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: December 31, 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)
(305) 695-8755
(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:
15,196,035 SHARES OF COMMON STOCK, $0.0001 PAR VALUE, AS OF
DECEMBER 31, 2002
Transitional Small Business Disclosure Format (check one); Yes No X
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INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements 3
Consolidated Balance Sheet as of December 31, 2002 (unaudited) 4
Consolidated Statements of Operations and Comprehensive Loss
for the three months ended December 31, 2002 and 2001 5
(unaudited)
Consolidated Statements of Cash Flows
for the three months ended December 31, 2002 and 2001 6
(unaudited)
Notes to consolidated financial statements (unaudited) 7 - 15
ITEM 2. Management's Discussion and Analysis or Plan of Operations 16
ITEM 3. Controls and Procedures 21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 2. Change in Securities 22
ITEM 3. Defaults upon Senior Securities 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURE
CERTIFICATION
2
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
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CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
3
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002 (UNAUDITED)
=========================================================================================
ASSETS
=========================================================================================
CURRENT ASSETS
Cash $ 22,261
Accounts receivable, net of allowance of $6,336 190,620
Inventory 164,415
Prepaid and other current assets 1,656
- -----------------------------------------------------------------------------------------
Total current assets 378,952
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $218,680 243,413
ADVANCES DUE FROM RELATED PARTIES 361,707
GOODWILL, net of accumulated amortization of $58,552 135,574
- -----------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,119,646
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=========================================================================================
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 408,044
Notes payable - stockholder 579,237
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Total current liabilities 987,281
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LEASE COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.0001 per share, 1,000,000 shares
authorized, zero issued and outstanding -
Common stock, par value $0.0001 per share, 20,000,000 shares
authorized, 15,196,035 issued and outstanding 820,843
Additional paid-in capital 3,800,406
Accumulated other comprehensive loss ( 35,387)
Deficit ( 4,453,497)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 132,365
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,119,646
=========================================================================================
See accompanying notes - unaudited.
4
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001 (UNAUDITED)
=============================================================================================================
2002 2001
=============================================================================================================
SALES ($378,229 to related parties in 2001) $ 635,055 $ 746,257
COST OF SALES 484,839 637,493
- --------------------------------------------------------------------------------- ---------------------------
GROSS MARGIN 150,216 108,764
Operating expenses ($30,000 to a related party in 2002) 224,486 324,091
Depreciation and amortization 23,934 23,037
Interest and other expense (income) 6,483 ( 1,088)
- --------------------------------------------------------------------------------- ---------------------------
NET LOSS $ 104,687 $ 237,276
=============================================================================================================
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized gain on investment $ - $ 4,099
Foreign currency translation adjustment ( 662) ( 25,153)
- --------------------------------------------------------------------------------- ---------------------------
COMPREHENSIVE LOSS $ 105,349 $ 258,330
=============================================================================================================
Net loss per share, basic and diluted ( $ 0.02) ( $ 0.05)
=============================================================================================================
Weighted average common shares outstanding, basic and diluted 5,965,266 5,212,702
=============================================================================================================
See accompanying notes - unaudited.
5
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001 (UNAUDITED)
==============================================================================================================
2002 2001
==============================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ( $ 104,687) ( $ 237,276)
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 23,934 23,037
Amortization of deferred stock-based compensation - 97,500
Changes in operating assets and liabilities:
Accounts receivable ( 173,190) ( 24,022)
Due from related parties - ( 111,893)
Inventory 83,378 ( 32,502)
Prepaid expenses and other current assets ( 66) 3,404
Accounts payable and accrued liabilities 177,556 197,185
- --------------------------------------------------------------------------------------------------------------
Total adjustments 111,612 152,709
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 6,925 ( 84,567)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net repayments from related party - 166,349
Loans to related parties ( 111,707) -
Purchase of property and equipment ( 5,561) -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities ( 117,268) 166,349
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - stockholder 107,031 -
Net (repayments) borrowings on line of credit facility - ( 29,337)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 107,031 ( 29,337)
- --------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH ( 689) ( 19,500)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH ( 4,001) 32,945
CASH AT BEGINNING OF PERIOD 26,262 112,524
- --------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 22,261 $ 145,469
==============================================================================================================
Supplemental Disclosures:
- --------------------------------------------------------------------------------------------------------------
Interest paid $ - $ 2,164
==============================================================================================================
Income taxes paid $ - $ -
==============================================================================================================
Supplemental Disclosures of Non-cash Investing and Financing Activities:
- --------------------------------------------------------------------------------------------------------------
During the quarter ended December 31, 2002, the Company issued
10,000,000 shares of common stock in exchange for a $200,000
reduction to its note payable-stockholder $ 200,000 $ -
==============================================================================================================
See accompanying notes - unaudited.
6
WILMINGTON REXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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BASIS OF PRESENTATION
The accompanying unaudited 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 month period ended
December 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending September 30, 2003.
The audited financial statements at September 30, 2002 which are
included in the Company's Annual Report on Form 10-KSB should be read
in conjunction with these consolidated financial statements.
CONSOLIDATION
The 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 electronic commerce companies and third party
e-commerce partners, as well as providing wholesale services to the
brick and mortar retailers.
RECEIVABLES
Accounts receivable are uncollateralized customer obligations due
under normal trade terms. The carrying amount of accounts receivable
is reduced by an allowance that reflects management's best estimate of
the amounts that will not be collected. Management individually
reviews all notes receivable and accounts receivable balances and
based on an assessment of current creditworthiness, estimates the
portion, if any, of the balance that will not be collected.
7
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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REVENUE RECOGNITION
Revenues derived from product sales is recognized on delivery of the
product. Wholesale sales are subject to potential returns by the
customer; however any such returns can be passed back to the Company's
supplier. Sales returns from retail customers are not significant.
Revenue includes shipping charges billed to customers, which charges
are based substantially on third-party shipping costs incurred.
The Company derives revenues from providing consulting services to
entities that are related by virtue of common control. The Company
recognizes revenue from these services at such time the entity
receiving the service has the ability to pay from funds generated from
operations or received from independent sources and collection is
reasonably assured.
INVENTORY
Inventory consists principally of music and movie compact discs that
are stated at the lower of cost, determined by the first-in, first-out
method, or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while
replacements, maintenance and repairs which do not extend the lives of
the respective assets are charged to expense currently.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and carrying value of the
asset.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets.
Amortization of leasehold improvements and property under capital
leases is computed on a straight-line basis over the shorter of the
estimated useful lives of the assets or the term of the lease. The
range of useful lives is between 3 and 10 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires that the Company
disclose estimated fair values for its financial instruments. The
following methods and assumptions were used by the Company in
estimating the fair values of each class of financial instruments
disclosed herein:
CASH - The carrying amount approximates fair value because of the
short maturity of those instruments.
8
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
NOTES PAYABLE - The fair value of notes payable are estimated
using discounted cash flows analyses based on the Company's
incremental borrowing rates for similar types of borrowing
arrangements. At December 31, 2002, the fair value approximates
the carrying value.
ADVANCES DUE FROM RELATED PARTIES - The fair value of advances
due from related parties are determined by calculating the
present value of the instruments using a current market rate of
interest as compared to the stated rate of interest and giving
effect for the right to offset with the note payable to
stockholder in the event of non-performance. At December 31,
2002, the fair value approximates the carrying value.
GOODWILL
In connection with its acquisition of Langara effective January 1,
2000, the Company has recorded goodwill of $200,000, which is the
excess of the purchase price over the fair value of the net assets
acquired. The acquisition was accounted for by the purchase method.
The Company evaluated the underlying facts and circumstances related
to the acquisition in establishing the amortization period for the
related goodwill. The goodwill was being amortized on a straight-line
basis over 10 years until certain provisions of Financial Accounting
Standards No. 142 were implemented during the first quarter of the
year ending September 30, 2003.
CONCENTRATION OF REVENUE
Revenues from VHQ Entertainment, Inc. (VHQ), a former shareholder,
accounted for approximately 16% and 50% of total revenue for the
quarters ended December 31, 2002 and 2001, respectively. At December
31, 2002, VHQ accounted for approximately 54% of the total accounts
receivable.
INCOME TAXES
The Company accounts for income taxes according to Statement of
Financial Accounting Standards No. 109, which requires a liability
approach to calculating deferred income taxes. Under this method, the
Company records deferred taxes based on temporary differences between
the tax bases of the Company's assets and liabilities and their
financial reporting bases. A valuation allowance is established when
it is more likely than not that some or all of the deferred tax assets
will not be realized.
STOCK 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 (SFAS 123), 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.
9
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
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.
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.
FOREIGN CURRENCY TRANSLATION
The functional currency of E-Trend and Langara is in the Canadian
dollar. Accordingly all assets and liabilities are translated into
United States dollars at the year-end exchange rate and revenues and
expenses are translated at average exchange rates. Gains and losses
arising from the translation of the financial statements of the
Company are recorded in a "Cumulative Translation Adjustment" account
in stockholders' equity.
Transactions denominated in other that Canadian dollars are translated
at the exchange rate on the transaction date. Monetary assets and
liabilities denominated in other than Canadian dollars are translated
at the exchange rate in effect on the balance sheet date. The
resulting exchange gains and losses on these items are included in
operations.
RECLASSIFICATIONS
Certain amounts in the December 31, 2001 financial statements have
been reclassified to conform to the December 31, 2002 presentation.
10
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NOTE 1. 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. The Company has not yet determined what the effects of this
Statement will be on its financial position and results of operations.
A reconciliation of reported net loss adjusted to reflect the adoption
of SFAS 142 is provided below:
For The Three Months
Ended December 31,
---------------------------------
2002 2001
--------------------------------------------------------------------------------
Reported net loss ( $ 104,687) ( $ 237,276)
Add-back goodwill amortization, net of tax - 4,847
--------------------------------------------------------------------------------
Adjusted net loss ( $ 104,687) ( $ 232,429)
--------------------------------------------------------------------------------
Reported basic net loss per share ( $ 0.02) ( $ 0.05)
Add-back goodwill amortization, net of tax - -
--------------------------------------------------------------------------------
Adjusted basic net loss per share ( $ 0.02) ( $ 0.05)
--------------------------------------------------------------------------------
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. The adoption of
this Statement did not have a material impact on the financial
statements.
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. The adoption of this Statement did not have a
material impact on the financial statements.
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.
The adoption of this Statement did not have a material impact on the
financial statements.
11
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
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 this Statement will be on its
financial position and results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The
Company has not yet determined what the effects of this Statement will
be on its financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45
("FIN45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires that a liability be recorded in the guarantor's
balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of this Statement did not
have a material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently and in
a tabular format. Additionally, SFAS No. 148 requires disclosure of
the pro forma effect in interim financial statements. The transition
and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. The Company has not yet determined what the effects
of this Statement will be on its financial position and results of
operations.
12
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June
15, 2003. The Company has not yet determined what the effects of this
Statement will be on its financial position and results of operations.
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NOTE 2. 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.
The Company has incurred substantial operating losses and negative
cash flows from operations from inception through December 31, 2002.
Although the Company believes it will become cash flow positive from
operations by the end of the fiscal year ending September 30, 2003,
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.
13
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NOTE 3. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
VHQ ENTERTAINMENT, INC.
By means of an agreement dated December 26, 2001 and amended on
February 12, 2002, eAngels International ("eAngels"), through its
operating entity, The Game Holdings, Ltd., agreed to purchase
2,000,000 common shares of the Company owned by VHQ thus acquiring a
controlling interest in the Company. In conjunction with the stock
purchase, (a) the existing officers and directors of the Company
resigned and designees of the purchaser were appointed in their place
and (b) the Company initiated steps to change its name to Wilmington
Rexford, Inc., effective February 19, 2002.
At December 31, 2001, the Company owned 99,900 common shares of VHQ.
On September 30, 2002, the Company sold this investment.
NOTES PAYABLE STOCKHOLDER
At December 31, 2002, the Company has borrowed a total of $579,237
from eAngels. The notes bear interest at 10% per year and are due on
July 1, 2003. For the quarter ended December 31, 2002, interest
expense related to these notes totaled $17,441. These notes are not
required to be repaid to the extent that the advances due from related
parties discussed below are not collected.
On December 24, 2002, the Company issued 10,000,000 shares of common
stock to eAngels in exchange for a $200,000 reduction to its note
payable balance.
ADVANCES DUE FROM RELATED PARTIES
At December 31, 2002, the Company has advanced a total of $361,707 to
various entities controlled by the majority shareholder of the
Company. These advances bear interest at 10% per year. For the quarter
ended December 31, 2002, interest income related to these advances
totaled $5,881.
MANAGEMENT FEE
During the quarter ended December 31, 2002, the Company incurred a
$30,000 management fee to eAngels. This amount was unpaid as of
December 31, 2002 and is included in notes payable stockholder.
14
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NOTE 4. BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Principally all operations of E-Trend and Langara are conducted in
Canada. Information about operating segments is as follows:
Three months ended December
31, 2002 Parent E-Trend Langara Total
======================================================================================================
Revenues from external
customers $ 4,389 $ 183,310 $ 447,356 $ 635,055
Intersegment revenues - 137,556 137,556
Segment income (loss) ( 78,092) ( 39,291) 12,696 ( 104,687)
------------------------------------------------------------------------------------------------------
Three months ended December
31, 2001
======================================================================================================
Revenues from external
customers $ - $ 286,495 $ 459,762 $ 746,257
Intersegment revenues - - 218,948 218,948
Segment income (loss) - ( 247,800) 10,524 ( 237,276)
------------------------------------------------------------------------------------------------------
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management Discussion and Analysis (MD&A) focuses on key statistics from
the consolidated financial statements of Wilmington Rexford, Inc. for the three
months ended December 31,2002, 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 months ended December 31,2002, should be read in
conjunction with the consolidated financial statements and related notes of
Wilmington Rexford, Inc.
RECENT EVENTS
On December 24, 2002, Wilmington Rexford, Inc. announced an agreement with
eAngels Equity Group, to exchange $200,000 of its $731,000 aggregate principal
amount of outstanding debt securities, in a private placement for WREX common
stock. As of the offer on December 24, 2002, approximately $200,000 had been
validly tendered and accepted for exchange. This reduced Wilmington Rexford's
total debt by $200,000. On the basis of the current market trading price for
WREX common stock, 10,000,000 shares were issued to eAngels EquiDebt Partners V,
LLC as consideration for the exchange and subsequent reduction in debt
securities. On the basis of the current outstanding amount of WREX common stock,
the shares issued represented approximately 66 percent of the WREX common stock
on a fully diluted basis.
On January 10, 2003, Garrett K. Krause was appointed as Chairman & Chief
Executive Officer of the company, effective immediately. Mr. Krause is a
director of eAngels Equity Group, a global investor network. Mr. Krause has more
than 15 years experience in the venture capital and investment banking industry.
In the second quarter of 2003, Wilmington Rexford, Inc. announced that it
intends to contribute its 100% ownership stake in Langara Distribution, Inc., to
Langara Group, Inc., a new, vertically integrated, Canadian-based entertainment
infrastructure, interactive and commerce company. Under the deal terms,
Wilmington Rexford will retain substantial investment in Langara Group, Inc.,
and be the principal and founding shareholder. Upon completion of the
transaction the management of the new Canadian company, Langara Group, Inc.,
intends to immediately move forward with a public offering prospectus of its
shares on both the Canadian TSX-Venture Exchange and the newly-formed American
BBX Exchange, which is slated to launch in 2003.
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.
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Prior to the first quarter of Fiscal 2002 (December 31, 2001), 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 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 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 revised
business plan, since in the past 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
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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 $635,055 and $746,257 for the three months ended December 31,
2002 and December 31, 2001, respectively, representing a decrease of 15%.
Decreases in absolute dollars of net sales during the three-months ended
December 31, 2002 are primarily due to decreased unit sales of our
EntertainMe.com website, and a reduction in sales to Langara Distribution's
largest customer, VHQ Entertainment, Inc., as a result of a cost cutting
program, which resulted in various store closings.
GROSS PROFIT
Gross profit was $150,216 and $108,764 for the three months ended December 31,
2002 and 2001, respectively, representing an increase of 38%. Gross margin was
24% and 15% for the three months ended December 31, 2002 and 2001, respectively.
Increases in the absolute dollars of gross profit for the three month period
primarily corresponds with an increase in prices of product shipped through our
business-to-business fulfillment platform, 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 expenses were $224,486
and $324,091 for the three months ended December 31, 2002 and 2001,
respectively, representing 35% and 43% of net sales for the corresponding
periods, respectively. The decline in absolute dollars of operating expenses for
the three 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 $104,687 and $237,276 for the three months ended
December 31, 2002 and 2001, respectively, a decrease in net loss of 56%. 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, which continued in 2002, which was
initiated 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
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Company's shift in business model and associated costs have been accounted for,
and expensed during the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2002, the Company had a working capital deficit of $608,329
compared to a working capital deficit of $609,619 on September 30, 2002, a
deficit decrease of less than 1%. Our cash balance was $22,261 as of December
31, 2002, as compared to $26,262, for the comparable period, a decrease of 15%.
The Company has incurred substantial operating losses and negative cash flows
from operations from inception through December 31, 2002. Although the Company
believes it will become cash flow positive from operations by the end of the
fiscal year ending September 30, 2003, 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 or
modify a business segment or overall operations.
To address these concerns, Wilmington Rexford continues to pursue new debt and
or equity financing opportunities, and is actively expanding its customer base
and is currently in process of managing its cost cutting strategies, to increase
profitability and liquidity. Furthermore, concurrent with the Company's change
in controlling shareholder, the Company received a debt financing commitment
from eAngels Equity Group, for up to $1,000,000 in the first quarter. As of
February 17, 2003, Wilmington Rexford had drawn upon $731,795 from the
aforementioned eAngels Equity Group debt financing commitment. As a result,
Wilmington Rexford still has approximately $268,204 available to the Company,
which can be used for general, corporate, and working capital purposes, under
the debt financing commitment.
Wilmington Rexford's restructuring efforts have pared down the number of
operating subsidiaries and investments to two core companies with the most
potential, E-Trend Networks, Inc. which operates the WWW.ENTERTAINME.COM
ecommerce website, and the proposed new subsidiary operations and investment in
Langara Group, which include Langara Entertainment, formerly Langara
Distribution, a full-service provider of entertainment infrastructure solutions
and related business services; and Langara Interactive, a provider of Internet
technology services that provides synergies with the merchandising,
distribution, and commerce strengths of Langara Group, Inc. Initially in early
fiscal 2003, these core companies and investments will represent a majority of
our operating revenue.
Wilmington Rexford has now completed the vast majority of our restructuring and
our goal is to generate sequential revenue growth beginning in our second fiscal
quarter, despite the difficult economic environment. We believe that a number of
our new business opportunities, specifically the newly announced Langara Group,
Inc. deal, and the existing opportunities for EntertainMe.com are
well-positioned to realize strong growth, while continuing to improve their
margins in the process. Similarly, as our operating companies grow, their higher
incremental margins should have a positive impact on our overall performance. We
have reduced our recurring losses from operations in 2002, and we anticipate
continuing to do so throughout fiscal 2003.
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
facilities from lenders for strategic reasons or to further strengthen our
financial position. The
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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 2002 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. As of this filing, Langara Distribution is generating net income from
operations, and WWW.ENTERTAINME.COM is approaching profitability.
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
Building on the core operations of the EntertainMe.com ecommerce website, and
the diversified entertainment distribution and interactive operations within
Langara Group, Wilmington Rexford intends to explicitly focus on improving
return on capital (ROC), alongside EPS and cash flow growth, as well as
enhancing the Company's balance sheet through the monetization of existing
assets and further debt reduction. This will be accomplished by monetizing
existing assets, and by increasing revenues and strengthening the market
position of our operating companies through strategic acquisitions, which are
appropriate and accretive, and expanding into new markets, which have the
potential to diversify our revenue streams and improve margins.
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;
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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.
ITEM 3. CONTROLS AND PROCEDURES
We have recently evaluated our internal controls. As of February 18, 2003, there
were no significant corrective actions taken by us or other changes made to
these internal controls. Our management does not believe there were changes in
other factors that could significantly affect these controls subsequent to the
date of the evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
On December 24, 2002, eAngels International agreed to exchange
$200,000 of its $731,795.77 aggregate principal amount of outstanding debt
securities in a private placement for the registrant's common stock. On the
basis of the then current trading price for the registrant's common stock,
10,000,000 shares were issued to eAngels EquitDebt Partners V, LLC, which is
managed by eAngels International, as consideration for the exchange and
subsequent reduction in debt securities. No underwriters were used. This sale of
stock was made in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as the purchaser was sophisticated
financially and with respect to the registrant.
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
- --------------------------------------------------------------------------------
10.1 Amended and Restated Investment Agreement with Swartz
Private Equity, LLC (2) N/A
- --------------------------------------------------------------------------------
10.2 Amended and Restated Registration Rights Agreement N/A
with Swartz Private Equity, LLC (2)
- --------------------------------------------------------------------------------
10.3 Amended Warrant to Purchase Common Stock issued to N/A
Swartz Private Equity, LLC (2)
- --------------------------------------------------------------------------------
10.4 Proposed Form of Video One Canada Ltd. Business N/A
Agreement with Langara Distribution (3)(4)
- --------------------------------------------------------------------------------
10.5 Debentures issued to eAngels International (4) N/A
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
- --------------------------------------------------------------------------------
10.6 Promissory Note from WorldVest Holding Corporation (4) N/A
- --------------------------------------------------------------------------------
10.7 Promissory Note from FutureVest Corporation (4) N/A
- --------------------------------------------------------------------------------
10.8 Promissory Note from South Beach Partners, LLC/South N/A
Beach Entertainment (4)
- --------------------------------------------------------------------------------
10.9 Promissory Note from WSY Limited, Inc. (4) N/A
- --------------------------------------------------------------------------------
10.10 Promissory Note from TransJet.com/Wild Toyz (4) N/A
- --------------------------------------------------------------------------------
10.11 Guaranty from eAngels International dated December N/A
12, 2002 (4)
- --------------------------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as 25
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- --------------------------------------------------------------------------------
- ----------------------------
(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.
(2) Incorporated by reference to the exhibits filed with the registrant's
registration statement on Form SB-2, file number 333-70184.
(3) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(4) Incorporated by reference to the exhibit filed with the registrant's
Annual Report on Form 10-KSB for the fiscal year ended September 30,
2002, file number 0-28879.
b) REPORTS ON FORM 8-K: None.
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: February 19, 2003 By: /s/ GARRETT K. KRAUSE
-------------------------------------
Garrett K. Krause
Chairman of the Board and CEO
Principal Financial and Accounting
Officer
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CERTIFICATION
I, Garrett K. Krause, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Wilmington
Rexford, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this quarterly report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 19, 2003
/s/ GARRETT K. KRAUSE
---------------------------------------
Garrett K. Krause
Chairman of the Board and CEO
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