations, one in Brooklyn, New York, which
accounted for $1,562,000 in sales since its inception, and, the second in
Chicago, Illinois, which accounted for $1,583,000 in sales since its inception
in August 2001. For the nine months ended September 30, 2001, same location
sales increased by approximately $18,524,000 or 35% to $71,323,000 in 2001 from
$52,799,000 in the prior year due to the Company primarily selling private label
cards as opposed to primarily distributing branded cards. Starting July 2001, we
began actively selling phone cards over the Internet. Internet sales accounted
for $2,056,000 for the nine months ended September 30, 2001.
Gross profit increased to $9,006,000 for the nine months of 2001, as
compared to $2,879,000 in same period in 2000, as a result of increased volume
and greater sales margins. As a percentage of sales, gross profit increased to
6.31% for nine months ended September 30, 2001 as compared to 5.35% for the nine
months ended September 30, 2000. This increase in gross profit was attributable
to our addition of higher margin private label cards, slightly offset by the
decrease in margins attributable to branded products and increasing competition
from additional cards entering the marketplace.
Operating expenses for the nine months ended September 30, 2001 increased
by $3,204,000 to $6,359,000, an increase of 101.6% over operating expenses of
$3,155,000 for the nine months ended September 30, 2000. Selling expenses
increased by $624,000 to $968,000 for the first nine months of 2001 from
$344,000 for the same period in 2000, as a result of our utilizing commissioned
sales staff to make bulk sales and promotional campaigns organized in connection
with introduction of new products in the market. In addition, general and
administrative expenses increased by $2,778,000 to $4,653,000 for the nine
months of
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2001, as compared to $1,876,000 for the same period in 2000. This increase was
primarily due to the increase in salaries of $937,000 that is directly related
to our growth and adding new locations, an increase in professional and
consulting fees of $576,000 due to legal, accounting and consulting fees
incurred primarily in connection with the mergers and certain unfounded lawsuits
instituted by former vendors and customers and communication with investors, and
an increase in trade publication advertising of $340,000. The remainder of the
increase in general and administrative expenses of approximately $925,000
reflects the normal escalation of overhead required to support our growth.
Depreciation and amortization for the nine months ended September 30, 2001
amounted to $368,000, an increase of $238,000 compared to the same period in
2000. The increase is comprised of $96,000 in increased depreciation of fixed
assets and $142,000 in increased amortization of goodwill. In the nine months
ended September 30, 2000 we recorded a loss on the disposition of assets of
$363,000 and a provision for bad debts of $303,000. During the nine months ended
September 30, 2001, the bad debt expense, net of bad debts recovery, was only
$73,000.
We had been involved in litigation with one of our suppliers since November
1999. The supplier had sued for non-payment of its outstanding bills. We
counter-sued the supplier for canceling service on the telephone cards supplied
by them. In order to avoid protracted litigation and additional legal costs, we
agreed to settle the lawsuit. Under the term of the agreement, we will pay the
supplier an aggregate amount of $250,000 over a period of four years in 4
monthly payments of $7,500 and 44 successive monthly payments of $5,000
beginning August 2001. We had not anticipated this settlement, and therefore had
not provided for the payment in previous years. During the nine months ended
September 30, 2001, we have taken a charge of $207,000 representing the net
present value of the settlement amount.
We had a net profit before taxes of $2,647,000 for the nine months ended
September 30, 2001 as compared to a loss of $276,000 for the nine months ended
September 30, 2000. The increase in net income was due to the increase in sales
volume and gross profit margins, improved control of overhead, reduced bad debts
and lack of any other significant losses. For purposes of earnings per share,
net income/loss attributable to common stock reflects net income of $2,601,000
for the nine months ended September 30, 2001 as compared to a net loss of
$284,000 for the nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had total current assets of approximately
$31,114,000. This included $7,031,000 in cash, $8,485,000 of inventory and
$15,457,000 of accounts receivable. Our cash balances vary significantly from
day-to-day due the large volume of purchases and sales we make from the various
prepaid phone cards companies and the numerous distributors to whom we sells
cards.
We generated $5,794,000 in cash from operating activities during the nine
months ended September 30, 2001 as compared to utilizing $310,000 during the
same period in 2000. Increases in cash flows during the nine months ended
September 30, 2001 are related to the higher net income and increase in accounts
payable, offset by increase in accounts receivable and inventory.
Cash utilized by investing activities amounted to $790,000 during the nine
months ended September 30, 2001, utilized to acquire additional fixed assets and
acquire another business operation. Cash utilized by financing activities
amounted to $2,088,000 during the nine months ended September 30, 2001, of
which, $1,149,000 was utilized to pay down notes payable to shareholder,
$900,000 to pay down notes payable to the former owner on acquisition of
Reliable Networks, Inc. and $39,000 to pay down principal on debt obligations.
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We believes that existing cash and cash equivalents, cash flow from
operations and available vendor credit will be sufficient to meet its planned
working capital and capital expenditure budget through the remainder of 2001.
However, there are no assurances that we will not be required to seek additional
financing. If we are required to seek other sources of financing, there can be
no assurance that we 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.
Effect of Recently issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 141- "Business Combinations" and SFAS 142- "Goodwill and
Other Intangible Assets". The new standards require that all business
combinations initiated after June 30, 2001 must be accounted for under the
Purchase Method. In addition, all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives will no longer be
subject to amortization, but will be subject to, at least, an annual assessment
for impairment by applying a fair value based test.
The Company will continue to amortize goodwill existing under its current
method until December 31, 2001. Thereafter, annual and quarterly goodwill
amortization of $266,756 and $66,689 respectively will no longer be recognized.
The company will perform a transitional fair value based impairment test at
March 31, 2002 and if the fair value is less than the recorded value at January
1, 2002 the company will record an impairment loss in the March 31, 2002 quarter
as a cumulative effect of a change in accounting principle.
In August 2001, the FASB issued statement of Financial Accounting Standard
No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets", ("SFAS
144"). This statement is effective for the fiscal years beginning after December
15, 2001. This supercedes SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of", while retaining many of the
requirements of such statement. The Company is currently evaluating the impact
of the statement.
FACTORS AFFECTING FUTURE RESULTS
We are actively looking for ways to increase sales and profitability. To
achieve that goal, we are looking at various avenues for expansion. The first is
geographical expansion, and to that end, we are currently negotiating opening
three new locations, one in Toronto, Canada, the second in the London, United
Kingdom and the third in Alexandria, Virginia area. These three new offices
should be operating by December 2001. The second avenue for additional sales is
"Internet E-Commerce" sales to the public. We unveiled our e-commerce website in
May 2001 and began active sales over the Internet in July 2001. These sales are
made utilizing consumer credit card payment and existing inventory. To date we
have received a strong response to our web sales and are continuing to grow.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to certain legal proceedings and claims which have arisen in
the ordinary course of our business. These actions when ultimately concluded
will not, in the opinion of management, have a material adverse effect on our
financial position, results of operations or liquidity. We are also subject to
other legal proceedings which we have previously disclosed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
9278 COMMUNICATIONS, INC.
Date: November, 14, 2001 By /s/ James Scigliano
-------------------
James Scigliano
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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