EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1999
<PAGE>
C O N T E N T S
Accountants' Report ......................................................... 3
Consolidated Balance Sheets ................................................. 4
Consolidated Statements of Operations ....................................... 6
Consolidated Statements of Stockholders' Deficit............................. 7
Consolidated Statements of Comprehensive Loss................................ 8
Consolidated Statements of Cash Flows ....................................... 9
Notes to the Financial Statements ........................................... 10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of Eurotelecom
Communications Inc. and subsidiaries as of June 30, 1999 and December 31, 1998
and 1997 and the related consolidated statements of operations, stockholders'
deficit, comprehensive loss and cash flows for the six months ended June 30,
1999 and the years ended December 31, 1998 and 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eurotelecom
Communications Inc. and subsidiaries as of June 30, 1999 and December 31, 1998
and 1997 and the results of their operations and cash flows for the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company's recurring operating losses
and lack of working capital raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 10. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
CROUCH, BIERWOLF & CHISHOLM
Salt Lake City, Utah
October 20, 1999
3
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
------
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ - $ 421 $ 69,810
Accounts receivable, net of provision for doubtful
debts of $98,920 as of June 30, 1999 ($NIL for other
dates) 901,195 - 442,187
Accounts receivable - related party 56,913 - -
Other receivables 17,125 - -
Inventory 357,952 - 76,637
Prepaid expenses 179,222 54,794 342,878
Other current assets - 42,010 29,802
------------ ------------ ------------
Total current assets 1,512,407 97,225 961,314
------------ ------------ ------------
NON-CURRENT ASSETS:
Property, plant and equipment, net 90,718 53,643 20,217
Goodwill, net 381,868 - -
Investments at cost - Note 11 43,964 44,597 44,597
------------ ------------ ------------
TOTAL ASSETS $ 2,028,957 $ 195,465 $ 1,026,128
------------ ------------ ------------
</TABLE>
(continued)
4
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 375,261 $ 65,904 $ -
Accounts payable - related party 9,464 - 56,000
Accounts payable 743,063 210,488 492,876
Accrued expenses 206,929 47,234 253,918
Other taxes payable 311,807 37,625 329,139
Current maturities of long-term obligations 111,252 14,627 48,000
------------- ------------- -------------
Total current liabilities 1,757,776 375,878 1,179,933
------------- ------------- -------------
LONG TERM LIABILITIES:
Notes Payable (Note 3) 941,865 923,209 -
Less: Current maturities of long-term obligations (111,252) (14,627) -
------------- ------------- -------------
Total long term liabilities 830,613 908,582 -
------------- ------------- -------------
TOTAL LIABILITIES 2,588,389 1,284,460 1,179,933
------------- ------------- -------------
STOCKHOLDERS' (DEFICIT):
Preferred stock $0.01 par value. Authorized
10,000,000 shares;
none issued - - -
Common stock, $0.01 par value, 20,000,000
authorized shares; 8,988,102, 6,519,016 and
5,036,616 issued and outstanding, at June 30,
1999, December 31, 1998 and 1997, respectively 89,882 65,191 50,367
Additional paid-in capital 23,556,427 20,784,957 20,204,886
Less: subscription receivable (131,788) (91,214) (40,014)
Accumulated deficit (24,078,967) (21,841,678) (20,362,793)
Other comprehensive income/(loss) 5,014 (6,251) (6,251)
------------- ------------- -------------
Total stockholders' (deficit) (559,432) (1,088,995) (153,805)
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,028,957 $ 195,465 $ 1,026,128
============= ============= =============
</TABLE>
5
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE SIX FOR THE SIX FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES (NOTE 2) $ 1,322,971 $ 32,000 $ 64,000 $ 1,212,352
COST OF REVENUES (NOTE 2) 803,178 - - 777,742
------------ ------------ ------------ ------------
GROSS PROFIT 519,793 32,000 64,000 434,610
------------ ------------ ------------ ------------
General & administrative expenses 1,639,187 664,758 1,173,966 994,434
Depreciation and amortization 40,268 11,434 22,606 7,670
Loss from closed subsidiary 123,928 - 291,923 -
------------ ------------ ------------ ------------
OPERATING LOSS (1,283,590) (644,192) (1,424,495) (567,494)
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Other Income - interest received 121 24 - -
Loss on investment - - (44,800)
Interest expense (34,970) (12,288) (54,290) (24,304)
Loan stock beneficial conversion expense (918,750) - - -
------------ ------------ ------------ ------------
Total other income and expenses (953,599) (12,264) (54,290) (69,104)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,237,189) (656,456) (1,478,785) (636,598)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES (100) - (100) -
------------ ------------ ------------ ------------
NET LOSS $(2,237,289) $ (656,456) $(1,478,885) $ (636,598)
============ ============ ============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.289) $ (0.122) $ (0.256) $ (0.141)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,748,059 5,394,416 5,777,816 4,517,738
------------ ------------ ------------ ------------
</TABLE>
6
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FROM JANUARY 1, 1997 THROUGH JUNE 30, 1999
<CAPTION>
Accumulated
Common Stock Other
------------ Paid in comprehensive Accumulated
Shares Amount Capital income (loss) Deficit
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1997
Eurotelecom Communications Inc 3,998,860 $ 39,989 $ 19,601,916 $ - $(19,559,517)
Shares issued to ATNN
Stockholders 77,179 772 - - -
Consulting services 734,477 7,345 468,376 - -
Cash 226,100 2,261 134,594 - -
Cash issued to acquire public shell - - - - (166,678)
Net loss for period ended December
31, 1997 - - - - (636,598)
Currency translation differences on
foreign currency net investments - - - (6,251) -
------------- ------------- ------------- ------------- -------------
Balance December 31, 1997 5,036,616 50,367 20,204,886 (6,251) (20,362,793)
------------- ------------- ------------- ============= -------------
Shares issued during 1998:
Consulting services 1,280,000 12,800 485,400 - -
Employee bonuses 151,200 1,512 43,983 - -
Subscription agreement 51,200 512 50,688 - -
Net loss for period ended
December 31, 1998 - - - - (1,478,885)
Currency translation differences on
foreign currency net investments - - - - -
------------- ------------- ------------- ------------- -------------
Balance December 31, 1998 6,519,016 65,191 20,784,957 (6,251) (21,841,678)
------------- ------------- ------------- ============= -------------
Shares issued during 1999:
Cash 1,381,666 13,817 884,266 - -
Consulting services 764,000 7,640 296,037 - -
Employee bonuses 96,000 960 158,160
Subscriptions 27,420 274 39,340 - -
Acquisition of Easy IP Limited 200,000 2,000 329,250 - -
Loan stock beneficial conversion - - 918,750 - -
Forgiveness of debt - - 145,667 - -
Net loss for period ended
June 30, 1999 - - - - (2,237,289)
Currency translation differences on
foreign currency net investments - - - 11,265 -
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1999 8,988,102 $ 89,882 $ 23,556,427 $ 5,014 $(24,078,967)
============= ============= ============= ============= =============
</TABLE>
7
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<CAPTION>
FOR THE SIX FOR THE SIX FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
NET LOSS $(2,237,289) $ (656,456) $(1,478,885) $ (636,598)
CURRENCY TRANSLATIONS DIFFERENCES ON FOREIGN
CURRENCY NET INVESTMENTS 11,265 - - (6,251)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS (2,226,024) (656,456) (1,478,885) (642,849)
------------ ------------ ------------ ------------
</TABLE>
8
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Net loss (2,237,289) (656,456) (1,478,885) (636,598)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 40,268 11,434 22,606 7,670
Non-cash items:
Stock issued for services 462,797 425,973 543,695 475,721
Loan stock beneficial conversion 918,750 - - -
Changes in current assets and Liabilities:
Receivables (442,908) 442,187 442,187 (408,691)
Inventories (213,312) 76,637 76,637 (76,637)
Other current assets (99,543) 313,310 275,876 (372,680)
Accrued expenses 160,320 (238,510) (206,737) 583,057
Accounts payable (138,486) (659,526) (338,388) 548,876
Other liabilities 273,557 - (291,461) 48,000
------------ ------------ ------------ ------------
Net cash (used in) provided by
Operating activities (1,275,846) (284,951) (954,470) 168,718
------------ ------------ ------------ ------------
Cash flows from Investing Activities:
Purchase of fixed assets (43,203) (44,859) (2,823) (27,888)
Purchase shell - - - (166,678)
Purchase of subsidiary (96,625) - - -
Cash acquired with subsidiary 128,850 - - -
Investments - - - (44,596)
------------ ------------ ------------ ------------
investing activities (10,978) (44,859) (2,823) (239,162)
------------ ------------ ------------ ------------
Cash flows from Financing Activities:
Repayment of debt (372,302) - (48,000) -
Proceeds from line of credit 309,357 - 65,904 -
Proceeds from issuance of - - - -
common stock 898,083 - - 136,855
Proceeds from issuance of debt 440,000 260,000 870,000 -
------------ ------------ ------------ ------------
Net cash provided by
financing activities 1,275,138 260,000 887,904 136,855
------------ ------------ ------------ ------------
Effect of exchange rate changes on cash 11,265 - - (6,251)
------------ ------------ ------------ ------------
Increase (decrease) in cash (421) (69,810) (69,389) 60,160
Cash and Cash Equivalents
at beginning of period 421 69,810 69,810 9,650
Cash and Cash Equivalents
at end of period - - 421 69,810
------------ ------------ ------------ ------------
Supplemental Cash Flow Information:
Cash paid for interest 34,970 12,288 54,290 24,304
Inception of finance leases - - 53,208 -
</TABLE>
9
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The financial statements presented are those of Eurotelecom
Communications, Inc. and its subsidiaries (the Company).
Eurotelecom Communications, Inc. was incorporated under the laws of the
State of Delaware in 1987. The principal business of the Company
through November 1988 was to sell point-of-purchase advertising
services to national and local advertisers using Ad Centers located in
shopping malls across the United States. In November 1988, ATNN
discontinued its advertising business and purchased a truck stop
business located in Brooks, Oregon which was comprised of a convenience
store, a fast food restaurant, and fueling facilities for trucks and
passenger cars. In September 1989, the Company acquired all of the
outstanding common stock of Meadow Valley Constructors (MVC), a
privately held interstate bridge construction company, located in
Phoenix, Arizona. On July 13, 1990, the Company entered into a
rescission agreement with the former stockholders of MVC. The Company
terminated its interests in MVC.
The Company continued in the truck stop business until August of 1993
when the Company conveyed the truck shop business to American Telemedia
Network, Inc. (ATN) in lieu of foreclosure. ATN assumed possession of
the assets and related liabilities.
Between August 1993 and August 1, 1999 there were no operations.
On August 1, 1997 the Company consummated a reverse merger pursuant to
an agreement dated July 10, 1997. The principle elements of the reverse
merger were as follows:
(a) a 1 for 117.05941 reverse split of the Company's 11,705,941
shares, leaving 100,000 common shares outstanding. A further
reduction was made of 22,821 leaving a net balance outstanding
of 77,179 common shares;
(b) the issuance of 5,865,000 post-reverse split shares to the
shareholders of Eurotelecom Inc. (Eurotelecom Inc. was
incorporated in the State of Delaware on December 19, 1996
under the name Wing Systems Inc. and changed its name to
Eurotelecom Inc. on January 31, 1997) of which 1,866,140
shares were subsequently cancelled due to non-performance of
consulting services;
(c) the issuance of 734,477 net post-reverse split shares to
consultants in consideration of services rendered in
connection with the transaction;
(d) A cash consideration was also paid of $166,678 to consultants;
The Company changed its name to Eurotelecom Communications Inc. on
August 11, 1997.
10
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a. Organization (continued)
The Company acquired a software development company, Easy IP Limited
(Easy IP), effective April 19, 1999 for $586,050. The Company paid the
$586,050 as follows: $96,625 in cash and issued a $96,625 note with 2
equal payments of $48,313 due in November 1999 and March 2000. In
addition the Company issued Easy IP 200,000 shares of the Company's
common stock, valued at $331,250 at the market price of the common
shares at the date of completion of the acquisition and incurred
acquisition costs of $61,550. The Company acquired $859,458 in assets,
assumed $681,158 in liabilities and recorded $407,750 in goodwill in
this transaction. This results in Easy IP being a wholly owned
subsidiary of the Company. See Note 9 for the pro forma financial
statements including Easy IP.
The summarised unaudited pro forma information below assumes that the
Company acquired Easy IP on January 1, 1998.
FOR THE SIX MONTHS FOR THE YEAR ENDED
ENDED JUNE 30, 1999 DECEMBER 31, 1998
Revenue $ 1,860,171 $ 2,026,800
============= =============
Net Loss (2,231,276) (1,457,235)
============= =============
Loss per share (0.288) (0.244)
============= =============
The Company has also formed two entities, Chunlan Limited and Universal
Communication Solutions Limited, which are wholly owned by the Company.
These two companies had no operations as of June 30, 1999.
The Company is seeking to build a group of companies engaged in
telecommunications and related activities. The Company's UK activities
are organized through a wholly owned intermediate holding company,
Eurotelecom Corporation Limited.
11
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b. Subsidiary Activity
On September 16, 1997 a wholly owned subsidiary company, Eurotelecom
Secure Networks Limited (Secure Networks), was incorporated in the UK
to provide certain internet technology and communication products and
services formerly carried on by OSPL (UK) Limited, which company had
been placed in administration, and other related services. On February
19, 1999, Secure Networks was placed into voluntary liquidation in
response to the loss of key employees and contracts and continuing
losses of customers. As a result, the assets of Secure Networks have
been written down to their fair value less the cost of their sale in
accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121. The full amount of the impairment has been
classified within operating loss as a loss from closed subsidiary in
the consolidated statement of operations. The investment made by the
Company has been adjusted to zero to fully reflect this permanent
impairment.
The amount expensed in the consolidated statement of operations for the
year ended December 31, 1998 was $291,923. In the period to February
1999, the Company was required to extend further amounts of $123,928 to
effect the closure of Secure Networks. All liabilities associated with
the closure of Secure Networks have been extinguished upon the
liquidation of Secure Networks.
c. Basis of Presentation
The consolidated financial statements present the consolidated
financial position of the Company and its subsidiary Eurotelecom
Corporation Limited. Secure Networks activity is recorded as a closed
subsidiary in the consolidated financial statements since it ceased
operations on February 19, 1999. All significant inter-company accounts
and balances have been eliminated on consolidation.
d. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash at bank and
temporary investments with original maturities of 90 days or less at
the date of purchase.
12
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. In these financial statements, assets, liabilities and earnings
involve reliance on management's estimates. Actual results could differ
from those estimates.
f. Provision for Income Taxes
The Company accounts for income taxes based on the provisions of
SFAS109, Accounting for Income Taxes. Under SFAS 109, the liability
method is used for accounting for income taxes, and deferred tax assets
and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities.
No provision for income taxes have been recorded due to net operating
loss carryforwards totaling approximately $21,000,000 that will be
offset against future taxable income. These NOL carryforwards begin to
expire in the year 1999 and will continue to expire through the year
2019. No tax benefit has been reported in the financial statements
because the Company believes there is a 50% or greater chance the
carryforward will expire unused.
1999 1998 1997
---- ---- ----
Tax Assets:
NOL Carryforwards $ 7,140,000 $ 7,408,300 $ 7,010,300
Valuation Allowance (7,140,000) (7,408,300) (7,010,300)
------------- ------------- -------------
Total $ - $ - $ -
============= ============= =============
g. Recognition of Revenue
Revenues arise from the sale of goods and provision of services.
Revenue from the sale of goods is recognised at the point so sale.
Revenue from the provision of long-term maintenance contracts is
recognised on a straight-line basis over the period for which the
services are provided. Revenue from the provision of consulting
services and guarding services is recognised as the service is
performed.
h. Foreign Currencies
Transactions in foreign currencies are recorded using the rate of
exchange at the date of the transaction. Assets and liabilities of
foreign subsidiaries' operations are translated using the exchange rate
at the balance sheet date. The results of foreign subsidiaries are
translated at the average rate for the period. Resulting translation
differences are included in the Consolidated Statement of Stockholders'
deficit.
13
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
i. Inventories
Inventories are stated at lower of cost or market using the First-in,
First-out method.
j. Property, Plant and Equipment
Property, Plant and Equipment is stated at cost. Major renewals and
improvements are capitalized while expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation is computed
on the straight-line method over the estimated useful life up to five
years.
Equipment at June 30, 1999 consists of computers and office equipment
(net) $90,718. The cost was $135,380, $83,919 and $27,888 with related
accumulated depreciation of $44,662, $30,276 and $7,670 at June 30,
1999, December 31, 1998 and December 31, 1997 respectively.
Depreciation expense was $14,386, $22,606 and $7,670 for the six months
ended June 30, 1999, the year ended December 31,1998 and the year ended
December 31,1997, respectively.
k. Net Income/(Loss) Per Share
The computed net income/(loss) per share is based on the weighted
average number of shares outstanding during the periods. The
convertible notes payable and warrants outstanding would have converted
to 5,500,000 and 223,600 shares respectively had they been converted.
Basic and diluted income/(loss) per share are identical due to any
effect of the convertible notes and warrants being anti-dilutive.
l. The Company expenses all advertising expenditure as incurred.
m. Research and Development
The Company did not incur any research and development costs for the
years ended December 31, 1998 or December 31, 1997, or the six months
ended June 30, 1999.
n. Forgiveness of Debt
During 1998, the Company received 2 loans from US Digital
Communications Inc in the amounts of $260,000 and $250,000 repayable on
March 31, 1999 and July 31, 1999 respectively. The Company repaid the
$260,000 in full while the $250,000 loan was assigned to three
shareholders. The assignees forgave the Company approximately 50% of
the loan plus accrued interest, totaling $145,667.
14
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o. Profit/(Loss) on Investment
Marketable equity securities are stated at market value in accordance
with Financial Accounting Standards ("FAS") No. 115. Valuation of other
security investments in non-marketable securities is based on
acquisition costs. Markdowns are made to reflect significant
(permanent) impairment in values and are reflected in the write down of
$44,800 in December 31, 1997. Gains and losses on sale of securities
available for sale are determined using a first-in first-out method.
p. Net Receivables
The financial statements include a gross receivable of $270,330 due
from a customer against which $98,921 has been provided, leaving a net
receivable in the balance sheet of $171,410.
15
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - REVENUES AND COST OF REVENUES
FOR THE SIX FOR THE SIX FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------ ------------ ------------ ------------
(unaudited)
REVENUES
SALE OF GOODS SOLD 974,967 - - 1,212,352
SALE OF SERVICES 348,004 32,000 64,000 -
------------ ------------ ------------ ------------
1,322,971 32,000 64,000 1,212,352
------------ ------------ ------------ ------------
COST OF REVENUES
SALE OF GOODS SOLD 657,710 - - 777,742
SALE OF SERVICES 145,468 - - -
------------ ------------ ------------ ------------
803,178 - - 777,742
------------ ------------ ------------ ------------
16
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE
The Company has the following notes payable:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Note in the original amount of $360,000, bears interest
at 10%, due in September, 2000, convertible into
common stock at $0.145 per share 360,000 - -
Note related to the acquisition of Easy IP Limited,
due in two equal instalments of $48,000 in
October, 1999 and May, 2000 96,625 - -
Note in the original amount of $80,000, bears interest
at 10%, due in September, 2000, convertible into
common stock at $0.145 per share 80,000 - -
Note in the original amount of $250,000, bears interest
at 10%, due on March 31, 1999, secured - 250,000 -
Note in the original amount of $260,000, bears interest
At 10%, due on March 31, 1999, secured - 260,000 -
Note in the original amount of $360,000, bears interest
at 10%, due on September, 2000, convertible into common
stock at $.145 per share 360,000 - -
Note payable related to the purchase of a vehicle
originating in June, 1998, bearing interest at 17.8%
for a term of 36 months. This note has a balloon
payment of $10,000 due in June, 2001 45,240 53,208 -
Unsecured loans of $360,000 bears interest at
10%, due on demand (see below) - 360,000 -
Loans from various directors, due on demand,
no stated interest rate - - 48,000
------------ ------------ ------------
Total notes payable 941,865 923,208 48,000
Less current portion (111,252) (14,627) (48,000)
------------ ------------ ------------
Total long term notes payable 830,613 908,581 -
============ ============ ============
</TABLE>
MATURITIES OF NOTES PAYABLE AT JUNE 30, 1999 ARE AS FOLLOWS:
2000 111,252
2001 830,613
2002 -
2003 -
Thereafter -
-------------
$ 941,865
-------------
The unsecured loan of $360,000 at December 31, 1998 was transferred into a
convertible loan note on February 11, 1999 at the rate of $0.145 per share. In
addition, further convertible loans of $360,000 and $80,000 were taken out by
the Company at the same date on the same terms.
In order to recognise the embedded beneficial conversion factor of the
convertible loan stock (in accordance with EITF Topic D-60) the Company has
calculated the total number of common shares that would convert under February
11, 1999 loan agreements as 5,500,000. The potential additional cost of $918,750
has been reflected in finance costs within the consolidated Statement of
Operations and additional paid in capital in the consolidated Statement of
Stockholder's Deficit.
17
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, A Disclosure about
Fair Value of Financial Instruments. The carrying amounts and fair value of the
Company's financial instruments at June 30, 1999, December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair Carrying Fair
Amounts Values Amounts Values Amounts Values
-------------- ------------ -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents - - 421 421 69,800 69,800
Line of credit 375,261 375,261 65,904 65,904 - -
Accounts receivable 901,195 901,195 - - 442,187 442,187
Notes payable 941,865 941,865 923,209 923,209 - -
Accounts receivable-
Related party 56,913 56,913 - - - -
Accounts payable 743,063 743,063 210,488 210,488 492,876 492,876
Accounts payable - related party 9,464 9,464 - - 56,000 56,000
</TABLE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and Cash Equivalents
-------------------------
The carrying amounts reported on the balance sheet for cash and cash equivalents
approximate their fair value.
Accounts Receivable
-------------------
The fair values of accounts receivable approximate their carrying amount because
of the short maturity of those instruments.
Accounts Payable
----------------
The carrying amounts reported in the balance sheet for accounts payable
approximate to their fair value due to their nearness to maturity.
Investments
-----------
It was not practical to estimate the fair values of non-marketable investments
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs.
Line of Credit and Notes Payable
--------------------------------
The fair value of amounts due under the line of credit and notes payable
approximate their carrying amount because of their short maturity.
18
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK TRANSACTIONS
In the six months to June 30, 1999, the Company had the following stock
transactions:
1. Issued 1,381,666 shares for $898,083 in cash.
2. Issued 764,000 shares for $303,677 in consulting services.
3. Issued 123,420 shares for $198,734 employee bonuses and subscriptions.
4. Issued 200,000 shares in the acquisition of Easy IP, valued at $331,250
NOTE 6 - WARRANTS
The Company issued warrants over 223,600 shares of Common Stock, exercisable at
$2 per share in January 1997. The warrants are exercisable on the day two years
from the first effective date of the registration statement being filed by the
Company in respect of the warrants. No registration statement has been filed and
the warrants presently have an indefinite exercise period. During the period
ended June 30, 1999 no new warrant or options have been granted. There were no
warrants or options issued to consultants or employees.
NOTE 7 - SUBSEQUENT EVENTS
On July 1, 1999, the convertible notes in the amounts of $80,000, $360,000, and
$360,000 were converted into 550,000, 2,475,000, and 2,475,000 shares of
restricted common stock, respectively.
In August 1999, the Company issued 150,000 shares of stock valued at $250,000
for the acquisition of all the outstanding shares of stock of RTC, Inc.
Simultaneously, with this transaction, the Company entered into a three-year
employment contract with the sole shareholder of RTC. At the time of the
acquisition, RTC had no assets, no liabilities, and no contracts in the process.
Consequently, the Company is accounting for the entire transaction as an
employment agreement and will amortize the value of the shares issued over the
term of the contract.
NOTE 8 - NON CASH AND INVESTING ACTIVITIES
For the period ended June 30, 1999 the Company issued $96,625 in notes and
issued 200,000 shares of stock with a market value of $331,250 to acquire Easy
IP Limited, a UK company. Common stock was also issued for consulting services
and employee bonuses, see Note 5 for more detail.
NOTE 9 - PRO FORMA UNAUDITED INFORMATION
The following is a pro form unaudited income statement for the six months ended
June 30, 1999 and assumes Easy IP was acquired on January 1, 1998.
19
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - PRO FORMA UNAUDITED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
EUROTELECOM EASY IP
----------- ------- CONSOLIDATED
FOR THE SIX FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 MARCH 31, 1999 ADJUSTMENTS JUNE 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES 1,322,971 537,200 - 1,860,171
COST OF REVENUES 803,178 413,200 - 1,216,378
-------------- -------------- -------------- --------------
GROSS PROFIT 519,793 124,000 - 643,793
-------------- -------------- -------------- --------------
GENERAL & ADMINISTRATIVE EXPENSES 1,803,383 89,200 20,387 1,912,970
-------------- -------------- -------------- --------------
OPERATING PROFIT/(LOSS) (1,283,590) 34,800 (20,387) (1,269,177)
-------------- -------------- -------------- --------------
OTHER INCOME AND (EXPENSES)
Other Income - interest received 121 - - 121
Interest expense (34,970) (1,200) - (36,170)
Loan stock beneficial conversion
expense (918,750) - - (918,750)
-------------- -------------- -------------- --------------
Total other income and expenses (953,599) (1,200) - (954,799)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (2,237,189) 33,600 (20,387) (2,223,976)
-------------- -------------- -------------- --------------
PROVISION FOR INCOME TAXES (100) (7,200) - (7,300)
-------------- -------------- -------------- --------------
NET LOSS (2,237,289) 26,400 (20,387) (2,231,276)
-------------- -------------- -------------- --------------
LOSS PER COMMON SHARE (0.289) (0.288)
-------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 7,748,059 7,748,059
-------------- --------------
</TABLE>
Notes
1. Easy IP's fiscal year end was March 31.
2. The results for Easy IP above for the three months ended March 31,
1999, are based on a pro rata of the company's audited results for the
year ended March 31, 1999. The results for the six months ended June
30, 1999 include Easy IP's results from April 1, 1999.
3. The adjustments above relate to the amortization of the goodwill and
other intangible assets relating to Easy IP. The additional
amortization charge of $20,387 is based on a three month charge of the
goodwill on acquisition of $407,750.
4. The basic and diluted loss per share amounts for historical and pro
forma results of operations are identical due to Eurotelecom's losses.
20
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - PRO FORMA UNAUDITED INFORMATION (CONTINUED)
The following is pro forma unaudited information for the year ended December 31,
1998. This assumes the Company owned both Easy IP for the entire period.
<TABLE>
<CAPTION>
EUROTELECOM EASY IP
----------- ------- CONSOLIDATED
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998 ADJUSTMENTS DECEMBER 31, 1998
----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
REVENUES 64,000 1,962,800 - 2,026,800
COST OF REVENUES - 1,468,000 - 1,468,000
----------------- ----------------- ----------- -----------------
GROSS PROFIT 64,000 494,800 - 558,800
----------------- ----------------- ----------- -----------------
GENERAL & ADMINISTRATIVE EXPENSES 1,488,495 350,000 81,550 1,920,045
----------------- ----------------- ----------- -----------------
OPERATING PROFIT/(LOSS) (1,424,495) 144,800 (81,550) (1,361,245)
----------------- ----------------- ----------- -----------------
OTHER INCOME AND (EXPENSES)
Interest expense (54,290) (6,800) - (61,090)
Dividend - (6,400) - (6,400)
----------------- ----------------- ----------- -----------------
Total other income and expenses (54,290) (13,200) - (67,490)
----------------- ----------------- ----------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES (1,478,785) 131,600 (81,550) (1,428,735)
----------------- ----------------- ----------- -----------------
PROVISION FOR INCOME TAXES (100) (28,400) - (28,500)
----------------- ----------------- ----------- -----------------
NET INCOME/(LOSS) (1,478,885) 103,200 (81,550) (1,457,235)
----------------- ----------------- ----------- -----------------
LOSS PER COMMON SHARE (0.256) (0.244)
----------------- -----------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,777,816 5,977,816
----------------- -----------------
</TABLE>
Notes
1. Easy IP's fiscal year end was March 31.
2. The results for Easy IP above for the year ended December 31, 1998 are
based on pro rated company audited results for the years ended March
31, 1998 and March 31, 1999.
3. The adjustments above relate to the amortization of goodwill and other
intangible assets relating to Easy IP of $81,550.
4. The basic and diluted loss per share amounts for historical and pro
forma results of operations are identical due to Eurotelecom's losses.
21
<PAGE>
EUROTELECOM COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as going concern. The Company has incurred operating
losses for the six months ended June 30, 1999 and in earlier years and is
dependent upon external financing to continue operations. Management is hopeful
that the Company's operations will result in positive cash flow during the year
2000. The Company's management is in discussions with a lender to increase a
line of credit. Additional sources of capital to support growth are being
investigated. The Company is currently in the process of raising additional
capital through a placement of shares on the Alternative Investment Market of
the London Stock Exchange. The financial statements do not include any
adjustments relating to recoverability and classification of reported asset
amounts or the amounts and classification of liabilities that might result from
the outcome of the uncertainty.
The Company is seeking to build a group of companies engaged in
telecommunications and related activities.
NOTE 11 - INVESTMENTS
The investment at cost relates to an investment in Opcom Inc., a private
company. The investment equates to a 1% holding of Opcom's common stock.
NOTE 12 - LEASES
The Company leases certain office space under lease arrangements.
Future minimum lease payments under non-cancelable operating leases as of June
30, 1999 are as follows:
Year ended June 30, 2000 $42,641
Thereafter -
The amount charged to the consolidated statement of operations for rent expense
in the period ended June 30, 1999 was $27,200.
22
