UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 June 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 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 98-0207906
------------------------------- ------------------------------------
(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 - 23,943,002 shares issued and outstanding as of
August 14, 2001
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2001 2000
---- ----
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,276,759 $ 4,114,651
Marketable Securities - 20,962
Accounts receivable, less allowance for doubtful accounts
of $710,000 and $675,000 at June 30, 2001 and December 31, 2000 respectively 10,712,216 6,844,833
Inventory 6,946,857 3,582,040
Prepaid expenses and all other current assets 84,534 -
------------ ------------
Total Current Assets 24,020,366 14,562,486
------------ ------------
Furniture and Equipment - Net of accumulated depreciation of $234,574 and
$133,378 at June 30, 2001 and December 31, 2000 respectively 908,193 653,597
Goodwill, net of accumulated amortization of $150,070 and $17,154
at June 30, 2001 and December 31, 2000 respectively 3,851,243 3,884,159
Other Assets 43,371 40,743
------------ ------------
$ 28,823,173 $ 19,140,985
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 23,958,525 $ 14,594,273
Current maturities of notes payable 4,647 904,936
Current maturities of Debt obligations 41,855 48,023
Income taxes payable 3,000 24,255
------------ ------------
Total Current Liabilities 24,008,027 15,571,487
------------ ------------
Notes payable, shareholder, less current maturities 1,040,000 2,000,000
Debt obligations, less current maturities 82,692 103,071
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25,130,719 17,674,558
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Shareholders' equity
Convertible preferred stock
Class B, $0.001 par value, 5,000,000 shares authorized
0 and 505 issued and outstanding, respectively - 505,000
Common Stock, $0.001 par value; 40,000,000 shares
authorized, 23,942,982 and 23,166,969 issued and outstanding, respectively 23,943 23,166
Paid in capital 8,247,475 7,743,252
Accumulated Deficit (4,578,964) (6,804,991)
------------ ------------
Total Shareholders' Equity 3,692,454 1,466,427
------------ ------------
$ 28,823,173 $ 19,140,985
============ ============
2
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Sales $ 49,578,900 $ 16,857,595 $ 87,017,630 $ 33,740,513
Cost of Sales 46,387,665 15,820,410 81,102,970 32,002,401
------------ ------------ ------------ ------------
Gross Profit 3,191,235 1,037,185 5,914,660 1,738,112
Operating Expenses
Selling 177,292 146,546 563,776 154,513
General and administrative 1,558,469 646,038 2,698,164 1,127,688
Depreciation and amortization 119,110 55,740 234,112 87,443
Loss on Disposition of Assets - - - 363,367
Bad and Doubtful Debts 69,347 40,000 121,617 303,474
Interest expense 24,881 42,532 70,339 87,559
Realized (Gain) on Investment in Securities (6,428) - (9,121) -
------------ ------------ ------------ ------------
1,942,671 930,856 3,678,887 2,124,044
Income/(Loss) from Operations Before Income Taxes 1,248,564 106,329 2,235,773 (385,932)
Provision for Income Taxes 6,175 - 9,746 -
------------ ------------ ------------ ------------
Net Income / (Loss) attributable to common stock 1,242,389 106,329 $ 2,226,027 (385,932)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ 0.05 $ 0.01 $ 0.10 $ (0.02)
============ ============ ============ ============
Shares used in the calculation of earnings per share 23,643,089 20,152,356 23,394,762 20,301,374
============ ============ ============ ============
3
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2001 2000
---- ----
Cash Flows From Operating Activities
Net Income / (Loss) $ 2,226,027 $ (385,932)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 234,112 87,443
Provision for Doubtful Accounts 35,000 303,474
Issuance of stock for services rendered - 30,000
Loss attributable to sale of equipment - 363,367
Changes in current assets and liabilities:
Accounts receivable (3,754,480) (1,290,203)
Inventory (3,296,802) 150,317
Prepaid expenses (84,534) (57,227)
Other Assets (2,628) (12,760)
Accounts payable 9,250,575 271,770
Income taxes payable (21,255) -
----------- ----------
Net Cash provided by (used in) Operating Activities 4,586,015 (539,751)
----------- ----------
Cash flows From Investing Activities
Acqusition of property and equipment (350,292) (234,217)
Acqusition of businesses in Connecticut (207,741) -
Disposition of Marketable Securities 20,962 -
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Net Cash used in Investing Activities (537,071) (234,217)
----------- ----------
Cash flows From Financing Activities
Notes and Advances Payable, shareholder (960,289) 2,808
Notes Payable - Other (900,000) -
Notes Payable - leases - 75,000
Principal payments on debt obligations (26,547) (38,445)
Issuance of common stock - 923,000
----------- ----------
Net cash (used in) provided by Financing Activities (1,886,836) 962,363
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivilents $ 2,162,108 $ 188,395
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4
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2001 2000
---- ----
Net Increase (Decrease) in Cash and Cash Equivilents $ 2,162,108 $ 188,395
Cash and Cash Equivilents - Beginning of Period 4,114,651 26,192
----------- ---------
Cash and Cash Equivilents - Ending of Period $ 6,276,759 $ 214,587
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 70,339 $ 7,559
Cash paid for taxes 6,746 4,555
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 505,000 425,000
Common stock issued for services rendered - 30,000
5
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
Retained
Preferred Number Additional Earnings
Stock 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 - $ -
Net income for the six months
ended June 30, 2001 - - - - 2,226,027 $ 2,226,027
--------- ---------- -------- ----------- ------------ -----------
$ - 23,942,982 $ 23,943 $ 8,247,475 $ (4,578,964) $ 3,692,454
--------- ---------- -------- ----------- ------------ -----------
6
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 Communications 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 six month periods ended June 30, 2001 and
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2001.
2 - NATURE OF BUSINESS
The Company markets and distributes prepaid telephone cards to small
retail establishments and distributors across the United States.
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 six months
ended June 30, 2001 reflects the utilization of the Company's net operating loss
carryforwards in the amount of approximately $3,100,000 from prior years. At
June 30, 2001 net operating losses of approximately $875,000 are available to be
setoff against possible future taxable income.
(Continued)
7
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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 six
months ended June 30, 2001 and 2000 excludes all potentially dilutive
securities, as the effect of the related incremental shares (210,000 and 235,000
shares in 2001 and 2000, respectively) would be antidilutive.
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
---------
321,419
Liabilities assumed:
Accounts payable (113,677)
---------
Net assets acquired $ 207,742
---------
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
On January 29, 2001 the Company acquired 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 8,100,000
shares of Cirus was diluted to 18%. The Company's investment in Cirus is
restricted and subject to other conditions pursuant to the service agreement.
The investment in Cirus is accounted for at cost and is not material to the
Company's financial position. Cirus Telecom Inc. trades under ticker symbol
"CTLE".
(Continued)
8
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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 June 30, 2001, the Company had repaid $960,000 on this note.
Interest on the note is payable at a rate of 8%. For the six months
ended June 30, 2001, interest expense on this note was $60,000 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 $11,628,000 and $3,088,000 for the six months ended June 30, 2001
and 2000 respectively. The Company also purchased inventory from this customer
during this period in the amount of $5,839,000 in 2001 and $0 in 2000. Included
in accounts receivable and accounts payable at June 30, 2001 is $2,659,124 and
$183,740 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. In the Company's opinion, with which its legal
counsel concurs, no material liability will result from the counter suit. The
Company incurred a loss of $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 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 telephone
cards instituted an action for approximately $600,000, based on a purported
breach of oral contract by the Company. The Company filed an answer and
counterclaim against the distributor for approximately $600,000 of unpaid
invoices. The Company believes it has meritorious defenses to the claims of the
distributor and is pursuing its claim for unpaid invoices. The Company has
provided an allowance for doubtful accounts equal to the total unpaid invoices.
(Continued)
9
9278 COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
9 - PREFERRED STOCK
During the six months ended June 30, 2001, the remaining 505 preferred
shares were converted into 776,013 common shares.
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 at June 30, 2001 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SET FORTH IN ITEM 7 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 May 2001, we have
started selling prepaid cards to end users via the Internet.
Private label cards are generally designed and produced by us,
utilizing card numbers or Personal Identification Numbers ("PIN") 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
PINs 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. 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 3% to 8%, 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.
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
two new locations, one in Brooklyn, New York and the other in the Chicago,
Illinois area. These two new offices should be operating by the end of August
2001. The second avenue for additional sales is "Internet E-Commerce" sales to
the public. We unveiled our e-commerce website in May 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net sales increased $32,721,000 to $49,579,000 for the three months
ended June 30, 2001, up 194.1% from net sales of $16,858,000 for the three
months ended June 30, 2000. The increase in net sales was primarily due to our
acquisitions and geographic expansion in the third and fourth quarters of
calendar year 2000 and the first quarter of 2001 and, to a lesser extent,
opening of a branch office in Los Angeles, California in May 2001. In September
2000 we acquired two businesses (in Yonkers, New York and Silver Springs,
Maryland) that accounted for $7,145,000 of sales in the three months ended June
30, 2001. In December 2000, we acquired Reliable Networks, Inc., a competitor of
ours located in Queens, New York, which accounted for $10,827,000 of sales for
the three months ended June 30, 2001. In January 2001, we acquired two separate
operations in Connecticut and opened an office in Connecticut, which accounted
for an aggregate of $2,552,000 in sales for the three months ended June 30,
2001. The new office in Los Angeles, California accounted for $3,445,000 in
sales since its inception in May 2001. For the three months ended June 30, 2001,
same location sales increased by approximately $8,752,000 or 51.91% to
$25,610,000 in 2001 from $16,858,000 in the prior year.
11
Gross profit increased to $3,191,235 for the three months ended June
30, 2001, as compared to $1,037,185 in same period in 2000, as a result of
increased volume and greater sales margins. As a percentage of sales, gross
profit increased to 6.44% for the three months ended June 30, 2001 as compared
to 6.15% for the three months ended June 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 three months ended June 30, 2001 increased
by $1,012,000 to $1,943,000 an increase of 109% over operating expenses of
$931,000 for the three months ended June 30, 2000. Selling expenses increased by
$31,000 to $177,000 for the three months ended June 30, 2001 from $146,000 for
the same period in 2000, as a result of our utilizing commissioned sales staff
to make bulk sales. In addition, general and administrative expenses increased
by $912,000 to $1,558,000 for the three months ended June 30, 2001, as compared
to $646,000 for the same period in 2000. This increase was primarily due to the
increase in salaries of $382,000 that is directly related to our growth and
adding new locations, an increase in professional and consulting fees of
$215,000 due to legal, accounting and consulting fees incurred primarily in
connection with the mergers and certain lawsuits instituted by former vendors
and customers and communication with investors, and an increase in trade
publication advertising of $58,000. The remainder of the increase in general and
administrative expenses of approximately $257,000 reflects the normal escalation
of overhead required to support our growth.
Depreciation and amortization for the three months ended June 30, 2001
equaled $119,000, an increase of $63,000 compared to the same period in 2000.
The increase is comprised of $16,000 in increased depreciation of fixed assets
and $47,000 in increased amortization of goodwill. In the three months ended
June 30, 2001 we recorded bad debts of $69,000 as compared to $40,000 for the
same period in 2000.
We had a net profit before tax of $1,249,000 for the three months ended
June 30, 2001 as compared to $106,000 for the three months ended June 30, 2000.
The increase in net income was due to the increase in sales volume and gross
profit margins, improved internal controls for 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 $1,249,000 for
the three months ended June 30, 2001 as compared to $106,000 for the three
months ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net sales increased $53,277,000 to $87,018,000 for the six months ended
June 30, 2001, up 157.9% from net sales of $33,741,000 for the six months ended
June 30, 2000. The increase in net sales was primarily due to our acquisitions
and geographic expansion in the third and fourth quarters of calendar year 2000
and the first quarter of 2001 and, to a lesser extent, opening of a branch
office in Los Angeles, California in May 2001. In September 2000 we acquired two
businesses (in Yonkers, New York and Silver Springs, Maryland) that accounted
for $11,885,000 of sales in the first six months of 2001. In December 2000, we
acquired Reliable Networks, Inc., a competitor of ours located in Queens, New
York, which accounted for $21,888,000 of sales in the first six months of 2001.
In January 2001, we acquired two separate operations in Connecticut and opened
an office in Connecticut, which accounted for an aggregate of $4,063,000 in
sales since its acquisition. The new office in Los Angeles, California accounted
for $3,445,000 in sales since its inception in May 2001. Same location sales
increased in first six months of 2001 by approximately $11,996,000 or 35.55% to
$45,736,000 in 2001 from $33,740,000 in the prior year.
Gross profit increased to $5,914,660 for the six months of 2001, as
compared to $1,738,112 in same period in 2000, as a result of increased volume
and greater sales margins. As a percentage of sales, gross profit increased to
6.8% for six months ended June 30, 2001 as compared to 5.15% for the six months
ended June 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 six months ended June 30, 2001 increased by
$1,555,000 to $3,679,000 an increase of 73% over operating expenses of
$2,124,000 for the six months ended June 30, 2000. Selling expenses increased by
$410,000 to $564,000 for the first six months of 2001 from $154,000 for the same
period in 2000, as a result of our utilizing commissioned sales staff to make
bulk sales. In addition, general and administrative expenses increased by
$1,570,000 to
12
$2,698,000 for the six months of 2001, as compared to $1,128,000 for the same
period in 2000. This increase was primarily due to the increase in salaries of
$592,000 that is directly related to our growth and adding new locations, an
increase in professional and consulting fees of $426,000 due to legal,
accounting and consulting fees incurred primarily in connection with the mergers
and certain litigations, and communication with investors, and an increase in
trade publication advertising of $130,000. The remainder of the increase in
general and administrative expenses of approximately $379,000 reflects the
normal escalation of overhead required to support our growth.
Depreciation and amortization for the six months ended June 30, 2001
equaled $234,000, an increase of $147,000 compared to the same period in 2000.
The increase is comprised of $53,000 in increased depreciation of fixed assets
and $94,000 in increased amortization of goodwill. In the six months ended June
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 six months ended June 30, 2001,
the provision for bad debts was only $122,000.
We had a net profit before taxes of $2,226,000 for the six
months ended June 30, 2001 as compared to a loss of $386,000 for the six months
ended June 30, 2000. The increase in net income was due to the increase in sales
volume and gross profit margins, improved internal controls for 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 $2,226,000 for the six months ended June 30, 2001 as compared to a net
loss of $386,000 for the six months ended June 30, 2000.
CAPITAL RESOURCES
At June 30, 2001, we had total current assets of approximately
$24,020,000. This included $6,277,000 in cash, $6,947,000 of inventory and
$10,712,000 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 $4,586,000 in cash from operating activities during the
six months ended June 30, 2001 as compared to utilizing $540,000 during the same
period in 2000. Increases in cash flows during the six months ended June 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 $537,000 during the
six months ended June 30, 2001, utilized to acquire additional fixed assets and
acquire another business operation. Cash utilized by financing activities
amounted to $1,887,000 during the six months ended June 30, 2001, of which,
$960,000 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 $27,000 to pay down principal on debt obligations.
We believe 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.
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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: August 14, 2001 By /s/ James Scigliano
---------------------------
James Scigliano
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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