OMNIPLEX COMMUNICATIONS GROUP, LLC
AND SUBSIDIARIES
Financial Statements
December 31, 2000 and 1999
INDEPENDENT AUDITORS' REPORT
To the Member
of Omniplex Communications Group, LLC and Subsidiaries
We have audited the consolidated balance sheet of Omniplex Communications Group,
LLC and Subsidiaries (the Company) as of December 31, 2000 and 1999, and the
related consolidated statements of operations, member's deficit, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Omniplex
Communications Group, LLC and Subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, there is substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regard to
that matter are also described in note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Salt Lake City, Utah
October 26, 2001
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
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2000 1999
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 530,917 $ 226,887
Accounts receivable, net of allowance for doubtful
accounts of $283,520 and $85,393, respectively 3,418,733 1,367,581
Prepaid and other current assets 136,401 135,747
------------- -------------
Total current assets 4,086,051 1,730,215
Customer acquisition costs, net 3,794,949 -
Property and equipment, net 429,336 382,004
Other assets 33,221 79,161
------------- -------------
Total assets $ 8,343,557 $ 2,191,380
============= =============
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Liabilities and Member's Deficit
Current liabilities:
Payable to parent $ 12,647,105 $ 8,020,076
Accounts payable 5,730,154 1,940,483
Accrued expenses 799,618 363,772
Seller financing payable 723,204 -
Contractual obligations with regard to
receivable sales agreement, net 4,431,697 341,979
Debt in default, net 1,042,335 -
------------- -------------
Total current liabilities 25,374,113 10,666,310
Commitments - -
Member's deficit (17,030,556) (8,474,930)
-------------- -------------
Total liabilities and member's deficit $ 8,343,557 $ 2,191,380
============== =============
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See accompanying notes to consolidated financial statements. 1
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31,
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2000 1999
------------- -------------
Revenues $ 13,543,272 $ 6,369,584
Service costs 11,017,560 5,612,178
------------- -------------
Gross profit 2,525,712 757,406
------------- -------------
Operating costs and expenses:
Selling, general and administrative 8,550,605 4,449,496
Depreciation and amortization 636,613 120,535
------------- -------------
Total operating costs and expenses 9,187,218 4,570,031
------------- -------------
Loss from operations (6,661,506) (3,812,625)
Other income (expense):
Interest income 21,854 13,864
Related party interest to parent (652,716) (436,335)
Interest expense (1,263,258) (195,479)
-------------- -------------
Total other income (expense) (1,894,120) (617,950)
-------------- -------------
Loss before income taxes (8,555,626) (4,430,575)
Income tax expense (benefit) - -
-------------- -------------
Net loss $ (8,555,626) $ 4,430,575
-------------- -------------
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See accompanying notes to consolidated financial statements. 2
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Consolidated Statement of Member's Deficit
Years Ended December 31, 2000 and 1999
- --------------------------------------------------------------------------------
Member's deficit, January 1, 1999 $ (4,044,355)
Net loss (4,430,575)
-------------
Member's deficit, December 31, 1999 (8,474,930)
Net loss (8,555,626)
-------------
Member's deficit, December 31, 2000 $(17,030,556)
-------------
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See accompanying notes to consolidated financial statements. 3
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31,
- --------------------------------------------------------------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $(8,555,626) $(4,430,575)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 636,613 120,535
Accrued interest 129,394 -
Accrued interest to parent 652,716 436,335
Amortization of discount on debt 336,969 -
(Increase) decrease in:
Accounts receivable (1,475,809) (101,041)
Prepaid and other assets 57,828 (8,974)
Increase (decrease) in:
Accounts payable 2,973,141 581,804
Accrued expenses 418,436 (33,973)
------------- ------------
Net cash used in
operating activities (4,826,338) (3,435,889)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (173,787) (178,268)
Cash paid for purchase of customer base (638,471) -
Net cash paid for acquisitions of businesses (532,377) -
-------------- ------------
Net cash used in
investing activities (1,344,635) (178,268)
-------------- ------------
Cash flows from financing activities:
Net borrowings (repayments) on contractual
obligations with regards to receivables
sales agreement 4,360,190 (119,659)
Net advances from Parent 114,813 2,357,853
Proceeds from debt in default 2,000,000 -
-------------- ------------
Net cash provided by
financing activities 6,475,003 2,238,194
-------------- ------------
Increase (decrease) in cash and cash equivalents 304,030 (1,375,963)
Cash and cash equivalents at beginning of year 226,887 1,602,850
-------------- ------------
Cash and cash equivalents at end of year $ 530,917 $ 226,887
============== ============
Supplemental disclosure of cash flow information -
cash paid for interest $ 796,895 $ 181,625
============== ============
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See accompanying notes to consolidated financial statements. 4
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2000 and 1999
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1. Organization Organization
and Omniplex Communications Group, LLC (the Company) is a wholly
Summary of owned subsidiary of mniplex Communications Corporation (the
Significant Parent). The Company is a provider of telecommunication services
Accounting to small and medium-sized businesses primarily through its core
Policies business model as a Competitive Local Exchange Carrier (CLEC).
The Company was organized as a Texas limited liability company on
November 6, 1996. The Company's articles of organization limit
its existence to December 31, 2026.
The Company is comprised of two wholly-owned operating
subsidiaries, Maxcom Acquisition Corp. (Maxcom) and
Americanetworks Acquisition Corp. (Americanetworks).
Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned and controlled subsidiaries of the Company. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Concentration of Risk
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents.
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade
receivables. In the normal course of business, the Company
provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers and
maintains allowances for possible losses.
The Company's networks and provision of telecommunications
services are subject to significant regulation at the federal,
state, and local level. Delays in receiving regulatory approvals
or the enactment of new adverse regulation or regulatory
requirements may have a material adverse impact on the Company's
operations.
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5
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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1. Organization Concentration of Risk - Continued
and The Company relies on local exchange companies for the provision
Summary of of local telephone service. In addition, the Company relies on
Significant other carriers to provide transmission and termination services
Accounting for a majority of its long distance traffic. The inability of
Policies any of these companies or carriers to fulfill service delivery
Continued requirements could impact the Company's operations.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes all
cash and investments with original maturities to the Company of
three months or less.
Customer Acquisition Costs
Customer acquisition costs represent the direct costs of
purchasing a billing base of customer accounts. These costs are
amortized on a straight-line basis over the expected life of the
customer base of five years. Accumulated amortization is $762,422
and $77,335 at December 31, 2000 and 1999, respectively.
Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation. Additions of new equipment and major replacements
of existing equipment are capitalized. Depreciation on property
and equipment is determined using the straight-line method over
the estimated useful lives of the various classes of assets,
which range from three to seven years. Leasehold improvements are
amortized over the shorter of their useful lives or the term of
the lease. Minor expenditures for maintenance and repairs are
expensed when incurred. Gains and losses on sale or disposal of
property and equipment are reflected in operations.
Revenue Recognition
Revenue is recognized monthly as telecommunications services are
provided. Amounts billed in advance of the service month are
recorded as deferred revenue.
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6
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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1. Organization Impairment of Long-Lived Assets
and The Company reviews its long-lived assets for impairment
Summary of whenever events or changes in circumstances indicate that the
Significant carrying amount of the assets may not be recoverable through
Accounting undiscounted future cash flows. If it is determined that an
Policies impairment loss has occurred based on expected cash flows, such
Continued loss is recognized in the statement of operations.
Income Taxes
Because the Company has two operating "C" corporation
subsidiaries and is the single member of a wholly owned
subsidiary of the Parent (a C Corporation), for tax purposes the
Company is deemed a disregarded entity, therefore the Company
accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Advertising
The Company expenses the cost of advertising as incurred. For the
years ended December 31, 2000 and 1999, advertising expense
totaled approximately $33,000 and $21,000, respectively.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
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7
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization Proforma Information
and Proforma information is not presented to reflect the operations
Summary of of the Company as if it were reporting as a "C" corporation as
Significant the proforma presentation would not be materially different from
Accounting the current presentation.
Policies
Continued
2. Going At December 31, 2000, the Company has a working capital deficit,
Concern a members'deficit, and has suffered recurring losses. In
addition, subsequent to year end, the Company filed a petition
for bankruptcy (see note 14). These conditions raise substantial
doubt about the ability of the Company to continue as a going
concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effect on
recoverability of assets or amounts of liabilities that might
result from the outcome of this uncertainty.
The Company is looking to merge with another entity or to obtain
additional financing or improve operations. There can be no
assurance that the Company will be successful in any of these
activities.
3. Property Property and equipment consist of the following at December 31:
and
Equipment 2000 1999
------------- -----------
Furniture and fixtures $ 62,193 $ 15,571
Office equipment 100,346 20,161
Computer hardware 323,422 214,479
Computer software 278,158 246,017
Leasehold improvements 49,118 44,664
------------- -----------
813,237 540,892
Less accumulated depreciation
and amortization (383,901) (158,888)
------------- -----------
$ 429,336 $ 382,004
============= ===========
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8
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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4. Accrued Accrued expenses consist of the following at December 31:
Expenses
2000 1999
----------- -----------
Estimated telecom carrier costs $ 595,952 $ 195,932
Accrued vacation costs 57,323 38,712
Other 146,343 129,128
----------- -----------
$ 799,618 $ 363,772
=========== ===========
5. Payable to Payable to parent represents advances made by the Parent company
Parent to the Company as well as obligations of the Company paid by the
Parent. The amounts are payable on demand.
6. Contractual The Company has entered into an arrangement with RFC Capital
Obligations Corporation (RFC)which is essentially a receivable purchase
with Regard arrangement which bases borrowing capacity on a percentage of
to outstanding receivables up to a specified maximum of
Receivable $10,000,000. The agreements allow RFC to cease funding new
Sales receivables without prior written notice. A program fee applies
Agreement to the outstanding balance of net purchased receivables equal to
the prime rate plus 4%. The agreement also requires a closing fee
of 1% per annum of the maximum amount, which the Company charges
to interest expense. In addition, during the year 2000 RFC was
granted warrants of the Parent to purchase an aggregate of
1,337,500 shares of common stock of the Parent. These warrants
have an exercise price of $0.60 per share and expire February 22,
2010. The value of the warrants was estimated at $374,500 using
the Black-Scholes pricing model. The value was included as an
advance from the Parent to the Company and recorded as a discount
on the debt, and is being amortized to interest expense over the
36 months of the agreement. The aggregate total owed to RFC under
the agreements at December 31, 2000 and 1999 is $4,702,169 and
$341,979, less $270,472 and $0 of unamortized debt discount, for
a total of $4,431,697 and $341,979, respectively. As of December
31, 2000, the Company was in default under the terms of the
agreement with RFC.
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9
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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7. Debt in Debt in default consists of a note payable to a company,
Default including interest at prime plus 8%, with the full amount due on
the first day following the payment in full of the obligation
owed to RFC. Interest is capitalized quarterly and added to the
outstanding principal. The note payable is secured by assets and
customer base of the Company and a personal guarantee by the
Parent company. The note matures April 30, 2003. In addition, the
note payable includes warrants to purchase an aggregate of
1,200,000 shares of common stock of the Parent. These warrants
have an exercise price of $2.50 per share and expire June 29,
2010. The value of the warrants was estimated at $1,320,000 using
the Black-Scholes pricing model. The value was included as an
advance from the Parent to the Company and recorded as a discount
on the debt, and is being amortized to interest expense over the
term of the note payable. Due to the Company's violation of
certain loan covenants, the note is classified as debt in
default. The aggregate total owed at December 31, 2000 and 1999
is $2,129,394 and $0, net of $1,087,059 and $0 unamortized debt
discount, for a total of $1,042,335 and $0, respectively.
Capitalized interest included in the balance due is $129,394 and
$0, respectively.
8. Income The benefit for income taxes is different than amounts which
Taxes would be provided by applying the statutory federal income tax
rate for the following reasons as of December 31:
2000 1999
------------- -------------
Federal income tax benefit at
statutory rate $ 2,926,000 $ 1,506,000
State income tax benefit at
statutory rate 436,000 220,000
Other (6,000) (8,000)
Change in valuation allowance (3,356,000) (1,718,000)
------------- -------------
$ - $ -
============= =============
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10
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Income Deferred tax assets (liabilities) are comprised of the following
Taxes at December 31:
Continued
2000 1999
------------- -------------
Net operating loss carryforward $ 4,885,000 $ 1,725,000
Amortization of acquisition costs 127,000 -
Depreciation (5,000) (13,000)
Allowance and reserves 111,000 49,000
------------- -------------
5,118,000 1,761,000
Valuation allowance (5,118,000) (1,761,000)
------------- -------------
$ - $ -
============= =============
A valuation allowance has been established for the net deferred
tax asset due to the uncertainty of the Company's ability to
realize such asset.
The Company has net operating loss carryforwards of approximately
$12,525,000 at December 31, 2000 which are available to offset
future taxable income which expire through 2020. The utilization
of the net operating loss carryforwards is dependent upon the tax
laws in effect at the time the net operating loss carryforwards
can be utilized. The Tax Reform Act of 1986 significantly limits
the annual amount that can be utilized for certain of these
carryforwards as a result of changes in the Company's ownership.
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11
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Supplemental During the year ended December 31, 2000:
Cash Flow
Information o the Company purchased all of the outstanding common stock of
Maxcom, Inc. and AmericanNetworks, Inc. in a purchase
transaction (see note 11). The Company paid net cash of
$532,377 for the common stock of each company and recorded
net assets from the acquisitions as follows:
Cash $ 190,249
Accounts receivable 575,343
Property and equipment 42,940
Customer acquisition costs 3,245,118
Other assets 1,120
Accounts payable (816,530)
Accrued expenses (17,410)
-------------
3,220,830
Less amount financed with seller (333,204)
Less amount advanced from Parent through
Parent's issuance of common stock (2,165,000)
Less cash received (190,249)
-------------
Net cash paid $ 532,377
=============
o the Company acquired a customer list and other assets from a
company through increasing customer acquisition costs by
$378,578 and other assets by $11,422 and increasing seller
financing by $390,000
o the Company increased the advance from the Parent by
$374,500 and discount on debt related to the RFC agreement
for warrants issued by the Parent (see note 6)
o the Company increased the advance from Parent by $1,320,000
and discount on debt related to the debt in default for
warrants issued by the Parent (see note 7)
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12
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Supplemental o the Company increased the advance from the Parent by
Cash Flow $652,716 and interest expense related to the payable to
Information Parent.
Continued
During the year ended December 31, 1999:
o the Company increased the advance from the Parent by
$436,335 and interest expense related to borrowings by the
Parent on the Company's behalf.
10.Leases The Company has noncancellable operating leases, primarily for
network and office equipment, that expire over the next three
years. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense
for these operating leases for the year ended December 31, 2000
and 1999 totaled approximately, $78,000 and $57,000,
respectively.
Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one
year) as of December 31, 2000 are approximately:
Years Ending December 31,
2001 $ 88,000
2002 43,000
2003 20,000
------------
$ 151,000
============
11.Asset MVP Communications, Inc.
Purchase and On March 1, 2000 the Company signed an agreement with MVP
Acquisitions Communications, Inc.(MVP) to acquire the customer base and list
of MVP for a cash payment of $400,000 plus deferred payments
payable over 18 months from the acquisition date equal to 13.5%
of monthly revenues derived from the acquired customer base, with
minimum payments of $390,000 and maximum deferred payments of
$408,905. At December 31, 2000, no deferred payments had been
made and the Company had recorded $390,000 as a seller financing
obligation.
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13
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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11.Asset Midwestern Services, L.C.
Purchase and On June 1, 2000, the Company signed an agreement with
Acquisitions Midwestern Services, L.C. d/b/a Midwestern Tel. (Midwestern) to
Continued acquire the customer base and list of Midwestern for the
assumption and payment of Midwestern liabilities of $238,471.
AmericaNetworks, Inc.
On June 30, 2000, one of the Company's wholly-owned subsidiaries
signed an agreement with AmericaNetworks, Inc. (AmericaNetworks)
to acquire all of the outstanding common stock of AmericaNetworks
in exchange for shares of common stock of the Company's Parent.
The Company paid total initial consideration of $365,000 worth of
Parent common stock. In addition, the Company escrowed 20,000
shares of Parent common stock valued at $50,000 that can be
earned if the Company receives a credit with MCI WorldCom. As of
December 31, 2000, no shares in escrow had been issued as further
consideration.
Maxcom, Inc.
On August 30, 2000, one of the Company's wholly-owned
subsidiaries signed an agreement with Maxcom, Inc. (Maxcom) to
acquire all of the outstanding common stock of Maxcom in exchange
for a combination of shares of common stock of the Company's
Parent, cash, and seller financing. The Company paid total
initial consideration of $582,000 cash, paid off $140,626 of
Maxcom obligations and issued $1,800,000 worth of Parent common
stock and deferred payments payable over 12 months from the
acquisition date equal to $166,602 and 9.917% of the first six
months of revenues derived from the acquired customer base with
maximum deferred payments totaling $333,204. At December 31,
2000, no deferred payments had been made and the Company had
recorded $333,204 as a seller financing obligation. In addition,
the Company issued in escrow 560,000 shares of Parent common
stock valued at $1,400,000 that can be earned as further
consideration over a maximum of nine months from the acquisition
based on an increase in annualized billings base of the customer
list obtained in the transaction. As of December 31, 2000, no
shares in escrow had been issued as further consideration.
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14
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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12.Fair Value of The Company's financial instruments consist of cash,
Financial receivables, payables, and notes payable. The carrying amount
Instruments of cash, receivables, and payables approximates fair value
because of the short- term nature of these items. The carrying
amount of notes payable approximates fair value as the individual
borrowings bear interest at market interest rates.
13.Commitments Lease Agreement
and The Company was obligated under a noncancellable operating
Contingencies lease for certain switching equipment. Upon the Company filing
bankruptcy (see note 14), the switching equipment was returned to
the lessor. However, the lease was never canceled. It is unknown
whether the lessor will take further action. Future minimum lease
payments were approximately as follows at December 31, 2000:
Years Ending December 31,
2001 $ 1,457,000
2002 2,120,000
2003 1,665,000
------------
$ 5,242,000
============
Employment Agreements
The Company has employment agreements with certain officers and
key employees which expire August 2001. The agreements provide
for annual compensation based on the Company achieving certain
gross revenue targets.
Litigation
The Company may become or is subject to investigations, claims or
lawsuits ensuing out of conduct of its business, including those
related to commercial transactions and billings issues. The
Company is currently not aware of any such items which it
believes could have a material adverse effect on its financial
position.
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15
OMNIPLEX COMMUNICATIONS GROUP, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14.Subsequent The Company filed a voluntary petition for relief under Chapter
Event 11 of the United States bankruptcy code on February 28, 2001 (the
petition date) in the United States Bankruptcy Court for the
Eastern District of Missouri (Bankruptcy Court), St. Louis,
Missouri. RFC agreed to continue loaning money to the Company
under a post petition arrangement. Effective September 11, 2001
as part of a reorganization, substantially all of the assets of
the Company were sold to CCC GlobalCom Corporation for cash plus
assumption of certain liabilities for a total of approximately
$8,125,000. It is not known when or if the Company will emerge
from bankruptcy protection.
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16