EUROTELECOM COMMUNICATIONS, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------
PAGE:
Report of BDO Stoy Hayward, Independent Accountants F-1
Report of Crouch, Bierwolf & Chisholm, Independent
Certified Public Accountants F-2
Consolidated balance sheet as of June 30, 2000 F-3
Consolidated statement of operations for the year
ended June 30, 2000, six months ended June 30, 1999
and year ended December 31, 1998 F-5
Consolidated statements of stockholders' equity for the year
ended June 30, 2000, six months ended June 30, 1999
and year ended December 31, 1998 F-6
Consolidated statements of cash flows
for the year ended June 30, 2000, six months
ended June 30, 1999 and year ended December 31, 1998 F-9
Notes to consolidated financial statements F-11
-----
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
INDEPENDENT ACCOUNTANTS' REPORT
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
EUROTELECOM COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheet of
EuroTelecom Communications, Inc. and subsidiaries as of June 30, 2000
and the related statement of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of EuroTelecom Communications, Inc. and subsidiaries as of
June 30, 2000 and the related results of operations, stockholders'
equity and cash flows for the year then ended in accordance with
generally accepted accounting principles applied in the United States.
BDO Stoy Hayward
London, England
October 12, 2000
F-1
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
EUROTELECOM COMMUNICATIONS, INC.
We have audited the accompanying consolidated statements of operations
of EuroTelecom Communications, Inc. and subsidiaries and related
statements of stockholders' deficit, comprehensive loss and cash flows
for the six months ended June 30, 1999 and the year ended December 31,
1998. 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 results of operations of
EuroTelecom Communications, Inc. and subsidiaries and cash flows for
the six months ended June 30, 1999 and the year ended December 31,
1998, 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
F-2
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------
<CAPTION>
JUNE 30,
2000
(IN THOUSANDS)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,114
Accounts receivable, net of provision for doubtful accounts of $8,000 2,869
Inventories 898
Unearned compensation 170
Prepaid expenses and other current assets 1,792
Costs and estimated earnings in excess of billings on uncompleted contracts 2,323
--------------
TOTAL CURRENT ASSETS 20,166
--------------
NON-CURRENT ASSETS
Property, plant and equipment, net of accumulated depreciation of $263,000 2,374
Goodwill, net of accumulated amortization of $145,000 1,051
Investment in affiliated company 2,560
--------------
TOTAL NON-CURRENT ASSETS 5,985
--------------
TOTAL ASSETS $ 26,151
==============
</TABLE>
See accompanying summary of accounting policies and notes
to consolidated financial statements.
F-3
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
------------------------------------------------------------------------------------------------
<CAPTION>
JUNE 30,
2000
(IN THOUSANDS)
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ 168
Accounts payable 2,827
Accrued liabilities 1,150
Other current liabilities 153
Other taxes payable 627
Current maturities of long-term obligations 55
--------------
TOTAL CURRENT LIABILITIES 4,980
--------------
NON-CURRENT LIABILITIES
Notes payable 149
Less: current maturities of long-term obligations (55)
--------------
TOTAL NON-CURRENT LIABILITIES 94
--------------
TOTAL LIABILITIES 5,074
--------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01, 10,000,000 authorized, none issued -
'A' common stock shares $0.01 par value, authorized
50,000,000; 12,055,118 issued and outstanding 120
Common stock, $0.01 par value, 50,000,000 authorized shares;
17,946,222 issued and outstanding 180
Additional paid in capital 51,933
Less: subscriptions receivable (132)
Accumulated deficit (31,148)
Accumulated other comprehensive income 124
--------------
TOTAL STOCKHOLDERS' EQUITY 21,077
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,151
==============
</TABLE>
See accompanying summary of accounting policies and notes
to consolidated financial statements.
F-4
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C>
REVENUES
Sale of goods sold $ 4,548 $ 975 $ -
Sale of services 3,123 348 64
Contract revenues earned 2,067 - -
-------------- -------------- --------------
9,738 1,323 64
COST OF REVENUES
Cost of goods sold 3,328 658 -
Cost of services 2,299 145 -
Cost of contract revenues earned 1,931 - -
-------------- -------------- --------------
GROSS PROFIT 2,180 520 64
Selling, general and administrative
expenses (9,015) (1,639) (1,174)
Depreciation and amortization (319) (40) (23)
Loss from closed subsidiary - (124) (292)
-------------- -------------- --------------
LOSS FROM OPERATIONS (7,154) (1,283) (1,425)
Share of loss from affiliated company (76) - -
Interest income (expense), net 161 (35) (54)
Loan stock beneficial conversion expense - (919) -
-------------- -------------- --------------
LOSS BEFORE INCOME TAX (7,069) (2,237) (1,479)
Income taxes - - -
-------------- -------------- --------------
NET LOSS $ (7,069) $ (2,237) $ (1,479)
============== ============== ==============
Loss per share
Basic and diluted $ (0.37) $ (0.29) $ (0.26)
============== ============== ==============
Weighted average number of common shares 19,097,390 7,748,049 5,777,816
============== ============== ==============
</TABLE>
See accompanying summary of accounting policies and notes
to consolidated financial statements.
F-5
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF NUMBER
'A' COMMON 'A' COMMON OF COMMON COMMON
SHARES STOCK SHARES STOCK
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Balance as of January 1, 1998 - $ - 5,036,616 $ 50
Share issues
Consulting services - - 1,280,000 13
Employee bonuses - - 151,200 2
Cash - - 51,200 -
Net loss - - - -
Comprehensive loss
-------------- -------------- -------------- --------------
Balance as of December 31, 1998 - $ - 6,519,016 $ 65
(CONTINUED)
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
CAPITAL INCOME (LOSS) DEFICIT TOTAL
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
Balance as of January 1, 1998 $ 20,205 $ (6) $ (20,363) $ (114)
Share issues
Consulting services 485 - - 498
Employee bonuses 44 - - 46
Cash 51 - - 51
Net loss - - (1,479) (1,479)
--------------
Comprehensive loss (1,479)
--------------
-------------- -------------- -------------- --------------
Balance as of December 31, 1998 $ 20,785 $ (6) $ (21,842) $ (998)
</TABLE>
F-6
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
---------------------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF NUMBER
'A' COMMON 'A' COMMON OF COMMON COMMON
SHARES STOCK SHARES STOCK
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Balance as of December 31, 1998 - $ - 6,519,016 $ 65
Share issues
Cash - - 1,381,666 14
Consulting services - - 764,000 8
Employee bonuses - - 96,000 1
Subscriptions - - 27,420 -
Acquisition of Easy IP - - 200,000 2
Net loss - - - -
Effect of foreign currency translation - - - -
Comprehensive loss
Loan stock beneficial conversion - - - -
Forgiveness of debt - - - -
-------------- -------------- -------------- --------------
Balance as of June 30, 1999 - $ - 8,988,102 $ 90
(CONTINUED)
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
CAPITAL INCOME (LOSS) DEFICIT TOTAL
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
Balance as of December 31, 1998 $ 20,785 $ (6) $ (21,842) $ (998)
Share issues
Cash 884 - - 898
Consulting services 296 - - 304
Employee bonuses 158 - - 159
Subscriptions 39 - - 39
Acquisition of Easy IP 329 - - 331
Net loss - - (2,237) (2,237)
Effect of foreign currency translation - 11 - 11
--------------
Comprehensive loss (2,226)
--------------
Loan stock beneficial conversion 919 - - 919
Forgiveness of debt 146 - - 146
-------------- -------------- -------------- --------------
Balance as of June 30, 1999 $ 23,556 $ 5 $ (24,079) $ (428)
</TABLE>
F-7
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
---------------------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF NUMBER
'A' COMMON 'A' COMMON OF COMMON COMMON
SHARES STOCK SHARES STOCK
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Share issues
Cash - - 2,310,000 23
Loan stock conversion - - 5,500,000 56
Shares issued for services 41,000 - 780,000 8
Unearned compensation - - 150,000 1
Remuneration of directors - - 218,120 2
Cash 11,220,118 112 - -
Acquisition of Q.Ton Limited 794,000 8 - -
Share issue costs relating to the 'A'
common stock shares - - - -
Net loss - - - -
Effect of foreign currency translation - - - -
Comprehensive loss
-------------- -------------- -------------- --------------
Balance as of June 30, 2000 12,055,118 $ 120 17,946,222 $ 180
-------------- -------------- -------------- --------------
(CONTINUED)
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
CAPITAL INCOME (LOSS) DEFICIT TOTAL
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
Share issues
Cash 1,883 - - 1,906
Loan stock conversion 745 - - 801
Shares issued for services 329 - - 337
Unearned compensation 249 - - 250
Remuneration of directors 434 - - 436
Cash 26,826 - - 26,938
Acquisition of Q.Ton Limited 1,451 - - 1,459
Share issue costs relating to the 'A'
common stock shares (3,540) - - (3,540)
Net loss - - (7,069) (7,069)
Effect of foreign currency translation - 119 - 119
--------------
Comprehensive loss 6,950
--------------
-------------- -------------- -------------- --------------
Balance as of June 30, 2000 $ 51,933 $ 124 $ (31,148) $ 21,209
-------------- -------------- -------------- --------------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
F-8
</TABLE>
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,069) $ (2,237) $ (1,479)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Depreciation and amortization 319 40 23
Stock issued for services 773 463 544
Amortization of unearned compensation 80 - -
Share of loss of affiliate 76 - -
Loan stock beneficial conversion - 919 -
Provision against investment 44 - -
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS
FROM PURCHASE OF EASY IP
Accounts payable 2,074 (138) (338)
Accrued liabilities 1,039 160 (207)
Other current liabilities 372 274 (292)
Accounts receivable (1,911) (443) 442
Costs in excess of billings on uncompleted contracts (2,323) - -
Inventories (508) (213) 77
Prepaid expenses and other current assets (1,596) (100) 276
-------------- -------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (8,630) (1,275) (954)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Easy IP (96) (97) -
Acquisition of TimTec (1,041) - -
Acquisition of Q.Ton (1,177) - -
Other acquisitions (330) - -
Net cash paid on fixed assets (1,773) (43) (3)
Cash acquired with subsidiary - 129 -
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (4,417) (11) (3)
-------------- -------------- --------------
</TABLE>
F-9
<PAGE>
<TABLE>
EUROTELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from issuance of common stock, net 25,304 898 -
Proceeds from issuance of debt - 440 870
Short-term bank line of credit (207) 309 66
Repayment of debt - (372) (48)
Payments under financing arrangement (55) - -
-------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,042 1,275 888
-------------- -------------- --------------
Effects of exchange rate changes on cash 119 11 -
-------------- -------------- --------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 12,114 - (69)
Cash and cash equivalents at beginning of period - - 69
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 12,114 $ - $ -
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 57 $ 35 $ 54
Non cash investing and financing transactions
Acquisition of assets by financing arrangements $ 135 $ - $ 53
Acquisition of subsidiary and affiliate for stock:
Easy IP $ - $ 331 $ -
Q.Ton $ 1,459 $ - $ -
</TABLE>
F-10
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 THE COMPANY
EuroTelecom Communications, Inc. ("the Company" or "EuroTelecom") was
incorporated under the laws of the State of Delaware in December 1996. The
Company trades principally in the UK through its wholly owned subsidiary,
EuroTelecom Corporation Limited, and in the US through its wholly owned
subsidiary, RTC, Inc.
EuroTelecom carries out its varied businesses under three segments:
Projects, Services and Communications. The individual lines of business
under each segment are set out below:
Projects - design and installation of application linking
platforms
- supply of computer equipment to the defense
industry
Services - provision of consultancy services for the design
and installation of secure computer networks to
the defense industry
- provision of security services
- contracted fit-outs
- sale and installation of air-conditioning units
Communications - distribution of software products
As of June 30, 2000, the Company had the following principal
subsidiaries:
<TABLE>
<CAPTION>
COUNTRY OF
INCORPORATION
NAME OF COMPANY NATURE OF BUSINESS AND OPERATION
<S> <C> <C>
EuroTelecom Corporation Application linking, security, sale of
Limited ("ECL") equipment and consultancy UK
SUBSIDIARIES OF ECL
Chunlan Limited Supplier of air conditioning units UK
Timtec International Limited Shop fitting and interior fitting out construction UK
Easy IP Limited Software distribution UK
EuroTelecom Connect Limited Internet application service provider UK
Universal Communications Design and installation of telecommunication
Solutions Limited infrastructure to the oil and gas industry UK
RTC, Inc. Technical marketing, sales and consulting
services USA
</TABLE>
Timtec International Limited is wholly owned by Chunlan Limited.
F-11
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of EuroTelecom and its subsidiaries and affiliate.
EuroTelecom Secure Networks Limited is recorded as a closed
subsidiary in the period ended June 30, 1999 since it ceased
operations on February 19. All significant intercompany transactions
have been eliminated in consolidation. Investments in affiliates are
accounted for using the equity method when the Company owns at least
20% but no more than 50% of such affiliates. Under the equity method
the Company records its proportionate share of profits and losses
based on its percentage interest in those affiliates.
(b) GOODWILL
The excess of cost of investments over the fair value of net assets
acquired which is not otherwise allocated is determined to be
goodwill and is amortized on a straight-line basis over a period of
5 years.
(c) LONG-LIVED ASSETS
Long-lived assets, such as property, plant and equipment, goodwill
and investments in affiliates, are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down
to fair value. An impairment write-down related to an investment of
$44,000 was necessary for fiscal 2000, $Nil for the six months ended
June 30, 1999 and $Nil for fiscal 1998.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line
method over estimated useful life of up to seven years.
(e) INCOME TAXES
The Company recognises deferred tax liabilities and assets for the
expected future tax consequences of events that have been included
in the financial statements or tax returns. Accordingly, deferred
tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and
liabilities using enacted rates in effect for the year in which the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognised in
income in the period that includes the enactment date.
A valuation allowance is established to reduce the deferred tax
assets when management determines it is more likely than not that
the related tax benefits will not be realised.
F-12
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) REVENUE RECOGNITION
Revenues comprise:
i) Sale of equipment and software which is recognised when
shipped.
ii) Provision of consultancy and security services is recognised
as services are performed.
iii) Provision of maintenance and monitoring services is
recognised on a straight line basis over the period of the
contract.
iv) The Company recognizes revenues from fixed-price and
modified fixed-price application linking and fit-out
contracts on the percentage of completion method, measured
by the percentage of cost incurred to date to estimated
total cost for each contract. That method is used because
management considers total cost to be the best available
measure of progress on the contracts. Because of inherent
uncertainties in estimating costs, it is at least reasonably
possible that the estimates used will change within the near
term.
Contract costs include all direct material and labor costs
and in the case of fit-out costs an element of indirect
costs are included. Selling, general and administrative
costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability may
result in revisions to costs and income, which are
recognized in the period in which the revisions are
determined. Changes in estimated job profitability are
accounted for as changes in estimates in the current period.
The asset "Costs and estimated earnings in excess of
billings on uncompleted contracts," represents revenues
recognized in excess of amounts billed. The liability,
"Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of
revenues recognized.
(g) FOREIGN CURRENCIES
The reporting currency of the Company is the United States dollar.
The Company's functional currency is the United Kingdom pound
sterling for the majority of its business.
For consolidation purposes, the assets and liabilities of overseas
subsidiaries are translated at the closing exchange rates.
Consolidated statements of income of such subsidiaries are
consolidated at the average rates of exchange during the period.
Exchange differences arising on the translation of subsidiaries'
financial statements are recorded in the cumulative foreign currency
translation adjustment account as a component of stockholders'
equity.
(h) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers
all investments with an original maturity of three months or less to
be a cash equivalent.
F-13
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) INVENTORY
Inventories are stated at lower of cost using the first in first out
method, or market.
(j) USE OF ESTIMATES
In preparing the consolidated financial statements in conformity
with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the consolidated financial statements and
revenues and expenses during the reported period. Actual results
could differ from these estimates.
(k) FINANCIAL INSTRUMENTS
Financial instruments held by the Company include cash and cash
equivalents, accounts receivable and payable, notes payable and
approximated fair value as of June 30, 2000 due to either short
maturity or terms similar to those available to similar companies in
the open market. The investment in affiliated company approximated
fair value as of June 30, 2000 due to the fact that it was recently
acquired.
(l) ADVERTISING COSTS
The company expenses advertising costs as incurred. Advertising
costs in fiscal 2000, six months ended June 30, 1999 and fiscal 1998
were $129,000, $10,000 and $Nil respectively.
(m) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard
("SFAS") No.130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS No.130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
The only item of comprehensive income is foreign currency exchange
translation adjustments.
(n) RESEARCH AND DEVELOPMENT
The Company incurred research and development costs of $717,000,
$Nil and $Nil for fiscal 2000, six months ended June 30, 1999 and
fiscal 1998 respectively.
(o) STOCK COMPENSATION
The Company applies the recognition and measurement provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" and the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" in accounting for
stock options issued to employees.
F-14
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(p) EARNING PER SHARE
The Company follows SFAS No. 128, "Earnings per share," which
requires presentation of basic earnings per share and diluted
earnings per share by all entities that have publicly traded common
stock or potential common stock (options, warrants, convertible
securities or contingent stock arrangements). Basic earnings per
share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share gives
effect to dilutive potential common shares outstanding during the
year. Assumed exercise of options and warrants has not been included
in the calculation of diluted loss per share since the effect would
be anti-dilutive. Accordingly, basic and diluted net loss per share
do not differ for any period presented. The number of options and
warrants outstanding as of June 30, 2000 is 1,189,362.
(q) EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, as amended by SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities," which requires the
Company to value derivative financial instruments, including those
used for hedging foreign currency exposures, at current market value
with the impact of any change in market value being charged against
earnings in each period. SFAS No. 133 will be effective for and
adopted by the Company in the first quarter of the fiscal year ended
June 30, 2001. The Company has not in the past nor does it
anticipate that it will engage in transactions involving derivative
instruments, and therefore does not expect this pronouncement to
have any effect on the financial statements.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". This
bulletin summarizes views of the Staff on applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company will be required to adopt SAB No. 101, as
amended by SAB 101B, in the fourth quarter of fiscal 2001.
Management believes that the current revenue recognition policy
complies with the guidelines in SAB No. 101 and, therefore, does not
believe the adoption of SAB No. 101B will have a material impact on
the financial position or results of operations.
In March 2000, the FASB issued Financial Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion 25". Interpretation No. 44 is
effective July 1, 2000. Interpretation No. 44 clarifies the
application of APB Opinion 25 for various matters, specifically: the
criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award; and the accounting for an exchange of stock compensation
awards in a business combination. Management believes that the
adoption of Interpretation No. 44 note will not have a material
impact on the Company's financial position or results of operations.
In March 2000, the FASB's Emerging Issue Task Force ("EITF") reached
a consensus on EITF 00-2, "Accounting for Web Site Development
Costs". EITF 00-2 discusses how an entity should account for costs
incurred to develop a web site. The EITF is effective in the first
quarter of fiscal 2001. Management believes that the adoption of
EITF 00-2 will not have a material impact on the Company's financial
position or results of operations.
F-15
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
3 INVENTORIES
Inventories consist of the following:
JUNE 30,
2000
(IN THOUSANDS)
Finished goods $ 643
Raw materials 255
--------------
$ 898
==============
4 PROPERTY, PLANT AND EQUIPMENT, NET
Major classes of property, plant and equipment consist of the
following:
JUNE 30,
2000
(IN THOUSANDS)
Leasehold improvements $ 283
Plant and equipment 2,354
--------------
2,637
Less: accumulated depreciation (263)
--------------
$ 2,374
==============
Depreciation expense was approximately $200,000, $14,000 and $23,000
for fiscal 2000, six months ended June 30, 1999 and fiscal 1998
respectively
F-16
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
5 UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts are
summarized as follows:
JUNE 30,
2000
(IN THOUSANDS)
Costs incurred on uncompleted contracts $ 2,299
Estimated earnings* 24
--------------
2,323
Billings to date -
--------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,323
==============
* Does not include the 49% of estimated earnings on the contract with
Q.Ton, the Company's affiliated company - Refer also to Note 15.
6 ACQUISITIONS
(a) EASY IP
On April 19, 1999 the Company acquired a software distribution
business known as Easy IP Limited. The transaction has been
accounted for as a purchase.
The consideration for the business and assets, including acquisition
costs, was $586,050, payable as to $193,200 in cash of which $96,625
was deferred and 200,000 shares of common stock valued at $331,250.
The Company acquired net assets of $178,300 resulting in goodwill of
$407,750.
The results for Easy IP have been included in the consolidated
financial statements from April 19, 1999.
F-17
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
6 ACQUISITIONS (CONTINUED)
(a) EASY IP (CONTINUED)
The unaudited pro forma statement for the Company as if the
acquisition had occurred on January 1, 1998 and January 1, 1999, is
set out below:
SIX MONTHS YEAR ENDED
JUNE 30, DECEMBER 31,
1999 1998
(IN THOUSANDS)
Revenues $ 1,860 $ 2,027
============== ==============
Loss from operations (1,269) (1,361)
============== ==============
Net loss (2,231) (1,457)
============== ==============
Loss per share $ (0.29) $ (0.24)
============== ==============
(b) TIMTEC
On April 18, 2000, a newly incorporated wholly owned subsidiary of
Chunlan Limited purchased the trade and assets of Timtec
International Limited ("Timtec") for a total consideration of
$1,041,000. The purchase consideration was allocated $583,000 to
equipment acquired and the balance of $458,000 attributed to
goodwill which will be amortized over 5 years. Timtec was in
administration at the time of the acquisition and following the sale
changed its name. The company which acquired the trade and assets
then changed its name to Timtec International Limited. The
transaction has been accounted for as a purchase.
The results of Timtec have been included in the consolidated
financial statements from April 18, 2000.
F-18
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
6 ACQUISITIONS (CONTINUED)
(b) TIMTEC (CONTINUED)
The unaudited pro-forma results of operations for the Company as if
the acquisition had occurred on January 1, 1998, January 1, 1999 and
July 1, 1999 is set out below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues 11,020 6,498 10,752
============== ============== ==============
Loss from operations (7,374) (1,397) (1,704)
============== ============== ==============
Net loss (7,300) (2,410) (1,835)
============== ============== ==============
Loss per share (0.38) (0.31) (0.32)
============== ============== ==============
</TABLE>
7 INVESTMENT IN AFFILIATED COMPANY
(a) On May 10, 2000 ECL acquired 49% of Q.Ton Limited in exchange for
794,000 shares of Class 'A' Common Stock of EuroTelecom and
$1,139,025 payable in cash. The fair value of the 794,000 shares
issued was $1,459,076. Total consideration paid, including
acquisition costs, was $2,635,953.
The fair value of the net assets acquired was $1,948,000 resulting
in a premium of $1,688,000 which is being amortized over a 5 year
period.
JUNE 30,
2000
(IN THOUSANDS)
Investment at cost 2,636
Share of loss for the period (51)
Amortization of premium on acquisition in the period (25)
--------------
$ 2,560
==============
F-19
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
7 INVESTMENT IN AFFILIATED COMPANY (CONTINUED)
(b) Summarised financial information on Q.Ton Limited as of June 30,
2000 and for the year ended June 30, 2000
JUNE 30,
2000
(IN THOUSANDS)
Current assets $ 1,615
Non-current assets 993
--------------
$ 2,608
==============
Current liabilities $ 777
==============
Revenues $ -
==============
Loss from operations $ (194)
==============
Net loss $ (160)
==============
8 STOCKHOLDERS' EQUITY
In the year ended December 31, 1998 the Company issued 1,280,000 shares
for services, 151,200 shares to employees (101,200) and a director
(50,000) and 51,200 shares for cash.
In the six months ended June 30, 1999, the Company issued 1,381,666
shares for cash, 764,000 shares for services, 123,420 shares in respect
of employee bonuses and subscriptions, and 200,000 shares for the
acquisition of Easy IP.
In the year ended June 30, 2000 the Company had the following stock
transactions:
(a) issued 2,310,000 shares of common stock shares for cash;
(b) convertible notes previously categorised as debt in the amounts of
$80,000, $360,000 and $360,000 were converted into 550,000,
2,475,000 and 2,475,000 restricted common stock shares
respectively at $0.145 per share. Conversion terms were agreed
prior to June 30, 1999 with the shares being issued on July 1,
1999. The beneficial conversion terms of $918,750 was reflected in
finance costs in the six months to June 30,1999;
F-20
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
8 STOCKHOLDERS' EQUITY (CONTINUED)
(c) issued 821,000 shares of common stock for services;
(d) issued 150,000 shares of common stock in consideration for an
employment agreement entered into on August 16, 1999 covering a
period of three years. The value of these shares is being
amortized over the period of the employment agreement;
(e) issued 218,120 common stock shares to directors of the Company;
(f) on April 5, 2000 the Company listed a new class of Class 'A'
common stock on the Alternative Investment Market of The London
Stock Exchange. A total of 11,220,118 Class 'A' common stock
shares were sold raising $26,938,283 before costs; and
(g) issued 794,000 shares of common stock in connection with the
acquisition of Q.Ton Limited.
Shares were valued at the prevailing market price at the date of grant
in the case of those issued to employees and directors, and at the date
the parties entered into the settlement agreement to satisfy invoiced
amounts in the case of professional services and for acquisitions at
the date of closing the transaction.
9 WARRANTS AND SHARE OPTIONS
As of June 30, 2000 the Company had 223,600 warrants outstanding
convertible into common stock shares.
The warrants are exercisable on the day two years from the first
effective date of a registration statement being filed by the Company
in respect of the warrants. No such registration statement has been
filed and the warrants presently have an indefinite exercise period.
The exercise price is $2.00 per share.
On March 28, 2000 the Company approved an Employee Share Option Scheme
("Option Scheme") which provided for the grant of options over the
Company's 'A' class common stock shares of $0.01. As of June 30, 2000
the Company had granted 965,762 options, of which 210,000 were granted
to directors of the Company. The options generally will vest after
three years and will expire ten years after the grant date. None were
forfeited.
The number of options which can be issued is restricted based on a
certain percentage ceilings dependent upon the number of shares in
issue.
Exercise price is the higher of market value at the date of grant,
determined by reference to the average of mid-market quotations on the
three dealing days preceding the date of grant, and par value. Options
cannot be exercised, subject to certain specified procedures in the
Option Scheme, until the expiry of three years from the date of grant.
The weighted average exercise price is $2.40.
The option exercise price at each option share is the fair market value
of the Company's shares of Class A Common stock. Options lapse on the
option holder ceasing to be either an employee or director of the
Company.
F-21
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
9 WARRANTS AND SHARE OPTIONS (CONTINUED)
The Company applies APB Opinion No. 25 and accordingly no compensation
expense has been recognized for its employee stock options. Had the
Company determined compensation expense based on the fair value at the
grant date in accordance with SFAS 123, the Company's net loss would
have been increased to the pro forma amount indicated below:
YEAR ENDED
JUNE 30,
2000
(IN THOUSANDS
EXCEPT LOSS
PER SHARE)
Net loss
- As reported $ (7,069)
- Pro forma (7,229)
==============
Loss per share
- As reported $ (0.37)
- Pro forma (0.38)
==============
The fair value of the options granted was estimated using the
Black-Scholes option pricing model assuming no expected dividends, a
vesting period of three years, risk free rate of 6.4% and volatility of
93%.
10 LOSS FROM CLOSED SUBSIDIARY
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. 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 were 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 for the
six months ended June 30, 1999 and fiscal 1998.
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.
As of June 30, 2000 EuroTelecom is carrying no assets or liabilities in
respect of this company.
F-22
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
11 INCOME TAXES
The Company did not provide any current or deferred US federal, state
or foreign income tax provision or benefit for any periods presented
because it has experienced operating losses since inception. The
Company has provided a full valuation allowance on the deferred tax
asset, consisting primarily of net operating loss, because of
uncertainty regarding its realizability.
As June 30, 2000 the majority of the losses carried forward arise in
the UK. Under UK legislation the net operating losses can, subject to
certain restrictions, be carried forward indefinitely.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss $ 2,474 $ 7,140 $ 7,408
Valuation allowance for deferred tax assets (2,474) (7,140) (7,408)
-------------- -------------- --------------
$ - $ - $ -
============== ============== ==============
</TABLE>
12 LEASES
The Company leases certain office space under lease agreements.
Future minimum lease payments under non-cancellable operating leases as
of June 30, 2000, are as follows (in thousands):
2001 $ 290
2002 288
2003 288
2004 288
Thereafter 1,656
--------------
$ 2,810
==============
Total rental expense for the fiscal 2000, six months to June 30, 1999
and fiscal 1998 was $261,000, $27,000 and $1,000 respectively.
F-23
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
13 BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are primarily located in the UK. Details of
corporate customers who account for more than 10% of revenue for fiscal
2000, six months to June 30, 1999 and fiscal 1998 are as follows:
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
Customer A - 20% -
Customer B 14% 13% -
14 COMMITMENTS AND CONTINGENCIES
From time to time the Company is subject to legal proceedings and
claims in the ordinary course of business.
The Company is not aware of any legal proceedings or claims against the
Company that will have, individually or in aggregate a material adverse
affect on the Company's business, prospects, financial condition and
results of operations.
15 RELATED PARTY TRANSACTIONS
The Company was charged $390,000 in fiscal 2000, $Nil in the six months
to June 30, 1999 and fiscal 1998 in professional fees by a company in
which one of the directors has a material interest.
The Company entered into an application linking contract with Q.Ton
Limited prior to its acquisition of 49% of Q.Ton Limited on May 10,
2000, an affiliated company. As of June 30, 2000 the contract was
uncompleted and no amounts had been billed. The amount of cost incurred
to June 30, 2000 was approximately $1,000,000 with estimated earnings
of $46,000 as of June 30, 2000. In accordance with the principles of
equity accounting the Company has only recorded 51% of revenues and
costs associated with this contract.
F-24
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
16 INDUSTRY AND GEOGRAPHIC AREA SEGMENTS
The Company and its subsidiaries are engaged in three lines of
business: Projects, Services and Communications. Operations of the
subsidiary companies are conducted in the UK and US. The following is a
summary of the Company's operations by business segment and by
geographical segment. The accounting policies of the segments are the
same as those described in Note 2 - Significant accounting policies
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS)
<S> <C> <C> <C>
(a) Statement of operations
Revenues
Projects $ 2,871 $ 443 $ -
Services 3,914 348 64
Communications 2,953 532 -
-------------- -------------- --------------
Revenues for reportable segments
and consolidated revenues 9,738 1,323 64
-------------- -------------- --------------
Loss before tax
Projects (6,018) (1,072) -
Services (674) (86) (1,133)
Communications (462) (1) -
Add: interest, loan beneficial conversion,
loss from closed subsidiary and share of
loss of affiliated company 85 (1,078) (346)
-------------- -------------- --------------
Total loss for reportable segments $ (7,069) $ (2,237) $ (1,479)
============== ============== ==============
Depreciation and amortization
Projects $ 214 $ 6 $ -
Services 94 14 23
Communications 11 20 -
-------------- -------------- --------------
$ 319 $ 40 $ 23
============== ============== ==============
</TABLE>
F-25
<PAGE>
EUROTELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
16 INDUSTRY AND GEOGRAPHIC AREA SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
2000
(IN THOUSANDS)
<S> <C> <C> <C>
(b) Total assets
Projects $ 5,657
Services 3,178
Communciations 1,417
Unallocated 15,899
--------------
$ 26,151
==============
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS)
(c) Geographic analysis of revenue
United Kingdom $ 9,385 $ 1,323 $ 64
United States 353 - -
-------------- -------------- --------------
9,738 1,323 64
============== ============== ==============
17 RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1998
(IN THOUSANDS,
EXCEPT LOSS PER SHARE)
Revenues $ 32
==============
Gross profit 32
==============
Selling, general and administrative expenses 676
==============
Net loss c (656)
==============
Loss per share $ (0.12)
==============
</TABLE>
F-26
