<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 28, 2000
--------------------------
SYMPOSIUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
0-25435 13-4042921
(Commission file number) (I.R.S. employer identification no.)
410 Park Avenue Suite 830 New York, New York 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 754-9901
<PAGE> 2
Items 1, 3, 4, 5, 6, 8 and 9 are not applicable and are omitted from this
amended Current Report. The information required by Items 2 and 7(c) has been
previously filed. This amended Current Report is filed to provide the financial
information required by Items 7(a) and 7(b).
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The financial statements and pro forma financial information that follow are
filed as part of this report.
(a) Financial Statements of Business Acquisition of Direct Sales International,
L.P.
(i) Direct Sales International, L.P. financial statements as of and
for the fiscal year ended December 31, 1999.
(ii) Direct Sales International, L.P. financial statements as of and
for the fiscal years ended December 31, 1998 and 1997.
(b) Pro Forma Financial Information
(i) Symposium Corporation and Subsidiaries Unaudited Pro Forma
Consolidated Financial Statements.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Symposium
Corporation has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: April 12, 2000 Symposium Corporation
/s/ Tim Ledwick
By:___________________________
Tim Ledwick
Chief Financial Officer
<PAGE> 4
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
DIRECT SALES INTERNATIONAL L.P.
December 31, 1999
<PAGE> 5
C O N T E N T S
Page
----
Report of Independent Certified Public Accountants 3
Financial Statements
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Changes in Partners' Capital 6
Consolidated Statement of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 15
<PAGE> 6
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Direct Sales International L.P.
We have audited the accompanying consolidated balance sheet of Direct Sales
International L.P. as of December 31, 1999, and the related statements of
operations, changes in partners' capital and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Direct Sales International L.P.
as of December 31, 1999, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
New York, New York
March 23, 2000
-3-
<PAGE> 7
Direct Sales International L.P.
(a limited partnership)
CONSOLIDATED BALANCE SHEET
December 31, 1999
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS
Accounts receivable, net of collection and
cancellation reserve of $18,493,203 $28,401,999
Other current assets, net 536,004
Deferred expenses 1,472,040
-----------
Total current assets 30,410,043
PROPERTY AND EQUIPMENT, NET 253,710
-----------
$30,663,753
===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Cash overdraft $ 189,950
Accounts payable 3,952,225
Deferred revenues 3,004,164
Other current liabilities 278,921
Payable to partners 1,999,000
-----------
Total current liabilities 9,424,260
PARTNERS' CAPITAL 21,239,493
-----------
$30,663,753
===========
</TABLE>
The accompanying notes are an integral part of this statement.
-4-
<PAGE> 8
Direct Sales International L.P.
(a limited partnership)
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1999
<TABLE>
<S> <C>
Net revenues $ 85,356,097
Direct costs and expenses
Commission expense 31,470,850
Collection and cancellation expenses 23,565,633
Magazine costs 8,256,194
Other direct costs 10,688,191
------------
73,980,868
General and administrative expenses 3,784,404
------------
Operating income 7,590,825
Other income and expenses
Interest expense, net (4,341)
Other income 438,568
------------
NET INCOME $ 8,025,052
============
</TABLE>
The accompanying notes are an integral part of this statement.
-5-
<PAGE> 9
Direct Sales International L.P.
(a limited partnership)
CONSOLIDATED STATEMENT OF CHANGES
IN PARTNERS' CAPITAL
Year ended December 31, 1999
<TABLE>
<CAPTION>
General Limited
Partner Partner Total
-------- ----------- -----------
<S> <C> <C> <C>
Partners' capital, January 1, 1999 $194,000 $15,714,280 $15,908,280
Distributions (2,693,839) (2,693,839)
Net income 80,250 7,944,802 8,025,052
-------- ----------- -----------
Partners' capital, December 31, 1999 $274,250 $20,965,243 $21,239,493
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
-6-
<PAGE> 10
Direct Sales International L.P.
(a limited partnership)
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 8,025,052
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Depreciation and amortization 135,799
Collection and cancellation reserve (1,445,797)
Changes in assets and liabilities
Accounts receivable (3,250,202)
Other current assets and deferred expenses 33,956
Accounts payable 1,144,474
Accrued liabilities and deferred revenues (511,914)
-----------
Net cash provided by operating activities 4,131,368
-----------
Cash flows from investing activities
Purchase of property, plant and equipment (63,509)
-----------
Net cash used in investing activities (63,509)
-----------
Cash flows from financing activities
Cash overdraft 189,950
Net payments under line of credit (1,808,000)
Partner withdrawals (2,693,809)
-----------
Net cash used in financing activities (4,311,859)
-----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (244,000)
Cash and cash equivalents at beginning of year 244,000
-----------
Cash and cash equivalents at end of year $ --
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for
Interest $ 42,942
===========
</TABLE>
The accompanying notes are an integral part of this statement.
-7-
<PAGE> 11
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE A - ORGANIZATION AND BACKGROUND
Direct Sales International L.P. (the "Company") is a Georgia limited
partnership formed on July 1, 1995 through the merger of Direct Sales
International and Direct Sales International, Inc. The Company has three
wholly-owned subsidiaries: National Readers Service, Inc. ("NRS"), DSI
Communications, LLC and Media Outsourcing.
The Company has four partners: Direct Sales, Inc. (the "General Partner"),
which owns 1% of the Company, Richard Prochnow (the "Limited Partner") and
two of the Limited Partner's family members (the "Additional Limited
Partners"). The Limited Partner and the Additional Limited Partners own
the remaining 99%. The Limited Partner is also the sole shareholder of the
General Partner.
The Company provides outsourced telecommunications-based marketing,
customer service and call center management services to a variety of
publishers to sell magazine subscriptions. Subcontract telemarketing
organizations ("lead brokers") solicit subscriptions on behalf of the
Company on a commission basis. The Company purchases subscriptions through
NRS, Media Outsourcing and other publisher clearinghouses to fulfill
customer orders.
NOTE B - SUBSEQUENT EVENTS
On January 28, 2000, the Company sold all of its assets and business to
Symposium Corporation in a purchase business combination for cash
consideration in the amount of $25,000,000.
The Company also terminated its line of credit arrangement with a bank
that provided for borrowings of up to $2,500,000 repayable with interest
at 2% above the prime rate or LIBOR (at the election of the Company). All
of the Company's assets were provided as collateral under this
arrangement. There were no outstanding borrowings at December 31, 1999.
Basis of Consolidation
The consolidated financial statements of the Company include the accounts
of Direct Sales International L.P. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
-8-
<PAGE> 12
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of 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.
Significant estimates inherent in the preparation of the financial
statements include the accounts receivable collection and cancellation
reserve. The Company evaluates a variety of factors in determining
potentially uncollectible accounts, including the historical collection
experience. Management's assessment of recoverability of accounts
receivable may change based on actual results and other factors.
Revenues
Revenues derived from originating magazine subscriptions are recognized by
the Company when the Company receives the first installment payment for
subscriptions purchased. The customer can cancel the subscription within
ten days of the order. Amounts collected from customers prior to the
expiration of the cancellation period are recorded as deferred revenues.
Revenues also include commissions earned from publishers in connection
with originating paid subscriptions for certain publications. Commissions
are also earned from outside parties for securing via telemarketing
memberships in a discount buying club. Commissions are recognized when the
related subscriptions or memberships are obtained.
Commission Expense
Commission expense is recognized by the Company when the Company receives
the first installment payment for subscriptions purchased. The customer
can cancel the subscription within ten days of the order. Amounts paid to
brokers prior to the expiration of the cancellation period are recorded as
deferred expenses.
-9-
<PAGE> 13
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE C (continued)
Cash and Cash Equivalents
The Company considers investments with original maturities of three months
or less to be cash equivalents. Cash equivalents at December 31, 1999
consist of an overnight repurchase agreement of approximately $1,500,000.
Accounts Receivable
Accounts receivable are recorded when the Company receives the first
installment payment for subscriptions purchased. Factors such as account
loss experience and historical cash collections are considered in
determining the allowance for doubtful accounts.
Property and Equipment
Property and equipment are stated at cost. The Company depreciates
property and equipment based on estimated useful lives, ranging from five
to seven years, using a modified accelerated cost recovery (tax basis)
method for both financial reporting and income tax purposes. For financial
reporting purposes, depreciation expense recorded using this accelerated
method did not differ significantly from what would have been recorded
using a straight-line method.
Maintenance and repairs are charged to operations as incurred while
improvements to assets are capitalized.
Income Taxes
No provision for Federal and State income taxes is reflected in the
accompanying financial statements because the Company is not subject to
income tax; rather, the tax effects of its activities accrue to the
partners.
-10-
<PAGE> 14
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE C (continued)
Partners' Capital
Profits and losses are allocated proportionately according to each
partner's interest relative to the total investments in the Company.
Fair Value of Financial Instruments
The recorded values of the cash overdraft, accounts receivable, accounts
payable, payable to partners, and other current liabilities reflected in
the financial statements are representative of their fair value due to the
short-term nature of the instruments.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The Company places its cash and cash equivalents with
high quality credit institutions. At times, such investments may be in
excess of the Federal Deposit Insurance Corporation insurance limit. The
Company sells primarily to individuals throughout the United States.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade accounts
receivable as the Company does not require collateral or other securities
to support customer receivables. However, credit risk concentration is
mitigated, due to the significant number of customers with relatively
small balances and the geographical dispersion of the Company's customer
base.
-11-
<PAGE> 15
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Cash order subscriptions $ 44,654,190
Due from publishers 852,738
Commissions 1,102,989
Other receivables 285,285
------------
46,895,202
Less allowance for doubtful accounts (18,493,203)
------------
$ 28,401,999
============
</TABLE>
NOTE E - DEFERRED EXPENSES
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Deferred commission expense $1,201,666
Deferred magazine costs 270,374
----------
$1,472,040
==========
</TABLE>
-12-
<PAGE> 16
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1999
-----------
<S> <C>
Furniture and fixtures $ 114,710
Equipment 929,765
Automobiles 116,034
-----------
1,160,509
Less accumulated depreciation (906,799)
-----------
$ 253,710
===========
</TABLE>
Depreciation expense for the year ended December 31, 1999 amounted to
$131,799.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under operating leases
having terms ranging from three to five years, including a lease of a
facility from an entity 60% owned by the Limited Partner. The operating
leases expire in 2004. Future minimum lease payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
Related Nonrelated
Year party party Total
---- ---------- ---------- ----------
<S> <C> <C> <C>
2000 $ 243,000 $151,000 $ 394,000
2001 243,000 136,000 379,000
2002 243,000 98,000 341,000
2003 243,000 40,000 283,000
2004 81,000 17,000 98,000
---------- -------- ----------
$1,053,000 $442,000 $1,495,000
========== ======== ==========
</TABLE>
-13-
<PAGE> 17
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE G (continued)
Rental expense under operating leases amortized to $432,000 for the year
ended December 31, 1999, including $289,000 paid to a related party for
leased premises.
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have
been filed or are pending against the Company. Management believes that
the ultimate resolution of such contingencies will not have a material
adverse effect on the financial position or results of operations of the
Company.
NOTE H - EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution savings plan (the "Plan")
under Section 401(k) of the Internal Revenue Code which is available to
all the employees who meet established eligibility requirements. Employee
contributions are generally limited to 15% of the employee's compensation.
Under the Plan provision, the Company may match a portion of the
participating employees' contributions. The Company's total contributions
to the Plan in 1999 were $93,854.
Employees are fully vested in their contributions, while vesting of the
Company's matching contribution occurs upon completion of the employee's
fifth year of eligible service. The Company may also make additional
contributions to the Plan, based on the profitability of the Company, at
management's discretion.
NOTE I - RELATED PARTY TRANSACTIONS
At December 31, 1999, the Company had loans payable of $199,000 and
$1,800,000 to the Limited Partner and General Partner, respectively. These
loans were repaid concurrent with the sale of the Company in January 2000.
-14-
<PAGE> 18
Direct Sales International L.P.
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
NOTE I (continued)
The Company had a $100,000 receivable due from a telemarketing company
which is 5% owned by the Limited Partner that monitored and collected
certain accounts receivable. In January 2000, the receivable was settled
for $43,000. The Company also paid approximately $23,827 of commissions to
this entity for receivables collected on behalf of the Company during
1999.
The Company also wrote off a $46,000 receivable due from a related party
under a subleasing arrangement that was discontinued in 1999.
As described in Note G, the Company has a five-year noncancellable
operating lease for facilities with a related party. Annual rental expense
under this lease is approximately $243,000.
-15-
<PAGE> 19
DIRECT SALES
INTERNATIONAL L.P.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 20
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
June 1, 1999
To the Partners of Direct Sales International L.P.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in partners' capital and cash
flows present fairly, in all material respects, the financial position of Direct
Sales International L.P., and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations, changes in partners' capital and their cash
flows for the years then ended 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 conducted our audits of these 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 provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
<PAGE> 21
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 244,000 $ 222,000
Accounts receivable, net of allowance for doubtful
accounts of $19,939,000 in 1998 and $16,075,000 in 1997 23,706,000 17,754,000
Other current assets, net 734,000 1,366,000
Deferred expenses 1,312,000 1,312,000
----------- -----------
Total current assets 25,996,000 20,654,000
Property and equipment, net 322,000 423,000
----------- -----------
Total assets $26,318,000 $21,077,000
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 2,808,000 $ 1,379,000
Borrowings under line of credit 1,808,000 1,960,000
Deferred revenues 2,455,000 2,646,000
Other current liabilities 1,340,000 1,016,000
Payable to partners 1,999,000 1,999,000
----------- -----------
Total current liabilities 10,410,000 9,000,000
Partners' capital
15,908,000 12,077,000
----------- -----------
Total liabilities and partners' capital $26,318,000 $21,077,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 22
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net revenues $ 105,908,000 $ 94,210,000
Direct costs and expenses
Commission expense 39,135,000 33,169,000
Cancellation expense 37,285,000 29,354,000
Magazine costs 9,258,000 8,099,000
Other direct costs 12,464,000 15,665,000
------------- -------------
Total direct costs and expenses 98,142,000 86,287,000
General and administrative expenses 3,731,000 3,339,000
------------- -------------
Operating income 4,035,000 4,584,000
Other income and expenses
Interest income 9,000 15,000
Interest expense (128,000) (140,000)
Other, net 1,386,000 609,000
------------- -------------
Net income $ 5,302,000 $ 5,068,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 23
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
<S> <C> <C> <C>
Partners' capital, January 1, 1997 $ 90,000 $ 8,770,000 $ 8,860,000
Distributions - (1,851,000) (1,851,000)
Net income 51,000 5,017,000 5,068,000
------------ ------------ ------------
Partners' capital, December 31, 1997 141,000 11,936,000 12,077,000
Distributions - (1,471,000) (1,471,000)
Net Income 53,000 5,249,000 5,302,000
============ ============ ============
Partners' capital, December 31, 1998 $ 194,000 $ 15,714,000 $ 15,908,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 24
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,302,000 $ 5,068,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Depreciation and amortization 177,000 151,000
Allowance for doubtful accounts 3,864,000 (2,187,000)
Changes in assets and liabilities
Accounts receivable (9,816,000) (4,361,000)
Other current assets and deferred expenses 628,000 (598,000)
Accounts payable 1,429,000 1,134,000
Accrued liabilities and deferred revenues 133,000 622,000
----------- -----------
Cash flow provided by (used in) operating activities 1,717,000 (171,000)
----------- -----------
Cash flows from investing activities
Proceeds from disposal of assets 2,000 -
Purchase of property, plant, and equipment (74,000) (320,000)
----------- -----------
Cash flow used in investing activities (72,000) (320,000)
----------- -----------
Cash flows from financing activities
(Payments) borrowings under line of credit, net (152,000) 1,960,000
Partner withdrawals (1,471,000) (1,851,000)
----------- -----------
Cash flow (used in) provided by financing activities (1,623,000) 109,000
----------- -----------
Net change in cash and cash equivalents 22,000 (382,000)
Cash and cash equivalents, beginning of period 222,000 604,000
----------- -----------
Cash and cash equivalents, end of period $ 244,000 $ 222,000
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 117,000 $ 140,000
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE> 25
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BACKGROUND
Direct Sales International L.P. (the "Company") is a Georgia limited
partnership formed on July 1, 1995 through the merger of Direct Sales
International and Direct Sales International, Inc. The Company has three
wholly owned subsidiaries: National Readers Service, Inc. ("NRS"), DSI
Communications, LLC. and Media Outsourcing.
The Company has four partners: Direct Sales, Inc., (the "General
Partner"), which owns 1% of the Company, Richard Prochnow (the "Limited
Partner ") and two of the Limited Partner's family members (the
"Additional Limited Partners "). The Limited Partner and the Additional
Limited Partners own the remaining 99%. The Limited Partner is also the
sole shareholder of the General Partner. Prior to July 1, 1995, the
Limited Partner conducted telemarketing sales of discounted magazines as
a sole proprietorship under the name Direct Sales International. On July
1, 1995, the Limited Partner contributed substantially all business
assets, operations and related contracts and agreements of the sole
proprietorship to the Company in order for the Company to continue the
Limited Partner's business of telemarketing sales of magazines.
Contributed assets were recorded at the Limited Partner's net book value.
The Company provides outsourced telecommunications-based marketing,
customer service and call center management services to a variety of
publishers to sell magazine subscriptions. Subcontract telemarketing
organizations ("lead brokers") solicit subscriptions on behalf of the
Company on a commission basis. The Company purchases subscriptions
through NRS, Media Outsourcing, and other publisher clearing houses to
fulfill customer orders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of Direct Sales International L.P. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
USE OF 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.
Significant estimates inherent in the preparation of the financial
statements include the allowance for doubtful accounts. The Company
evaluates a variety of factors in determining potentially uncollectible
accounts, including the historical collection experience. Management's
assessment of recoverability of accounts receivable may change based on
actual results and other factors.
6
<PAGE> 26
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
REVENUES
Revenues are recognized by the Company when the Company receives the
first installment payment for subscriptions purchased. The customer can
cancel the subscription within ten days of the order. Amounts collected
from customers prior to the expiration of the cancellation period are
recorded as deferred revenues.
COMMISSION EXPENSE
Commission expense is recognized by the Company when the Company receives
the first installment payment for subscriptions purchased. The customer
can cancel the subscription within ten days of the order. Amounts paid to
brokers prior to the expiration of the cancellation period are recorded
as deferred expenses.
OTHER INCOME
Other income consists primarily of interest income on overnight
investments and income from selling discount buying club memberships.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of investments with original maturities
of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded when the Company receives the first
installment payment for subscriptions purchased. Factors such as account
loss experience and historical cash collections are considered in
determining the allowance for doubtful accounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company depreciates
property and equipment based on estimated useful lives, ranging from five
to seven years, using a modified accelerated cost recovery (tax basis)
method for both financial reporting and income tax purposes. For
financial reporting purposes, depreciation expense recorded using this
accelerated method did not differ significantly from what would have
been recorded using a straight-line method.
Maintenance and repairs are charged to operations as incurred while
improvements to assets are capitalized.
OTHER ASSETS AND DEFERRED EXPENSES
Other assets are comprised primarily of advances to lead brokers.
Deferred expenses consist of commission expense, magazine costs and
cancellation expense recognized by the Company upon receipt of the first
installment payment for subscriptions purchased prior to the expiration
of the cancellation period.
INCOME TAXES
No provision for federal and state income taxes is reflected in the
accompanying financial statements because the Company is not subject to
income tax; rather, the tax effects of its activities accrue to the
partners.
7
<PAGE> 27
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
PARTNERS' CAPITAL
Profits and losses are allocated proportionately according to each
partner's investment relative to the total investments in the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded values of cash, accounts receivable, accounts payable
borrowings under line of credit, payable to partners, and accrued
liabilities reflected in the financial statements are representative of
their fair value due to the short-term nature of the instruments.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The Company places its cash and cash equivalents
with high quality credit institutions. At times, such investments may be
in excess of the Federal Deposit Insurance Corporation insurance limit.
The Company sells primarily to individuals throughout the United States.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable as the Company does not require collateral or other securities
to support customer receivables. However, credit risk concentration is
mitigated, due to the significant number of customers with relatively
small balances and the geographical dispersion of the Company's customer
base.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Cash order subscriptions $ 42,667,000 $ 32,684,000
Paid during service subscriptions 205,000 401,000
Other receivables 773,000 744,000
------------ ------------
43,645,000 33,829,000
Less: allowance for doubtful accounts (19,939,000) (16,075,000)
------------ ------------
$ 23,706,000 $ 17,754,000
============ ============
</TABLE>
8
<PAGE> 28
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
4. OTHER CURRENT ASSETS
Other current assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Commission advances, net $ 592,000 $ 611,000
Prepaid lead lists - 500,000
Other, net 142,000 255,000
---------- ----------
$ 734,000 $1,366,000
========== ==========
</TABLE>
Commission advances represent amounts advanced to lead brokers to provide
funding for establishment of infrastructure or working capital
requirements. Amounts have been evaluated for impairment, and a reserve
for potentially uncollectible amounts of $591,000 and $626,000 has been
recorded in 1998 and 1997, respectively. The Company recovers the
advances through reduction of future earned commissions.
5. DEFERRED EXPENSES
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred commission expense $ 838,000 $ 923,000
Deferred magazine costs 474,000 389,000
---------- ----------
$1,312,000 $1,312,000
========== ==========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Furniture and fixtures $ 104,000 $ 102,000
Equipment 877,000 848,000
Automobiles 116,000 75,000
----------- -----------
1,097,000 1,025,000
Less: Accumulated depreciation (775,000) (602,000)
----------- -----------
$ 322,000 $ 423,000
=========== ===========
</TABLE>
9
<PAGE> 29
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1998 and 1997
approximated $173,000 and $145,000, respectively.
7. OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Accrued magazine costs $ 711,000 $ 480,000
Accrued telephone costs 49,000 82,000
Other liabilities 580,000 454,000
---------- ----------
$1,340,000 $1,016,000
========== ==========
</TABLE>
8. BORROWINGS UNDER LINE OF CREDIT
In January 1997, the Company borrowed $2,500,000 from the Limited
Partner. This loan was financed by a revolving line of credit from a bank
to the Limited Partner which was guaranteed by the Company and
collaterialized by the Company's accounts receivable. In December 1997,
the revolving line of credit to the Limited Partner from the bank was
restructured, resulting in a transfer of the debt obligation ($1,960,000
at December 31, 1997) from the Limited Partner to the Company.
The revolving line of credit has a maximum borrowing limit of $2,500,000.
Interest on outstanding borrowings under the revolving line of credit
varies with either the prime rate or LIBOR plus 2%, at the election of
the Company. The rate in effect at December 31, 1998 was 7.92%. The
revolving line of credit continues to be collaterialized by the Company's
accounts receivable and matures on July 5, 1999.
The revolving line of credit agreement contains restrictive covenants
including maintenance of certain financial ratios and limitations on new
debt. The Company was in compliance with all such covenants at December
31, 1998.
10
<PAGE> 30
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under operating
leases having terms ranging from three to five years, including a lease
of a facility from an entity 60% owned by the Limited Partner. The
operating leases expire in 2003. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED NON-RELATED
YEAR PARTY PARTY TOTAL
<S> <C> <C> <C>
1999 $ 213,000 $ 120,000 $ 333,000
2000 213,000 84,000 297,000
2001 213,000 66,000 279,000
2002 213,000 54,000 267,000
2003 213,000 13,000 226,000
---------- ---------- ----------
Total $1,065,000 $ 337,000 $1,402,000
========== ========== ==========
</TABLE>
Total future minimum rentals to be received under subleases related to
the above leases are $231,000. Rental expense under operating leases for
the years ended December 31, 1998 and 1997 was approximately $358,000 and
$327,000, respectively.
The Company has commitments to purchase telephone services from one
company at December 31, 1998. Monthly commitments under these contracts
aggregate $200,000, which does not exceed the Company's requirements for
these services in the normal course of business.
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have
been filed or are pending against the Company. Management believes that
the ultimate resolution of such contingencies will not have a material
adverse effect on the financial position or results of operations of the
Company.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution savings plan (the "Plan")
under Section 401(k) of the Internal Revenue Code which is available to
all employees who meet established eligibility requirements. Employee
contributions are generally limited to 15% of the employee's
compensation. Under the Plan provision, the Company may match a portion
of the participating employees' contributions. The Company's total
contributions to the Plan in 1998 and 1997 were $58,000 and $49,000,
respectively.
Employees are fully vested in their contributions, while vesting of the
Company's matching contribution occurs upon completion of the employee's
fifth year of eligible service. The Company may also make additional
contributions to the Plan, based on the profitability of the Company, at
management's discretion.
11
<PAGE> 31
DIRECT SALES INTERNATIONAL L.P.
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, the Company had loans payable of
$1,800,000 and $199,000 to the Limited Partner and General Partner,
respectively. These loans have no established repayment terms and no
interest is charged by the Partners.
In the ordinary course of business, the Company contracts with a
telemarketing company which is 5% owned by the Limited Partner for the
purpose of monitoring and collecting accounts receivable related to paid
during service subscription sales. The Company paid approximately $42,000
and $22,000 of broker commissions to this entity for receivables
collected on behalf of the Company during 1998 and 1997, respectively.
The Company contracts, in the ordinary course of business, with a travel
agency which is wholly-owned by the Limited Partner. The Company paid
approximately $22,000 and $16,000 for travel services to this agency in
1998 and 1997, respectively.
The Company contracts with a telemarketing company which is owned by a
related party. Total payments made to this company during 1998 and 1997
were $1,513,000 and $1,711,000, respectively. All payments represent
broker commissions paid in the ordinary course of business.
Effective January 1997, the Company entered into a five-year
noncancelable operating lease for facilities with a related party. Annual
rental expense under this lease is $213,000.
12
<PAGE> 32
Symposium Corporation and Subsidiaries
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Symposium Corporation ("Symposium" or the "Company") was incorporated in
Delaware on May 9, 1997 under the name of Brack Industries Inc. and, after
amending its certificate of incorporation, changed its name to Symposium
Corporation. The Company's principal business strategy is to identify, acquire,
and consolidate direct marketing businesses. In November 1999, the Company
formed Media Outsourcing, Inc. ("MOS"), formerly known as Direct Sales
International, Inc., a wholly-owned subsidiary, for the purpose of acquiring the
net assets of Direct Sales International, LP ("DSI"). The Company completed its
acquisition of DSI (the "DSI Acquisition") on January 28, 2000.
The following unaudited pro forma consolidated financial information (the "Pro
Forma Financial Statements") of the Company is based on the consolidated
historical financial statements of Symposium Corporation and Subsidiary adjusted
to give effect to: (i) the DSI Acquisition and the following related financing
transactions, (ii) the sale of mandatorily redeemable convertible preferred
stock, (iii) acquisition bridge financings, (iv) initial borrowings under the
Revolving Credit Facility and (v) the payment of fees and expenses related to
the acquisition and the financings (collectively, the "Transactions").
The Pro Forma Financial Statements were prepared to illustrate the estimated
effects of the Transactions. The Pro Forma Consolidated Balance Sheet gives
effect to the Transactions as if they had occurred on December 31, 1999. The Pro
Forma Consolidated Statement of Operations for the year ended December 31, 1999
gives effect to the transactions as if they had occurred on January 1, 1999. In
addition, the Pro Forma Consolidated Balance Sheet, as Adjusted also gives
effect to the extension of the mandatory due date for certain preferred stock,
the subsequent conversion of certain preferred stock and an acquisition bridge
note into Symposium common stock and the repayment of another acquisition bridge
note (collectively, the "Redemptions"), as if each had occurred on December 31,
1999. The one-time effects of nonrecurring charges associated with the intrinsic
value of beneficial conversion features of preferred stock and certain
acquisition bridge debt and the Redemptions are not included in the Pro Forma
Consolidated Statement of Operations.
The pro forma adjustments are based on assumptions that management believes are
reasonable. The Pro Forma Financial Statements do not purport to represent what
the results of operations or financial position of the Company would have been
had the Transactions or Redemptions in fact occurred on such dates nor do they
purport to project the results of operations or financial position of the
Company for any future period or as of any date. The Pro Forma Financial
Statements should be read in conjunction with the consolidated financial
statements of Symposium and the related notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 1999, and the financial statements
of DSI and related notes thereto included in their Form 8-K/A.
F-1
<PAGE> 33
The Acquisition will be accounted for as a purchase business combination. Under
purchase accounting, the total purchase cost will be allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values. The excess of the purchase cost over the book value of
the net assets acquired has been allocated to goodwill and other intangible
assets in the accompanying Pro Forma Financial Statements. The pro forma
allocation represents the Company's preliminary determination of purchase
accounting adjustments based upon available information and certain assumptions
that management believes are reasonable. The actual allocation of the purchase
cost and its effect on the Company's results of operations and financial
position may differ significantly from the pro forma amounts included herein.
F-2
<PAGE> 34
Symposium Corporation and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
Symposium Direct Sales Pro forma
Corporation International, LP Pro forma Pro forma redemption Pro forma
(Historical) (Historical) adjustments consolidated adjustments as adjusted
---------- ----------- ---------- ----------- --------- -----------
(Note A) (Note B)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 337,615 $ (46,000) $ 291,615 $(291,615)
Trade accounts receivable, net $28,401,999 28,401,999 $28,401,999
Prepaid insurance 19,916 536,004 555,920 555,920
Deferred expenses 1,472,040 1,472,040 1,472,040
---------- ----------- ---------- ----------- --------- -----------
357,531 30,410,043 (46,000) 30,721,574 (291,615) 30,429,959
Property and equipment, net 34,208 253,710 287,918 287,918
Deferred acquisition costs 514,317 (514,317)
Deferred financing costs 150,000 956,000 1,106,000 1,106,000
Goodwill and other intangible assets 5,775,824 5,775,824 5,775,824
---------- ----------- ---------- ----------- --------- -----------
Total current assets $1,056,056 $30,663,753 $6,171,507 $37,891,316 $(291,615) $37,599,701
========== =========== ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 35
Symposium Corporation and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
<TABLE>
<CAPTION>
Symposium Direct Sales Pro forma
Corporation International, LP Pro forma Pro forma redemption
(Historical) (Historical) adjustments consolidated adjustments
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Note A) (Note B)
Cash overdraft $ 189,950 $ 1,500,000 $ 1,689,950 $ 208,385
Revolving credit facility 16,000,000 16,000,000
Acquisition bridge financings 1,000,000 1,000,000 (700,000)
Trade accounts payable $ 69,093 3,952,225 4,021,318
Acquisition liabilities 2,000,000 2,000,000
Accrued professional fees 454,280 40,000 494,280
Other current liabilities 238,921 238,921
Deferred revenue 3,004,164 3,004,164
Payable to partners 1,999,000 (1,999,000)
----------- ----------- ------------ ------------ ------------
Total current liabilities 523,373 9,424,260 18,501,000 28,448,633 (491,615)
----------- ----------- ------------ ------------ ------------
Mandatorily redeemable convertible preferred
stock 4,976,876 4,976,876 (1,428,571)
Partners' capital 21,239,493 (21,239,493)
Stockholders' equity
Common stock 14,043 2,268 16,311 5,651
Stock note receivable (2,500,000) (2,500,000)
Additional paid-in capital 12,848,277 8,589,708 21,437,985 16,092,120
Accumulated deficit (9,829,637) (4,658,852) (14,488,489) (14,469,200)
----------- ----------- ------------ ------------ ------------
Total stockholders' equity 532,683 3,933,124 4,465,807 1,628,571
----------- ----------- ------------ ------------ ------------
Total liabilities and stockholders'
equity $ 1,056,056 $30,663,753 $ 6,171,507 $ 37,891,316 $ (291,615)
=========== =========== ============ ============ ============
<CAPTION>
Pro forma
as adjusted
------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Cash overdraft $ 1,898,335
Revolving credit facility 16,000,000
Acquisition bridge financings 300,000
Trade accounts payable 4,021,318
Acquisition liabilities 2,000,000
Accrued professional fees 494,280
Other current liabilities 238,921
Deferred revenue 3,004,164
Payable to partners -
------------
Total current liabilities 27,957,018
------------
Mandatorily redeemable convertible preferred
stock 3,548,305
Partners' capital
Stockholders' equity
Common stock 21,962
Stock note receivable (2,500,000)
Additional paid-in capital 37,530,105
Accumulated deficit (28,957,689)
------------
Total stockholders' equity 6,094,378
------------
Total liabilities and stockholders'
equity $ 37,599,701
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 36
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1999
NOTE A - UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma consolidated balance
sheet adjustments:
<TABLE>
<CAPTION>
Total
pro forma
(1) (2) (3) (4) adjustments
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 16,504,000 $ 8,450,000 $(25,000,000) $ (46,000)
Deferred financing costs 956,000 956,000
Goodwill and other
intangible assets 5,775,824 5,775,824
Deferred acquisition
costs (514,317) (514,317)
Cash overdraft $(1,500,000) (1,500,000)
Acquisition liabilities (2,000,000) (2,000,000)
Revolving credit
facility (16,000,000) (16,000,000)
Acquisition bridge
financings (1,000,000) (1,000,000)
Payable to partners 1,999,000 1,999,000
Preferred stock (4,976,876) (4,976,876)
Partners' capital (499,000) 21,738,493 21,239,493
Common stock (75) (2,193) (2,268)
Additional paid-in
capital (506,425) (8,083,283) (8,589,708)
Accumulated deficit 46,500 4,612,352 4,658,852
----------- ------------ ----------- ------------ ------------
$ -- $ -- $ -- $ -- $ --
=========== ============ =========== ============ ============
</TABLE>
F-5
<PAGE> 37
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
NOTE A (continued)
(1) Represents the partial repayment of loans payable to partners of DSI
concurrent with the sale of the business to Symposium and an
increase to partners' capital for the remaining balance of the
liability that was not assumed by Symposium.
(2) Reflects the receipt of proceeds related to initial borrowing under
the Revolving Credit Facility and Acquisition Bridge Financings:
<TABLE>
<CAPTION>
Acquisition Bridge Financings
---------------------------------------------
Revolver Fontenelle Commtel D-2
(a) (b) (c) (d) Total
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Deferred financing costs $ 956,000 $ 956,000
Revolving credit facility (16,000,000) (16,000,000)
Acquisition bridge
financings $(500,000) $(200,000) $(300,000) (1,000,000)
Common stock (75) (75)
Additional paid-in capital (360,000) (99,925) (46,500) (506,425)
Accumulated deficit 46,500 46,500
------------ --------- --------- --------- ------------
Net cash $ 15,404,000 $ 500,000 $ 300,000 $ 300,000 $ 16,504,000
============ ========= ========= ========= ============
</TABLE>
(a) Represents initial borrowings of $16,000,000 under the Coast
Business Credit Revolving Credit Facility that was entered into in
January 2000. Deferred financing costs include $360,000 for the fair
value of common stock purchase warrants issued to the Lenders, and
$266,000 representing cash and the fair value of common stock
purchase warrants issued to a director of the Company who performed
services for the Company in connection with obtaining the credit
facility.
(b) The Company borrowed $500,000 from Fontenelle LLC under a 60-day
subordinated bridge note that was repaid with interest at 10% per
annum in March 2000.
F-6
<PAGE> 38
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
NOTE A (continued)
(c) The Company entered into a 30-day bridge note agreement with Commtel
Service, Ltd. and issued 75,000 shares of its common stock to
Commtel as consideration for the loan. The proceeds were allocated
between the note and the common stock based upon their relative fair
values at the date of issuance. The Company defaulted on its
obligation to repay the note, and Commtel agreed to convert it into
common stock as described in Note B (2) to the pro forma balance
sheet.
(d) The Company borrowed $300,000 from D-2 Co., LLC. The loan is
immediately convertible into 150,000 shares of the Company's common
stock. Accordingly, the pro forma adjustment gives effect to
recognizing the intrinsic value of the beneficial conversion
feature, which amounts to $46,500 (the difference between the fair
market value of the Company's common stock of $2.31 per share and
the conversion price of $2.00 on the date of issuance multiplied by
the number of shares into which the loan is convertible) as a
component of interest expense (reflected as an increase in
accumulated deficit).
(3) Reflects the impact of the Company's initial issuance of the
mandatorily redeemable convertible preferred stock as follows:
<TABLE>
<CAPTION>
Series A Series B Series C Total
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Preferred stock $(1,428,571) $(1,146,953) $(2,401,352) $(4,976,876)
Common stock (430) (1,763) (2,193)
Additional paid-in capital (1,860,999) (1,274,047) (4,948,237) (8,083,283)
Accumulated deficit 1,290,000 921,000 2,401,352 4,612,352
---------- ----------- ---------- ----------
Net cash $ 2,000,000 $ 1,500,000 $ 4,950,000 $ 8,450,000
========== ========== ========== ==========
</TABLE>
Series A Mandatorily Redeemable Convertible Preferred Stock ("Series
A Preferred")
The Company sold 21,500 units, each unit consisting of one share of
Series A mandatorily redeemable convertible preferred with a face
value of $100 and 430,000 shares of the Company's common stock for
gross proceeds of $2.0 million. The Series A Preferred is initially
convertible into 1,075,000 shares of common stock at a conversion
ratio of $2.00 per share and carries a 16% per annum cumulative
dividend.
F-7
<PAGE> 39
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
NOTE A (continued)
As indicated in Note B (1) to the pro forma consolidated balance sheet,
the Series A preferred shareholders extended the due date for the
redemption and subsequently agreed to convert their shares into Symposium
common stock.
Series B Mandatorily Redeemable Convertible Preferred Stock ("Series B
Preferred")
The Company sold 15,350 shares of Series B mandatorily redeemable
convertible preferred stock with a face value of $100 each and warrants to
purchase 383,750 shares of the Company's common stock for gross proceeds
of $1.5 million. The Series B Preferred is initially convertible into
767,500 shares of common stock at a conversion ratio of $2.00 per share
and carries a 10% cumulative dividend, payable quarterly.
The Series B Preferred is mandatorily redeemable on the earlier of July
26, 2000 or upon the consummation of an additional financing transaction
resulting in gross proceeds of at least $10 million. If the Company does
not redeem the shares by July 26, 2000, the conversion ratio is reduced to
$.50 per share (representing 3,070,000 shares of the Company's common
stock).
Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C
Preferred")
The Company sold 52,892 shares of Series C mandatorily redeemable
convertible preferred stock with a face value of $100 each and 1,763,067
shares of the Company's common stock for approximately $5 million.
Additionally, the Company reduced the exercise price on 2 million warrants
previously issued to a Series C holder from $3.50 per share to $1.00 per
share. The Series B Preferred is initially convertible into 2,644,600
shares of common stock at a conversion ratio of $2.00 per share and
carries a 10% cumulative dividend, payable quarterly.
The Series C Preferred is mandatorily redeemable on the earlier of July
26, 2000 or upon the consummation of a financing transaction resulting in
gross proceeds of at least $10.0 million. If the Company does not redeem
the shares by July 26, 2000, the conversion ratio is reduced to $.25 per
share (representing 21,156,800 shares of the Company's common stock) and
the Company must issue 370,244 five-year common stock purchase warrants
with an exercise price of $.25 per share each month until the shares are
fully redeemed.
F-8
<PAGE> 40
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
NOTE A (continued)
Preferred Stock Accounting
The proceeds received from the issuances of preferred stock with common
stock and/or common stock purchase warrants will be allocated to each
component based on their relative fair values on January 28, 2000 (the
date of issuance). The fair value of the preferred stock is considered to
be equal to the aggregate market value of the equivalent number of common
shares into which the preferred is convertible. The fair value of the
common stock is based on the closing market value on the date of issuance
and the fair value of the common stock purchase warrants was determined
using the Black-Scholes option pricing model.
The difference between the carrying value of the preferred stock and its
mandatory redemption price (of $100 per share) will be amortized from the
date of issuance to the mandatory redemption date by increasing the
carrying value of the preferred stock and decreasing retained earnings for
accrual of preferred dividends. In addition, cumulative dividends payable
to the preferred shareholders on the mandatory dates of redemption will
also be accounted for by periodically increasing the carrying value of the
preferred stock and increasing accumulated deficit.
All of the preferred shares were issued with a beneficial conversion
feature that has an intrinsic value of $1.20 per share, representing the
difference between the market value of the Company's common stock of $3.20
per share and the initial conversion price of $2.00 per share on the date
of issuance. Since all of the preferred shares are immediately convertible
into common stock, the intrinsic value of the beneficial conversion
feature will be characterized as a preferred dividend and accounted for by
increasing additional paid-in capital and increasing accumulated deficit
on the date of issuance.
Reductions in the conversion price of the preferred stock into common
stock (that would take effect if the Company fails to redeem the preferred
stock on the mandatory date of redemption) are considered contingencies
that are not recognized for accounting purposes on the date of issuance.
The difference between the intrinsic value that would result from a
reduction of the conversion price in the event of a default and the
intrinsic value recorded as a dividend on the date of issuance would be
characterized as additional dividends that would further increase
accumulated deficit.
F-9
<PAGE> 41
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
NOTE A (continued)
(4) The following table provides an analysis of the purchase price of
the DSI acquisition. The excess of the purchase price over the book
value of the net assets acquired has been allocated to goodwill and
other intangible assets based upon a preliminary analysis of the net
assets acquired and certain assumptions that the Company believes
are reasonable. The actual allocation of purchase price may differ
significantly from the pro forma amounts included herein.
<TABLE>
<S> <C>
Cash consideration paid to the seller $25,000,000
Commitment to fund Amerinet, Inc. (a) 1,500,000
Estimated transaction expenses 1,014,317
-----------
Total purchase cost 27,514,317
Estimated fair value of net assets acquired 21,738,493
-----------
Purchase price in excess of estimated fair value
of net assets acquired $ 5,775,824
===========
Allocation of purchase price in excess of book value of net
assets acquired to goodwill and other intangible assets $ 5,775,824
===========
</TABLE>
(a) Amerinet, Inc. ("Amerinet") is a company that is 50%-owned by
the seller of DSI. As a prerequisite to consummating the DSI
acquisition, the Company agreed to provide a $1.5 million
credit facility to Amerinet. Due to the uncertainty of
Amerinet's ability to repay any of the funds to be extended to
them under this arrangement, the Company has characterized the
commitment as an increase in the purchase price of DSI and
accrued an acquisition liability.
F-10
<PAGE> 42
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (continued)
December 31, 1999
NOTE B - PRO FORMA REDEMPTION ADJUSTMENTS
The following table summarizes the effects of the redemptions:
<TABLE>
<CAPTION>
Series A (1)
------------------------ Commtel Fontenelle
Extension Conversion repayment (2) repayment (3) Total
----------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Cash $(500,000) $ (500,000)
Acquisition bridge financings $ 200,000 500,000 700,000
Preferred stock $ 1,428,571 1,428,571
Common stock $ (275) (4,635) (741) (5,651)
Additional paid-in capital (3,857,340) (10,837,204) (1,397,576) (16,092,120)
Accumulated deficit 3,857,615 9,413,268 1,198,317 14,469,200
----------- ------------ ----------- --------- ------------
Net cash $ -- $ -- $ -- $ -- $ --
=========== ============ =========== ========= ============
</TABLE>
(1) The pro forma redemption adjustment gives effect to issuing 275,000
shares of common stock to the Series A shareholders in exchange for
extending the due date of the Series A preferred and then converting
their preferred shares and accumulated dividends into 4,414,666
shares of common stock. The market value of the Company's common
stock on the date of conversion was $2.63. Accordingly, the pro
forma adjustment includes the effect of a contractual dividend of
$57,533 payable to the Series A holders on the date of conversion
and additional dividends of approximately $13.3 million including
(i) the fair value of the additional common shares, (ii) accretion
of the difference between the carrying value and the redemption
amount, and (iii) the difference in the amount of intrinsic value of
the beneficial conversion feature on the date of redemption and the
date of original issuance.
(2) The note was in default for 31 days and then Commtel agreed to
convert the note into 614,048 shares of Symposium common stock in
exchange for a fee equal to 50,000 shares of Symposium common stock.
In addition, Commtel also received 77,500 shares of common stock
from Symposium as a penalty during the default period. As a result
of the conversion, Commtel now owns 818,548 shares of Symposium
common stock and Symposium recorded a pro forma interest charge
(reflected as an increase in the accumulated deficit) of
approximately $1.4 million.
(3) The Company repaid the Fontenelle note in March 2000.
F-11
<PAGE> 43
Symposium Corporation and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1999
<TABLE>
<CAPTION>
Symposium Direct Sales
Corporation International, LP Pro forma Pro forma
(Historical) (Historical) adjustments consolidated
----------- ------------ ----------- -----------
(Note B)
<S> <C> <C> <C> <C>
Revenues $85,356,097 $85,356,097
Direct costs and expenses 73,980,868 73,980,868
------------ -----------
Gross profit 11,375,229 11,375,229
------------ -----------
Salaries and benefits $ 594,118 1,754,341 2,348,459
Consulting expenses 6,577,827 $ 400,000 (1) 6,977,827
Bad debt expense 500,000 500,000
Other operating expenses 1,246,382 2,030,063 3,276,445
Amortization of goodwill and other intangible assets 577,582 (2) 577,582
Costs of acquisitions not consummated 621,716 621,716
----------- ------------ ----------- -----------
Total expenses 9,540,043 3,784,404 977,582 14,302,029
----------- ------------ ----------- -----------
Operating income (loss) (9,540,043) 7,590,825 (977,582) (2,926,800)
Interest expense, net (4,341) (2,078,016) (3) (2,082,357)
Other income, net 29,910 438,568 468,478
----------- ------------ ----------- -----------
Net loss (9,510,133) 8,025,052 (3,055,598) (4,540,679)
Preferred dividends (Note C) (3,612,431) (3,612,431)
----------- ------------ ----------- -----------
Income available to common stock $(9,510,133) $ 8,025,052 $(6,668,029) $(8,153,110)
========== =========== ========== ===========
Net (loss) per share (Note D)
Basic and diluted $(0.80) $(0.41)
====== ======
Shares used in computing pro forma net loss per share
Basic and diluted 11,852,273 19,771,554
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE> 44
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1999
NOTE A - UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma consolidated statement of operations does not give effect to
nonrecurring charges which include any interest expense associated with
the acquisition bridge note payable to Commtel, since it is deemed to have
been converted into common stock on its date of issuance and interest
expense associated with the beneficial conversion feature of the D-2 note.
In addition, the pro forma net loss to common stockholders does not give
effect to nonrecurring dividends which include any dividends associated
with the Series A preferred stock, since those shares are deemed to have
been converted into common stock on their date of issuance and dividends
associated with the beneficial conversion feature of the Series B and
Series C preferred stock. See Note A for nonrecurring charges which have
been reflected in the unaudited pro forma consolidated balance sheet as an
increase in accumulated deficit.
NOTE B - UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
1. In connection with the Transactions, the Company will incur
approximately $400,000 of additional consulting expense pursuant to
a five-year consulting agreement entered into with the seller of DSI
providing for compensation of $600,000 per annum.
2. Goodwill and other intangible assets will be amortized over their
estimated useful lives of ten years.
3. The following table summarizes the pro forma adjustments to interest
expense based on the pro forma borrowing amounts as of January 1,
1999, at their respective contractual interest rates that would be
in effect for the periods of time each obligation would be
outstanding:
F-13
<PAGE> 45
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year ended December 31, 1999
NOTE B (continued)
<TABLE>
<S> <C>
Revolving Credit Facility - $16 million at 11% $1,760,000
Acquisition bridge financings at 10%
Fontenelle note payable - 60-day maturity 8,219
D-2 loan - 180-day maturity 14,795
Amortization of deferred financing costs
over the three-year credit facility 337,944
----------
Pro forma interest expense 2,120,958
Elimination of historical interest 42,942
----------
Pro forma adjustment $2,078,016
==========
</TABLE>
The Revolving Credit Facility provides for interest at the prime rate plus
2% per annum. Each 0.125% change in the rate would increase or decrease
annual pro forma interest expense by $20,000.
NOTE C - PRO FORMA DIVIDENDS ON PREFERRED STOCK
The pro forma preferred stock dividends represent contractual dividends at
the rate of 10% that would be payable to the Series B and Series C
preferred stockholders at the end of the 180-day holding period of those
shares plus the accretion of the difference between their carrying values
at their date of issuance and their mandatory redemption amounts.
F-14
<PAGE> 46
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year ended December 31, 1999
NOTE C (continued)
The following summarizes the pro forma calculation of dividends on
preferred stock:
<TABLE>
<CAPTION>
Contractual
dividend Accretion Total
-------- ---------- ----------
<S> <C> <C> <C>
Series
B $ 75,699 $ 388,047 $ 463,746
C 260,837 2,887,848 3,148,685
-------- ---------- ----------
$336,536 $3,275,895 $3,612,431
======== ========== ==========
</TABLE>
NOTE D - PRO FORMA NET LOSS PER SHARE
The pro forma weighted-average number of shares outstanding is equal to
the historical number of weighted-average shares outstanding increased by
7,919,281 shares representing the effect of issuing (i) 5,339,666 shares
to the Series A preferred stockholders and (ii) 816,548 shares to the
holder of the Commtel note, each in connection with issuing and
subsequently converting those instruments into Symposium common stock, and
(iii) 1,763,067 shares issued to the Series C preferred stockholders in
connection with the issuance of the Series C preferred.
If the Series B and Series C preferred stock were converted into common
stock on January 1, 1999, the pro forma net loss to common shareholders
would be $4,540,679, since all of the pro forma dividends are related to
the Series B and Series C preferred stock. In addition the number of
common shares outstanding would increase by 3,412,100 to 22,183,654 shares
and the resulting effect on the pro forma diluted net loss per share would
be antidilutive.
F-15
<PAGE> 47
Symposium Corporation and Subsidiaries
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year ended December 31, 1999
NOTE E - PRO FORMA INCOME TAXES
At December 31, 1999, the Company had net Federal and State net operating
loss carryforwards of approximately $5.9 million that will be available to
offset future taxable income, if any, through December 2019. The
utilization of the net operating losses may be subject to a substantial
limitation due to the "change of ownership" provisions under Section 382
of the Internal Revenue Code and similar state provisions. Such limitation
may result in the expiration of the net operating losses before their
utilization. A 100% valuation allowance has been established to reserve
for the deferred tax assets arising from the net operating losses and
other temporary differences since there is no assurance that their benefit
will be realized in the future. Accordingly, there is no income tax
benefit presented in either the pro forma consolidated balance sheet or
the pro forma statement of operations.
F-16
