1
EXHIBIT 99.1
FINANCIAL STATEMENTS
AMERICAN EXPRESS
TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS
TRAVEL RELATED SERVICES COMPANY, INC.,
A WHOLLY-OWNED SUBSIDIARY OF
THE AMERICAN EXPRESS COMPANY)
DECEMBER 31, 1997 AND DECEMBER 31, 1996
2
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
CONTENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Audited financial Statements
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholder's Deficit......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Express Telecom, Inc.
We have audited the accompanying balance sheets of American Express
Telecom, Inc. (a wholly-owned subsidiary of American Express Travel Related
Services Company, Inc., a wholly-owned subsidiary of The American Express
Company) as of December 31, 1997 and December 31, 1996, and the related
statements of operations, stockholder's deficit, and cash flows for the years
ended December 31, 1997 and December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Express Telecom,
Inc. (a wholly-owned subsidiary of American Express Travel Related Services
Company, Inc., a wholly-owned subsidiary of The American Express Company) at
December 31, 1997 and December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1997 and December 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 2, 1998
F-2
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AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
BALANCE SHEETS
ASSETS
DECEMBER 31
----------------------------
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents................................. $ -- $ 360,302
Accounts receivable, net of allowance of $0 and $13,895 in
1997 and 1996, respectively............................ 2,396,629 1,948,730
Accounts receivable from parent........................... -- 143,228
Inventories............................................... 1,195,713 461,978
Joint venturer's share of unearned revenues............... 2,439,443 2,219,859
Deferred card costs....................................... 135,486 227,624
Prepaid expenses.......................................... 79,264 94,285
------------ ------------
Total current assets........................................ 6,246,535 5,456,006
Equipment, furniture and fixtures........................... 1,713,521 1,327,577
Accumulated Depreciation.................................... (966,310) (413,861)
------------ ------------
747,211 913,716
------------ ------------
$ 6,993,746 $ 6,369,722
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,077,537 $ 888,889
Accounts payable to parent................................ 476,410 810,076
Due to USPS............................................... -- 1,960,319
Accrued liabilities....................................... 1,315,238 690,550
Deferred revenues......................................... 5,506,514 6,189,748
------------ ------------
Total current liabilities................................... 8,375,699 10,539,582
Loan payable to parent...................................... 10,055,481 5,973,242
Common stock of $.10 par value, 100 shares authorized and
outstanding............................................... 10 10
Paid-in capital............................................. 99,990 99,990
Accumulated deficit......................................... (11,537,434) (10,243,102)
------------ ------------
Total stockholder's deficit................................. (11,437,434) (10,143,102)
------------ ------------
Total liabilities and stockholder's deficit................. $ 6,993,746 $ 6,369,722
============ ============
See accompanying notes.
F-3
5
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
--------------------------
1997 1996
----------- -----------
Revenues.................................................... $21,361,685 $ 4,705,377
Joint venturer's share of revenues.......................... (10,009,124) (1,996,297)
----------- -----------
Net revenue................................................. 11,352,561 2,709,080
Cost of goods sold.......................................... 9,784,420 4,077,104
Joint venturer's share of cost of goods sold................ (4,843,153) (1,201,253)
----------- -----------
Gross profit (loss)......................................... 6,411,294 (166,771)
Costs and expenses:
Salaries and benefits..................................... 2,877,040 2,058,145
Depreciation.............................................. 552,449 381,605
Advertising............................................... 443,590 1,093,688
Marketing................................................. 2,995,297 6,386,069
General and administrative................................ 2,181,867 1,726,727
Joint venturer's share of costs and expenses.............. (1,935,722) (3,224,497)
----------- -----------
7,114,521 8,421,737
----------- -----------
Loss from operations........................................ (703,227) (8,588,508)
Interest expense............................................ 591,105 261,421
----------- -----------
Net loss.................................................... $(1,294,332) $(8,849,929)
=========== ===========
See accompanying notes.
F-4
6
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
STATEMENTS OF STOCKHOLDER'S DEFICIT
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ------------ ------------
Balance at December 31, 1995............... $10 $99,990 $ (1,393,173) $ (1,293,173)
Net loss................................. -- (8,849,929) (8,849,929)
--- ------- ------------ ------------
Balance at December 31, 1996............... 10 99,990 (10,243,102) (10,143,102)
Net loss................................. -- (1,294,332) (1,294,332)
--- ------- ------------ ------------
Balance at December 31, 1997............... $10 $99,990 $(11,537,434) $(11,437,434)
=== ======= ============ ============
See accompanying notes.
F-5
7
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,294,332) $(8,849,929)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 552,449 381,605
(Increase) decrease in current assets:
Accounts receivable.................................. (447,899) (1,718,132)
Accounts receivable from parent...................... 143,228 (124,680)
Inventories.......................................... (733,735) 105,739
Prepaid expenses..................................... 15,021 (77,964)
Joint venturer's share of unearned revenues.......... (219,584) (2,219,859)
Deferred card costs.................................. 92,138 (227,624)
Increase (decrease) in current liabilities:
Accounts payable..................................... 188,648 848,873
Accounts payable to parent........................... (333,666) 556,852
Due to USPS.......................................... (1,960,319) 1,960,319
Accrued liabilities.................................. 624,688 (112,151)
Deferred revenue..................................... (683,234) 5,814,245
----------- -----------
Total adjustments...................................... (2,762,265) 5,187,223
----------- -----------
Net cash used in operating activities.................. (4,056,597) (3,662,706)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expended for property, plant and equipment................ (385,944) (790,116)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in loan payable to parent........................ 4,082,239 4,780,858
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (360,302) 328,036
Cash and cash equivalents:
Beginning of year......................................... 360,302 32,266
----------- -----------
End of year............................................... $ -- $ 360,302
=========== ===========
See accompanying notes.
F-6
8
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
1. NATURE OF OPERATIONS
American Express Telecom, Inc. ("the Company" or "AETI") is a wholly-owned
subsidiary of American Express Travel Related Services Company, Inc., a
wholly-owned subsidiary of The American Express Company ("AMEX" or "Parent").
The Company operates in a single industry segment and its principal activities
are selling domestic and international long distance telecommunications services
via a prepaid phone card product.
The Company purchases all of their telephone time from a single supplier
and the Company purchases all of its card inventory from a single supplier.
The majority of operations involved in the selling of the phone cards are
under a joint venture arrangement with the United States Postal Service
("USPS"), whereas the USPS sells, among other functions, phone cards through its
outlets. Under the arrangement in effect from May 25, 1996 to December 31, 1997
("Arrangement"), revenues and costs are shared pursuant to the Arrangement with
the USPS functioning as the principal distribution or selling agent. Under the
arrangement in effect from August 17, 1995 to May 24, 1996, net income, if any,
generated by the Company was to be shared equally. There was no net income
shared under that arrangement. Sales are reported to the Company by the USPS. As
a result, various reporting captions in the accompanying financial statements
reflect certain aspects of the Arrangement as follows:
Accounts receivable represent those phone cards sold for which USPS has not
remitted net funds to the Company and amounts due to AETI under the cost sharing
arrangement.
Inventories represent the costs, on the weighted average basis, incurred to
produce the phone cards, excluding any telecommunications services, for cards
not sold.
Joint venturer's share of unearned revenues is a deferred cost which
represents USPS' share of unearned revenues for cards sold to the customer.
Revenues, including the joint venturer's share, are earned pro rata with
customer usage.
Deferred card costs represent the remaining unamortized costs of card
inventories for those cards which have been sold. Upon sale, such inventory
costs are amortized as costs of goods sold, pro rata with estimated customer
usage.
Deferred revenues represent the unearned portion of phone card revenues for
those cards sold to the customer. Revenues are earned pro rata with customer
usage.
Joint venturer's share of cost of goods sold and costs and expenses,
primarily related to cost of goods sold and marketing costs, represent the USPS
calculated portion of specified costs and expenses pursuant to the terms of the
Arrangement for which the costs have been previously incurred by the Company.
2. 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
9
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. The carrying amounts reported in
the balance sheet for cash and cash equivalents approximates those assets' fair
value.
BREAKAGE REVENUE
Breakage represents units of unused calling time remaining at the
expiration date of individual cards sold or, for certain series of cards, the
last expiration date within that series of cards for which no utilization of a
card within the series has occurred. Revenues are recognized for breakage at the
individual card's expiration date or the latest expiration date of cards in a
series. The last expiration dates for unused cards within series being 1998 and
2000.
DEPRECIATION
Depreciation is provided on a straight-line basis over the estimated useful
lives of owned assets. The depreciable lives are primarily five years for
telecommunications equipment, eight years for furniture and fixtures and three
years for computer equipment.
ADVERTISING EXPENSE
The Company expenses advertising costs as costs are incurred. Total
advertising expense amounted to $443,590 and $1,093,688 for the years ended
December 31, 1997 and December 31, 1996, respectively.
INCOME TAXES
The Company reports income taxes as part of a consolidated group. For
financial reporting purposes, income taxes are presented on a stand alone basis.
No income tax expense was recorded for the years ended December 31, 1997 and
December 31, 1996.
The Company provides for deferred taxes as temporary differences arise in
recording income and expenses between financial reporting and tax reporting.
3. RELATED PARTY TRANSACTIONS
AETI personnel are employees of AMEX. Salaries and benefits for these
employees were $2,877,040 and $2,058,145 for the years ended December 31, 1997
and December 31, 1996, respectively.
Certain corporate expenses incurred by AMEX were allocated to the Company.
These expenses, consisting of occupancy and legal costs were, $277,002 and
$162,438 for the years ended December 31, 1997 and December 31, 1996,
respectively.
Certain corporate vendor credits received by AMEX were allocated to the
Company. These credits were $692,559 and $0 for the years ended December 31,
1997 and December 31, 1996, respectively.
Accounts payable to AMEX related to salaries and benefits, occupancy and
legal costs were $476,410 and $810,076 at December 31, 1997 and December 31,
1996, respectively.
The Company sells phone cards to AMEX. Revenues from sales to AMEX units
were $998,907 and $151,473 for the years ended December 31, 1997 and December
31, 1996, respectively. Accounts receivable
F-8
10
AMERICAN EXPRESS TELECOM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY,
INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE AMERICAN EXPRESS COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
from AMEX related to such purchases were $0 and $143,228 at December 31, 1997
and December 31, 1996, respectively.
Interest is charged on the intercompany loan payable at an average rate of
6.05%, which approximates the Parent's cost of debt.
4. INCOME TAXES
Deferred tax assets as of December 31, 1997 and 1996 related to the
following temporary differences:
1997 1996
--------- ---------
Reserves............................................ $ 377,138 $ 315,112
Other............................................... 71,524 46,109
--------- ---------
Deferred tax assets................................. 448,662 361,221
Valuation allowance................................. (448,662) (361,221)
--------- ---------
Deferred balance at December 31..................... $ -- $ --
========= =========
There was an increase in the valuation allowance of $87,441 from December
31, 1996 to December 31, 1997.
5. RETIREMENT PLANS
Company personnel are employees of AMEX and are therefore eligible to
participate in the retirement plans sponsored by AMEX. These plans include a
Defined Contribution Pension Plan and an Incentive Savings Plan, which is
qualified under section 401(k) of the Internal Revenue Code.
Under the Pension Plan, employees are credited each pay period with
additions equal to a percentage of their base pay based on age plus service,
overtime, commissions and bonuses. Employees' balances are also credited
annually with a fixed rate of interest based on the daily average of published
five-year Treasury Note yields. Participation in the Pension Plan requires one
year of service and vesting occurs after four years of service. Lump sum payout
is available at termination or retirement.
Employees participating in the Incentive Savings Plan (ISP) may contribute
up to 15 percent of their annual base salary (up to IRS limits). In addition,
AMEX contributes to the ISP on behalf of all eligible employees with company
matching contributions and discretionary profit sharing contributions based on
AMEX's operating results. Participation in the ISP requires one year of service
and vesting occurs after four years of service.
AMEX also sponsors postretirement benefits that provide health care, life
insurance and other benefits to retired U.S. employees. There are no retired
AETI employees, therefore, no such benefits were allocated to the Company.
AMEX allocated the cost of these retirement plans back to its subsidiaries
as part of the employee benefits allocation. The total costs for benefits
charged by AMEX to the Company were $602,037 and $422,521 for the years ended
December 31, 1997 and December 31, 1996, respectively.
6. SALE OF STOCK
On December 22, 1997, a stock purchase agreement between SmarTalk
Teleservices, Inc. and the American Express Company was signed in which SmarTalk
Teleservices, Inc. purchased all of the Company's shares effective December 30,
1997. Entries, if any, reflecting this stock purchase were not included in the
accompanying financial statements.
F-9