U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________________ to ______________
Commission file number 0-28879
WILMINGTON REXFORD, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0348508
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
420 LINCOLN ROAD, SUITE 301, MIAMI, FLORIDA 33139
(Address of principal executive offices)
(403) 252-7766
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the last practicable date:
5,212,702 SHARES OF COMMON STOCK, $0.0001 PAR VALUE, AS OF
JUNE 30, 2002
Transitional Small Business Disclosure Format (check one); Yes No X
----- -----
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2002 (unaudited) and September 30, 2001 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months ended
June 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2002 and 2001 (unaudited) 5
Notes to unaudited condensed consolidated financial statements 6 - 10
ITEM 2. Management's Discussion and Analysis or Plan of Operations 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Change in Securities 17
ITEM 3. Defaults upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
2
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
F/K/A E-TREND NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND SEPTEMBER 30, 2001
=========================================================================================================
(UNAUDITED) (Audited)
ASSETS JUNE 30, 2002 September 30, 2001
=========================================================================================================
CURRENT ASSETS
Cash and cash equivalents $ 32,182 $ 17,529
Cash- restricted 98,750 94,995
Marketable securities 48,536 129,699
Accounts receivable, net 250,064 47,083
Due from related parties- accounts receivable 83,323 229,978
Inventory 278,776 229,320
Prepaid and other current assets 47,189 47,302
- ---------------------------------------------------------------------------------------------------------
Total current assets 838,820 795,906
ADVANCES TO RELATED PARTY - 166,349
NOTES RECEIVABLE - RELATED PARTIES 106,531 -
NOTES RECEIVABLE 25,828 -
PROPERTY AND EQUIPMENT, NET 306,960 348,495
GOODWILL, NET 145,901 154,909
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,424,040 $ 1,465,659
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=========================================================================================================
CURRENT LIABILITIES
Line of credit $ 103,954 $ 103,817
Bank overdrafts 498 -
Accounts payable and accrued liabilities 428,676 407,221
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 533,128 511,038
- ---------------------------------------------------------------------------------------------------------
NOTES PAYABLE - STOCKHOLDER 379,984 -
- ---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 842,643 842,643
Additional paid-in capital 3,601,406 3,601,406
Advance due from stockholder ( 22,800) ( 22,800)
Deferred stock-based compensation ( 85,501) ( 183,008)
Accumulated other comprehensive losses
Unrealized loss on investments ( 100,148) ( 13,845)
Cumulative translation adjustment ( 6,025) ( 36,876)
Deficit ( 3,718,647) ( 3,232,899)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 510,928 954,621
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,424,040 $ 1,465,659
=========================================================================================================
See accompanying notes - unaudited.
3
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
F/K/A E-TREND NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
====================================================================================================================================
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------------- -------------------------------------
2002 2001 2002 2001
====================================================================================================================================
SALES $ 635,817 $ 713,376 $ 1,851,794 $ 1,637,598
COST OF SALES 509,092 590,208 1,485,712 1,410,527
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 126,725 123,168 366,082 227,071
Operating expenses ( 234,907 ) ( 863,680 ) ( 842,963 ) ( 1,821,672 )
Depreciation and amortization ( 23,745 ) ( 27,158 ) ( 69,590 ) ( 70,865 )
Consulting fees- related parties 60,000 - 60,000 -
Interest and other income (expense) ( 417 ) 19,423 723 103,810
- ------------------------------------------------------------------------------------------------------------------------------------
NET LOSS ( $ 72,344 ) ( $ 748,247 ) ( $ 485,748 ) ( $ 1,561,656 )
====================================================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized loss from investment ( $ 21,042 ) ( $ 7,310 ) ( $ 86,30 ) ( $ 87,720 )
Foreign currency translation adjustment 42,2900 ( 31,214 30,851 20,108
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS ( $ 51,096 ) ( $ 786,771 ) ( $ 541,200 ) ( $ 1,629,268 )
====================================================================================================================================
Net loss per share, basic and diluted ( $ 0.01 ) ( $ 0.18 ) ( $ 0.10 ) ( $ 0.36 )
====================================================================================================================================
Weighted average common shares outstanding,
basic and diluted 5,212,702 4,472,228 5,212,702 4,472,228
====================================================================================================================================
See accompanying notes - unaudited.
4
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
F/K/A E-TREND NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
=============================================================================================================================
2002 2001
=============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ( $ 485,748 ) ( $ 1,561,656 )
- -----------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Shares issued in exchange for services - 304,000
Depreciation and amortization 69,590 70,865
Amortization of deferred stock-based compensation 97,507 -
Cumulative translation adjustment 25,837 ( 67,037 )
Changes in operating assets and liabilities:
Accounts receivable ( 56,326 ) 3,237
Inventory ( 49,456 ) ( 205,668 )
Prepaid expenses and other current assets 113 ( 48,427 )
Accounts payable and accrued liabilities 21,455 311,858
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments 108,720 368,828
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities ( 377,028 ) ( 1,192,828 )
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid for company acquired - ( 168,000 )
Net repayments from related party 166,349 -
Issuance of notes receivable ( 132,359 ) -
Purchase of property and equipment ( 19,173 ) ( 72,214 )
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 14,817 ( 240,214 )
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance to related party - ( 145,022 )
Net increase in bank overdraft 498 -
Proceeds on notes payable - related party 379,984 -
Net (repayments) borrowings on line of credit facility 137 ( 74,816 )
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 380,619 ( 219,838 )
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 18,408 ( 1,652,880 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 112,524 1,866,159
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 130,932 $ 213,279
=============================================================================================================================
Supplemental Disclosures:
- -----------------------------------------------------------------------------------------------------------------------------
Interest paid $ 5,753 $ -
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes - unaudited.
5
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
F/K/A E-TREND NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-QSB for quarterly reports under section 13 or 15(d) of the
Securities Exchange Act of 1934. Accordingly, they do not include all
of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and
such adjustments are of a normal recurring nature. Operating results
for the three and nine month periods ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the
year ending September 30, 2002.
The audited financial statements at September 30, 2001 which are
included in the Company's Annual Report on Form 10-KSB should be read
in conjunction with these condensed consolidated financial
statements.
CONSOLIDATION
The condensed consolidated financial statements include the accounts
of Wilmington Rexford, Inc. (Parent) and its wholly owned subsidiary
E-Trend Networks, Inc. (E-Trend) and E-Trend's wholly owned
subsidiary Langara Distribution, Inc. (Langara) (collectively "the
Company"). All significant intercompany balances and transactions
have been eliminated in consolidation.
BUSINESS ACTIVITY
Wilmington Rexford, Inc. (WilRex) was incorporated on June 17, 1996
under the laws of the State of Colorado and changed its domicile in
February 2001 to the State of Delaware. WilRex targets investment
opportunities in industries with the potential to achieve significant
capital appreciation. E-Trend was incorporated on April 29, 1999
under the laws of the State of Nevada and is an online "entertainment
superstore", specializing in the sale of movies, music, and
electronics. Langara was incorporated on June 28, 1999 under the laws
of the Province of Alberta Canada and manages an inventory of popular
music and movie titles. Langara offers business-to-business
fulfillment services to client electronic commerce companies and
third party e-commerce partners, as well as providing wholesale
services to the brick and mortar retailers.
6
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the respective reporting period. Actual results could differ from
those estimates.
CONCENTRATION OF CREDIT RISK AND REVENUE
At June 30, 2002 approximately 83% of accounts receivable were from
one customer, VHQ Entertainment, Inc., a previous shareholder.
Revenues from the same customer accounted for approximately 40% and
46% of total revenue for the three and nine months ended June 30,
2002 and approximately 41% and 48% of total revenue for the three and
nine months ended June 30, 2001.
RECLASSIFICATIONS
Certain amounts in the June 30, 2001 and September 31, 2001 financial
statements have been reclassified to conform to the June 30, 2002
presentation.
NET LOSS PER SHARE
The Company applies Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (FAS 128) which requires dual presentation
of net earnings (loss) per share: Basic and Diluted. Basic earnings
(loss) per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common shares
outstanding during the period adjusted for the effect of dilutive
outstanding options and warrants. Outstanding stock options and
warrants were not considered in the calculation of diluted net loss
per share as their effect was anti-dilutive.
SEGMENT REPORTING
The Company applies Financial Accounting Standards Boards ("FASB")
statement No. 131, "Disclosure about Segments of an Enterprise and
Related Information". The Company has considered its operations and
has determined that it operates in three operating segments for
purposes of presenting financial information and evaluating
performance, The Parent targets investment opportunities, while
E-Trend and Langara are retail and wholesale distributors of
entertainment products, respectively. As such, the accompanying
financial statements present information in a format that is
consistent with the financial information used by management for
internal use.
7
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142), which is effective for fiscal
years beginning after December 15, 2001, except goodwill and
intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of
this Statement. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will
be subject to annual impairment tests in accordance with the
Statement. Other intangible assets will continue to be amortized over
their useful lives.
In August 2001, the Financial Accounting Standards Board Issued
Statement of Financial Accounting Standards No. 143 "Accounting for
Asset Retirement Obligations", effective for fiscal years beginning
after June 15, 2002. This statement addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long-lived Assets", effective for
fiscal years beginning after December 15, 2001. This statement
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections". This statement, among other things,
eliminates an inconsistency between required accounting for certain
sale-leaseback transactions and provides other technical corrections.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement
addresses accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3. This statement is effective for exit or disposal costs
initiated after December 31, 2002, with early adoption encouraged.
The Company has not yet determined what the effects of these
Statements will be on its financial position and results of
operations.
- --------------------------------------------------------------------------------
NOTE 3. LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America, which contemplates continuation of the
Company as a going concern. Going concern assumes that the Company
will continue in operations for the foreseeable future and will be
able to realize its assets and discharge its liabilities in the
normal course of operations.
8
- --------------------------------------------------------------------------------
NOTE 3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- --------------------------------------------------------------------------------
The Company has incurred substantial operating losses and negative
cash flows from operations from inception through June 30, 2002.
Although the Company believes it will become cash flow positive from
operations by the end of the fiscal year ending September 30, 2002,
there can be no assurance that this will occur. In the absence of
achieving positive cash flows from operations or obtaining additional
debt or equity financing, the Company may have difficulty meeting
obligations as they become due, and may be forced to discontinue a
business segment or overall operations.
To address these concerns, the Company continues to pursue new debt
and/or equity financing, is actively expanding its customer base and
is currently in process of implementing cost cutting strategies.
Management believes that actions presently being taken, as described
in the preceding paragraph, provide the opportunity for the Company
to continue as a going concern, however, there is no assurance this
will occur.
- --------------------------------------------------------------------------------
NOTE 4. LOANS PAYABLE STOCKHOLDER
- --------------------------------------------------------------------------------
During May and June 2002, the Company borrowed $371,000 from a
stockholder. The loan bears interest at 10% per annum and is due on
July 1, 2003.
- --------------------------------------------------------------------------------
NOTE 5. BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Principally all operations of E-Trend and Langara are conducted in
Canada. Information about operating segments is as follows:
Nine Months Ended
June 30, 2002 Parent E-Trend Langara Total
===========================================================================================================
Revenues from external
customers $ 64,000 $ 582,000 $ 1,266,000 $ 1,912,000
Intersegment revenues - - 405,000 405,000
Segment loss ( 114,000 ) ( 356,000) ( 16,000 ) ( 486,000 )
-----------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2002
===========================================================================================================
Revenues from external
customers $ 64,000 $ 196,000 $ 436,000 $ 696,000
Intersegment revenues - - - -
Segment gain (loss) ( 31,000 ) ( 51,000 ) 10,000 ( 72,000 )
-----------------------------------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
NOTE 5. BUSINESS SEGMENT INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
Nine Months Ended
June 30, 2001 Parent E-Trend Langara Total
============================================================================================================
Revenues from external
customers $ - $ 697,000 $ 941,000 $ 1,638,000
Intersegment revenues - - - -
Segment gain (loss) - ( 1,607,000 ) 45,000 ( 1,562,000 )
------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2001
============================================================================================================
Revenues from external
customers $ - $ 388,000 $ 325,000 $ 713,000
Intersegment revenues - - - -
Segment gain (loss) - ( 837,000 ) 89,000 ( 748,000 )
------------------------------------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management Discussion and Analysis (MD&A) focuses on key statistics from
the condensed consolidated financial statements of Wilmington Rexford, Inc. for
the three and nine months ended June 30, 2002, and pertains to known risks and
uncertainties relating to its businesses. This MD&A should not be considered
all-inclusive, as it excludes changes that may occur in general economic,
political, and environmental conditions. This MD&A of the financial condition
and results of operations for the three and nine months ended June 30, 2002,
should be read in conjunction with the condensed consolidated financial
statements and related notes of Wilmington Rexford, Inc.
RECENT EVENTS
On December 26th, 2001, an agreement was reached whereby a new organization and
management team lead by eAngels International would acquire controlling interest
in E-Trend Networks, Inc. Subsequent to the change in control, the controlling
shareholder announced the appointment of three representatives to its Board of
Directors, and the resignation of three former members of the Board of
Directors. Furthermore, on January 17th, 2002, the Company announced that it
would change its name to Wilmington Rexford, Inc., in an effort to properly
reflect changes in the Company's business focus. Concurrent with the name
change, the Company announced that it plans to focus its operations on venture
development, a business model predicated on the acquisition, financing, and
management of a diverse portfolio of related businesses. Wilmington Rexford will
also explore potential synergies within the Company's current operations by
expanding the product portfolio and service lines of its offline distribution
and fulfillment business, with that of its online e-commerce business,
capitalizing on the Company's existing Business-to-Business e-commerce
capabilities, as well as the Company's unique capacity to combine product supply
and technology infrastructure.
In the third quarter, Wilmington Rexford and South Beach Entertainment, Inc a
unit of South Beach Partners, a private equity firm based in Miami Beach,
Florida, announced a potential joint transaction in which Wilmington Rexford
would contribute its 100% ownership stake in its business-to-business home
entertainment distribution subsidiary, Langara Distribution, Inc., to Langara
Entertainment, Inc., a new, vertically integrated, Canadian-based entertainment
company, which would be jointly controlled by Wilmington Rexford, Inc., and
South Beach Partners, Inc., as founding shareholders.
As consideration for the ownership stake in the Langara Entertainment venture,
South Beach Entertainment, Inc. would contribute certain Interactive and Media
assets and would arrange an equity and debt financing commitment, which is to be
received by Langara Entertainment for general working capital purposes. Upon
completion of the transaction, the management of the new Canadian Company,
Langara Entertainment, Inc., intends to immediately apply for a dual listing of
its shares on both the Canadian Venture Exchange, and the newly formed BBX
Exchange, which is slated to launch in 2003. The proceeds from the offering are
to be received by Langara Entertainment for general working capital purposes,
and to Wilmington Rexford, as a selling shareholder.
We expect that the partial monetization efforts through the contribution of
Wilmington Rexford's 100% ownership stake in Langara Distribution, to the
Langara Entertainment venture, and subsequent public offering of the combined
entity, would further strengthen the balance sheet of Wilmington Rexford, via
the addition of available-for-sale securities. Furthermore, the public offering
would provide additional resources for the continued expansion of Langara
Distribution, as part of the Langara Entertainment portfolio, creating a
stronger foundation for continued growth for both entities.
11
OVERVIEW
Wilmington Rexford is a strategic venture development company that acquires and
manages a portfolio of related businesses. Operating in a diverse set of
business activities, Wilmington Rexford seeks to make investments and or
acquisitions that meet its portfolio criteria, then pursue pre-defined
strategies to support the operating management in enhancing the value of these
businesses.
Our acquisition strategy relies upon two primary factors. First, our ability to
identify and acquire target businesses that fit within our general acquisition
criteria. Second, the continued availability of capital and financing resources
sufficient to complete these acquisitions. Our growth strategy relies upon a
number of factors, including our ability to efficiently integrate the businesses
of the companies we acquire, generate the anticipated economies of scale from
the integration, and maintain the historic sales growth of the acquired
businesses so as to generate organic organizational growth.
Prior to the first quarter of 2002, the Company's principal business strategy
focused on the distribution of packaged entertainment media, through
distribution channels encompassing both online electronic commerce and
traditional bricks-and-mortar outlets. The Company operated an online retail
website WWW.ENTERTAINME.COM and through its fulfillment and distribution
subsidiary, Langara Distribution, the Company offered distribution and
fulfillment services to both traditional retail and online merchants.
Prior to the shift in the Company's business model, the Company incurred
significant losses since inception, and the Company's cost of sales and
operating expenses increased dramatically. This trend reflected the costs
associated with the Company's increased efforts to build market awareness,
attract new customers, recruit personnel, build operating infrastructure, and
develop and expand the Company's web site and related transaction-processing
systems. However, we initiated a restructuring plan in the fourth quarter of
2001, which encompassed a series of cost-cutting initiatives. Consistent with
our plan, we intended to reduce our marketing budget, our discount program, web
site development activities, and technology and operating infrastructure
development.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosures of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to impairment of long-lived assets. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.
IMPAIRMENT OF LONG-LIVED ASSETS. Our long-lived assets include property,
equipment, and goodwill. We assess impairment of long-lived assets whenever
changes or events indicate that the carrying value may not be recoverable. In
performing our assessment, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value
12
of the respective assets. If these estimates change, in the future we may be
required to record impairment charges against these respective assets.
STOCK BASED COMPENSATION. Options granted to employees under the Company's Stock
Option Plan are accounted for by using the intrinsic method under APB Opinion
25, Accounting for Stock Issued to Employees (APB 25). In October 1995, the
Financial Accounting Standards Board issued Statement No. 123, Accounting for
Stock-Based Compensation (SFAS123), which defines a fair value based method of
accounting for stock options. The accounting standards prescribed by SFAS 123
are optional and the Company has continued to account for stock options under
the intrinsic value method specified in APB 25.
RESULTS OF OPERATIONS
The company is considered to be in the early stages of implementing its business
plan, since it has not generated significant revenues and is continuing to
develop its business, particularly the Web-based site that is currently in its
initial customer acquisition phase. The Company's website, (EntertainMe.com),
and its fulfillment and distribution subsidiary, Langara Distribution, Inc., and
the acquisition of complementary business or product lines, will serve as the
primary growth-drivers for the future. Within our two operating subsidiaries,
Langara Distribution and E-Trend Networks, we derive revenues principally from
the sale of products. We recognize product revenue upon shipment of products.
NET SALES
Net sales were $ 635,817 and $713,376 for the three months ended June 30, 2002
and June 30, 2001, respectively, and $1,851,794 and $1,637,598 for the nine
months ended June 30, 2002 and 2001 respectively, representing a decrease of
11%, and an increase of 13%, respectively. Decreases in absolute dollars of net
sales during the three-months ended June 30, 2002 are primarily due to decreased
unit sales of our EntertainMe.com website. The decrease, both as a percentage of
revenues and in absolute dollars, was primarily attributable to the reduction of
our advertising campaign consistent with our cost cutting initiatives
implemented during the fourth quarter of 2001. Increases in absolute dollars,
during the nine months ended June 30, 2002 are primarily due to increased unit
sales in our Langara Distribution subsidiary, and an increase in fulfillment
revenues.
GROSS MARGIN
Gross margin was $126,725 and $123,168 for the three months ended June 30, 2002
and 2001, respectively, and $366,082 and $227,071 for the nine months ended June
30, 2002 and 2001, respectively, representing an increase of 3% and 61%,
respectively. Gross margin was 20% and 17% for the three months ended June 30,
2002 and 2001, respectively, and 20% and 14% for the nine months ended June 30,
2002 and 2001, respectively. Increases in the absolute dollars of gross profit
for the both the three month, and nine month-ended periods, primarily correspond
with increases in units sold, improvements in transportation and inventory
management, improved product sourcing, suspension of the Company's discount
reward program, as well as increased product sales of VHS movies and DVD videos,
through the EntertainMe.com website, which carry a higher gross profit margin.
OPERATING COSTS
Operating expenses consist of payroll and related expenses for executive,
finance and administrative personnel, recruiting, professional fees and other
general corporate expenses; payroll and related expenses for development,
editorial, systems and telecommunications operations personnel and consultants;
systems and telecommunications infrastructure. Operating
13
expenses were $234,907 and $863,680 for the three months ended June 30, 2002 and
2001 respectively, representing 37% and 121% of net sales for the corresponding
periods, respectively, and $842,963 and $1,821,672 for the nine months ended
June 30, 2002 and 2001, respectively, representing 46% and 111% of net sales for
the corresponding periods, respectively. The decline in absolute dollars of
operating expenses for the both the three month, and nine month-ended periods,
principally correspond to the Company's operational restructuring plan, which
reduced the number of headcount positions in finance and administration within
the Company, a reduction in our marketing budget, website development
expenditures, technology and operating infrastructure expenditures, as well as a
reduction in spending due to the completion of the Company's website, and b2b
software platform, which were completed, and expensed, in the December 31, 2000
period.
NET LOSS
Net loss for the quarter was $72,344 and $748,247 for the three months ended
June 30, 2002 and 2001, respectively, a decrease of 90%, and $485,748 and
$1,561,656 for the nine months ended June 30, 2002 and 2001, respectively, a
decrease of 69%. The improvement in net loss in comparison with the prior period
was primarily due to increases in the Company's gross profit margin, and decline
in marketing, technology, and administrative-related expenditures.
Although the Company incurred significant losses prior to the Company's
announced strategic shift in business model, the Company initiated a
restructuring plan in December 2001, instigated by the new management team,
which encompassed a series of cost-cutting initiatives. Consistent with our
plan, we intended to reduce our marketing budget, our discount program, web site
development activities, and technology and operating infrastructure development.
Furthermore, a series of operating expenses pertaining to the Company's shift in
business model and associated costs have been accounted for, and expensed during
the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2002, the Company had a working capital surplus of $305,692 compared
to a surplus of $284,868 on September 30, 2001, an increase of 7% over the
comparable period. Our cash and cash equivalents balance was $32,182 and
$17,529, an increase of 84%, and our marketable securities balance was $48,536
and $129,699 on June 30, 2002 and September 31, 2001, respectively, a decline of
63%. The decline in our marketable securities balance is due to the decline in
the valuation of the Company's primary publicly-traded-holding, VHQ
Entertainment, Inc., (TSE: VHQ).
Concurrent with the Company's change in controlling shareholder, in the second
quarter of 2002, the Company received a debt financing commitment from eAngels
International, Inc., the Company's controlling shareholder, for up to
$1,000,000. As of June 30, 2002, Wilmington Rexford has drawn upon $371,000 and
$585,000 has been drawn upon as of August 15th, 2002.
The Company is currently in negotiations with a series of funding sources to
place a $1,000,000 inventory line of credit for the Company's Langara
Distribution subsidiary. The Company believes that the placement of this
inventory line of credit would have an immediate, favorable effect on the
Company's financial position, as the Company would be able to attract, and
service, a larger, and a more diverse set of customers.
To date, virtually all of the company's resources have been provided from the
sale of common stock and the issuance of debt. At the current rate of
expenditure, additional funds from the sale of common stock or debt will have to
be secured to enable the company to continue to operate. We continually evaluate
opportunities to sell additional equity or debt securities, or obtain credit
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facilities from lenders for strategic reasons or to further strengthen our
financial position. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders. In addition,
we will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, and the
repurchase and retirement of debt, which might impact our liquidity requirements
or cause us to issue additional equity or debt securities. There can be no
assurance that financing will be available in amounts or on terms acceptable to
us, if at all.
BUSINESS RISKS AND MANAGEMENT
We announced a change to our current business plan in January of 2001 and
therefore have a very limited operating history under our current business plan.
Although we have formed and capitalized Wilmington Rexford, Inc., we have not
yet acquired any subsidiaries. Moreover, Wilmington Rexford is approaching
profitability, with the substantial operating improvement of its affiliate
companies.
Immediately prior to the Company's announcement that it would be shifting its
business model, the Company commenced a series of initiatives within its Langara
Distribution and EntertainMe.com operations, to drive profitable, organic
growth, through product innovation, superior service, and additional service
lines, governed by a more stringent financial operating structure, and a
heightened emphasis on Return on Capital.
Within our venture development operations, we face competition for potential
acquisitions from a broad range of potential acquirers, including buyout funds,
strategic and financial investors and operating companies in the same industries
as the targets. Many of these competitors have greater financial resources and
brand name recognition than we do. These competitors may limit our opportunity
to acquire companies that meet our criteria or may adversely affect the prices
and terms on which acquisitions may be made. If we cannot make acquisitions on
acceptable terms, then we may not be able to successfully execute our strategy.
Within our e-commerce operations, the segments in which we compete are
relatively new, rapidly evolving and intensely competitive. In addition, the
market segments in which we participate are intensely competitive and we have
many competitors in different industries, including the Internet and retail
industries.
FUTURE OPERATIONS
Prior to the first quarter of fiscal year 2002, the Company's principal business
strategy focused on the distribution of packaged entertainment media, through
distribution channels encompassing both online electronic commerce and
traditional bricks-and-mortar outlets. The Company operated an online retail
website WWW.ENTERTAINME.COM and through its fulfillment and distribution
subsidiary, Langara Distribution, the Company offered distribution and
fulfillment services to both traditional retail and online merchants.
On December 26th, 2001, an agreement was reached whereby a new organization and
management team lead by eAngels International would acquire controlling interest
in E-Trend Networks, Inc. Furthermore, January 17th, 2002, the Company announced
that it would change its name to Wilmington Rexford, Inc., in an effort to
properly reflect changes in the Company's business focus.
Concurrent with the name change, the Company announced that it plans to focus
its operations on venture development, a business model predicated on the
acquisition, financing, and management of a diverse portfolio of related
businesses. The Company will seek to make
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investments and or acquisitions that meet its portfolio criteria, then pursue
pre-defined strategies to support the operating management in enhancing the
value of these businesses.
Wilmington Rexford will employ the following key strategic initiatives:
o explore potential synergies within the Company's current operations by
expanding the product portfolio and service lines of its offline
distribution and fulfillment business, with that of its online
e-commerce business, capitalizing on the Company's existing
Business-to-Business e-commerce capabilities, as well as the Company's
unique capacity to combine product supply and technology
infrastructure;
o identify profitable middle market businesses whose enterprise value can
be enhanced through the adoption of an e-commerce strategy and other
technologies, the implementation of innovative business practices, the
addition of experienced industry specific management, and through other
traditional means of increasing efficiency and profitability;
o monetize existing assets which have exhibited strong increased revenue,
earnings and market share growth, and whom would benefit from an
independent capital, management and operational structure; and
o acquire companies and grow them organically, as well as via the
acquisition of complementary businesses or product lines as the lead or
majority investor.
The Company's venture development strategy is predicated on creating shareholder
value through higher earnings per share and stronger cash flow. The Company will
deliver on this strategy by generating revenue and earnings from stable,
consistent sources; through healthy organic business growth; through strong cash
flow generation; through acquisitions that are immediately accretive to
earnings, that fit within the Company's existing business segments; and, through
a relentless focus on productivity improvements throughout the businesses that
the Company acquires and operates within its portfolio of operating
subsidiaries. While the option exists to retain each portfolio company within
its business segment, from time-to-time the Company will consider different
monetization efforts, which include a strategic sale to a larger consolidator or
a Public Offering of the portfolio company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
- --------------------------------------------------------------------------------
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Share Exchange (1) N/A
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended (2) N/A
- --------------------------------------------------------------------------------
3.2 Bylaws (2) N/A
- --------------------------------------------------------------------------------
3.3 Certificate of Amendment of Certificate of
Incorporation (3) N/A
- --------------------------------------------------------------------------------
10.1 Amended and Restated Investment Agreement with
Swartz Private Equity, LLC (2) N/A
- --------------------------------------------------------------------------------
10.2 Amended and Restated Registration Rights Agreement
with Swartz Private Equity, LLC (2) N/A
- --------------------------------------------------------------------------------
10.3 Amended Warrant to Purchase Common Stock issued to
Swartz Private Equity, LLC (2) N/A
- --------------------------------------------------------------------------------
10.4 Proposed Form of Video One Canada Ltd. Business
Agreement with Langara Distribution (2)(4) N/A
- --------------------------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 20
- --------------------------------------------------------------------------------
- ----------------------------
(1) Incorporated by reference to the exhibits filed with the registrant's
definitive information statement filed January 2, 2001 for the meeting
held January 26, 2001.
17
(2) Incorporated by reference to the exhibits filed with the registrant's
registration statement on Form SB-2, file number 333-70184.
(3) Incorporated by reference to the exhibits filed with the registrant's
current report on Form 8-K dated February 19, 2002, file number
0-28879.
(4) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
B) REPORTS ON FORM 8-K: On May 7, 2002, the Registrant filed a
a current report on Form 8-K dated May 1, 2002, disclosing the change of
independent accountants. No financial statements were required to be filed.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WILMINGTON REXFORD, INC.
(Registrant)
Date: August 19, 2002 By: /s/ ROBERT G. TAYLOR
-------------------------------------------
Robert G. Taylor
President
Principal Financial and Accounting Officer
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