ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
We were incorporated in the State of Colorado on June 17, 1996, under the name Minas Novas Gold Corp., to engage in mining operations. From inception to January 1999, we obtained options to acquire various mining properties. On January 29, 1999, we abandoned all mining operations and proceeded to acquire all of the issued and outstanding capital stock of Cool Entertainment, Inc., a Washington corporation, in exchange solely for 65% of our outstanding common stock. The acquisition of the Washington corporation was completed March 1, 1999, and effective February 22, 1999, we changed our name to Cool Entertainment, Inc.
From March 1, 1999 to February 2000, the coolentertainment.com website was under development. We launched the website in February 2000 and from February 2000 to November 2000, we offered a variety of entertainment products on the Internet through our website, WWW.COOLENTERTAINMENT.COM. We also offered value-added services such as celebrity interviews, book reviews, online chat rooms, online games, and free e-mail accounts on its website to attract users to the website. We generated revenues of only $3,518 from this website.
Realizing that we were undercapitalized and unable to market our services properly, we searched for another business opportunity. On February 21, 2001, we acquired all of the issued and outstanding capital stock of E-Trend Networks, Inc., a Nevada corporation, in exchange solely for approximately 92% of our common stock. We changed our name to E-Trend Networks, Inc., changed our domicile to Delaware, and effected a 1-for-100 reverse split of our issued and outstanding shares of common stock.
On December 26th, 2001, an agreement was reached whereby a new organization and management team led by eAngels International would acquire controlling interest in E-Trend Networks, Inc. Effective February 19, 2002, we changed our name to Wilmington Rexford, Inc., in an effort to properly reflect changes in our business focus. Concurrent with the name change, we announced our plans to focus our operations on venture development, a business model predicated on the acquisition, financing, and management of a diverse portfolio of related businesses. We also plan to explore potential synergies within our current operations by expanding the product portfolio and service lines of our offline distribution and fulfillment business, with that of our online e-commerce business, capitalizing on our existing Business-to-Business e-commerce capabilities, as well as our unique capacity to combine product supply and technology infrastructure.
We are now a strategic venture development company that proposes to acquire and manage a portfolio of related businesses. Operating in a diverse set of business activities, we will seek to make investments and / or acquisitions that meet our portfolio criteria, and then pursue pre-defined strategies to support the operating management in enhancing the value of these businesses. As of September 2002 our Venture Development operations from the reorganization were just getting started as we spent most of 2002 cleaning up E-Trend Networks and Langara Distribution.
Our acquisition strategy relies upon two primary factors. First, our ability to identify and acquire target businesses that fit within our general acquisition criteria. Second, the continued availability of capital and financing resources sufficient to complete these acquisitions. Our growth strategy relies upon a number of factors, including our ability to efficiently integrate the businesses of the companies we acquire, generate the anticipated economies of scale from the integration, and maintain the historic sales growth of the acquired businesses so as to generate organic organizational growth.
Prior to the first calendar quarter of 2002, our 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. We operated an online retail website WWW.ENTERTAINME.COM and through our fulfillment and distribution subsidiary, Langara Distribution, we offered distribution and fulfillment services to both traditional retail and online merchants.
Prior to the shift in our business model, we incurred significant losses since inception, and our cost of sales and operating expenses increased dramatically. This trend reflected the costs associated with our increased efforts to build market awareness, attract new customers, recruit personnel, build operating infrastructure, and develop and expand our web site and related transaction-processing systems. However, we initiated a restructuring plan in the fourth quarter of calendar 2001, which encompassed a series of cost-cutting initiatives. Consistent with our plan, we have attempted to reduce our marketing budget, our discount program, web site development activities, and technology and operating infrastructure development.
Besides consulting operations of our parent company, most of our operations are conducted through our wholly-owned subsidiary, E-Trend Networks, Inc., a Nevada corporation, which we refer to as "E-Trend", and its wholly-owned subsidiary, Langara Distribution Inc., an Alberta corporation.
E-TREND NETWORKS
E-Trend was founded as a Nevada corporation under the name "The MovieSource.com Corp." in April 1999 by VHQ Entertainment Inc., formerly Video Headquarters Inc. and eAngels International (Garrett K. Krause). Officers and directors of VHQ along with eAngels International (Garrett K. Krause) incorporated The MovieSource.com Corp. and provided the initial capitalization. The name of the company was changed to "E-Trend Networks, Inc." in February 2000. The stock of VHQ trades on the Toronto Stock Exchange under the symbol "VHQ." VHQ and eAngels founded E-Trend to mitigate the effects of technology on "bricks and mortar" retail operations and to expand its geographic reach by taking advantage of the continuing growth in the online market for home entertainment sales. E-Trend seeks to increase the depth of its entertainment marketing presence through the development of entertainment-related websites and through the acquisition of or distribution to both online and bricks and mortar retailers.
E-Trend distributes packaged entertainment media, with distribution channels to both online retail e-commerce and traditional bricks and mortar retail outlets. E-Trend operates an online retail website (Entertainme.com) and, through Langara Distribution, it offers fulfillment services to other Internet retailers and wholesale services to traditional retailers. We do not own any other online or brick and mortar retail businesses. By generating sales from both bricks and mortar and online organizations, we believe we are mitigating our risks and maximizing our chances for success, especially during our managed growth phase. Despite the failures of many Internet "dot com" companies in 2000, industry analysts still predict growth in the online retail market. E-Trend will, subject to the availability of capital resources, seek to grow its online operations by:
o maintaining a focus on marketing through a network of affiliates;
o considering prudent mergers, acquisitions, and/or partnerships;
o increasing its depth of product offering;
o assessing technology, such as broadband streaming and wireless, with the goal of enhancing the online experience and broadening the reach of its site if the addition of such technology is economically feasible;
o capitalizing on its relationship with VHQ Entertainment by pursuing sales from within VHQ's growing customer base.
We will, subject to the availability of capital resources, also seek to expand the operations of Langara Distribution in the following ways:
o add movies to its inventory and expand the number of music titles it inventories;
o capitalize on the growth of VHQ Entertainment by selling music into new stores and by increasing the inventory within existing locations;
o increase inventory levels and SKU's in order to increase fill rates and reduce shipping times, thus offering a more attractive distribution package to customers;
o expand strategic alliances with insurance companies to fulfill claims for replacement movies and music CDs;
o pursue additional e-commerce and bricks and mortar accounts;
o offer movies and games to accounts that currently only stock music;
o further automate the distribution process in order to increase the volume of business that it can efficiently manage;
o investigate the ability to expand its reach into additional retail outlets by installing Internet-enabled kiosks to enable sales of our full range of product.
ENTERTAINME.COM
E-Trend developed EntertainMe.com as an Internet entertainment superstore. Through this website, E-Trend offers movies on DVD and VHS and music on CDs and cassette, with convenience of shopping 24 hours a day, seven days a week. E-Trend's goal is to combine the advantages of online commerce with superior customer focus in order to be the preferred online retailer for filmed entertainment and music. E-Trend has designed its online storefront to offer a broad selection of products in each category, informative content, easy-to-use navigation and search capabilities, a high level of customer service, competitive pricing and personalized retail store-style merchandising and recommendations. E-Trend offers a virtual inventory that provides a selection of products that is five to ten times that of a typical "brick and mortar" retailer operating out of a traditional physical location. The site features live customer service NetReps, who are able to interact with customers in a chat-based format to offer assistance and product recommendations.
As part of our strategic repositioning in mid-2001, we have moved our movie inventory in-house. Langara Distribution now arranges for the distribution of music, movie and game titles to our customers. These are steps toward our plan to provide the customer with one-stop shopping. The customer can now combine their orders for all of our entertainment media in one shopping cart. The customer's credit card is charged only once an order is shipped.
LANGARA DISTRIBUTION
Early in calendar 2000, E-Trend purchased Langara Distribution from a non-affiliated third party for E-Trend common stock and warrants. Langara Distribution has direct buying relationships with all the major music labels and currently handles music supply and fulfillment for E-Trend and other Internet retailers, as well as for a number of other traditional brick and mortar companies' wholesale accounts. Due to its business relationship with E-Trend, Langara offers preferential pricing to E-Trend. Currently, VHQ is Langara's largest customer, but new relationships are growing weekly. Further, in July 2001, Langara Distribution assumed responsibility for the supply and fulfillment of all our movies and music.
In December 2000, E-Trend entered into an agreement with Video One Canada Ltd. ("Video One"), a wholesaler of pre-recorded movies and games. Video One is the largest distributor of pre-recorded movies in Canada and they provided supply and fulfillment services for our clients. However, in June of 2001, our agreement with Video One expired and, since Langara assumed the responsibility for the supply and fulfillment for our movies and music, Langara entered into an agreement with Video One for the supply and fulfillment of movies. Pursuant to the agreement between Langara and Video One, Video One charges Langara cost plus 11% for catalog titles and cost plus 6% for new release titles. We cannot assure anyone that Langara will maintain its relationship with Video One, or any other supplier capable of meeting our fulfillment requirements beyond the term of the existing agreement.
We believe that Langara Distribution is able to compete within its market because:
o it maintains relationships and alliances with a substantial number of manufacturers of entertainment products, which in turn eliminates the middleman; o it carries key titles in both movie and music categories;
o it has developed a comprehensive business-to-business system; o it has developed an extensive product database which currently has approximately 160,000 music products, 50,000 video products, and 1,450 entertainment accessories products; o it is able take advantage of favorable currency exchange rate in Canada; and o it offers both imported and domestic entertainment products.
The primary competitors of Langara Distribution are:
o PINDOFF MUSIC SALES, which owns and operates the Music World stores throughout Canada and is a wholesaler and distributor of music products. o TOTAL SOUND, based in Edmonton, Canada, is a distributor and wholesaler of music products mainly to independent retailers located in western Canada. o HANDELMAN, which provides wholesale product for racking in department stores such as Wal-Mart and Zeller's. o RECORDS ON WHEELS, based in Ontario, Canada, is a distributor and wholesaler of music products mainly to independent retailers located in eastern and central Canada. o VALLEY MEDIA INC., is a U.S. based company with warehouses in California and Kentucky. Valley Media focuses its wholesale distribution of music, video, related products and data in the U.S. Valley Media is also one of the leaders in Internet fulfillment distribution.
COMPETITION
Our competitive marketplace can be broken into two main camps: online and traditional retailers. In both cases, there are two sub-categories of retailers: those who are in the entertainment business exclusively, and those who sell multiple products, usually extending beyond the entertainment category, such as department stores.
The online commerce market is new and rapidly evolving. We expect that our online competition will further intensify. In addition, the broader retail filmed entertainment, prerecorded music and video game industries are intensely competitive. Our competitors include, among others:
o online retailers, such as Amazon.com, CDNow.com, DVDEmpire.com, Buy.com, and 800.com; o publishers and wholesalers, such as Time Life Video and Sony; o traditional retailers, such as Blockbuster, Hollywood Entertainment, Tower Records, Music World, Sam Goody, Sam the Record Man, and VHQ Entertainment; o mail order clubs, such as Columbia House; o specialty retailers; o electronic consumer stores; and o mass merchandisers and department stores, such as K-mart; Target; Wal-Mart; Sears; Costco.
We believe that the principal competitive factors in our market are:
o price; o merchandising and appeal of site; o delivery; o live customer service; o positive shopping experience; o ease of use, content quality and web site convenience; o brand recognition; and o selection.
Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than us. Some of our competitors, like Hollywood Entertainment, Blockbuster, VHQ Entertainment, Wal-Mart, Costco and Amazon.com, also may be able to secure merchandise from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies, and devote substantially more resources to web site and systems development than we can.
MARKETING STRATEGY
We have adopted a strategy of capturing market share by focusing on marketing to very targeted consumers on sites that contain relevant content. We believe that this strategy allows us to dramatically reduce new customer acquisition costs.
We utilize several online marketing opportunities to reach our market and drive targeted traffic to our sites:
o CONTENT SITES - Content sites offer entertainment and news features to visitors, but do not sell product directly themselves. Examples are BigStar.com, Reel.com, DVDReview.com, and DVDTalk.com. We attempt to reach visitors to these sites through a variety of affiliate arrangements, sponsored links, and placement of dynamic banners.
o PRICE COMPARISON SEARCH ENGINES - These allow surfers to compare the prices offered by vendors on a single site. Examples are MySimon.com, BizRate.com, CoolSavings.com, and PriceGrabber.com. Inclusion on such sites involves uploading the database, which is then called up by a surfer's search for a specific title. When a surfer clicks through to our listing, we pay a minimal charge to the price comparison site. Buy-rates are considerably higher from this type of traffic, as compared to other forms of Internet traffic, since the customer has already selected the product and vendor, and knows the price.
o PAY FOR POSITION SEARCH ENGINES - This type of search engine allows firms to "sponsor" results, by bidding on key words - the higher the bid, the higher the result appears in the ranking. We have been able to drive significant traffic to our site by using this strategy on sites such as GoTo.com. Rankings on GoTo.com are also syndicated to over 75% of all search engine sites, including AOL.com and AskJeeves.com.
o AFFILIATE SITES - Affiliates provide links directly to our site and are paid a commission on all sales that result from a visit that originates from their sites.
Subject to the availability of capital resources, we also plan to utilize broader marketing strategies that and designed to drive traffic to our site that is pre-qualified by interest in the product lines. These strategies include:
o OPT-IN EMAIL CAMPAIGNS - Lists will be utilized from customers on third party sites who have requested notification of information on either movies (especially DVD) or CDs. Lists from About.com, AOL and Yahoo.com will be accessed and aggressively targeted with motivating content.
o AFFILIATE NETWORKS - Agencies have created networks of sites in which they place virtual shopping malls within existing sites, such as iVillage.com and ABC.com, on a commission basis, similar to the affiliate model described above. We believe that alliance such networks allows us to extend the reach of both EntertainMe.com's products and branding, with payment only required upon sale of products.
o ENTERTAINMENT NETWORK SITES - Several media companies have assembled networks by joining many sites that are contextually relevant and accept third party advertising such as ours. We believe that advertising in this manner allows us to cast a broad net, while still staying within the framework of entertainment, specifically movies or music.
o THIRD PARTY CO-REGISTRATION - Tremendous volume is being generated through lottery and gaming sites. This traffic can be efficiently harvested by messaging that requires the viewer to agree that he wishes to sign up to a new site or take advantage of an offer for a specific site. Viewers are then encouraged to "sign up" on the spot and a minimal charge is generated to the originating site. Although these viewers are not on an entertainment site, they have "agreed" to see the message about DVDs or CDs, which gives the offer a more targeted audience.
o PUBLICITY - We try to ensure that all relevant publications, such as Yahoo's Internet Life, Sympatico's NetLife, and eCompany, have EntertainMe.com prominently displayed in editorial coverage, especially in their fall/Christmas 2001 online shopping guides.
Lastly, we will employ several different loyalty strategies to not only retain the customers who come to our site, but encourage them to purchase more frequently. This strategy includes opt-in email messages and offers, frequency discounts, coupons, and other benefits that we believe will differentiate us from the competition.
TECHNOLOGY
Through our consultants and technical staff, we have developed technologies and implemented systems to support distributed, reliable and scalable online retailing in a secure and easy-to-use format. Using a combination of proprietary solutions and commercially available licensed technologies, we intend to deploy systems for online content dissemination, online transaction processing, customer service, market analysis and electronic data interchange. We estimate that approximately $800,000 and $412,000 were spent during the 2001 and 2000 fiscal years, respectively, on research and development activities, none of which was borne directly by customers. In 2002 our investment in Technology, programming and system development was approximately $200,000 and this was mostly paid in programmer salaries.
HARDWARE. Our web delivery system runs on IBM NetFinity Servers. As our computing requirements grow, we intend to evaluate other platforms for additional reliability and scalability over the current Intel-based architecture.
Our hardware is rack-mounted in "server farms" and is designed so that as business volume grows it can be duplicated in various hosting facilities to provide full redundancy in case of an Internet outage. Since outages mean downtime and an inability to do business, the system has been configured to insure that more than one piece of hardware is available to perform each business function. If any one component is out of service, traffic will be rerouted without impacting the performance of our e-commerce system.
Graphics and basic static HTML text and graphics are served from a web server. The web server is not responsible for connectivity to the database, and is under relatively light load, as the application servers actually do all the intensive computing.
Application servers run the catalog system. These machines are responsible for retrieving information from the database and generating personalized pages to be sent to the individual browser sessions. The servers run on the Linux platform to ensure speed.
SOFTWARE. We believe that flexible, adaptable, and robust software is the key to our success. We must be able to adapt our site to maximize ease of use, consumer appeal, and competitive advantage. Software must also be robust enough to handle rush hour and peak season business volumes. Our web delivery system is composed of several software packages working together to comprise the entire system. The major software packages are configured as follows:
o DATABASE - The current system runs on Oracle. The database holds all the system information such as products, pricing, contents of customer's carts, and actual orders.
o FIREWALL - We currently run a commercial firewall product but are considering implementing a customized Linux solution in the future. The firewall software secures our information, yet is fast enough to handle the load of peak traffic times.
o WEB SERVER - The web server that runs our website is Apache, the de facto industry standard. This server was selected for its scalability and performance, plus its ability to run on several platforms.
o APPLICATION SERVER SOFTWARE - The current application server configuration runs on a Tom Cat, chosen for its scalability and performance.
CONNECTIVITY. We use Group Telecom in its Calgary, Canada location for our Internet access and web hosting.
SECURITY. Lynk Systems handles credit card payments for us. Lynk is a secure Internet payment system that the customer accesses directly from our website. To assure maximum privacy and customer security, we never see the customer's credit card number. Instead, Lynk provides a purchase authorization that can be used for future reference to the customer's order.
ENTERTAINME.COM IS A VERISIGN SECURE SITE. The VeriSign Secure Site Program allows surfers to verify that a site offers security measures before they submit any confidential information. The logo and valid digital certificates appearing on our site assure customers that all information sent to this site, is in a secure socket layer session, is encrypted and protected against disclosure to third parties. Inclusion of the VeriSign logo encourages purchases on our site, so it is prominently displayed, especially in the final check out pages. To become a VeriSign Secure Site, we have to purchase an annual digital certificate from VeriSign.
DATA TRANSFER. Our distribution efforts are supported by two-way data transfer applications, which allow us to transmit orders to Langara Distribution and in return receive order status information, which is capable of being downloaded onto our web site.
INTELLECTUAL PROPERTY
We use technology that we have developed internally, as well as technologies that are readily available from third party commercial packages. We enter into confidentiality and assignment agreements with all of our consultants and vendors who have access to our proprietary information.
We currently own and use the unregistered trademark "entertainme". There is an existing Intended Use Trade Mark Application filed in the United States by Metro One Telecommunications, Inc. ("Metro One"'"), serial # 76189444, for the trademark "ENTERTAINME". It is our intention to oppose the trademark application of Metro One based on the fact that we have used the "entertainme" trademark since at least June 2000. We are in the process of filing our own application in the United States and Canada for the "entertainme" trademark. We cannot predict at this time if we will obtain a registration for this mark in either the United States or Canada.
GOVERNMENT REGULATION
There are currently few laws or regulations that apply directly to the Internet. Due to the increasing popularity of the Internet, it is possible that a number of local, state, national or international laws and regulations may be adopted with respect to issues such as the pricing of services and products, advertising, user privacy, intellectual property, information security, or anti-competitive practices over the Internet. In addition, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New state tax regulations may subject us to additional state sales, use, and income taxes. Because our business is dependent on the Internet, the adoption of any such laws or regulations may decrease the growth of Internet usage or the acceptance of Internet commerce that could, in turn, decrease the demand for our services and increase costs or otherwise have a material adverse effect on our business, results of operations, and financial condition. To date, we have not spent significant resources on lobbying or related government affairs issues, but we may need to do so in the future.
EMPLOYEES
As of September 30, 2002, Wilmington Rexford, E-Trend and Langara Distribution had a total of 12 full time employees, including 4 executive positions, 1 in technology, 1 in marketing, 6 in operations, and 1 in accounting. None of our employees is covered by a collective bargaining agreement.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
Our principal executive offices are located at 420 Lincoln Road, Suite 301 Miami Beach, Florida 33139 where we lease approximately 1000 square feet of space on a lease expiring April 2003. Our Subsidiary, Langara Distribution has an office located at 5919-3rd St. S.E., Calgary, Alberta, Canada, T2H 1K3 where we lease approximately 4,608 square feet of space on a lease expiring November 2004.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock has been trading on the over-the-counter bulletin board ("OTCBB") under the symbol "WREX" Since February 20, 2002 The common stock was first listed on June 9, 1998 under the symbol "MNGD". From March 1, 1999 to February 22, 2001, the stock traded under the symbol "CULE" and from February 22, 2001 to February 20, 2002 the stock traded under the symbol of "ETDN". The following table sets forth the range of high and low bid quotations for each fiscal quarter for the last two fiscal years. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions.
FISCAL QUARTER ENDING HIGH BID LOW BID
December 31, 2000......................... $ 9.38 $ 1.56 March 31, 2001............................ $ 4.69 $ 1.02 June 30, 2001............................. $ 2.25 $ 0.65 September 30, 2001........................ $ 2.50 $ 1.00 December 31, 2001......................... $ 1.85 $ 0.72 March 31, 2002............................ $ 0.91 $ 0.26 June 30, 2002............................. $ 0.47 $ 0.22 September 30, 2002........................ $ 0.29 $ 0.10
On January 10, 2003, the closing price for the common stock was $0.04
As of September 30, 2002, there were 223 record holders of our common stock. Since our inception, no cash dividends have been declared on our common stock.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION ANALYSIS AND PLAN OF OPERATION.
OVERVIEW
Effective February 21, 2001 an arrangement was completed between the company, then known as Cool Entertainment, Inc. and E-Trend Networks, Inc., a Nevada corporation, whereby the shareholders of E-Trend Networks, Inc. exchanged all of their common shares for 4,439,371 shares of Cool common stock.
Following the acquisition the former shareholders of E-Trend Networks, Inc. held a majority of Cool's total issued and outstanding common shares; E-Trend Networks, Inc. was thereby deemed to be the acquiror. Accordingly, the transaction has been accounted for as a reverse takeover using the purchase method whereby the assets and liabilities of Cool have been recorded at their fair market values and operating results have been included in the company's financial statements from the effective date of purchase. The fair value of the net assets acquired is equal to their book values. The excess of $155,200 of the consideration given over the net assets acquired has been recognized as a capital transaction and charged directly to the deficit.
On December 26th, 2001, an agreement was reached whereby a new organization and management team led by eAngels International would acquire controlling interest in E-Trend Networks, Inc. Effective February 19, 2002, we changed our name to Wilmington Rexford, Inc., in an effort to properly reflect changes in our business focus. Concurrent with the name change, we announced our plans to focus our operations on venture development, a business model predicated on the acquisition, financing, and management of a diverse portfolio of related businesses.
In the first quarter of 2002, in relation to the proposed change in controlling shareholder, we received a debt financing commitment from eAngels International for up to $1,000,000. The notes carried an interest rate of ten percent and have a provision allowing for deferral of interest payments. The notes can be exchanged at any time for WREX common stock. The number of shares issued will be calculated by dividing the principal amount of notes to be exchanged by the exercise price of the common stock. Of the $1,000,000 debt financing commitment, Wilmington Rexford, Inc. utilized $0.00 in the first quarter; $185,000.00 in the second quarter; $194,983.88 in the third quarter; and $292,222.12 in the fourth quarter. The net proceeds were used to increase liquidity, repay debt, and for other general working capital and corporate purposes.
On December 24, 2002, Wilmington Rexford and eAngels International agreed to an exchange of $200,000 of its $731,795.77 aggregate principal amount of outstanding debt securities, in a private placement for WREX common stock. As of the offer on December 24, 2002, $200,000 had been validly tendered and accepted for exchange. This will reduce Wilmington Rexford's total debt by $200,000. On the basis of the current trading price for WREX common stock, 10,000,000 shares were issued to eAngels EquiDebt Partners V, LLC, which is controlled by eAngels International 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 to be issued would represent approximately 66 percent of the WREX common stock on a fully diluted basis.
Following the issuance of approximately 10,000,000 shares to eAngels EquiDebt Partners V, LLC, which is controlled by eAngels International in relation to the conversion of $200,000 in debt securities to WREX common stock, eAngels EquiDebt Partners V, LLC holds a majority of WREX's total issued and outstanding common shares, and is thus deemed our controlling and majority shareholder.
During the year ended September 30, 2002, the Company borrowed $672,206 from eAngels. The notes bear interest at 10% per year and are due on July 1, 2003. For the year ended September 30, 2002, interest expense related to these notes totaled $22,221. These notes are not required to be repaid to the extent that the advances due from related parties, which totaled approximately $250,000 at September 30, 2002 are not collected.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
IMPAIRMENT OF LONG-LIVED ASSETS.
Our long-lived assets include property, equipment and goodwill. We assess impairment of long-lived assets whenever changes or events indicate that the carrying value may not be recoverable. In performing our assessment we must make assumptions regarding estimated future cash flows and other factors to determine the fair value 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
FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001. We experienced a nominal decrease in revenues for the year ended September 30, 2002 as compared to previous fiscal year. The decrease is primarily due to decreased unit sales of the Company's EntertainMe.com website. The decrease, both as a percentage of revenues and in absolute dollars, was primarily attributable to the reduction of the Company's advertising campaign consistent with cost cutting initiatives implemented during earlier periods. Sales for the 2002 fiscal year were $2,014,696, compared to $2,139,804 for the 2001 fiscal year.
Gross profit was $364,767 and $293,032 for the twelve months ended September 30, 2002 and 2001, respectively, representing an increase of 24.5%, respectively. Gross margin increased to 18.1% from 13.7% for the year ended September 30, 2002 as compared to the previous fiscal year. Increases in the absolute dollars of gross profit for the twelve month period correspond with 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 expenses decreased to $1,247,727 for the 2002 fiscal year from $2,378,112 for the 2001 fiscal year, representing 61.9% and 111% of net sales for the corresponding periods, respectively. The decline in absolute dollars of operating expenses for the twelve month period correspond with 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, 2001 period.
Net loss was $1,115,911 and $2,211,204 for the twelve months ended September 30, 2002 and 2001, respectively, a decrease of 49.5%. The improvement in net loss in comparison with the prior year was primarily due to increases in the Company's gross profit margin, and decline in marketing, technology, and administrative-related expenditures.
Although the Company incurred significant losses prior to the Company's announced strategic shift in business model, the Company initiated a restructuring plan in December 2001, instigated by the new management team, which encompassed a series of cost-cutting initiatives. Consistent with our plan, we intended to reduce our marketing budget, our discount program, web site development activities, and technology and operating infrastructure development. Furthermore, a series of operating expenses pertaining to the Company's shift in business model and associated costs have been accounted for, and expensed during the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2002, the Company had a working capital deficit of $609,619 compared to a surplus of $155,169 on September 30, 2001, a decrease of 492% over the comparable period. Our cash and cash equivalents balance was $26,262 and $112,524, a decrease of 76% and our marketable securities balance was $0 and $129,699. The decline in our marketable securities balance is due to the sale of the Company's primary publicly-traded-holding, VHQ Entertainment, Inc., (TSE:VHQ).
Our operations used cash of $587,615 for the 2002 fiscal year, as compared to $1,675, 591 for the previous fiscal period. We also used $8,730 for the purchase of property and equipment, as compared to using $149,405 in fiscal 2001 for the purchase of property and equipment. We received $672,206 from the issuance of Note Debentures during the 2002 fiscal year from our majority shareholder, eAngels International, as compared to having raised $0 during fiscal 2001. In connection with this issuance, we advanced $224,655 to related parties during the fiscal year. It is expected that the company will receive net repayments from the related parties in the amount of $224,655, plus any interest that has accrued during fiscal 2003.
At September 30, 2001, we had a working capital surplus of $155,169 compared to a surplus of $1,908,174 at September 30, 2000. To date, virtually all of our resources have been provided from the sale of common stock or
the issuance of debt through our corporate debentures. At the current rate of expenditure, additional funds from the sale of common stock or debt will have to be secured to enable us to continue to operate.
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 September 30, 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, the Company continues to pursue new debt and/or equity financing opportunities, and is actively expanding its customer base and is currently in process of implementing 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 International, for up to $1,000,000 in the first quarter. As of December 24, 2002, Wilmington Rexford had drawn upon $731,795.77 from the aforementioned eAngels International, Inc. 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.
The Company is also currently in negotiations with a series of funding sources to place a $1,000,000 inventory line of credit for the Company's Langara Distribution subsidiary. The Company believes that the placement of this inventory line of credit would have an immediate, favorable effect on the Company's financial position, as the Company would be able to attract, and service, a larger, and a more diverse set of customers.
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.
To date, virtually all of the company's resources have been provided from the sale of common stock and debt securities. 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 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.
There is no assurance that this financing arrangement will enable us to implement our long-term growth strategy. Our failure to obtain additional financing when needed could result in delay or the indefinite postponement of attaining profitability, and the possible loss of your entire investment.
PLAN OF OPERATION
Prior to the first quarter of 2002, the Company's principal business strategy focused on the distribution of packaged entertainment media, through distribution channels encompassing both online electronic commerce and traditional bricks-and-mortar outlets. The Company operated an online retail website WWW.ENTERTAINME.COM and through its fulfillment and distribution subsidiary, Langara Distribution, the Company offered distribution and fulfillment services to both traditional retail and online merchants.
On December 26th, 2001, an agreement was reached whereby a new organization and management team lead by eAngels International would acquire controlling interest in E-Trend Networks, Inc. Furthermore, January
17th, 2002, the Company announced that it would change its name to Wilmington Rexford, Inc., in an effort to properly reflect changes in the Company's business focus.
Concurrent with the name change, the Company announced that it plans to focus its operations on venture development, a business model predicated on the acquisition, financing, and management of a diverse portfolio of related businesses. The Company will seek to make investments and or acquisitions that meet its portfolio criteria, and then pursue pre-defined strategies to support the operating management in enhancing the value of these businesses.
Wilmington Rexford will employ the following key strategic initiatives:
o explore potential synergies within the Company's current operations by expanding the product portfolio and service lines of its offline distribution and fulfillment business, with that of its online e-commerce business, capitalizing on the Company's existing Business-to-Business e-commerce capabilities, as well as the Company's unique capacity to combine product supply and technology infrastructure;
o identify profitable middle market businesses whose enterprise value can be enhanced through the adoption of an e-commerce strategy and other technologies, the implementation of innovative business practices, the addition of experienced industry specific management, and through other traditional means of increasing efficiency and profitability;
o optimize current investments, and subsidiary companies, through operational improvements, by stimulating sales growth; redeploying marketing resources; improving productivity; effectively managing working capital; reducing costs; exploring portfolio synergies within our Company; and establishing results-driven incentive plans;
o explicitly focus on improving Return on Capital (ROC) as a management goal alongside EPS and cash flow growth;
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.
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.
The e-commerce sales and distribution of filmed entertainment and music is very competitive. We face a number of competitors, with competition existing on a global basis. The main competitive factors are availability, price and service. Management continues to review and assess our competitors, and is continually vigilant to industry trends.
Within our current operations, which include our ecommerce segment, and our distribution segment, we will continue to seek strategic alliances and acquisitions that will complement our existing business and overall corporate strategy as expressed in our business plan. Furthermore, we believe we are poised to implement key strategic initiatives that will include:
o increasing the number of music titles carried in Langara's inventory, o adding DVD and key VHS titles to the Langara product mix, o amending movie purchasing agreements to reduce product cost, o improving the data model and overall scalability of the e-commerce engine, o improving site capacity to seamlessly manage the planned increase in site traffic and sales volumes, o merging our three internet sites (MovieSource.com, VHQMusic.com and EntertainMe.com) into one brandable entertainment-focused supersite {EntertainMe.com (and EntertainMe.ca in Canada)}, o initiating new online marketing campaigns, o implementing new software to enable seamless B2B2C (Business to Business to Consumer) applications, o increasing offline internal sales efforts through the addition of sales personnel, trade show representation, and marketing campaigns, o obtaining new equity capital, and o adding strategic alliances to expand the reach of entertainment products.
As of September 30, 2002, we had a working capital deficit of $609,619.
As a result, we will need external financing to implement our plan of operations. Concurrent with the Company's change in controlling shareholder, the Company received a debt financing commitment from eAngels International, Inc., for up to $1,000,000 in the first quarter. As of December 24, 2002, Wilmington Rexford had drawn upon $731,795.77 from the aforementioned eAngels International, Inc. 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.
The Company is currently in negotiations with a series of funding sources to place a $1,000,000 inventory line of credit for the Company's Langara Distribution subsidiary. The Company believes that the placement of this inventory line of credit would have an immediate, favorable effect on the Company's financial position, as the Company would be able to attract, and service, a larger, and a more diverse set of customers.
To date, virtually all of the company's resources have been provided from the sale of common stock and debt securities. 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 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.
There is no assurance that this financing arrangement will enable us to implement our long-term growth strategy. Our failure to obtain additional financing when needed could result in delay or the indefinite postponement of attaining profitability, and the possible loss of your entire investment.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB, as well as statements made by the company in periodic press releases, oral statements made by the company's officials to analysts and shareholders in the course of presentations about the company, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Such factors include, among other things, (1) general economic and business conditions; (2) interest rate changes; (3) the relative stability of the debt and equity markets; (4) competition; (5) demographic changes; (6) government regulations particularly those related to Internet commerce; (7) required accounting changes; (8) equipment failures, power outages, or other events that may interrupt Internet communications; (9) disputes or claims regarding the company's proprietary rights to its software and intellectual property; and (10) other factors over which the company has little or no control.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
See pages beginning with page.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
At a shareholders' meeting held January 26, 2001, the shareholders of E-Trend Networks, Inc., then a private Nevada corporation, approved the election of KPMG LLP to audit the financial statements for the fiscal year ended September 30, 2001. Our Board of Directors recommended KPMG LLP because that firm was our existing certifying accountant, which then became the parent company of E-Trend Networks due to the acquisition described above. We did not consult KPMG regarding the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on our financial statements.
Ernst & Young LLP had audited the financial statements of E-Trend Networks for the fiscal year ended September 30, 2000. The report of Ernst & Young did not contain an adverse opinion or disclaimer of opinion and was not modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Ernst & Young, would have caused it to make reference to the subject matter of the disagreement in connection with its report.
On May 1, 2002, our Directors announced the appointment of Kaufman, Rossin & Co., P.A. to audit the financial statements for the fiscal year ended September 30, 2002. The decision to change auditors was based upon financial considerations. During the two most recent fiscal years and the subsequent interim period, neither we nor anyone on our behalf consulted Kaufman, Rossin & Co., P.A. regarding the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on our financial statements.
The audit report of KPMG LLP on our financial statements as of and for the fiscal year ended September 30, 2001 did not contain an adverse opinion or disclaimer of opinion and was not modified as to uncertainty, audit scope, or accounting principles, except as follows:
The audit report of KPMG LLP on our financial statements as of and for the fiscal year ended September 30, 2001 contained a separate paragraph stating: "The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has suffered substantial losses and negative operating cash flow, which circumstance raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this circumstance are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty."
During our two most recent fiscal years and the subsequent interim period ending May 1, 2002, there were no disagreements between us and KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of KPMG LLP, would have caused that firm to make reference to the subject matter of the disagreement in connection with its audit report. We requested KPMG LLP to furnish a letter addressed to the Commission stating whether it agreed with the above statements. A copy of that letter, dated May 1, 2002, was filed as Exhibit 16.1 a Form 8-K dated May 1, 2002.
There were no other "reportable events" as that term is described in Item 304a(1)(v) of Regulation S-K occurring within our two most recent fiscal years and the subsequent interim period ending May 1, 2002
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Our executive officers and directors are:
NAME AGE POSITION Garrett K. Krause 36 Chairman of the Board & Chief Executive Officer Robert G. Taylor 25 Director, President and Chief Financial Officer Sean L. Krause 32 Director, Vice President and Corporate Secretary Bob Duszynski 36 President, Langara Distribution, Inc.
Our directors are elected annually by our shareholders and our officers are appointed annually by our board of directors. Vacancies in our board are filled by the board itself. Set forth below are brief descriptions of the recent employment and business experience of our executive officers and directors.
GARRETT K. KRAUSE, CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER.
Mr. Krause was recently appointed as our Chairman & CEO on January 10, 2003. Since 1992, Mr. Krause has also been the Founder, and Managing Director of eAngels International, an angel investor network, based in Miami, Florida, where investors can come together to launch, invest in, and grow viable business concepts into industry-leading organizations. eAngels International played a principal role in the founding of Wilmington Rexford and continues to participate in the investment in the real estate, financial services, media, entertainment, and technology industries. Mr. Krause studied finance at University of Calgary before starting his private investment and entrepreneurial ventures. During his tenure at Wilmington Rexford, and at eAngels, Mr. Krause's responsibilities encompassed various areas of management operations, merchant and investment banking, venture capital, and corporate finance.
ROBERT G. TAYLOR, PRESIDENT AND CHIEF FINANCIAL OFFICER.
Mr. Taylor has been our President and a director since January 2002. From November, 2001 to May, 2002, Mr. Taylor served as the President & CEO of Tec Factory, Inc., a Fort Lauderdale, Florida, based full-service infrastructure and facilities provider, delivering completely integrated services to expansion stage and emerging-growth companies. Mr. Taylor earned a Bachelor of Science and Masters in Business Administration from Loyola Marymount University in 2002 and is currently pursuing his Masters of Science in Financial Engineering at Claremont Graduate University. During his tenure at Wilmington Rexford, Inc., and at Tec Factory, Inc., Mr. Taylor's responsibilities encompassed various areas of management operations, business development and planning, financial, public and investor relations, and merchant and investment banking.
SEAN L. KRAUSE, VICE PRESIDENT.
Mr. Sean Krause has been our Executive Vice President of Business Development and Corporate Secretary since January 2002. From January, 1995 to January, 2003, Mr. Sean Krause served as the President of FutureVest Corporation, an international venture capital and investment company, with principal operations in Miami, Florida. In addition to his duties at Wilmington Rexford, Mr. Sean Krause also serves on the board of directors of eAngels International, which he joined in February 2002. In 2001, Mr. Krause earned a Bachelors degree from Malaspina University in British Columbia, Canada. During his operational tenure at FutureVest, Inc., and at Wilmington Rexford, Inc., Mr. Sean Krause's responsibilities encompassed various areas of management operations, marketing, business and operational planning.
BOB DUSZYNSKI, PRESIDENT OF LANGARA DISTRIBUTION.
Mr. Duszynski has been the President of Langara Distribution, Inc. since October, 2002. Prior to his appointment to the Presidency of Langara Distribution, Mr. Duszynski was the Vice President of Operations from April, 2000, to October, 2002. Prior to his appointment at Langara Distribution, Mr. Duszynski was the Manager of Operations and Purchasing for Diz Investments, Ltd., a music retail chain in Alberta, Calgary from 1984 to 2000. In his capacity as the Vice President of Operations at Langara Distribution, Mr. Duszynski was responsible for growing the size, loyalty and profitability of the customer base, focusing on relationship marketing, customer experience and market intelligence. Mr. Duszynski is a founding member of Langara Distribution, Inc. During his operational tenure at Langara Distribution and at Diz Investments, Ltd., Mr. Duszynski's responsibilities encompassed various areas of product selection and procurement, merchandising, fulfillment, marketing, sales, and management operations.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. Insofar as the officers and directors are engaged in other business activities, we anticipate they will devote only a minor amount of time to our affairs.
Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to us. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.
We do not have any standing audit, nominating, or compensation committees of our board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
During the fiscal year ended September 30, 2002, the following persons were required to file reports under Section 16(a) of the Securities Exchange Act of 1934:
- -------------------------------------------------------------------------------- REPORTING PERSON DATE REPORT DUE DATE REPORT FILED - -------------------------------------------------------------------------------- Robert G. Taylor Form 3 due 01/28/02 12/24/02 - -------------------------------------------------------------------------------- Sean L. Krause Form 3 due 01/28/02 01/13/03 - -------------------------------------------------------------------------------- Garrett K. Krause Form 3 due 12/24/02 12/27/02 - --------------------------------------------------------------------------------
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information the remuneration of our chief executive officers for the last three completed fiscal years.
We reimburse our officers and directors for reasonable expenses incurred during the course of their performance. Although we offer a standard medical plan, we have no longer-term incentive or compensation plans. We anticipate offering some form of incentive-based monetary compensation in the future.
STOCK OPTION PLANS
On January 26, 2001, our shareholders adopted a stock option plan, under which an aggregate of 4,000,000 shares of common stock are reserved for issuance pursuant to the exercise of stock options. These options may be granted to our employees, officers, directors, and consultants. We may also make awards of restricted stock under this plan. Shares issued under this plan are "restricted" in the sense that they are subject to repurchase by us at cost during the vesting period. The options issued under our previous 2001 option plan were assumed under our new stock option plan.
The plan is designed to (i) induce qualified persons to become employees, officers, or directors of us; (ii) reward such persons for past services to us; (iii) encourage such persons to remain in our employ or associated with us; and (iv) provide additional incentive for such persons to put forth maximum efforts for the success of our business. Transactions under the plan are intended to comply with all applicable provisions under the Securities Exchange Act of 1934. This plan will remain in effect until December 22, 2010, unless soon terminated by the Board of Directors.
Our board of directors administers the plan and determines: o who will be granted options or awards; o when options or awards will be granted; o the number of options or shares to be granted; o which options may be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, versus non-qualified options which are not intended to so qualify; o the time or times when each option becomes exercisable; o the duration of the exercise period for options; o the form or forms of the instruments evidencing options or awards granted under the plan; o the purchase price of the shares issued under the plan; o the period or periods of time during which we will have a right to repurchase the shares; and o the terms and conditions of such repurchase.
The board may adopt, amend, and rescind such rules and regulations as in its opinion may be advisable for the administration of the plan. It may amend the plan without shareholder approval where such approval is not required to satisfy any statutory or regulatory requirements. The board also may construe the plan and the provisions in the instruments evidencing options granted under the plan to employee and officer participants. The board has the power to make all other determinations deemed necessary or advisable for the administration of the plan. The board may not adversely affect the rights of any participant without the consent of such participant.
The plan contains provisions for proportionate adjustment of the number of shares for outstanding options and the option price per share in the event of stock dividends, recapitalizations resulting in stock splits or combinations or exchanges of shares.
The board may select participants in the plan from employees and officers of us and our subsidiaries and consultants to us and our subsidiaries. In determining the persons to whom options and awards will be granted and the number of shares to be covered by each option, the board will take into account the duties of the respective persons, their present and potential contributions to our success, and such other factors as the board deems relevant to accomplish the purposes of the plan.
STOCK OPTIONS. Only employees of us and our subsidiaries, as the term "employee" is defined for the purposes of the Internal Revenue Code will be entitled to receive incentive stock options. The option price of any incentive stock option may be not less than 100% of the fair market value per share on the date of grant of the option; provided, however, that any incentive stock option granted under the plan to a person owning more than ten percent of the total combined voting power of the common stock will have an option price of not less than 110% of the fair market value per share on the date of grant of the incentive stock option. The exercise period of options granted under the plan may not exceed ten years from the date of grant thereof. Incentive stock options granted to a person owning more than ten percent of the total combined voting power of our common stock will be for no more than five years. Except in the case of options granted to disinterested directors who administer the plan, the board
will have the authority to accelerate or extend the exercisability of any outstanding option at such time and under such circumstances as it, in its sole discretion, deems appropriate. However, no exercise period may be extended to increase the term of the option beyond ten years from the date of the grant.
An option may not be exercised unless the optionee then is an employee, officer, or consultant of us or our subsidiaries, and unless the optionee has remained continuously as an employee, officer, or consultant since the date of grant of the option. If the optionee ceases to be an employee, officer, or consultant other than by reason of death, disability, or for cause, all options granted to such optionee, fully vested to such optionee but not yet exercised, will terminate three months after the date the optionee ceases to be an employee, officer or consultant. All options that are not vested to an optionee, under the conditions stated in this paragraph for which employment ceases, will immediately terminate on the date the optionee ceases employment or association.
If an optionee dies while an employee, officer or consultant, or if the optionee's employment, officer, or consultant status terminates by reason of disability, all options theretofore granted to such optionee, whether or not otherwise exercisable, unless earlier terminated in accordance with their terms, may be exercised at any time within one year after the date of death or disability of said optionee, by the optionee or by the optionee's estate or by a person who acquired the right to exercise such options by bequest or inheritance or otherwise by reason of the death or disability of the optionee.
Options granted under the plan are not transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. Options may be exercised, during the lifetime of the optionee, only by the optionee and thereafter only by his legal representative. An optionee has no rights as a shareholder with respect to any shares covered by an option until the option has been exercised.
Unless otherwise specified in an optionee's agreement, options granted under the plan will become vested with the optionee over the course of four years from date of grant under the following schedule: 25% upon the first anniversary of the option grant and the remaining 75% monthly over the following 36 months.
RESTRICTED STOCK AWARDS. Shares issued under the plan will be evidenced by a written restricted stock purchase agreement between us and the participant. Shares issued under the plan are transferable only if the transferee agrees to be bound by all of the terms of the plan, including our right to repurchase the shares, and only if such transfer is permissible under federal and state securities laws. To facilitate the enforcement of the restrictions on transfer, the board may require the holder of the shares to deliver the certificate(s) for such shares to be held in escrow during the period of restriction.
Unless otherwise specified in a participant's agreement, awards of shares issued under the plan will become vested with the participant over the course of four years from date of grant under the following schedule: 25% upon the first anniversary of the grant and the remaining 75% monthly over the following 36 months.
OUTSTANDING OPTIONS. As of September 30, 2002, there were 9,000 stock options left under this plan and an additional 300,000 options outside this plan.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides certain information as to the officers and directors individually and as a group, and the holders of more than 5% of the Common Stock of the Company, as of December 31, 2002:
Mr. Garrett Krause may be deemed to be the "parent" of our company within the meaning of the rules and regulations of the Securities and Exchange Commission.
CHANGES IN CONTROL
There are no agreements known to management that may result in a change of control of our company.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, none of our present directors, officers or principal shareholders, nor any family member of the foregoing, nor, to the best of our information and belief, any of our former directors, senior officers or principal shareholders, nor any family member of such former directors, officers or principal shareholders, has or had any material interest, direct or indirect, in any transaction, or in any proposed transaction which has materially affected or will materially affect us.
EANGELS INTERNATIONAL
In the first quarter of 2002, in relation to the change in controlling shareholder, we received a debt financing commitment from eAngels International for up to $1,000,000. Of the $1,000,000 debt financing commitment, Wilmington Rexford, Inc. utilized $0.00 in the first quarter; $185,000.00 in the second quarter; $194,983.88 was in the third quarter; and $292,222.12 in the fourth quarter. The net proceeds were used to increase liquidity, repay debt, and for other general working capital corporate purposes. The notes carried an interest rate of ten percent and have a provision allowing for deferral of interest payments. The notes can be exchanged at any time for WREX common stock. The number of shares issued will be calculated by dividing the principal amount of notes to be exchanged by the exercise price of the common stock.
Garrett K. Krause is the founder and managing director of eAngels International and Manager or eAngels EquitDebt Partners V, LLC.
On December 24, 2002, Wilmington Rexford and eAngels International agreed to exchange $200,000 of its $731,795.77 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 will reduce Wilmington Rexford's total debt by over $200,000. On the basis of the current trading price for WREX 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.
LOANS TO OTHER ENTITIES
We have made loans to entities owned and/or controlled by Garrett K. Krause or Sean L. Krause as follows:
(1) All loans have been secured for repayment by eAngels International as an offset from the outstanding Debentures. These loans have all been extended through September 30, 2003.
(2) These loans were made to these related entities to advance the company according to the new business model established in February of 2002 whereby Wilmington Rexford has adopted a new Venture Development business strategy to help young companies in hopes of further funding, acquisition or participation in the resulting company.
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------------- REGULATION S-B NUMBER EXHIBIT - -------------------------------------------------------------------------------- 2.1 Agreement and Plan of Share Exchange (1) - -------------------------------------------------------------------------------- 3.1 Certificate of Incorporation, as amended (2) - -------------------------------------------------------------------------------- 3.2 Bylaws (2) - -------------------------------------------------------------------------------- 10.1 Amended and Restated Investment Agreement with Swartz Private Equity, LLC (2) - -------------------------------------------------------------------------------- 10.2 Amended and Restated Registration Rights Agreement with Swartz Private Equity, LLC (2) - -------------------------------------------------------------------------------- 10.3 Amended Warrant to Purchase Common Stock issued to Swartz Private Equity, LLC (2) - -------------------------------------------------------------------------------- 10.4 Proposed Form of Video One Canada Ltd. Business Agreement with Langara Distribution (2)(3) - -------------------------------------------------------------------------------- 10.5 Debentures issued to eAngels International - -------------------------------------------------------------------------------- 10.6 Promissory Note from WorldVest Holding Corporation - -------------------------------------------------------------------------------- 10.7 Promissory Note from FutureVest Corporation - -------------------------------------------------------------------------------- 10.8 Promissory Note from South Beach Partners, LLC/South Beach Entertainment - -------------------------------------------------------------------------------- 10.9 Promissory Note from WSY Limited, Inc. - -------------------------------------------------------------------------------- 10.10 Promissory Note from TransJet.com/Wild Toyz - -------------------------------------------------------------------------------- 10.11 Guaranty from eAngels International dated December 12, 2002 - -------------------------------------------------------------------------------- 21 Subsidiaries of the registrant (2) - -------------------------------------------------------------------------------- 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - --------------------------------------------------------------------------------
- ----------------
(1) Incorporated by reference to the exhibits to the registrant's definitive proxy statement filed January 2, 2001. (2) Incorporated by reference to the exhibits to 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.
Reports on Form 8-K: None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WILMINGTON REXFORD, INC.
Date: January 13, 2003 By: /s/ GARRETT KRAUSE --------------------- ----------------------------------------- Garrett Krause, Chairman / CEO
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATION
I, Garrett K. Krause, certify that:
1. I have reviewed this annual report on Form 10-KSB of Wilmington Rexford, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: January 13, 2003
/s/ GARRETT K. KRAUSE ------------------------------------------ Chairman of the Board and CEO (principal executive officer and principal financial officer)
WILMINGTON REXFORD, INC. AND SUBSIDIARIES F/K/A E-TREND NETWORKS, INC. - --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
INDEPENDENT AUDITORS' REPORT - --------------------------------------------------------------------------------
To the Board of Directors and Stockholders Wilmington Rexford, Inc. (f/k/a E-Trend Networks, Inc.) Miami Beach, Florida
We have audited the accompanying consolidated balance sheet of Wilmington Rexford, Inc. and Subsidiaries (f/k/a E-Trend Networks, Inc.) as of September 30, 2002, and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wilmington Rexford, Inc. and Subsidiaries (f/k/a E-Trend Networks, Inc.) as of September 30, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has incurred substantial losses and negative cash flows from operations since inception. In the absence of achieving positive cash flows from operations or obtaining additional debt or equity financing, the Company may have difficulty meeting obligations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans are also discussed in Note 2. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company can not continue in existence.
/s/ KAUFMAN, ROSSIN & CO.
KAUFMAN, ROSSIN & CO., P.A.
Miami, Florida December 27, 2002
KPMG
KPMG LLP CHARTERED ACCOUNTANTS 1200 205-5th Avenue SV Telephone (403) 691-8000 Calgary AB T2P 4B9 Telefax (403) 691-8008 www.kpmg.ca
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Wilmington Rexford, Inc. (formerly E-Trend Networks, Inc.)
We have audited the consolidated statements of operations and comprehensive loss, changes in stockholders' equity and cash flows of E-Trend Networks, Inc. for the year ended September 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of E-Trend Networks, Inc. and its subsidiary company for the year ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has suffered substantial losses and negative operating cash flow, which circumstance raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this circumstance are also described in note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chartered Accountants Calgary, Canada November 8, 2001
WILMINGTON REXFORD, INC. AND SUBSIDIARIES F/K/A E-TREND NETWORKS, INC. CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2002
See accompanying notes.
WILMINGTON REXFORD, INC. AND SUBSIDIARIES F/K/A E-TREND NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS YEARS ENDED SEPTEMBER 30, 2002 AND 2001
See accompanying notes.
WILMINGTON REXFORD, INC. AND SUBSIDIARIES F/K/A E-TREND NETWORKS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2002 AND 2001
See accompanying notes.
WILMINGTON REXFORD, INC. AND SUBSIDIARIES F/K/A E-TREND NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2002 AND 2001
See accompanying notes.
WILMINGTON REXFORD, INC. AND SUBSIDIARIES F/K/A E-TREND NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ - -------------------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------------------------------------
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Wilmington Rexford, Inc. (Parent), 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.
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.
- -------------------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - --------------------------------------------------------------------------------
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.
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 September 30, 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 from related party in the event of non performance. At September 30, 2002, the fair value approximates the carrying value.
- -------------------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - --------------------------------------------------------------------------------
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 is being amortized on a straight-line basis over 10 years.
The Company continuously evaluates whether events have occurred or circumstances exist which impact the recoverability of the carrying value of long-lived assets and related goodwill, pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
CONCENTRATION OF REVENUE
Revenues from VHQ Entertainment, Inc. (VHQ), a former shareholder, accounted for approximately 42% and 49% of total revenue for the years ended September 30, 2002 and 2001, respectively. In addition, another customer accounted for approximately 16% of revenue for the year ended September 30, 2002.
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. Pro forma disclosures of net income and earnings per share have been made in accordance with SFAS 123.
- -------------------------------------------------------------------------------- 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.
- -------------------------------------------------------------------------------- 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.
In August 2001, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations", effective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets", effective for fiscal years beginning after December 15, 2001. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". This statement, among other things, eliminates an inconsistency between required accounting for certain sale-leaseback transactions and provides other technical corrections.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3. This statement is effective for exit or disposal costs initiated after December 31, 2002, with early adoption encouraged.
The Company has not yet determined what the effects of these Statements will be on its financial position and results of operations.
- -------------------------------------------------------------------------------- NOTE 2. GOING CONCERN - --------------------------------------------------------------------------------
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 September 30, 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.
- -------------------------------------------------------------------------------- NOTE 3. BUSINESS COMBINATION - --------------------------------------------------------------------------------
COOL ENTERTAINMENT, INC.
Effective February 21, 2001, an arrangement was completed between the Parent and Cool Entertainment, Inc. (Cool) whereby the Company's stockholders exchanged all of their common shares for 4,439,371 common shares of Cool. In connection with the transaction the Company also acquired associated assets for cash and common shares.
Following the acquisition, the former shareholders of the Company held a majority of the total issued and outstanding common shares of Cool; the Company was thereby deemed to be the acquirer. Accordingly, the transaction has been accounted for as a reverse-take-over using the purchase method whereby the assets and liabilities of Cool have been recorded at their fair market values and the operating results of Cool have been included in the Company's financial statements from the effective date of the purchase. The fair values of the net assets acquired is equal to their book values.
As Cool was a non-operating public shell at the time of the combination, no goodwill has been recognized and the excess of the consideration paid over the fair value of the identifiable assets acquired has been charged to stockholders' equity.
- -------------------------------------------------------------------------------- NOTE 3. BUSINESS COMBINATION (Continued) - --------------------------------------------------------------------------------
Net book value of assets acquired: Property and equipment of Cool, at book value $ 10,940 Assets acquired in associated transactions 68,000 Less working capital deficiency ( 72,351) -----------------------------------------------------------------------
$ 6,589 =======================================================================
Assigned value of 4,439,371 common shares issued in exchange for common shares issued in exchange for common shares of Cool $ - Settlement of liability assumed by the issue of 25,000 common shares 93,789 Issue of 15,000 common shares on the acquisition of associated assets 45,000 Cash paid on the acquisition assets 23,000 ----------------------------------------------------------------------- 161,789 Less excess of consideration given over net book value of assets acquired ( 155,200) -----------------------------------------------------------------------
$ 6,589 =======================================================================
Costs of $145,000 related to the acquisition were charged to operations as they were in excess of the cash received on the business combination.
Other transactions relating to the foregoing arrangement, and integral thereto, were as follows:
1. Change of the Company's name from Cool Entertainment, Inc. to E-Trend Networks, Inc.;
2. Re-domestication of the Company to the State of Delaware from the State of Nevada;
3. Reverse stock split of 1-for-100 common shares;
4. Continuance, on a equivalent basis, of all of the unexpired and unexercised outstanding stock options and warrants of the former E-Trend company under the same terms and conditions;
5. Cancellation of all of the outstanding warrants of Cool;
6. Settlement of a note payable of $93,789 to Fictional Media, Inc., a company controlled by stockholders of Cool, by way of the issuance of 25,000 common shares; and
7. Cash payment of $23,000 and the issuance of a promissory note of $45,000 by the Parent to Fictional Media, Inc. in exchange for property and equipment, subsequently settled by way of the issuance of 15,000 common shares.
- -------------------------------------------------------------------------------- NOTE 4. PROPERTY AND EQUIPMENT - --------------------------------------------------------------------------------
Property and equipment consisted of the following:
September 30, =======================================================================
Computer software $ 259,111 Computer hardware 120,528 Furniture and fixtures 33,117 Leasehold improvements 43,776 ----------------------------------------------------------------------- 456,532 Less accumulated depreciation and amortization ( 194,773) -----------------------------------------------------------------------
$ 261,759 =======================================================================
Depreciation and amortization expense relating to property and equipment totaled $95,569 and $71,647 for the years ended September 30, 2002 and 2001.
- -------------------------------------------------------------------------------- NOTE 5. 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 September 30, 2001, the Company owned 99,900 common shares of VHQ. On September 30, 2002, the Company sold this investment at a loss of $118,320 to an entity that is controlled by the majority shareholder of the Company in exchange for a note in the amount of $25,345.
NOTES PAYABLE STOCKHOLDER
During the year ended September 30, 2002, the Company borrowed $672,206 from eAngels. The notes bear interest at 10% per year and are due on July 1, 2003. For the year ended September 30, 2002, interest expense related to these notes totaled $22,221. These notes are not required to be repaid to the extent that the advances due from related parties discussed below are not collected.
- -------------------------------------------------------------------------------- NOTE 5. RELATED PARTY TRANSACTIONS (Continued) - --------------------------------------------------------------------------------
ADVANCES DUE FROM RELATED PARTIES
During the year ended September 30, 2002, the Company advanced $250,000 to various entities controlled by the majority shareholder of the Company. These advances bear interest at 10% per year. For the year ended September 30, 2002, interest income related to these advances totaled $16,248.
- -------------------------------------------------------------------------------- NOTE 6. INCOME TAXES - --------------------------------------------------------------------------------
The components of income taxes were as follows:
2002 2001 =======================================================================
Income Tax Benefit
Income tax benefit at combined statutory rate of 42.62% $ 475,600 $ 942,415 Change in Valuation Allowance ( 475,600) ( 942,415) -----------------------------------------------------------------------
Income Tax Benefit $ - $ - =======================================================================
The income tax benefit for the years ended September 30, 2002 and 2001, differed from the combined federal and provincial statutory rates due principally to the increase in the deferred tax asset valuation allowance.
At September 30, 2002, the approximate deferred tax assets were as follows:
Non-capital loss carryforwards $ 1,418,000 Capital assets 47,000 ----------------------------------------------------------------------- Total deferred tax assets 1,465,000 Less valuation allowance ( 1,465,000 ) -----------------------------------------------------------------------
$ - =======================================================================
- -------------------------------------------------------------------------------- NOTE 7. STOCK OPTIONS - --------------------------------------------------------------------------------
The Company is authorized to grant options to employees, officers and directors, to purchase up to 4,000,000 common shares. Stock option activity for the year ended September 30, 2002 was as follows:
Number of Weighted Average Options Exercise Price -----------------------------------------------------------------------
Balance, September 30, 2000 1,438,000 $ 1.99 Forfeited during the year ( 996,500) $ 1.99 -----------------------------------------------------------------------
Balance, September 30, 2001 441,500 $ 1.93 Granted during the year - $ - Forfeited during the year ( 132,500) $ 3.96 ----------------------------------------------------
Balance, September 30, 2002 309,000 $ 1.06 ====================================================
Exercisable, September 30, 2002 309,000 $ 1.06 ====================================================
The following table summarizes information about stock options outstanding at September 30, 2002:
Weighted Average Remaining Number of Contractual Exercise Price Options Life (Years) --------------------------------------------------------
$ 1.00 300,000 8.62 $ 2.00 4,000 2.25 $ 4.00 5,000 2.25 ------------
309,000 ============
As there were no option grants during the years ended September 30, 2002 or 2001, therefore, presenting the pro forma consolidated results of operations of the Company as though the fair value based accounting method in SFAS 123 had been used in accounting for stock options is not applicable
- -------------------------------------------------------------------------------- NOTE 8. LEASE COMMITMENTS - --------------------------------------------------------------------------------
LEASES
The Company leases office and certain computer equipment under various non-cancelable operating leases. Approximate future minimum payments under these leases for the years subsequent to September 30, 2002, are as follows:
2003 $ 29,000 2004 20,000 2005 4,000 -----------------------------------------------------------------------
Total $ 53,000 =======================================================================
Rent expense for facilities and computer equipment for the year ended September 30, 2002 and 2001 totaled approximately $66,000 and $75,000, respectively.
- -------------------------------------------------------------------------------- NOTE 9. BUSINESS SEGMENT INFORMATION - --------------------------------------------------------------------------------
Principally all operations of E-Trend and Langara are conducted in Canada. Information about operating segments is as follows:
- -------------------------------------------------------------------------------- NOTE 10. SUBSEQUENT EVENT - --------------------------------------------------------------------------------
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