SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 29, 1998
ICON CMT CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-23477 13-3603128
--------------------------- ----------- ---------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File No.) Identification No.)
1200 Harbor Boulevard, Weehawken New Jersey 07087
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (201) 601-2000
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. Other Events
Attached hereto as Exhibit 99.1 are the registrant's audited
consolidated financial statements for the year ended December 31, 1997, which
have been restated for the registrant's acquisition of Frontier Media Group,
Inc., a Pennsylvania corporation, on May 27, 1998.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
Exhibit
No. Description
------- -----------
99.1 Consolidated financial statements of the registrant as
of December 31, 1997
-2-
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 29, 1998
ICON CMT CORP.
By: /s/ Kenneth J. Hall
-------------------------
Kenneth J. Hall
Senior Vice President,
Chief Financial Officer
and Treasurer
-3-
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Description No.
- -------- ------------ ----
99.1 Consolidated financial statements of the registrant as of
December 31, 1997
-4-
<TABLE>
<CAPTION>
Icon CMT Corp.
Index to Consolidated Financial Statements
Page
<S> <C>
Report of PricewaterhouseCoopers LLP............................................................. F-2
Report of Ernst & Young LLP...................................................................... F-3
Consolidated Balance Sheet as of December 31, 1996 and 1997...................................... F-4
Consolidated Statement of Operations for the years ended December 31, 1995,
1996 and 1997............................................................................... F-5
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997...................................................... F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1995,
1996 and 1997............................................................................... F-7
Notes to Consolidated Financial Statements....................................................... F-8
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Icon CMT Corp.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Icon CMT
Corporation and its subsidiaries at December 31, 1996 and 1997, and the results
of their operations and their cash flows for the years ended December 31, 1995,
1996 and 1997 in conformity with generally accepted accounting principles. 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 audits. We did not audit the financial statements of Frontier Media Group,
Inc. as of and for the years ended December 31, 1996 and 1997, which statements
reflect total assets of $1,264 and $1,723 at December 31, 1996 and 1997,
respectively, and total revenues of $4,596 and $5,344 for the years ended
December 31, 1996 and 1997, respectively. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Frontier
Media Group, Inc. as of and for the years ended December 31, 1996 and 1997, is
based solely on the report of the other auditors. We conducted our audits of the
consolidated financial statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Stamford, Connecticut
March 6, 1998, except as to the acquisition and restatement described in Note 2,
which is as of September 30, 1998
F-2
<PAGE>
Report of Independent Auditors
The Stockholders
Frontier Media Group, Inc.
We have audited the balance sheets of Frontier Media Group, Inc. as of December
31, 1997 and 1996, and the related statements of income, stockholders' equity,
and cash flows for the years then ended (not presented separately herein). 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frontier Media Group, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania /s/ Ernst & Young LLP
February 14, 1998
F-3
<PAGE>
ICON CMT CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------ ------------
(In thousands, except
share amounts)
ASSETS
<S>
Current assets: <C> <C>
Cash and cash equivalents $ 722 $ 1,410
Accounts receivable, net of allowance for
doubtful accounts of $442, and $455, respectively 8,080 10,237
Unbilled costs and accrued earnings 265 1,119
Notes receivable 167 178
Inventories 92 104
Prepayments and other current assets 752 1,379
Deferred financing costs - 824
Deferred tax asset 430 -
------------ ------------
Total current assets 10,508 15,251
Fixed assets, net 3,956 6,675
Other assets 92 231
------------ ------------
Total assets $ 14,556 $ 22,157
============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 6,808 $ 9,124
Accrued expenses 2,523 4,542
Short-term borrowings 2,294 1,000
Deferred revenue 587 658
------------ ------------
Total current liabilities 12,212 15,324
Deferred tax liability 155 -
------------ ------------
Total liabilities 12,367 15,324
------------ ------------
Commitments (Note 14)
Mandatorily redeemable 10% PIK Series B Convertible Participating
Preferred Stock ($.01 par value; 415,000 shares authorized, none
issued and outstanding in 1996, 180,240 shares issued and outstanding
in 1997)
(liquidation preference of $18,866 at December 31, 1997) - 16,628
Mandatorily redeemable Series A Convertible Participating Preferred Stock
($.01 par value; 450,000 shares authorized, 422,607 issued and
outstanding in 1996 and 1997)
(liquidation preference of $10,401
and $10,993, respectively) 9,881 10,601
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized) Common - -
stock ($.001 par value; 50,000,000 shares authorized,
7,273,779 shares issued and outstanding in 1996 and 1997)
Additional paid-in-capital 58 533
Accretion of mandatorily redeemable preferred stock (89) (388)
Accumulated deficit (7,669) (20,549)
------------ ------------
Total stockholders' deficit (7,692) (20,396)
------------ ------------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' deficit $ 14,556 $ 22,157
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
ICON CMT CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
-------------- ------------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues, net:
Services:
Professional $ 6,388 $ 11,166 $ 22,484
Communications 189 1,268 5,979
Media 202 529 89
-------------- ------------- --------------
Total services revenues 6,779 12,963 28,552
-------------- ------------- --------------
Products 21,424 29,741 23,769
-------------- ------------- --------------
Total revenues, net 28,203 42,704 52,321
-------------- ------------- --------------
Cost of revenues:
Services 3,798 9,213 19,919
Products 17,653 24,607 19,401
-------------- ------------- --------------
Total cost of revenues 21,451 33,820 39,320
-------------- ------------- --------------
Gross profit 6,752 8,884 13,001
-------------- ------------- --------------
Operating expenses:
General and administrative 2,863 7,645 11,826
Sales and marketing 3,782 7,184 10,849
Research and development 411 969 1,347
Depreciation and amortization 241 493 1,024
-------------- ------------- --------------
Total operating expenses 7,297 16,291 25,046
-------------- ------------- --------------
Loss from operations (545) (7,407) (12,045)
-------------- ------------- --------------
Other income (expense):
Interest income 16 126 111
Interest expense (91) (93) (376)
-------------- ------------- --------------
Total other income (expense) (75) 33 (265)
-------------- ------------- --------------
Loss before income taxes (620) (7,374) (12,310)
-------------- ------------- --------------
Provision (benefit) for income taxes (183) (210) 256
-------------- ------------- --------------
Net loss $ (437) $ (7,164) $ (12,566)
============== ============= ==============
Basic loss per share and diluted loss per share $ (0.06) $ (1.06) $ (1.90)
============== ============= ==============
Weighted average shares outstanding used for
basic loss per share and diluted loss per share 7,274 7,274 7,274
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
ICON CMT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCRETION OF
MANDATORILY RETAINED TOTAL
COMMON STOCK ADDITIONAL REDEEMABLE EARNINGS STOCKHOLDERS'
------------------- PAID-IN PREFERRED (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL STOCK DEFICIT) (DEFICIT)
------------ ---------- ---------- ------------- ------------- ----------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 7,273,779 $ 8 $ 348 $ 395 $ 751
Issuance of compensatory stock
options to employees - - 133 - 133
Distributions to stockholders - - (20) - (20)
Net loss - - - (437) (437)
---------- ------- -------- --------- --------
BALANCE AT DECEMBER 31, 1995 7,273,779 8 461 (42) 427
Issuance of warrants in
connection with sale of Series A
convertible participating
preferred stock - - 166 - 166
Accretion of mandatorily
redeemable convertible
preferred stock to
redemption value - - (569) $ (89) - (658)
Distributions to stockholders - - - - (463) (463)
Net loss - - - - (7,164) (7,164)
---------- ------- -------- -------- --------- --------
BALANCE AT DECEMBER 31, 1996 7,273,779 8 58 (89) (7,669) (7,692)
Issuance of warrants in
connection with sale of 10%
PIK Series B convertible
participating preferred stock - - 2,362 - - 2,362
Expenses related to issuance of
10% PIK Series B convertible
participating preferred stock - - (500) - - (500)
Accretion of mandatorily
redeemable convertible
preferred stock to
redemption values - - (1,387) (299) - (1,686)
Distributions to stockholders - - - - (314) (314)
Net loss - - - - (12,566) (12,566)
---------- ------- -------- -------- ---------- ---------
BALANCE AT DECEMBER 31, 1997 7,273,779 $ 8 $ 533 $ (388) $ (20,549) $ (20,396)
========== ======= ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
ICON CMT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss (437) (7,164) (12,566)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 278 1,180 2,370
Deferred income taxes, net (198) (62) 275
Noncash expenses 133 - 20
Changes in assets and liabilities:
Accounts receivable (2,234) (1,783) (2,157)
Unbilled costs and accrued earnings (33) (203) (854)
Inventories 223 (71) (12)
Prepayments and other current assets (352) (402) (638)
Other assets (72) - (14)
Accounts payable 797 3,201 2,316
Accrued expenses 833 744 2,019
Income taxes payable (316) - -
Deferred revenue 295 145 71
--------------- --------------- ---------------
Net cash used in operating activities (1,083) (4,415) (9,170)
--------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures (1,022) (3,932) (5,089)
Investment in joint venture - - (125)
--------------- --------------- ---------------
Net cash used in investing activities (1,022) (3,932) (5,214)
--------------- --------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock - 9,389 16,504
Proceeds from the issuance of short-term notes 3,000 2,194 7,750
Net repayments of short-term notes - (3,000) (8,044)
Deferred financing costs - - (824)
Distributions and loans to stockholders (171) (359) (314)
--------------- --------------- ---------------
Net cash provided by financing activities 2,829 8,224 15,072
--------------- --------------- ---------------
Net increase (decrease) in cash 724 (123) 688
Cash and cash equivalents at beginning of period 121 845 722
--------------- --------------- ---------------
Cash and cash equivalents at end of period 845 722 1,410
=============== =============== ===============
Cash paid (received) for:
Income taxes 461 (175) (22)
=============== =============== ===============
Interest 69 93 346
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Organization and Business
Organization
Icon CMT Corp. (the "Company" or "Icon") was incorporated in February
1995 under the laws of the State of Delaware for the purpose of merging with
Integration Consortium, Inc. (the "Predecessor"), which was incorporated in 1991
under the laws of the State of New York. In July 1995, the stockholders of the
Predecessor exchanged their shares of the Predecessor for 6,545,454 shares of
the common stock of Icon and the Predecessor became a wholly owned subsidiary of
Icon. A merger of Icon and the Predecessor was effected in December 1995, and
pursuant to the merger agreement, Icon was the surviving entity. The share
exchange and subsequent merger has been accounted for in a manner similar to a
pooling of interests.
Business
From inception through 1994, the Company was primarily engaged in the
design, marketing, sale, installation and on-going support of information
management systems and distribution of information over networks. Through 1994,
the Company primarily generated revenue through the sales of hardware and
services to migrate its customers' networks to local client/server environments
and by managing, maintaining and expanding those networks.
During 1995 the Company began its transition to become an end-to-end
Internet solutions provider to corporate customers. The Company currently
derives its revenues from the following services and products: (i) professional
services including strategic planning and creative development, custom
application and website development and design, systems integration and
maintenance and support services, (ii) high quality Internet access and related
communications services such as web/server hosting and management and (iii)
product resales, including hardware and software, as a part of systems design
and integration.
2. Acquisition and Restatement
On May 27, 1998, the Company acquired all of the issued and outstanding
shares of common stock of Frontier Media Group, Inc. ("Frontier") in exchange
for 728,325 shares of the Company's common stock. The acquisition has been
accounted for as a pooling of interests. Frontier is an interactive marketing
company that combines strategic planning, creative development and technical
implementation to assist its customers to manage relationships with their
customers and business partners. Frontier's deliverables include Internet,
Intranet, extranet, e-commerce, CD-ROM and touchscreen kiosk programs. The
Company issued approximately 0.26 shares of its common stock for each of
Frontier's 2,800,000 outstanding shares of common stock. The financial data
included in these financial statements has been restated to reflect the
acquisition of Frontier. There were no material transactions between the Company
and Frontier during the periods prior to the acquisition.
F-8
<PAGE>
Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
The following is a summary of certain statement of operations data of
the separate companies for the periods prior to the acquisition:
Year Ended December 31,
----------------------
1995 1996 1997
---- ---- ----
Revenues, net:
Icon $26,212 $38,108 $46,977
Frontier 1,991 4,596 5,344
------- --------- ---------
$28,203 $42,704 $52,321
======= ========== ==========
Net (loss) income:
Icon $(440) $(8,038) $(12,997)
Frontier 3 874 431
------- ---------- -----------
$(437) $(7,164) $(12,566)
======= ========== ===========
There were no significant adjustments to the net assets or results of
operations of Frontier for any of the periods presented to adopt the accounting
policies of the Company.
The Company incurred $1,094 of transaction and other costs associated
with the acquisition of Frontier. Such costs were expensed in 1998 upon
consummation of the acquisition.
3. Liquidity
The Company has incurred significant operating losses for the years
ended December 31, 1996 and 1997. At December 31, 1996 and 1997 the Company had
an accumulated deficit of $7,669 and $20,549, respectively, and a working
capital deficit of $1,704 and $897, respectively. Such losses have resulted
principally from general and administrative and selling and marketing expenses
associated with the Company's expanded level of operations. The Company expects
that its cash and working capital requirements will continue to increase as the
Company's operations continue to expand. In order to fund these efforts, the
Company completed private placements of its mandatorily redeemable Series A
Convertible Participating Preferred Stock (the "Series A Preferred") during 1996
(Note 8) and its mandatorily redeemable 10% PIK Series B Convertible
Participating Preferred Stock (the "Series B Preferred") during 1997. The
Company utilized the net proceeds from these issuances for the repayment of
short-term debt and working capital, including marketing and product line
expansions. In addition, the Company has borrowed $1,000 under a secured line of
credit at December 31, 1997 (Note 7) to meet its working capital requirements.
In February 1998, the Company completed an initial public offering of
its common stock and management believes that the net proceeds of such offering
will provide sufficient funding to meet the Company's planned business
objectives through December 31, 1998 (Note 15).
F-9
<PAGE>
Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
4. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and Frontier. All intercompany accounts and transactions have
been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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
reporting period. Actual results could differ from those estimates.
Services Revenue
Revenue from custom software development, database design, outsourcing
and corporate website production is recognized as the services are rendered or
on a percentage of completion basis for contracts requiring milestone
achievements prior to invoicing.
Revenue from communications services, such as Internet access, hosting
services, on-site maintenance, product enhancements and telephone support, is
recognized ratably over the period of the underlying agreement as the services
are provided, ranging from one to three years.
Revenue from sponsorships of digital publications is recognized ratably
over the period in which the sponsorship is displayed on a website or webzine
produced by the Company.
Unbilled costs and accrued earnings consist primarily of services
performed which were not billed at the end of the period due to specific
contractual terms established with certain customers.
Products Revenue
Revenue from the resale of products, which consist of high-end
non-proprietary network hardware and software products, is recognized upon
shipment to the customer when no significant vendor obligations exist and
collectibility is probable.
Deferred Revenue
Deferred revenue consists principally of billings in advance for
services not yet provided.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
F-10
<PAGE>
Inventories
Inventories, which consist principally of purchased computer hardware,
are stated at the lower of cost (determined on a first-in, first-out basis) or
market value.
Deferred Financing Costs
On October 16, 1997, the Board of Directors of the Company authorized
management to pursue an underwritten sale of shares of the Company's common
stock in an initial public offering (the "IPO") pursuant to the Securities Act
of 1933. In connection with the Company's proposed IPO, the Company has incurred
certain costs which have been deferred at December 31, 1997 (Note 15).
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the
respective assets, generally three to five years. Depreciation expense related
to equipment used solely for communications-related services is included in
services cost of revenues.
Research and Development
The Company charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
Effective May 27, 1998, in conjunction with its acquisition by the
Company, Frontier became subject to taxation as a "C Corporation". Prior to the
acquisition, the stockholders of Frontier had elected to be treated as an "S
Corporation" for Federal income tax purposes as provided for under section
1362(a) of the Internal Revenue Code. The election resulted in each Frontier
stockholder being responsible for their pro-rata share of Frontier's taxable
income. The amount of deferred income taxes resulting from the termination of
Frontier's S Corporation status was insignificant.
Frontier's policy, prior to its acquisition by the Company, had been to
make annual distributions to its stockholders to pay federal taxes based on
their share of allocable taxable income. Frontier's distributions to
stockholders for Federal taxes amounted to $20, $63 and $314 in 1995, 1996 and
1997, respectively.
F-11
<PAGE>
Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
Reclassifications
Certain prior year amounts have been reclassified to conform with their
1997 presentation.
Fair Value of Financial Instruments
The carrying value of accounts receivable, notes receivable, accounts
payable, accrued expenses and short-term borrowings approximate their fair
values due to the relatively short maturity of these instruments.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"), which requires the presentation of the
components of comprehensive income in a company's financial statements for
reporting periods beginning subsequent to December 15, 1997. Comprehensive
income is defined as the change in a company's equity during a financial
reporting period from transactions and other circumstances from nonowner sources
(including cumulative translation adjustments, minimum pension liabilities and
unrealized gains/losses on available-for-sale securities). The adoption of FAS
130 is not expected to have a material impact on the Company's financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" ("FAS 131"), which requires that public business enterprises report
certain information about operating segments. It also requires that public
business enterprises report certain information about products and services,
geographic areas in which they operate and major customers. FAS 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
adoption of FAS 131 is not expected to have a material impact on the Company's
existing disclosures.
5. Loss Per Common Share
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (i.e., options, warrants, convertible securities or
contingent stock arrangements). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation of
Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an antidilutive effect on earnings.
F-12
<PAGE>
Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
All prior periods presented have been restated for the adoption of FAS
128. The adoption of FAS 128 did not have a significant impact on the loss per
share of prior periods. The computations of basic loss per share and diluted
loss per share for the years ended December 31, 1995, 1996 and 1997 are as
follows:
Year Ended December 31,
----------------------
1995 1996 1997
---- ---- ----
Net loss ................................ $(437) $(7,164) $(12,566)
Accrued dividends on Series A
Preferred and Series B Preferred....... - (542) (1,234)
------ ------- ---------
Loss available to common
stockholders........................... $(437) $(7,706) $(13,800)
====== ======== =========
Weighted average shares outstanding
used for basic loss per share
and diluted loss per share............. 7,273,779 7,273,779 7,273,779
Basic loss per share and
diluted loss per share................. $(0.06) $(1.06) $(1.90)
======= ====== ======
At December 31, 1997, outstanding options to purchase 1,241,150 shares
of common stock, with exercise prices ranging from $6.02 to $14.27 have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 948,891 shares of common stock,
with exercise prices ranging from $0.01 to $6.02, were also antidilutive and
excluded from the computation of diluted loss per share at December 31, 1997.
Common shares issuable upon conversion of Series A Preferred and Series B
Preferred have also been excluded from the computation of diluted loss per share
at December 31, 1997 as they are antidilutive.
6. Fixed Assets
Fixed assets are comprised of the following at December 31, 1996 and
1997:
December 31,
------------------------
1996 1997
---- ----
Computer equipment.............. $ 5,013 $ 9,336
Furniture and fixtures.......... 411 483
Vehicles........................ 35 35
Leasehold improvements.......... 130 824
------------ ------------
5,589 10,678
Less: accumulated depreciation
and amortization...... (1,633) (4,003)
------------- ------------
$ 3,956 $ 6,675
============= ============
F-13
<PAGE>
Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
7. Notes Payable
Secured Lines of Credit
On August 14, 1995, the Company obtained a secured line of credit with
a bank for $3,000 which expired on June 30, 1996. Borrowings under this line
were secured by certain assets of the Company. At December 31, 1995, borrowings
under this line amounted to $3,000. Interest was charged at the bank's prime
rate plus one percent, which was 9.5% at December 31, 1995. Interest expense
amounted to $78 and $25 in 1995 and 1996, respectively.
This line of credit was repaid in full on January 31, 1996.
On August 13, 1996, the Company obtained a secured line of credit with
a lending institution for $10,000 which expired on August 13, 1998. Such line
was renewed on August 13, 1998 and expires on August 13, 1999. Borrowings under
this line are secured by substantially all of the assets of the Company.
Borrowings under this line are limited to a specified percentage of qualifying
accounts receivable less outstanding obligations of the Company owed to the
lending institution including outstanding letters of credit. The payment of cash
dividends is prohibited under this secured line of credit. At December 31, 1996
and 1997, borrowings under this line amounted to $2,194 and $1,000,
respectively. Interest is payable monthly at an annual rate equal to the lending
institution's prime rate plus one percent, which was 9.25% and 9.50% at December
31, 1996 and 1997, respectively. The rate adjusts on the first of the month
following any change. Interest expense amounted to $50 and $324 for the years
ended December 31, 1996 and 1997, respectively. The agreement requires an annual
commitment fee of approximately $28. At December 31, 1997, amounts available
under this secured line of credit were $4,143.
At December 31, 1997, irrevocable letters of credit of $1,000 were
issued under this agreement which are being maintained as security for
performance under long-term property lease agreements.
Frontier had a $600 secured line of credit which expired on May 30,
1998. There were no outstanding borrowings under the line at December 31, 1997.
Borrowings under this line were limited to a specific percentage of Frontier's
qualifying receivables. The line was secured by substantially all assets of
Frontier. Interest was payable monthly at an annual rate equal to the prime rate
plus a quarter percent.
Bridge Financing
In March 1997, the Company obtained a $1,000 unsecured bridge loan
which bore interest at a rate of 10% per annum from a holder of the Series A
Preferred. The terms of the loan provided for a rate of interest of 10% per
annum through June 30, 1997 and 18% per annum from July 1, 1997, payable
monthly. The loan was payable upon demand by the holder at any time after the
earliest of the following to occur: (i) the closing of initial public offering
in the amount of $8,000 or greater, (ii) the closing of a private placement of
any class of the Company's capital stock equal to or exceeding $8,000, (iii) a
"Disposal Event" as defined by the loan agreement, or (iv) September 30, 1997.
The loan agreement also provided that upon completion of a public
offering or private placement equal to or exceeding $8,000, the holder of the
loan had the option to convert the outstanding principal amount of the note and
accrued and unpaid interest into the class of capital stock issued in the public
F-14
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
or private offering. In May 1997, the holder of the loan converted the loan plus
accrued interest thereon, in the amount of $20, into 10,200 shares of Series B
Preferred.
In further consideration of the loan, upon completion of the Series B
Preferred financing, the Company issued a warrant to the Series A Preferred
holder to purchase 41,511 shares of common stock at an initial exercise price of
$6.02 per share. The warrant is exercisable for a period of ten years from the
date of issuance. The fair value of the warrant, in the amount of $103, has been
recorded as additional paid-in capital.
8. Common Stock and Convertible Participating Preferred Stock
Common Stock Split, Increase in Authorized Common Shares, Change to Par Value of
Common Stock, and Reverse Stock Split
Effective May 30, 1997, the Company implemented a six-for-one stock
split applicable to all issued and outstanding shares of the Company's common
stock and increased the number of authorized shares of common stock from
10,000,000 to 50,000,000. In addition, the par value of the Company's common
stock was changed from $.01 per share to $.001 per share.
In connection with the IPO, on October 16, 1997 the Company's Board of
Directors approved a 1-for-2.75 reverse stock split to be applicable to all
issued and outstanding shares of the Company's common stock, which split became
effective on December 15, 1997.
All common shares, stock options, warrants and related per share data,
reflected in the consolidated financial statements and notes thereto, have been
presented as if the stock split had occurred on January 1, 1995.
Series A Convertible Participating Preferred Stock
In January 1996, the Company issued 422,607 shares of Series A
Preferred at $23.33 per share providing gross proceeds of $9,859 and net
proceeds, after deducting expenses, of $9,389. Each share of Series A Preferred
is convertible at the option of the holder into the number of shares of common
stock determined by dividing $23.33 by the conversion price. The initial
conversion price was $10.70, which is subject to adjustment to the share price
of any security issuances at a per share price lower than $10.70 prior to the
second anniversary of the date of issuance of the Series A Preferred stock.
Subsequent to the second anniversary of the issuance of the Series A Preferred
the Series A shares are subject to weighted average anti-dilution provisions.
Upon issuance of the initial Series B Preferred on May 30, 1997 (See below), the
conversion price of the Series A Preferred was adjusted to $6.02 per share. The
Series A Preferred shares converted into common stock upon the consummation of
the Company's IPO.
If the Series A Preferred shares had not been converted upon the
consummation of the Company's IPO, then each holder, at their option, at any
time after the fifth anniversary of the date of issuance of the Series A
Preferred, could have sold such shares to the Company at a redemption price of
$23.33 per share plus a redemption premium equal to $1.40 per annum accruing
from the date of issuance to the redemption date, less any dividends paid
thereon prior to the redemption date and including the amount of any dividends
or other distributions declared but unpaid on the Series A Preferred. The excess
of the
F-15
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts
redemption value over the carrying value was recorded by periodic charges to
stockholders' equity through the earliest date at which the Series A Preferred
holders may require redemption of the Series A Preferred.
The holders of Series A Preferred were entitled to vote on matters
which holders of common stock have the right to vote.
In connection with this transaction, the Company issued a warrant for
the purchase of 15,542 shares of the Company's common stock, at an initial
exercise price of $0.03 per share, as a placement fee to a financial advisor.
The fair value of the warrant in the amount of $166 has been recorded to
additional paid-in capital. The warrant is exercisable for a period of ten years
from the date of issuance.
10% PIK Series B Convertible Participating Preferred Stock
On May 30, 1997, the Company issued and sold 100,000 shares of the
Series B Preferred at $100.00 per share providing gross proceeds of $10,000 and
net proceeds, after deducting expenses, of $9,601. Subsequent to the initial
issuance, and prior to the first anniversary of the closing date, subject to
certain closing conditions, the Company had the option to issue and sell up to
an additional 50,000 shares to the original investors at a price per share of
$100.00. As of December 31,1997, the Company had not exercised this option. This
option lapsed upon the closing of the IPO. In connection with this transaction,
the Company issued a warrant for the purchase of 838,199 shares of the Company's
common stock, at an initial exercise price of $6.02 per share, to the original
investors of the Series B Preferred. The warrant is exercisable for a period of
ten years from the date of issuance. The fair value of the warrant, in the
amount of $1,958, has been recorded as additional paid-in capital.
The holders of the Series B Preferred had the right to convert such
shares into common stock at an initial conversion rate of $100.00 divided by a
conversion price of $6.02 per share. In the event the Company had exercised its
option to sell the additional 50,000 shares of Series B Preferred to the
original investors, the conversion price would have been amended to $4.51 per
share. Such shares converted into common stock upon the consummation of the IPO.
If the Series B Preferred shares had not been converted upon the
consummation of the Company's IPO, then each holder, at their option, at any
time after the fifth anniversary of the date of issuance of the Series B
Preferred, could have sold such shares to the Company at a redemption amount,
and in the event of a liquidation of the Company the holders of the Series B
Preferred were entitled to a senior liquidation preference (each as defined).
An in-kind dividend accrued at an annual rate of 10%. The excess of
redemption value over carrying value, was recorded by periodic charges to
stockholders' equity through May 30, 2002, the earliest date the Series B
Preferred holders could have required redemption of the Series B Preferred. The
holders of Series B Preferred were entitled to participate equally per share in
any dividends to holders of common stock or the Series A Preferred in excess of
an annual rate of 10% and were entitled to vote on matters which holders of
common stock have the right to vote.
Also in connection with the initial issuance of Series B Preferred, the
Company issued a warrant to a financial advisor for the purchase of 50,042
shares of common stock at an exercise price of $0.03 per share. The fair value
of the warrant, in the amount of $301, has been recorded to additional paid-in
capital.
F-16
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts
Prior to the initial issuance of the Series B Preferred, the original
Series B Preferred investors advanced amounts to the Company in the form of
bridge loans totaling $5,750 bearing interest at an annual rate of 10%. Such
advances were repaid with interest in the amount of $16, upon the closing of the
initial issuance of the Series B Preferred.
During the period from June 1997 to December 1997, the Company issued
and sold an additional 70,040 shares of the Series B Preferred at $100.00 per
share, providing gross proceeds of $7,004 and net proceeds, after deducting
expenses, of $6,904.
9. Transactions with Related Parties
On July 17, 1995, the three founders and principal stockholders of the
Company entered into an agreement whereby, among other things, each of these
stockholders agreed to grant to the other two stockholders the right of first
refusal to purchase any shares of the Company's common stock they propose to
sell on substantially the same terms as a potential third-party is offering and,
upon their death, the right to purchase any or all of their shares of common
stock of the Company at the fair market value on the date of death. Upon
consummation of the IPO, the agreement was terminated.
In August 1995, the Company made loans in the amount of $50 to each of
its three principal stockholders. The loans bear interest at a rate of 7% per
annum. Interest income from such loans amounted to $3, $10, and $11 for the
years ended December 31, 1995, 1996 and 1997, respectively. The loans, and
accrued interest thereon, are due on demand.
On December 4, 1995, the Company entered into employment agreements
with each of its three principal stockholders and founders, which expire five
years from the date of the agreement. The employment agreements, which provide
for base salaries and guaranteed bonuses, contain certain non-compete clauses
which are in effect for a period of one year following termination of
employment. In the event of termination of employment of any of such principal
stockholders following a change in control (as defined in the employment
agreements), that has not been approved by the Board of Directors, the principal
stockholders will receive a termination payment equal to 2.99 times their
respective base salary. On June 2, 1997, the employment agreements were amended
by the Company. As a result of these amendments, the expiration dates of the
agreements were extended to May 29, 2002.
F-17
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts
10. Stock Option, Defined Contribution and Profit Sharing Plans
Stock Option Plans
In July 1995, the Company adopted a stock option plan (the "July Plan")
which was subsequently terminated by the Company's Board of Directors on October
23, 1995. Pursuant to the July Plan, the Company granted certain employees
options to purchase 552,000 shares of the Company's common stock at $0.27 per
share. The Company recorded $133 of compensation expense during 1995 related to
the grant of such options. As of the date of grant, 65,455 options were
exercisable, and none were exercised prior to October 23, 1995, the date on
which the July Plan and all options granted pursuant thereto were canceled.
On October 23, 1995, the Company implemented its 1995 Stock Option Plan
(the "Plan"), whereby incentive and nonqualified options to purchase up to
1,090,909 shares of the Company's common stock may be granted to key employees,
directors and consultants. On March 14, 1997, the Board of Directors approved an
amendment to the Plan whereby the aggregate number of shares of common stock for
which options may be granted under the Plan was increased to 1,636,363. The
exercise and vesting periods and the exercise price for options granted under
the Plan are determined by a Committee of the Board of Directors. The Plan
stipulates that no option may be exercisable after ten years from the date of
grant. The fair market value of the Company's common stock is determined by the
Board of Directors. Options granted under the Plan generally vest in equal
installments over periods ranging from one to five years.
Under the Plan, each non-employee director, upon their initial
appointment, shall be granted options to purchase 3,273 shares of the Company's
common stock at a price equal to its fair market value at the date of grant.
Additionally, options to purchase 2,182 shares of the Company's common stock at
the then fair market value shall be granted immediately following each annual
meeting of the stockholders. These options are exercisable for five years from
the date of grant. No such options have yet been granted as of December 31,
1997.
On June 18, 1997 outstanding employee stock options, with exercise
prices ranging from $6.42 to $14.27, to purchase 868,364 shares of common stock
were repriced at $6.02 per share, which was the fair market value as determined
by the Board of Directors at such date. Outstanding stock options to purchase
109,091 shares of common stock held by an employee who is also a principal
stockholder were also repriced on such date from $11.76 to $6.63 per share.
F-18
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts
The following table summarizes activity regarding stock options for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Exercise
Option Price
------ --------
<S> <C> <C>
Options outstanding at December 31, 1995............................... 614,182 $ 6.42
Granted at $11.00 $11.74.......................................... 479,127 11.17
Forfeited at $6.42................................................ (148,364) 6.42
Forfeited at $11.00............................................... (35,127) 11.00
---------
Options outstanding at December 31, 1996 at:
$6.42............................................................. 465,818 6.42
$11.00 $11.74..................................................... 444,000 11.19
----------
Total options outstanding at December 31, 1996......................... 909,818 8.74
Granted at $10.00 $14.27.......................................... 402,968 13.54
Cancelled at $6.42 $14.27......................................... (977,455) 9.92
Re granted at $6.02 $6.63......................................... 977,455 6.09
Granted at $6.02.................................................. 106,364 6.02
Forfeited at $6.02 $11.00......................................... (178,000) 9.13
Options outstanding at December 31, 1997 at:
$10.00 $14.27..................................................... 173,877 12.58
$6.02 $6.63....................................................... 1,067,273 6.08
---------
Total options outstanding at December 31, 1997......................... 1,241,150 6.99
=========
Exercisable at December 31, 1997....................................... 274,364 7.99
==========
Options available for grant at December 31, 1997....................... 395,214
==========
Weighted average remaining contractual life for options at:
$6.02 $6.63...................................................... 2.3 years
$10.00 $14.27.................................................... 2.3 years
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its Plan and other stock-based compensation issued to employees
and directors. During the years ended December 31, 1996 and 1997, the Company
was not required to recognize compensation expense for options granted to
employees.
Had compensation cost for options grants to employees been determined
based upon the fair value at the date of grant for awards under the Plan
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation," the
Company's net loss for the years ended December 31, 1995, 1996 and 1997 would
have increased by approximately $35, $529 and $561, respectively.
F-19
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts
The fair values of options granted to employees during the years ended
December 31, 1995, 1996 and 1997 has been determined on the date of the
respective grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield........................................... None None None
Weighted average risk free interest rate on date
of grant............................................ 6.3% 6.3% 6.3%
Forfeitures.............................................. None None None
Expected life............................................ 5 years 5 years 5 years
</TABLE>
Defined Contribution and Profit Sharing Plans
The Company has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code, for employees
meeting certain service requirements. Participants may contribute up to 10% of
their gross wages not to exceed, in any given year, a limitation set by Internal
Revenue Service regulations. The Plan provides for discretionary contributions
to be made by the Company as determined by the Company's Board of Directors. The
Company has not made any contributions to the Plan during periods presented. The
Company also has a profit sharing plan (the "PSP") covering substantially all
full-time employees. Contributions by the Company to the PSP amounted to $28 in
1996. There were no contributions to the PSP during 1995 and 1997.
In 1997, Frontier implemented a defined contribution 401(k) employee
savings plan (the "Frontier Plan") covering all full-time eligible employees, as
defined in such plan. The Frontier Plan provides for discretionary contributions
as determined by the Company's Board Of Directors. For the year ended December
31, 1997, contributions in the amount of $10 were made by the Company to the
Frontier Plan.
11. Concentration of Risk and Customer Information
A significant percentage (54%, 60% and 59% in the years ended December
31, 1995, 1996, and 1997, respectively) of the Company's revenues are derived
from third-party domestic financial services companies. Financial instruments
which potentially subject the Company to concentrations of credit risk are
primarily cash, accounts receivable, notes receivable, accounts payable and
short-term notes payable. The Company generally does not require collateral and
the majority of its trade receivables are unsecured. The Company is directly
affected by the well being of the financial services industry; however, the
Company
F-20
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
does not believe significant credit risk exists at December 31, 1997. The
Company relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality required by the Company, are
available only from a limited number of sources. The Company is also dependent
upon local exchange carriers to provide telecommunications services to the
Company and its customers. There can be no assurance that the Company will be
able to obtain such services on the scale and within the time frames required by
the Company at an acceptable cost, or at all.
The network-based information management systems sold by the Company
are provided primarily by one manufacturer for whom the Company serves as a
value-added reseller. Termination or loss of the Company's agreement with this
manufacturer may have a material adverse impact on the Company's financial
position and results of operations.
Revenues attributable to a single customer comprised 26%, 27% and 44%
of the Company's total net revenues in 1995, 1996 and 1997, respectively.
Revenues attributable to a second customer comprised 14% and 12% of the
Company's total net revenues in 1995 and 1996, respectively.
12. Income Taxes
The Company has incurred losses during 1995, 1996, and 1997. At
December 31, 1997, the Company has available for federal income tax purposes net
operating loss carryforwards of approximately $19,182 that expire in 2011
through 2012. At December 31, 1997 the Company also had research and development
tax credit carryforwards in the amount of $87 which expire in 2001. These losses
and credits are subject to limitation on future years utilization as a result of
certain ownership changes. In general, a change in ownership occurs when greater
than a 50 percent change in ownership takes place. The annual utilization of net
operating loss carryforwards generated prior to the change in ownership is
limited, in any one year, to a percentage of the fair value of the Company at
the time of the change in ownership.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $8,778 at December 31,
1997. The Company's operating plans anticipate taxable income in future periods;
however, such plans make significant assumptions which cannot be reasonably
assured including continued market acceptance of the Company's products and
services by customers. Therefore, in consideration of the Company's accumulated
losses and the uncertainty of its ability to utilize this deferred tax benefit
in the future, the Company has recorded a valuation allowance in the amount of
$8,778 at December 31, 1997 to offset the deferred tax benefit amount.
F-21
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
Significant components of the current and noncurrent deferred tax
assets at December 31, 1996, and 1997 are as follows:
December 31,
------------
1996 1997
---- ----
Deferred tax assets:
Accounts receivable reserves................... $ 185 $ 197
Net operating loss............................... 3,296 8,392
Accruals......................................... 245 135
Research and development credits................. -- 87
Depreciation..................................... -- 4
------ ------
Total deferred tax assets........................ 3,726 8,815
------ ------
Deferred tax liabilities:
Depreciation................................. (117)
Other........................................ (38) (37)
------ ------
Total deferred tax liabilities............... (155) (37)
------ ------
Net deferred tax asset................................ 3,571 8,778
Less: valuation allowance............................. (3,296) (8,778)
------ ------
Deferred tax asset, net............................... $ 275 $ --
======== =========
The components of the provision (benefit) for income taxes are as
follows:
Year Ended December 31,
1995 1996 1997
---- ---- ----
Current taxes:
Federal......................... -- $ (148) --
State and city.................. $ 15 -- --
--------- -------- ------
Total current taxes............. 15 (148) --
--------- -------- ------
Deferred taxes:
Federal......................... (114) (51) $ 174
State and city.................. (84) (11) 82
--------- -------- ------
Total deferred taxes............ (198) (62) 256
--------- -------- ------
Provision (benefit) for income taxes..... $ (183) $ (210) $ 256
========= ======== ======
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. income tax rate to loss
before taxes as follows:
Year Ended December 31,
1995 1996 1997
---- ---- ----
Federal income tax statutory rate.................. 35.0%) (35.0%) (35.0%)
State income taxes, net of federal tax benefit..... (7.2) (9.6) (8.8)
Stock compensation................................. 7.4 -- --
Other nondeductible items.......................... 5.3 1.8 2.9
Valuation allowance................................ -- 40.0 43.0
-------- -------- -------
Income tax rate as recorded........................ (29.5%) (2.8%) 2.1%
======== ======== =======
F-22
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
13. Joint Venture
In November 1997, the Company entered into a Joint Venture agreement
with Teleway, a Japanese communications company, pursuant to which they agreed
to establish Icon-Teleway Internet Corporation ("ITIC"). ITIC will operate an
Internet solutions business to market end-to-end solutions to corporate
customers in Japan. Teleway and the Company will hold equity stakes of 52% and
48%, respectively, in ITIC, which was formally established during the first
quarter of 1998. The services provided ITIC will be similar to the services
provided by the Company in the United States, including communications services,
professional services and product resales.
Teleway has agreed to provide ITIC an initial loan of Y1 billion
(approximately $7,900) and, upon request, to make an additional loan for up to
Y500 million (approximately $4,000) to fund operations. In connection with the
creation of ITIC, the Company licensed to ITIC the exclusive right to utilize
the Company's intellectual property in Japan for a period of five years.
As consideration of the rights granted to ITIC by the Company, ITIC
will pay royalties to the Company in an amount equal to 3.5% and 1.0% of net
income generated by ITIC through the leasing and sublicensing or sale of the
Company's services and communications products, respectively. Any royalties
received by the Company (up to a maximum of $8,000) will be contributed back to
ITIC as equity and will be matched by Teleway so that their respective ownership
interests will remain constant.
In connection with the formation of ITIC the Company was required to
make a capital contribution of $125, which has been recorded in Other assets at
December 31, 1997.
F-23
<PAGE>
14. Commitments
Leases
Future minimum payments under non-cancelable operating leases, which
primarily relate to network capacity and office space, with initial or remaining
terms of one year or more, consist of the following as of December 31, 1997:
Year
---------
1998.................. $ 1,861
1999.................. 1,377
2000.................. 1,247
2001.................. 1,263
2002.................. 1,291
2003 and thereafter... 3,879
----------
$ 10,918
==========
Rent expense amounted to $294, $676 and $913 for 1995, 1996 and 1997,
respectively.
F-24
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
Other
In February 1997, the Company entered into an agreement to purchase
interexchange telecommunications services through February 29, 2000. Pursuant to
this agreement the Company has a monthly commitment, before discounts, of $50.
These purchase commitments are not expected to exceed usage requirements in any
of the months covered by the agreement.
At December 31, 1997 trade payables and accrued expenses to a vendor in
the amount of $3,800 were secured by substantially all of the assets of the
Company. The security agreement is subordinated to the security interests of a
lending institution in connection with a secured line of credit (Note 7).
15. Subsequent Events
Initial Public Offering
On February 18, 1998, the Company completed the IPO, selling 3,850,000
shares of common stock at a price of $10.00 per share providing gross proceeds
to the Company of $38,500 and net proceeds, after deducting underwriting
discounts, commissions and estimated offering expenses payable by the Company,
of approximately $34,505.
Upon completion of the offering, the shares available for grant under
the 1995 Stock Option Plan were increased from 1,636,364 to 2,181,818.
Upon the closing of the IPO, all outstanding shares of Series A and
Series B Preferred Stock converted into an aggregate of 4,629,831 shares of
common stock.
Discontinued Product Line
In March 1998, the Company discontinued its media services product
offerings. The Company generated revenues of $202, $529 and $89 from the selling
of advertising space on its new media properties in 1995, 1996 and 1997,
respectively. The cost of revenues associated with media services during 1995,
1996 and 1997 was $147, $1,504 and $2,316, respectively.
16. Subsequent Event - Merger Agreement (unaudited)
On September 13, 1998, the Company agreed, subject to stockholder
approval, to merge with Qwest Communications International, Inc. ("Qwest").
Under the terms of the merger agreement each share of the outstanding common
stock of the Company will be exchanged for no less than 0.32 shares of Qwest
common stock (if Qwest's average per share stock price exceeds $37.50) or no
more than 0.4444 shares of Qwest common stock (if Qwest's average per share
stock price is less than $27.00). The final ratio of exchange will be determined
by dividing $12 by a 15-day volume weighted average of consecutive trading
prices of Qwest common stock prior to the three business days before the
Company's stockholders meeting that will be called to approve the transaction.
If the merger is terminated prior to consummation the Company will be required,
under certain circumstances, to pay a $7,000 termination fee.
F-25
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Icon CMT Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share amounts)
Pursuant to the merger agreement the Company and Qwest have agreed to
enter into a credit facility, maturing January 31, 2000, whereby Qwest will lend
the Company up to an aggregate of $15,000 to fund working capital and for other
corporate purposes. In connection with the credit facility, the Company has
issued to Qwest ten year warrants to purchase an aggregate of 750,000 shares of
the Company's common stock. The exercise price of the warrants is $12.00 per
share. The Company's three founders and principal stockholders have entered into
agreements with Qwest to vote to approve the merger so long as a superior
proposal has not been accepted by the Company's Board of Directors and to grant
Qwest an option on their shares.
Also, pursuant to the merger agreement, the Company entered into a
private line service agreement and related master collocation license agreement
for the use of certain of Qwest's communications related facilities.
On September 15, 1998, a class action complaint was filed against the
Company,its directors and Qwest. The complaint alleges, among other things that
the members of the Company's Board of Directors violated their fiduciary duties
by failing to auction the Company or to seek other potential bidders. The
company considers the action to be without merit and intends to vigorously
defend the action.
F-26
