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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------- ---------------
COMMISSION FILE NUMBER: 333-37654
---------
9278 COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4165136
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1942 WILLIAMSBRIDGE ROAD, BRONX, NEW YORK 10461
-----------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(718) 887-9278
---------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date:
Common Stock, $.001 par value -23,932,912 shares issued and outstanding as of
December 20, 2002
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
9278 Communications, Inc. and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of September 30, 2002 (unaudited) and
December 31, 2001 F-2 - F-3
Consolidated Statements of Operations for the three months ended September 30,
2002 and 2001 and nine months ended September 30, 2002
and 2001 (unaudited) F-4
Consolidated Statement of Shareholders' Equity for the nine months
ended September 30, 2002 (unaudited) F-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and December 31, 2001 (unaudited) F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-14
9278 Communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
--------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,817,334 $ 4,335,936
Restricted cash 1,012,935 1,051,215
Accounts receivable, net of allowance of $835,000
at September 30, 2002 and $760,000 at December 31, 2001 10,682,548 13,058,773
Accounts receivable-related party 2,604,632 1,315,011
Inventories 13,927,164 12,969,347
Prepaid expenses and other current assets 268,386 149,044
-------------- ---------------
Total current assets 33,312,999 32,879,326
-------------- ---------------
PROPERTY AND EQUIPMENT, NET 1,736,158 1,306,884
GOODWILL, NET 3,624,071 3,624,071
OTHER ASSETS 649,544 158,187
-------------- ---------------
$ 39,322,772 $ 37,968,468
============== ===============
The accompanying notes are an integral part of these statements.
F-2
9278 Communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
---- ----
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 41,089,553 $ 34,590,301
Accounts payable - related party 16,595 318,950
Current maturities of notes and advances payable,
Shareholder - 570,100
Current maturities of capital lease obligations 52,924 45,549
Current maturities of convertible notes payable 47,375 35,824
Income taxes payable 33,813 59,250
------------- --------------
Total current liabilities 41,240,260 35,619,974
------------- -------------
CAPITAL LEASE OBLIGATIONS, less current maturities 59,830 85,974
CONVERTIBLE NOTES PAYABLE, less current maturities 100,206 140,146
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $.001 par value; 40,000,000 shares authorized; 23,932,912
shares issued and outstanding at September 30,2002 and 22,932,912 at
December 31,2001 23,933 22,933
Additional paid-in capital 8,247,458 8,248,458
Accumulated deficit (10,348,915) (6,149,017)
------------- -------------
(2,077,524) 2,122,374
-------------- -------------
Total Shareholders' Equity
$ 39,322,772 $ 37,968,468
============= =============
The accompanying notes are an integral part of these statements.
F-3
9278 Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
RESTATED RESTATED
-------- --------
Net sales $ 53,763,541 $ 55,736,568 $177,041,317 $142,754,197
Cost of sales 50,169,944 52,904,546 167,104,219 134,007,515
------------ ------------ ------------ -----------
Gross profit 3,593,597 2,832,022 9,937,098 8,746,682
------------ ------------ ------------ ------------
Operating expenses
Selling 2,634,145 675,852 5,431,407 1,435,695
General and administrative 2,627,315 1,543,151 7,621,748 4,282,748
Depreciation and amortization 100,937 133,500 271,595 367,612
Provision for bad debts 361,434 (48,277) 730,835 73,340
Litigation Settlement - 207,000 - 207,000
------------ ------------ ------------ ------------
5,723,831 2,511,226 14,055,585 6,366,395
------------ ------------ ------------ ------------
Operating profit/(loss) (2,130,234) 320,796 (4,118,487) 2,380,287
Other income/(expenses)
Realized gain on investment securities - - - 9,121
Interest expense, net (19,732) (28,454) (36,411) (98,792)
------------ ------------ ------------ ------------
(19,732) (28,454) (36,411) (89,671)
------------ ------------ ------------ ------------
Earnings/(loss) before income taxes (2,149,966) 292,342 (4,154,898) 2,290,616
Income tax provision 15,000 46,275 45,000 46,275
------------ ------------ ------------ ------------
Net income/(loss) $ (2,164,966) $ 246,067 $ (4,199,898) $ 2,244,341
============ ============ ============ ============
Earnings/(loss) per common share per 10K
Basic and diluted $(0.09) $0.01 $(0.18) $0.10
====== ===== ====== =====
Weighted-average shares
Basic and diluted 23,932,912 23,942,982 23, 932,912 23,491,922
========== ========== =========== ==========
The accompanying notes are an integral part of these statements.
F-4
9278 Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months ended September 30, 2002
Common stock Additional
------------------------- paid-in Accumulated
Shares Amount capital deficit Total
--------- -------- ---------------- ----------- --------
Balance at January 1, 2002 22,932,912 $ 22,933 $ 8,248,458 $ (6,149,017) $ 2,122,374
Issuance of common stock upon
acquisition of Reliable Networks Inc. 1,000,000 1,000 (1,000)
Net loss for the nine months
ended September 30, 2002 (4,199,898) (4,199,898)
---------- ---------- ------------ ------------ -----------
Balance at September 30, 2002 23,932,912 $ 23,933 $ 8,247,458 $(10,348,915) $(2,077,524)
========== ========== ============ ============ ===========
The accompanying notes are an integral part of this statement.
F-5
9278 Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
September 30, September 30,
2002 2001
---- ----
Cash flows from operating activities
Net income (loss) (4,199,898) $ 2,600,591
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 271,595 367,612
Provision for doubtful accounts 75,000 73,340
Changes in assets and liabilities, net of
assets acquired and liabilities assumed
Restricted cash 38,280 -
Accounts receivable 1,011,604 (8,537,400)
Inventories (718,467) (4,835,379)
Prepaid expenses and other current assets (119,342) (140,306)
Other assets (342,357) (17,951)
Accounts payable and accrued expenses 6,196,896 16,370,251
Income taxes payable (25,437) 15,870
------------ ------------
Net cash provided by operating activities 2,187,874 5,896,628
------------ ------------
Cash flows from investing activities
Acquisition of property and equipment (700,868) (705,164)
Acquisition of businesses (388,351) (207,741)
Disposition of marketable securities - 20,962
------------ ------------
Net cash used in investing activities (1,089, 219) (891,943)
----------- ------------
Cash flows from financing activities
Notes and advances payable, shareholder, net (570,100) (1,148,634)
Notes payable - other - (900,000)
Principal payments on capital lease obligations (18,769) (26,547)
Principal payments on convertible notes payable (28,389) (39,362)
Repurchase of shares and retired - (27)
----------- ------------
Net cash used in financing activities (617,256) (2,088,023)
------------ ------------
Net increase in cash and
cash equivalents 481,399 2, 916,662
Cash and cash equivalents, beginning of period 4,335,935 4,114,651
------------ ------------
Cash and cash equivalents, end of period $ 4,817,334 $ 7,031,313
============ ============
F-6
9278 Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
September 30, September 30,
2002 2001
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 36,411 $ 98,792
========== ==========
Income taxes $ 70,437 $ 31,406
========== ==========
Noncash investing and financing activities:
Conversion of preferred stock to common stock $ 505,000
=========
The accompanying notes are an integral part of these statements.
F-7
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTION
The accompanying consolidated unaudited financial statements of 9278
Communication Inc. and subsidiaries (collectively, the "Company") have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not
include all of the information and footnote disclosures generally required
by accounting principles generally accepted in the United States and should
be read in conjunction with our consolidated financial statements and notes
thereto for the fiscal year ended December 31, 2001, included in the
Company's Form 10-K as filed with the SEC. The accompanying condensed
consolidated unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States and reflect all adjustments (consisting of normal recurring
accruals) which are, in the opinion of the management, considered necessary
for a fair presentation of results for these interim periods. Operating
results for the nine month periods ended September 30, 2002 and 2001 are
not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2002.
NOTE 2 - NATURE OF BUSINESS
The Company distributes prepaid telephone calling cards to distributors and
retail establishments through its various sales locations throughout the
United States.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
9278 Communications, Inc. and its wholly owned subsidiaries, 9278
Distributors, Inc., 9278 Dot Com Inc., E-Store Solution, Inc., 9278
Distributors Illinois, Inc., 9278 Distributors Maryland Inc., 9278
Distributors New Jersey Inc. and Reliable Acquisition Corp. (hereinafter,
the "Company"). All significant intercompany transactions and balances have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash and highly liquid investments
with an original maturity of three months or less.
F-8
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories, which consist of prepaid telephone cards, are stated at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for, using straight-line and accelerated methods, in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives. Leased property under capital leases is
amortized over the shorter of the service lives of the assets or the term
of the lease. Repairs and maintenance are charged to operations as
incurred.
INCOME TAXES
Income taxes are accounted for under the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting of Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The company has made provision for various minimum state
and local taxes. The provision, in 2001, for federal taxes has been
offset against the company's net operating losses carried forward from
prior years. A valuation allowance has been established as the likelihood
of realizing net deferred tax benefits is presently doubtful.
EARNINGS/LOSS PER SHARE
Basic earnings per share are determined by dividing the Company's net
earnings/loss by the weighted-average shares outstanding. Diluted
earnings per share include the dilutive effects of outstanding stock
option and warrants. Excluded from the calculation of diluted earnings
per share are warrants issued in March 2001 to purchase 210,000 shares of
the Company's common stock, as their inclusion would have been
antidilutive.
GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). For all business combinations initiated after June 30,
2001, SFAS No. 141 eliminates the pooling-of-interests method of accounting
and requires the purchase method of accounting, including revised
recognition criteria for intangible assets other than
F-9
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
goodwill. Under SFAS No. 142, which is effective for years beginning after
December 15, 2001, goodwill and indefinite-lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Intangible assets that have
finite lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets ."
The Company has adopted SFAS No. 142 for the year beginning January 1,
2002. Therefore, annual and quarterly amortization of goodwill of
approximately $267,000 and $67,000 are no longer recognized. The Company
has performed a transitional fair value based impairment test and has
determined that no impairment of goodwill exist as of January 1, 2002.
The following table presents a reconciliation of net income (loss) and
earnings (loss) per share amounts, as reported in the financial statements,
to those amounts adjusted for goodwill and intangible asset amortization
determined in accordance with the provisions of SFAS No. 142.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income (loss) $(2,164,966) $246,067 $(4,199,898) $2,244,341
Add back: goodwill amortization - 66,689 - 200,067
Income tax effect - - - -
----------- -------- ----------- ----------
Adjusted net income (loss) $(2,164,966) $312,756 $(4,199,898) $2,444,408
=========== ======== =========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Reported net income (loss) $(0.09) $0.01 $(0.18) $0.10
Goodwill amortization - - - 0.01
Income tax effect - - - -
----------- -------- ----------- ----------
Adjusted net income (loss) $(0.09) $0.01 $(0.18) $0.11
=========== ======== =========== ==========
F-10
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or group of
assets may not be fully recoverable. If an impairment indicator is present,
we evaluate recoverability by a comparison of the carrying amount of the
assets to future undiscounted net cash flows that we expect to generate
from these assets. If the assets are impaired, we recognize an impairment
charge equal to the amount by which the carrying amount exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
carrying values or fair values, less estimated costs of disposal.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations," which is effective for years beginning after
June 15, 2002. SFAS No. 143 addresses legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development or normal operation of a long-lived asset. The
standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. Any associated asset
retirement costs are to be capitalized as part of the carrying amount of
the long-lived asset and expensed over the life of the asset. The Company
will adopt SFAS No. 143 for the year beginning January 1, 2003. The impact
of adopting SFAS No. 143 will have no impact to the consolidated financial
statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 clarifies
accounting and reporting for assets held for sale, scheduled for
abandonment or other disposal, and recognition of impairment loss related
to the carrying value of long-lived assets. The Company has adopted SFAS
No. 144 for the year beginning January 1, 2002. There has been no impact of
adopting SFAS No. 144 to the consolidated financial statements.
REVENUE RECOGNITION
Revenue is recognized from sales when a product is shipped and title passes
to the customer.
ADVERTISING
Advertising costs are expensed as incurred and totaled $2,351,100 and
$467,661 for the nine months ended September 30, 2002 and 2001,
respectively.
SHIPPING AND HANDLING FEES AND COSTS
The Company includes fees billed to a customer relating to shipping and
handling costs in net sales. All shipping and handling expenses incurred by
the Company are included in cost of sales.
F-11
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USES OF ESTIMATES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Management of the Company believes that the fair value of financial
instruments, consisting of cash, accounts receivable and debt, approximates
carrying value due to the immediate or short-term maturity associated with
its cash and accounts receivable and the interest rates associated with its
debt.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
NOTE 4 - ACQUISITIONS
On August 31, 2002, the Company acquired certain assets its distributor in
an asset purchase transaction, wherein it acquired inventories and customer
lists of the distributor. The Company paid $149,000 in excess of the
tangible assets, which has been allocated to the estimated value of
acquired customer lists. The assets acquired were recorded at estimated
fair market value. The consolidated statements of operations include the
results of this acquisition beginning September 1, 2002.
A summary of the transactions is as follows:
Assets purchased
Inventory purchased 239,351
Customer lists 149,000
---------
Net assets acquired $ 388,351
==========
Cash paid $ 388,351
==========
Pro forma results of operations are not presented, as they are not material
to the historical results presented herein.
F-12
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - RESTRICTED CASH
Restricted cash consists of the following at September 30, 2002:
Amounts invested in certificate of deposit, which is
pledged as collateral for a letter of credit issued by the bank $ 1,012,935
-----------
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated useful life September 30, December 31,
(years) 2002 2001
------- ---- ----
Furniture and equipment 5 - 7 $ 905,962 $ 483,164
Automobiles 5 - 7 245,165 224,566
Computer equipment 5 927,537 731,685
Leasehold improvements 3 - 8 307, 349 245,729
----------- -----------
2,386,013 1,685,144
Less accumulated
depreciation and amortization 649,855 378,260
----------- -----------
$ 1,736,158 $ 1,306,884
=========== ===========
Depreciation and amortization expense for property and equipment for the
nine months ended September 30, 2002 and 2001 was approximately $271,595
and $168,008, respectively.
NOTE 7 - NOTES PAYABLE - SHAREHOLDER
On December 10, 1999, the Company declared $3,000,000 in dividends, of
which $1,000,000 was paid. On December 13, 1999, the Company executed a
promissory note for $2,000,000 for the declared but unpaid dividends,
payable to the Company's chief executive officer, who is also a
shareholder. A principal payment of $1,000,000 was originally due on June
13, 2000, and the second payment originally payable on December 13, 2001.
On March 22, 2001, the Company amended the terms of these promissory notes
to defer both payments to June 30, 2002 and December 31, 2002,
respectively. The final payment is accelerated if the Company's gross
revenue exceeds $10 million in each of any nine consecutive calendar months
or exceeds $60 million in any six-month period. During the nine months
ended September 30, 2002, the Company made principal payments aggregating
$570,100. Interest is payable at a rate of 8%. For the nine months ended
September 30, 2002, interest expense on this note was $12,017 and was paid
in full as of that date.
F-13
9278 Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RELATED PARTY TRANSACTIONS
Sales of inventory to a customer who is related to an officer of the
Company were approximately $19,297,000 and $18,953,000 for the nine months
ended September 30, 2002 and 2001, respectively. The Company also purchased
inventory from this customer in the amount of $3,630,000 and $8,865,000
during the nine months ended September 30, 2002 and 2001, respectively.
NOTE 9 - CONTINGENCIES
The Company from time to time is subject to other certain legal
proceedings and claims which have arisen in the ordinary course of its
business. These aforementioned actions when ultimately concluded will not,
in the opinion of management, have a material adverse effect upon the
financial position, results of operations or liquidity of the Company.
NOTE 10 - RESTATEMENT
The Operating results for the three and nine month periods ended September
30, 2001 have been restated to reflect an accrual for officers'
compensation and to reclassify certain expenses.
F-14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto set forth in Item 1of this Quarterly
Report. In addition to historical information, this discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions, which could cause actual results to differ materially from
Management's expectations. Factors that could cause differences include, but are
not limited to, expected market demand for the Company's products, fluctuations
in pricing for products distributed by the Company and products offered by
competitors, as well as general conditions of the telecommunications
marketplace.
OVERVIEW
To date, our principal source of revenue has been the marketing and
distribution of prepaid phone cards. We market and distribute branded prepaid
phone cards, which are produced by a variety of telecommunications long distance
carriers and resellers, as well as private label proprietary prepaid phone cards
produced exclusively for us by various long distance carriers and/or resellers.
Prepaid phone cards are distributed through a vast network of retail
outlets, including convenience stores, newsstands, grocery stores and discount
stores. The retail outlets are serviced by independent distributors, which often
distribute newspapers or other items to the retail outlets. We purchase large
volumes of branded prepaid phone cards from the long distance carrier or
reseller and sell the cards in smaller quantities, together with cards from
other carriers and/or private label cards we distribute, to the independent
distributor, for ultimate distribution to retailer outlet.
We purchase branded cards at a discount from the face value of the card,
and resell them to the distributor at a slightly lower discount. The difference
between the two discount rates, typically from 1% to 8%, represents the gross
margin we retain. We purchase branded cards on varying terms, from C.O.D. to an
as used basis. Sales of our products are generally made on a net 21 basis.
Private label cards are generally designed and produced by us, utilizing
card numbers and PINs provided by the telecommunications carrier or reseller
providing the long distance service for the card. We incur the upfront expense
of printing the phone cards. However, we do not pay the long distance carrier
until it activates the cards, which occurs upon our sale to the distributor.
Accordingly, through the use of private label cards, our cost of inventory is
significantly reduced, as purchases are effectively made on an as-needed basis.
In addition, private label cards generally provide us with the ability to
achieve a greater gross margin percentage, typically ranging from 3% to 8%.
During the past two years, we have continued to increase our sales of private
label cards, both on an absolute dollar volume and as a percentage of our sales.
During the year ended December 31, 2001, we sold over 120 varieties of private
label cards, which accounted for in excess of 70% of our total revenues.
We continue to seek to expand our geographic reach and to increase our
sales. In recent years, we have established distribution centers in California,
Maryland, Connecticut, Illinois, Upstate New York, as well as additional
distribution centers in the New York metropolitan area, and we have established
strategic relationships with distributors in Canada and United Kingdom. In
addition, in 2001, we commenced pre-paid phone card sales through our Internet
Website 9278.com(TM). Through our website, consumers worldwide can purchase 9278
phone cards over the Internet from a selection of over 40 cards, searchable by
various criteria, e.g., rates, brand name, country, etc., and receive immediate
delivery of the card's access number and PIN codes via e-mail.
F-15
We are seeking to develop and acquire rights to additional prepaid
telecommunications services and other prepaid products or services to diversify
our product offerings and increase our overall gross margin. In the short-term,
additional costs related to the development or acquisition of such products may
have an impact on our net profits.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
For the three months For the nine months
ended September 30, ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net revenues 100.00% 100.00% 100.00% 100.00%
Cost of services 93.32 94.92 94.39 93.87
--------- --------- -------- --------
Gross margin 6.68 5.08 5.61 6.13
Selling expenses 4.90 1.21 3.07 1.01
General and administrative expenses 4.89 2.77 4.31 3.00
Depreciation and amortization 0.18 0.24 0.15 0.26
Provision for bad debts 0.67 (0.08) 0.41 0.05
Interest expense, net 0.04 0.05 0.02 0.06
Litigation settlement - 0.37 - 0.15
--------- --------- -------- --------
Earnings (loss) before income taxes (4.00)% 0.52% (2.35)% 1.60%
--------- --------- -------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
NET REVENUES. Net revenues for the three months ended September 30, 2002
decreased $2.0 million, or 3.54%, to $53.7 million from $55.7 million for the
same period in 2001. Except for the NY Metro area offices, same location sales
in each other location increased during the three months ended September 30,
2002 as compared to the same period in 2001. Sales for our Los Angeles,
California office increased 98% over previous year, whereas Internet sales
recorded a 146% increase over its previous year levels. The Company, in August
2001, added its office in Chicago, IL, which recorded 142% increase over
previous year sales. The Company opened its Poughkeepsie, NY office in December
2001, which accounted for 2.26% of the sales for the three months ended
September 30, 2002. The Same store revenues increased primarily as a result of
extensive marketing efforts and continued expansion of market share for our
private label cards. However, sales in some of the NY Metro area offices have
declined by as much as 46% over the same period in 2001. The Company has
primarily been focusing its sales efforts outside the NY Metro area during the
past one year. Intense competition and slowing economy in the region have also
contributed to this decline.
The Company, in October 2002, opened two new offices, one in Charlotte, NC and
the other in Miami, FL. These offices will enable the Company to gain additional
market share.
F-16
GROSS MARGIN. Gross margin increased by $0.76 million, or 26.9%, to $3.59
million, or 6.68% of net revenues, for the three months ended September 30,
2002, from $2.83 million, or 5.08% of net revenues, for the same period in 2001.
SELLING EXPENSES. Selling expenses for the three months ended September 30, 2002
increased $1.96 million or 290% to $2.64 million from $0.68 million for the
three months ended September 30, 2002. Of this, $683,000 was attributable to
increase in advertising and promotion costs incurred to promote our new private
label cards in new markets and to promote sales over the Internet. Commission
expense increased by $1,200,000 as we hired commissioned salespersons to promote
sales, starting in 2001.
Selling expenses as a percentage of net revenues increased to 4.90% for the
three months ended September 30, 2002, from 1.21%, for the same period in 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
three months ended September 30, 2002, increased by $1.09 million or 70% to
$2.63 million from $1.54 million for the same period in 2001. This increase was
primarily due to the increase in salaries and related taxes by $524, 000 in 2002
as compared to 2001. Included in the general and administrative expenses is the
cost of processing credit card sales over the Internet which increased by
$72,000 in 2002. Rent expense increased by $172,000 and telephone expense
increased by $89,000 in 2002 as compared to 2001 as the Company continued to add
new locations and expand existing facilities. We opened additional offices
during the past one-year, for which we had to incur start-up and establishment
expenses that resulted in the increase.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three
months ended September 30, 2002 totaled $101,000; a decrease of $32,500 as
compared to the same period in 2001. The decrease is due to the fact that we no
longer amortize goodwill as a result of the adoption, effective January 1, 2002,
of SFAS No. 142 of the Financial Accounting Standards Board. This decrease was
offset by an increase in depreciation expense of $32,000 due to acquisition of
fixed assets for our new locations.
NET INCOME (LOSS) FROM OPERATIONS. We had a net loss of $2,165,000 for the three
months ended September 30, 2002 as compared to a net profit of $246,000 for the
three months ended September 30, 2001. The decrease in net income was due to the
increase in selling expenses and operating expenses. Our geographical expansion
by opening up new offices nationwide has led to increase in selling, general and
administrative costs. We also adopted an aggressive pricing policy by
discounting our cards and giving away promotional cards in these new locations
to gain market share. We believe that our loss from operations is a temporary
phenomenon and that there should be a turnaround once these new offices are
established.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
NET REVENUES. Net revenues for the nine months ended September 30, 2002
increased $34.3 million, or 24.0% to $177.1 million from $142.8 million for the
same period in 2001. During 2002, the Company introduced several new calling
cards in its bid to take market share from its competitors. The increase in
revenues was also due to our acquisitions and geographic expansion since the
third quarter of calendar year 2000 and continuing during the fiscal year ended
2001 and 2002. In May 2001, we opened a new office in Los Angeles, California,
which accounted for 58.6% of the increase in sales for the nine months ended
September 30, 2002. In August 2001, we opened two new locations, one in
Brooklyn, New York, which accounted for 15.7% of the increase in sales, and the
second in Chicago, Illinois, which accounted for 26.0 % of the increase in sales
for the nine months ended September 30, 2002. Starting July 2001, we began
actively selling phone cards over the Internet. Internet sales accounted for
35.6% of the increase in sales for
F-17
the nine months ended September 30, 2002. In November 2001, we opened a new
office in Poughkeepsie, New York, which accounted for 9.2% of the increase in
sales for the nine months ended September 30, 2002. For the nine months ended
September 30, 2002, same location sales for our Bronx office declined 9.8%,
Queens Office declined by 33.0%, Yonkers office declined by 12%. The decline is
attributable to the intense competition in these markets. Maryland office
accounted for 7.9% of the increase in sales, Connecticut office accounted for
2.5% of the increase in sales. During the three months ended September 30, 2002,
the Company opened its new offices in New Jersey and acquired the business of a
distributor in Virginia. Though the sales from these offices were nominal, the
Company expects sales to rise in the next three months.
GROSS MARGIN. For the nine months ended September 30, 2002, gross margin
increased by $1.19 million, or 13.6%, to $9.94 million, or 5.61% of net
revenues, from $8.75 million, or 6.13% of net revenues, for the same period in
2001. The decrease in gross margin percentage was attributable to the Company's
aggressive sales efforts to increase its market share by selling cards at a
reduced gross margin during this period . Our gross margin varies from period to
period depending upon discounts and promotions employed from time to time to
stimulate sales.
SELLING EXPENSES. Selling expenses for the nine months ended September 30, 2002
increased by $3,996,000 or 278% to $5,431,000 from $1,436,000 for the nine
months ended September 30, 2001. Of this, $1,900,000 was increase in advertising
costs incurred to promote our new private label cards in new markets and sales
over the Internet. Included in selling expenses are costs related to sales,
marketing and promotion campaigns organized to build our brand in new markets.
Commission expenses increased by $1,947,000 as the Company hired commissioned
salespersons to promote sales, starting in 2001. Trade show expenses increased
by $313,000, as we participate in more trade shows.
Selling expenses as a percentage of net revenues increased to 3.07% for the
nine months ended September 30, 2002, from 1.01% for the same period in 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
nine months ended September 30, 2002, increased by $3,339,000, or 78.0% to
$7,622,000 from $4,283,000 for the same period in 2001. This increase was
primarily due to the increase in salaries and related taxes by $1,722,000 to
$3,846,000 in 2002 as compared to $2,124,000 in 2001. Included in the general
and administrative expenses is the cost of processing credit card sales over the
Internet which increased by$461,000 to $546,000 for the nine months ended
September 30, 2002 as compared to $85,000 for the same period in 2001. Rent
expense increased by $350,000 to $512,000 in 2002 as compared to $162,000 in
2001 and telephone expense increased by $257,000 to $361,000 in 2002 as compared
to $104,000 in 2001 as we continued to add new locations and expand our existing
facilities. Other general and administrative expenses increased due to our
opening additional locations and expenses related to increase in sales volume.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine months
ended September 30, 2002 totaled $272,000; a decrease of $96,000 as compared to
the same period in 2001. The decrease is attributable to the fact that the
Company no longer amortizes goodwill as a result of its adoption of SFAS No. 142
of the Financial Accounting Standards Board effective January 1, 2002. This
decrease was offset by an increase in depreciation expense of $104,000 due to
acquisition of fixed assets on opening new locations.
NET INCOME (LOSS) FROM OPERATIONS. We had a net loss of $4,200,000 for the nine
months ended September 30, 2002 as compared to a net profit of $2,244,000 for
the nine months ended September 30, 2001. The decrease in net income was due to
the increase in operating expenses coupled by a decrease in gross profit
margins. Our geographical expansion by opening up new offices nationwide has led
to increase
F-18
in selling, general and administrative costs. We also adopted an aggressive
pricing policy by discounting our cards and giving away promotional cards in
these new locations to gain market share. We believe that our loss from
operations is a temporary phenomenon and we expect a turnaround once these new
offices are established.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had total current assets of $33,313,000. This
included $4,817,000 in cash, $1,013,000 in restricted cash, $13,927,000 in
inventories and $13,287,000 in accounts receivable. Our cash balances vary
significantly from day-to-day due to the large volume of purchases made by us
from the various prepaid phone cards companies and sales to numerous
distributors to whom we sells cards.
We provided $2,188,000 in cash from operating activities during the nine
months ended September 30, 2002 as compared to $5,897,000 during the same period
in 2001. Decreases in cash flows during the nine months ended September 30, 2002
are related to net loss incurred in 2002 and increase in inventories, offset by
increase accounts payable and decrease in accounts receivables. Our decrease in
working capital is attributable to our net loss from operations and to a lesser
extent to our opening of new offices, which involve carrying of additional
inventories and accounts receivable. We believe our working capital shortfalls
will decline once these offices are established and profitable.
Investing activities used $1,089,000 during the nine months ended September
30, 2002 to acquire additional fixed assets and acquisition of business of a
distributor in Virginia. Financing activities used $617,000 during the nine
months ended September 30, 2002 to pay down notes payable and principal on debt
obligations.
We believe that existing cash and cash equivalents, cash flow from
operations and available vendor credit, including recently negotiated more
favorable payment terms will be sufficient to meet its planned working capital
and capital expenditure budget through the remainder of 2002 and 2003. We are
largely dependent upon the credit granted to us by our vendors. In the event
sufficient vendor credit is not available to us we would require other sources
of financing. If we are required to seek other financing, there can be no
assurance that we will be able to obtain such financing on commercially
reasonable terms, or otherwise, or that we will be able to otherwise satisfy our
short-term cash flow needs from other sources in the future which would have a
material adverse effect on our operations.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, published by the SEC, recommends that
all companies include a discussion of critical accounting policies used in the
preparation of their financial statements. The Company's significant accounting
policies are summarized in Note 3 of its financial statements. While all these
significant accounting policies impact its financial condition and results of
operations, the Company views certain of these policies as critical. Policies
determined to be critical are those policies that have the most significant
impact on the Company's financial statements and require management to use a
greater degree of judgment and/or estimates. Actual results may differ from
those estimates.
The Company believes that given current facts and circumstances, it is
unlikely that applying any other reasonable judgments or estimate methodologies
would cause a material effect on the Company's consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
The accounting policies identified as critical are as follows:
F-19
REVENUE RECOGNITION. The Company recognizes revenues in accordance with
generally accepted accounting principles as outlined in SAB No. 101 which
requires that four basic criteria be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists, (2) product delivery, including
customer acceptance, has occurred or services have been rendered, (3) the price
is fixed or determinable and (4) collectibility is reasonably assured. The
Company believes that its revenue recognition policy is critical because revenue
is a very significant component of its results of operations. Decisions relative
to criteria (4) regarding collectibility are based upon management judgments and
should conditions change in the future and cause management to determine these
criteria are not met, the Company's recognized results may be affected.
INCOME TAXES. In preparing the Company's consolidated financial statements,
income tax expense is calculated for each of the jurisdictions in which the
Company operates. This process involves estimating actual current taxes due plus
assessing temporary differences arising from differing treatment for tax and
accounting purposes which are recorded as deferred tax assets and liabilities.
Deferred tax assets are periodically evaluated to determine their
recoverability, and where their recovery is not likely, a valuation allowance is
established and a corresponding additional tax expense is recorded in the
Company's statement of operations. In the event that actual results differ from
the Company's estimates given changes in assumptions, the provision for income
taxes could be materially impacted. As of September 30, 2002, the company had a
deferred tax asset of approximately $5,600,000 and a full valuation allowance
due to uncertainty surrounding the company's ability to realize its deferred tax
asset.
INVENTORIES. Inventories, which are composed of prepaid calling cards, are
valued at the lower of cost (first in, first out) or market. On a periodic
basis, we compare the amount of inventory on hand and under commitment with our
latest forecasted requirements to determine whether write-downs for excess or
obsolete inventory are required. Although we consider the amounts on hand at
quarter-end to be realizable, there can be no assurance that these amounts will
prove to be realizable over time.
GOODWILL AND OTHER INTANGIBLES. Purchase accounting requires extensive use of
accounting estimates and judgments to allocate the purchase price to the fair
market value of the assets and liabilities purchased, with the excess value, if
any, being classified as goodwill. In addition, as described in Notes 3 of the
Company's financial statements, as a result of the Company's acquisitions,
values were assigned to intangible assets for customer lists and related
relationships. Finite useful lives were assigned to these intangibles and they
will be amortized over their remaining life. As with any intangible asset,
future write-downs may be required if the value of these assets become impaired.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company performs ongoing credit evaluations
of its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by a review of their current
credit information. The Company continuously monitors collections and payments
from customers and a provision for estimated credit losses is maintained based
upon its historical experience and any specific customer collection issues that
have been identified. While such credit losses have historically been within the
Company's expectations and the provisions established, the Company cannot
guarantee that the same credit loss rates will be experienced in the future.
Concentration risk exists relative to the Company's accounts receivable, as
19.6% of the Company's total accounts receivable balance at September 30, 2002
is concentrated in one affiliated customer. While the accounts receivable
related to this customer may be significant, the Company does not believe the
credit loss risk to be significant given the consistent payment history by this
customer.
F-20
RECENT ACCOUNTING PRONOUNCEMENTS.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, (SFAS No. 143), "Accounting for Asset
Retirement Obligations". This standard addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard is effective for
fiscal years beginning after June 15, 2002. We will adopt this standard
effective January 1, 2003. We do not expect the adoption of SFAS No. 143 to have
a material impact on the company's financial results.
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 eliminates the requirement under SFAS 4 to aggregate and classify
all gains and losses from extinguishment of debt as an extraordinary item, net
of related income tax effect. This statement also amends SFAS 13 to require that
certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
In addition, SFAS No. 145 requires reclassification of gains and losses in all
prior periods presented in comparative financial statements related to debt
extinguishment that do not meet the criteria for extraordinary item in
Accounting Principles Board Opinion ("APB") 30. The statement is effective for
fiscal years beginning after May 15, 2002 with early adoption encouraged. The
Company will adopt SFAS No. 145 effective January 1, 2003. The Company is
currently evaluating the requirements and impact of this statement on our
consolidated results of operations and financial position.
On July 30, 2002, The Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The statement requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
statement include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the requirements and impact of this statement on our
consolidated results of operations and financial position.
F-21
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURES. The Company maintains disclosure controls and
procedures designed to provide reasonable assurance that information required to
be disclosed in the reports filed with the SEC is recorded, processed,
summarized and reported within the time periods specified in the rules of the
SEC. Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,
an evaluation, was completed under the supervision and participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the design and operation of this disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including the Company's consolidated subsidiaries)
required to be included in the periodic SEC filings.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in internal
controls or other factors that could significantly affect the Company's internal
controls subsequent to the date of our evaluation.
F-22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to certain legal proceedings and claims which have arisen in the
ordinary course of our business. These actions when ultimately concluded will
not, in the opinion of management, have a material adverse effect on our
financial position, results of operations or liquidity. We are also subject to
other legal proceedings which we have previously disclosed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
4.1 2001 Stock Option Plan of the Company(2)
- --------------------
(1) Incorporated by reference from the Company's report on Form 10-Q for the
three-month period ended March 31, 2000
(2) Incorporated by reference from the Company's report on Form 10-KSB for the
year ended December 31, 2000
(b) Reports on Form 8-K.
None.
F-23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
9278 COMMUNICATIONS, INC.
Date: December 20, 2002 By /s/ Sajid Kapadia
---------------------------
Sajid Kapadia
Chief Executive Officer/
Principal Accounting Officer
F-24
CERTIFICATIONS
I, Sajid B. Kapadia, Chief Executive Officer of 9278 Communications, Inc.
certify that:
1. I have reviewed this quarterly report on Form 10-Q of 9278 Communications,
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; and
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.
Date: December 20, 2002
/s/ Sajid B. Kapadia
-------------------------------
Sajid B. Kapadia
Chief Executive Officer/
Principal Accounting Officer
F-25
CERTIFICATION(1)
Pursuant to Section 906 of the Public Company Accounting Reform and Investor
Protection Act of 2002 (18 U.S.C.ss. 1350, as adopted), Sajid B. Kapadia, Chief
Executive Officer of 9278 Communications, Inc. (the "Company"), and Jim
Scigliano, the Chief Financial Officer of the Company, each hereby certifies
that, to the best of his or her knowledge:
1. The Company's Quarterly Report on Form 10-Q for the period ended September
30, 2002, and to which this Certification is attached as Exhibit 99.1 (the
"PERIODIC REPORT") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition of the Company at the end of the
period covered by the Periodic Report and results of operations of the Company
for the period covered by the Periodic Report.
Dated: December 20, 2002
/s/ Sajid B. Kapadia
- ---------------------------
Sajid B. Kapadia
Chief Financial Officer
Principal Accounting Officer
(1) THIS CERTIFICATION ACCOMPANIES THIS REPORT PURSUANT TO SS. 906 OF THE
SARBANES-OXLEY ACT OF 2002 AND SHALL NOT BE DEEMED "FILED" BY THE COMPANY
FOR PURPOSES OF SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
F-26