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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number: 0-25820
PROMAX COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)
Province of British Columbia N/A
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 Central Park West, # 16 E
New York, NY 10023
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 265-0842
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of October
31, 1997 was:
Class A common stock - 9,475,548 shares; and Class B
common stock - 363,200 shares.
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PROMAX COMMUNICATIONS INC.
FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED SEPTEMBER 30, 1997
(UNAUDITED)
BALANCE SHEET
AS AT SEPTEMBER 30, 1997
September 30, 1997 June 30, 1997
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 359,076 735,847
Accounts receivable 438,746 90,502
Inventory 127,056 33,858
---------- ----------
924,878 860,207
CAPITAL EQUIPMENT
Transmission equipment 192,056 95,787
Subscriber equipment 126,154 --
Furniture and equipment 257,313 105,986
---------- ----------
575,523 201,773
---------- ----------
DEFERRED COSTS 11,263,435 3,175,721
---------- ----------
INVESTMENTS
Investment in ArgenTel 200,000 200,000
Mortgages and loans -- 26,522
---------- ----------
200,000 226,522
---------- ----------
12,963,836 4,464,223
========== ==========
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PROMAX COMMUNICATIONS INC.
FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED SEPTEMBER 30, 1997
(UNAUDITED)
BALANCE SHEET CONT'D
AS AT SEPTEMBER 30, 1997
September 30, 1997 June 30, 1997
$ $
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 2,289,620 214,232
Due to related parties 10,665 --
---------- ----------
2,300,285 214,232
---------- ----------
ADVANCES RECEIVED RE SHARES 48,750 1,032,109
---------- ----------
NON-CONTROLLING INTEREST 64,200 9,479
---------- ----------
LONG-TERM DEBT
Promissory notes 3,800,000 --
Interest on notes 110,238 --
---------- ----------
3,910,238 --
---------- ----------
SHAREHOLDERS' EQUITY
Share capital 9,157,595 4,027,455
Costs of financing (852,150) --
Deficit (1,663,245) (822,371)
Cumulative translation adjustment (1,837) 3,319
---------- ----------
6,640,363 3,208,403
---------- ----------
12,963,836 4,464,223
========== ==========
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PROMAX COMMUNICATIONS INC.
STATEMENT OF OPERATIONS AND DEFICIT
FOR THE FIRST QUARTER ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1997 1996
Three Three
Months Months
$ $
REVENUES
Subscriber revenue 180,042 --
Equipment sales 55,443 --
Interest income 15,971 16,998
---------- ----------
251,456 16,998
---------- ----------
EXPENSES
Cost of goods sold 33,009 --
Technical operations 123,627 --
Sales and marketing 198,718 --
Administration 496,899 24,865
---------- ----------
852,253 24,865
---------- ----------
LOSS BEFORE THE UNDERNOTED (600,797) (7,867)
Amortization (162,989) --
Foreign exchange loss (12,141) --
Interest on debt (110,238) --
---------- ----------
LOSS FOR THE PERIOD (886,165) (7,867)
NON-CONTROLLING INTEREST 45,291 --
---------- ----------
NET LOSS FOR THE PERIOD (840,874) (7,867)
DEFICIT, BEGINNING OF PERIOD (822,371) (44,030)
---------- ----------
DEFICIT, END OF PERIOD (1,663,245) (51,897)
========== ==========
Loss per Class "A" Share (0.098) (0.009)
Loss per common share (Class "A" and "B") (0.086) (0.002)
Wtd avg no of Class "A" shares outstanding 8,578,573 854,965
Wtd avg no of all common shares outstanding 9,814,373 3,255,165
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PROMAX COMMUNICATIONS INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE FIRST QUARTER ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1997 1996
Three Three
Months Months
$ $
OPERATING ACTIVITIES
Loss for the period (840,874) (7,867)
Amortization 162,989 --
Non-controlling interest (45,291) --
Cumulative translation adjustment (6,840) --
Net change in non-cash items 1,877,591 (12,756)
---------- ----------
1,147,575 (20,623)
---------- ----------
INVESTING ACTIVITIES
Capital assets (94,399) --
Investment in SkyLink, net of cash (8,487,082) --
Increase in deferred costs (37,496) --
Mortgages and loans -- 107,240
---------- ----------
(8,618,977) 107,240
---------- ----------
FINANCING ACTIVITIES
Shares issued for cash 4,100,281 --
Shares redeemed for cash -- (477,999)
Promissory notes 3,800,000 --
Costs of financing (805,650) --
---------- ----------
7,094,631 (477,999)
---------- ----------
INCREASE (DECREASE) IN CASH DURING THE PERIOD (376,771) (391,382)
CASH, BEGINNING OF PERIOD 735,847 395,560
---------- ----------
CASH, END OF PERIOD 359,076 4,178
========== ==========
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PROMAX COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
(A) Description of Business:
Promax Communications Inc.'s focus is to acquire and develop paging operations
in South America, with investments in companies holding paging licenses located
in Brazil, Bolivia and Argentina. At present, the Company has operations only in
Brazil with approximately 11,000 subscribers.
(B) Basis of Presentation:
(i) Principles of Consolidation:
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in Canada which, in all material
respects, are in accordance with accounting principles generally accepted in the
United States.
These statements include the accounts of the Company and its direct and
indirect wholly-owned subsidiaries including Auto Link Telecom S.A. ("Auto
Link"), Amparo Central de Telecommunicacoes ("Amparo"), Andrade Gomez
Communicacoes Ltda. ("SkyLink"), all in Brazil, and Servicios de
Telecomunicaciones S.A. ("Servicios") located in Bolivia. All material
intercompany balances and transactions have been eliminated. These
consolidated financial statements include the results of operations of Auto
Link, Amparo and SkyLink, the latter acquired on September 9, 1997. See
Acquisition below.
(ii) Reporting Currency:
The Company's operations are now primarily denominated in U.S. dollar based
currencies. Consequently, the Company changed to U.S. dollar reporting in 1997
and has restated the prior period comparative financial information to U.S.
dollars using the June 30, 1997 year end exchange rate of 0.7309 on the
previously reported amounts stated in Canadian dollars.
(iii) Foreign Exchange:
The Company's foreign business operations are considered to be self-sustaining
in nature. Accordingly, assets and liabilities are translated into United States
dollars at rates of exchange in effect at the balance sheet date. Transactions
which impact the determination of earnings are translated at average exchange
rates during each reporting period. Exchange gains and losses arising from the
translation of the business into U.S. dollars are excluded from the
determination of income and disclosed as the cumulative translation adjustment
in shareholders' equity in the consolidated balance sheets. Other exchange gains
and losses are included in the determination of income.
(iv) Interim Financial Information:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses which arose during the
reporting period. Actual results could differ from the estimates used.
In the opinion of management, the accompanying unaudited consolidated
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financial statements of the Company contain all adjustments, consisting only of
those of a recurring nature, necessary to present fairly the Company's financial
position as at September 30, 1997, the results of operations for the three
months ended September 30, 1997 and 1996 and cash flows for the three months
ended September 30, 1997 and 1996. These results are not necessarily indicative
of the results to be expected for the full year. The accompanying financial
statements are for the interim periods and should be read in conjunction with
the audited financial statements of the Company, contained in Promax's Annual
Report on Form 10-K for the year ended June 30, 1997.
(C) Acquisition:
On September 9, 1997, Promax, through its Auto Link subsidiary, completed the
acquisition of 77.76% of Andrade Gomez Communicacoes Ltda. operating under the
name "SkyLink". SkyLink holds a license for paging operations for the greater
Sao Paulo region and provides services to approximately 10,000 subscribers.
The total consideration for SkyLink consisted of approximately $7,890,000 in
cash plus 300,000 shares of Class A common stock which includes a provision of
$1 million as described in (D) Commitments and Contingencies. The fair value of
consideration on the acquisition has been allocated to the assets acquired and
liabilities assumed as follows:
Net assets acquired $
Cash 2,918
Current assets 595,401
Fixed assets 293,383
Deferred development costs 8,143,846
----------
9,035,548
Less:
Current liabilities 443,803
Non-controlling interest 100,061
Cumulative translation adjustment 1,684
----------
8,490,000
==========
Consideration:
Common shares 600,000
Cash, including costs 7,890,000
----------
8,490,000
==========
(D) Commitments and Contingencies:
Pursuant to the terms of the acquisition of SkyLink, the Company has an
obligation to have an independent audit performed of the subscriber base and to
adjust the purchase price accordingly for each subscriber in excess of 9,000
based on a valuation formula. With a subscriber base of 10,000, the Company's
additional liability under the contract would be approximately $1 million which
has been accrued in the purchase price.
The Company is presently arranging financing to be able to fulfill this
commitment and to provide added working capital to fund its expansion program.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion and analysis should be read in conjunction with the interim
consolidated financial statements and notes thereto contained in this filing.
RESULTS OF OPERATIONS - For the three months ended September 30, 1997 compared
with the three months ended September 30, 1996.
Revenues:
Due to the successful completion of the acquisition of SkyLink in the quarter,
consolidated revenues from operations in 1997 rose to $251,000 from $17,000
earned in the first quarter of 1996. As SkyLink was acquired on September 9,
only revenues after this date have been included in the above reported revenue
amount. At the date of acquisition, SkyLink had approximately 10,000
subscribers, and consequently, the Company's overall subscriber base, inclusive
of SkyLink and Amparo, increased to approximately 11,000 at the end of the
quarter.
Revenues for the 1997 quarter were comprised of subscriber monthly fees of
$180,000, of which $ 154,000 came from SkyLink and the remaining $26,000 from
the Company's Amparo operations, new subscriber equipment sales of $55,000 and
interest income of $16,000. In 1996, only interest revenues were generated from
the Company's mortgage portfolio held at that time.
Expenses:
Expenses include the cost of equipment sold to subscribers of $33,000, and costs
for technical operations in the amount of $124,000, sales and marketing of
$199,000 and administration of $497,000 for the period, aggregating $852,000. In
contrast, the costs for the comparative period, when only administration costs
were incurred for the management of the mortgages, were $25,000.
Costs for the current quarter reflect much higher than normal levels due to the
Company's early position in the growth cycle for this industry and the need for
significant developmental expenditure in the areas of sales and marketing and
administration to strategically position the Company to take advantage of the
market potential determined by management to be present.
Administration costs of $497,000 include Brazilian in-country salaries and other
costs of $256,000 and corporate costs of $241,000, the latter comprised of
professional fees of $93,000, management fees of $40,000, office operating and
other costs of $60,000, and travel of $ 48,000.
Net Operating Loss ( EBITDA ):
A net operating loss resulted from the first quarter operations of $601,000 as
compared to a loss in 1996 of $8,000 when the Company's activity was minimal.
The loss is before charges for amortization of $163,000, foreign currency
translation losses of $12,000 and debenture interest of $110,000, offset
somewhat by the non-controlling interest equal to $45,000.
Loss for the Period:
The overall net loss for the period after giving effect to the above items is
$841,000, significantly larger than for the prior comparable period in 1996 of
$8,000.
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LIQUIDITY AND CAPITAL RESOURCES
Corporate Funding Activities:
During the quarter, in order to complete the acquisition of SkyLink, the Company
closed a financing for approximately 1.5 million Class A common shares priced at
$2.00 per share for total proceeds of $3,025,281. In addition, 559,400 Class B
common shares were converted to Class A common shares giving rise to an
additional contribution to capital of $335,000. As part of the acquisition,
300,000 Class A common shares were issued also.
The Company also issued 12% promissory notes due on July 11, 1998 aggregating
$3,800,000 to assist in the financing of the SkyLink acquisition and for working
capital purposes. 70,000 Class A common shares were issued as part of the
financing terms. Financing costs for the above-noted transactions amounted to
$805,650.
Liquidity:
At September 30, the Company held $359,000 in cash and short-term investments,
having made the payments required for the SkyLink acquisition and the funding
requirements of the Brazilian paging operations. The acquisition pricing was
based on a subscriber base of 9,000 and is subject to adjustment following an
audit of the subscriber accounts. Management anticipates a further payment of
the order of $1 million will be required to satisfy this pricing adjustment
provision in the next quarter and plans to issue additional capital stock in
order to finance this need and that of working capital for both the Brazilian
operations and the corporate office.
Future Operating Results:
The Company's future profitability is subject to a variety of risks and
uncertainties including the successful launch of its new marketing programs to
generate the subscriber growth forecast, the risks associated with foreign
operations, both operational and regulatory, and the Company's ability to
complete the financings required to sustain its operations through to cash flow
self-sufficiency.
In addition to the above, certain other statements made in this filing are based
on management's assessment of a variety of factors including the Company's
technological capabilities, the competency of its staff to meet the needs of the
planned growth and the impact of competition in the marketplace. Consequently,
the actual results realized by the Company could differ materially from the
statements made in this filing document, and readers are cautioned that such
statements concerning the future results of the Company are management's
projections at the time of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
PROMAX COMMUNICATIONS INC.
Date: November 14, 1997 BY: "Steven Sinn"
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Chairman, President & CEO
Date: November 14, 1997 BY: "Ross Wilmot"
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Vice President, Finance