PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
WITH INDEPENDENT AUDITOR'S REPORT
For the Year Ended June 30, 1999
and the period August 7, 1997 (date of inception)
through June 30, 1998
<PAGE>
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
<PAGE>
Vestal & Wiler
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
Pre-Paid Solutions, Inc. and Subsidiary
Melbourne, Florida
We have audited the accompanying consolidated balance sheets of Pre-Paid
Solutions, Inc. and Subsidiary as of June 30, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended June 30, 1999 and the period August 7, 1997 (date of
inception) through June 30, 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 consolidated financial statements are
free of 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 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 consolidated financial position of
Pre-Paid Solutions, Inc. and Subsidiary as of June 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the year and
period then ended in conformity with generally accepted accounting principles.
/s/ Vestal & Wiler
Certified Public Accountants
April 25, 2000
201 East Pine Street, Suite 801 Orlando, Florida 32801
407/843-4433 Fax 407/841-6694
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<TABLE>
<CAPTION>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
1999 1998
------------ -----------
ASSETS
Current assets:
<S> <C> <C>
Cash $ 14,856 $ 91,237
Accounts receivable 40,156 7,424
Inventory 13,592 -
Prepaid expenses 2,527 13,379
------------ -----------
Total current assets 71,131 112,040
Long-lives assets 627,588 295,368
Other assets 23,748 4,324
---------- ----------
Total assets $ 722,467 $ 411,732
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 35,891 $ 1,512
Notes payable 975,689 214,808
Accounts payable 200,955 211,718
Accrued expenses 243,602 52,145
------------ -----------
Total current liabilities 1,456,137 480,183
------------ -----------
Long-term liabilities 25,446 1,953
------------ -----------
Total liabilities 1,481,583 482,136
------------ -----------
Stockholders' deficiency:
Preferred stock, 10,000,000 shares authorized - -
Common stock, $.01 par value, 2,000,000 shares
authorized; 3,497,334 and 2,369,834 shares
issued and outstanding 34,973 23,698
Additional paid-in capital 1,216,533 687,116
Accumulated other comprehensive income 59,226 8,983
Accumulated deficit (2,069,848) (790,202)
------------ -----------
Total stockholders' deficiency (759,116) (70,405)
------------ -----------
Total liabilities and stockholders' deficiency $ 722,467 $ 411,731
============ ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 1,431,426 $ 85,534
Direct costs 1,254,452 303,807
Other expenses 1,363,951 532,191
----------- -----------
Operating loss (1,186,977) (750,464)
Interest and other expense 95,946 39,738
----------- -----------
Net loss (1,282,923) (790,202)
----------- -----------
Other comprehensive income - foreign currency
translation adjustments 50,243 8,983
----------- -----------
Comprehensive income (loss) $(1,232,680) $ (781,219)
=========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
Common Stock Accumulated
------------ Additional Other
Number Paid-In Comprehensive Accumulated
Of Shares Amount Capital Income Deficit Total
--------- -------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance August 7, 1997
(date of inception) - $ - $ - $ - $ - $ -
Common stock issued
to founders 1,659,500 16,595 (16,595) - - -
Common stock issued
for cash 676,334 6,763 677,551 - - 684,314
Common stock issued
for services 34,000 340 26,160 - - 26,500
Other comprehensive
income - - - 8,983 - 8,983
Net loss - - - - (790,202) (790,202)
--------- -------- ----------- ---------- ------------ -----------
Balance June 30, 1998 2,369,834 23,698 687,116 8,983 (790,202) (70,405)
Common stock issued
for cash 1,127,500 11,275 529,417 - - 540,692
Other comprehensive
income - - - 50,243 3,277 53,520
Net loss - - - - (1,282,923) (1,282,923)
--------- -------- ----------- ---------- ------------ -----------
Balance June 30, 1999 3,497,334 $ 34,973 $ 1,216,533 $ 59,226 $ (2,069,848) $ (759,116)
========= ======== =========== ========== ============ ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
1999 1998
----------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(1,282,923) $ (790,202)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 104,479 30,599
Translation gain 59,227 8,983
Increase in accounts receivable (32,733) (7,424)
Increase in inventory (13,592) -
Decrease (increase) in prepaid expenses 10,852 (13,378)
Increase in accounts payable and accrued expenses 610,490 290,363
----------- ----------
Net cash used by operating activities (544,200) (481,059)
----------- ----------
Cash flows from investing activities:
Payments for purchase of long-lived assets (436,699) (325,968)
Increase in other assets (19,424) (4,324)
----------- ----------
Net cash used by investing activities (456,123) (330,292)
----------- ----------
Cash flows from financing activities:
Proceeds from the sale of common stock 534,986 684,314
Proceeds from the issuance of debt instruments 611,184 219,550
Repayment against debt instruments (222,228) (1,276)
----------- ----------
Net cash provided by financing activities 923,942 902,588
----------- ----------
Net increase (decrease) in cash (76,381) 91,237
Cash at beginning of period 91,237 -
----------- ----------
Cash at end of period $ 14,856 $ 91,237
=========== ==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
5
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pre-Paid
Solutions, Inc. and its wholly owned subsidiary, Pre-Paid Solutions (Canada),
Inc. (the "Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation. The accounts of Pre-Paid Solutions
(Canada), Inc. were translated into U. S. dollars using the appropriate year-end
rates for the balance sheet and the average rates during the periods for the
statement of operations.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
CASH
Cash consists of bank deposits, which at times may exceed federally insured
limits.
INVENTORIES
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.
LONG-LIVED ASSETS
Long-lived assets are recorded at cost. The major component of long-lived assets
is the data management system that controls the purchased air-time balances of
customers and controls their ability to remotely reload air-time into their
specialized cellular phones. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, generally five years.
Expenditures for repairs and maintenance are charged to operations as incurred.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred. Advertising expense for
the year ended June 30, 1999 and the period ended June 30, 1998 totaled
approximately $74,300 and $17,600, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. Measurement
of deferred income tax is based on enacted tax rates and laws that will be in
effect when the differences are expected to reverse, with the measurement of
deferred income tax assets being reduced by available tax benefits not expected
to be realized.
6
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
1. BUSINESS
The Company provides to end-users, custom cellular phones through a network
of distributors and dealers and airtime services on a prepaid basis.
Customers use cellular phones purchased from the Company to access and use
specified amounts of airtime, which they purchase in advance. The Company
furnishes the airtime to customers by purchasing it from various local and
long distance phone carriers through out the United States and Canada.
2. LONG-LIVED ASSETS
Long-lived assets consist of the following:
Estimated
Useful life 1999 1998
----------- ---- ----
Data management system 5 years $ 625,304 $ 296,786
Equipment 5 - 10 years 136,395 29,181
--------- ----------
761,699 325,967
Less accumulated depreciation 134,111 30,599
--------- ----------
$ 627,588 $ 295,368
========= ==========
3. NOTES PAYABLE
Notes payable consist of the following:
1999 1998
---- ----
Notes payable to shareholder due July 30, 1998,
interest compounded monthly at 18%; due at maturity;
the note is past due at June 30, 1999 (see additional
note below) $152,689 $ 69,808
Note payable to shareholder due July 30, 1998; interest
at 25% due January 30, 1999; interest subsequently
settled for $23,000 23,000 100,000
Note payable to vendor due $30,767 per month,
non-interest bearing 300,000 -
Note payable for working capital due July 8, 1999;
interest at 10% due at note maturity 500,000 -
Note payable for working capital due upon demand;
interest at prime plus 2.5% - 45,000
-------- --------
$975,689 $214,808
======== ========
7
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
3. NOTES PAYABLE - Continued
In conjunction with the borrowing from the first shareholder above, the
Company granted a warrant to purchase from the Company up to 2.5% of the
outstanding voting common stock at 50% of the publicly traded price or, if
the stock is not publicly traded at the time of the exercise, at a price
equal to the most recent arms length sales price. The warrant to purchase
expires March 31, 2000.
4. LONG-TERM LIABILITIES
Long-term liabilities consists of the following:
1999 1998
---- ----
Equipment purchase obligations, due
monthly, interest at 14.25% to 14.64% $ 2,414 $ 3,465
Installment note payable to vendor
due monthly, interest at 15.25% 58,923 -
Less current maturities (35,891) (1,512)
-------- ---------
$ 25,446 $ 1,953
======== =========
As of June 30, 1999, the aggregate amount of long-term liabilities maturing
in future years is $35,891 in 2000 and $25,446 in 2001.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
1999 1998
---- ----
Accrued compensation $ 231,363 $ 41,084
Accrued interest and other 12,239 11,061
--------- --------
$ 243,602 $ 52,145
========= ========
6. INCOME TAXES
At June 30, 1999, the Company had unused federal tax net operating losses
(NOLs) to carry forward against future years' taxable income of
approximately $1,750,000 which expire beginning in 2018. The deferred tax
asset resulting from such NOLs totaling approximately $680,000 is entirely
offset by a valuation allowance.
8
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
7. COMMITMENTS AND CONTINGENCIES LEASES
The Company conducts its operations from leased facilities in both Florida
and Canada. These leases are classified as operating leases and expire on
various dates during 2000. As of June 30, 1999, future minimum lease
payments under these operating leases total $16,144. Rent expense for the
periods ended June 30, 1999 and 1998 totaled approximately $43,600 and
$15,700.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with its senior executive
officers which terminated subsequent to year end (see Note 12).
LETTER OF CREDIT
The Company is contingently liable under the terms of a letter of credit of
up to $500,000 issued to secure credit from certain of its suppliers of
cellular phone airtime. The letter of credit is secured by a $500,000
certificate of deposit owned by Teletouch, who in turn holds a contingent
note from the company. As of June 30, 1999, there were no claims against
the letter of credit.
LITIGATION
On September 21, 1999, the Company was named as a defendant in a lawsuit
alleging patent infringement arising out of having made, used, offered for
sale and/or sold in the United States products which infringe one or more
claims of Patent No. 5,631,947. The claim for monetary damages is
undisclosed. While any litigation or investigation has an element of
uncertainty, in the opinion of management and legal counsel, there is no
reasonable probability at present of any substantial liabilities arising
out of this matter. The Company is involved in various other lawsuits and
litigation matters on an ongoing basis as a result of its day-to-day
operations. However, the Company does not believe that any of these other
or any threatened lawsuits and litigation matters will have a material
adverse effect on the Company's financial position or results of
operations.
9
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
8. STOCK OPTION PLANS
The Company has adopted an Employee Stock Option Plan (Employee Plan) and a
Director Stock Option Plan (Director Plan).
Under the Employee Plan, options are granted at the direction of the
Compensation Committee of the Board of Directors. The options are to be
granted at fair market value or above and generally vest one-third upon
grant and one third each year thereafter. The Committee may grant earlier
vesting periods. The Committee also determines the period of the options,
however, options generally expire ninety days after termination. There were
500,000 shares initially reserved for issuance under the plan (see Note
12).
Under the Director Plan options are granted to Directors of the Company at
specified anniversary dates and at specified quantities according to board
and committee positions. The options are to be granted at fair market value
or above and vest one-third upon grant and one third each year thereafter.
Generally the options are for a period of five years but generally expire
ninety days after termination. There were 300,000 shares initially reserved
for issuance under the plan (see Note 12).
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been recognized for
options granted to employees at exercise prices that equal or exceed the
market price of the Company's common stock at the date of grant. Options
granted at exercise prices below market prices are recognized as
compensation cost measured as the difference between market price and
exercise price at the date of grant. At June 30, 1999 and 1998, no
compensation cost has been recognized for such differences (see Note 12).
10
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
8. STOCK OPTIONS PLANS - Continued
The following table summarizes the stock option activity for the periods
June 30, 1999 and 1998 (see Note 12):
<TABLE>
<CAPTION>
Average Estimated
Option Market
Shares Price Price
------ ----- -----
<S> <C> <C> <C>
Outstanding, August 7, 1997 (date of inception) - - -
Granted to employees 405,000 $0.51 $0.51
Granted to directors 50,000 1.02 1.00
Exercised - - -
-------
Outstanding, June 30, 1998 455,000
Granted to directors 110,000 1.03 1.00
Granted to employees 10,000 1.00 1.00
Expired (40,000)
Exercised -
-------
Outstanding, June 30, 1999 535,000
=======
</TABLE>
9. SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest for the period ended June 30, 1999 and June 30, 1998
was $13,670 and $3,449.
The Company's non-cash financing activities were as follows:
1999 1998
---- ----
Debt instruments issued for accounts payable 429,796 -
Common stock issued for debt instruments 144,308 -
Common stock issued for services - 26,500
11
<PAGE>
PRE-PAID SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1999 and the period
August 7, 1997 (date of inception) through June 30, 1998
10. RELATED PARTY TRANSACTIONS
Under the terms of a sublease and an administrative services agreement, the
Company provides office space and various administrative services to a
company related by common ownership. The total value of these transactions
during the period ended June 30, 1999 was $14,649. It is believed that the
values approximate those that would have been obtained in arms-length
transactions.
11. SUBSEQUENT EVENTS
Subsequent to the end of the its fiscal year, the Company raised $4,610,000
in three subscription agreements for common stock. The first transaction,
which closed in September and November 1999, involved 1,000,000 shares sold
at $1.00 per share. Each share includes a warrant to purchase one
additional share of common stock at $1.50 expiring September 29, 2004. The
second transaction, which closed in September 1999, involved 100,000 shares
sold at $1.00. The third transaction, which closed on April 4, 2000,
involved 2,489,876 shares sold at $1.41. The shares included warrants to
purchase 1,244,997 shares at $7.89 expiring on April 4, 2003.
On April 4, 2000, the Company agreed to be acquired by Pre-Cell Solutions,
Inc. in a stock-for-sale transaction.
12
