================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 14, 2004
COMMISSION FILE NUMBER 1-13725
--------------
ILINC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0545043
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(address of principal executive offices) (Zip code)
(602) 952-1200
(Registrant's telephone number, including area code)
--------------
================================================================================
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro Forma Financial Information (unaudited)
iLINC COMMUNICATIONS, INC. AND GLYPHICS COMMUNICATIONS, INC. PRO FORMA
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
Introduction........................................................4
Pro Forma Unaudited Condensed Combined Balance Sheet as of
March 31, 2004..................................................5
Pro Forma Unaudited Condensed Combined Statement of Operations
for the year ended March 31, 2004...............................6
Notes to Pro Forma Unaudited Condensed Combined Financial
Statements......................................................7
(b) Financial Statements of Business Acquired
GLYPHICS COMMUNICATIONS, INC. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm............9
Balance Sheets at December 31, 2003 and 2002......................10
Statements of Operations for the years ended December 31, 2003
and 2002.......................................................11
Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 2003 and 2002...............................12
Statements of Cash Flows for the years ended December 31, 2003
and 2002.......................................................13
Notes to Financial Statements.....................................14
EXHIBIT 23 Consent of Hansen, Barnett & Maxwell..............................20
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
iLinc Communications, Inc.
By: /s/ James M. Powers, Jr.
------------------------------------
James M. Powers, Jr.,
Chairman of the Board, President and
Chief Executive Officer
Date: August 13, 2004
3
ILINC COMMUNICATIONS, INC.
AND GLYPHICS COMMUNICATIONS, INC.
PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The following pro forma combined financial statements reflect the
acquisition of certain assets of Glyphics Communications, Inc. ("Glyphics") by
iLinc Communications, Inc. ("iLinc"). The acquisition had a stated effective
date of June 1, 2004 and was fully consummated on June 14, 2004.
The pro forma unaudited condensed combined balance sheet is derived
from the historical consolidated balance sheet of iLinc as of March 31, 2004 and
the historical balance sheet of Glyphics as of December 31, 2003. The pro forma
adjustments to the pro forma unaudited condensed combined balance sheet have
been presented as if the acquisition had been consummated on March 31, 2004.
The pro forma unaudited condensed combined statement of operations for
the year ended March 31, 2004 is derived from the historical consolidated
statement of operations of iLinc for the fiscal year ended March 31, 2004 and
the historical statement of operations of Glyphics for the calendar year ended
December 31, 2003. The pro forma adjustments to the pro forma unaudited
condensed combined statement of operations have been prepared as if the
acquisition of Glyphics had been consummated on April 1, 2003.
The pro forma unaudited condensed combined financial statements are not
necessarily indicative of the results of the future operations of iLinc. The pro
forma unaudited condensed combined statements of operations do not reflect any
of the anticipated cost savings resulting from integration of the operations of
iLinc and Glyphics nor do they include any anticipated costs that may be
incurred to integrate the operations of the two companies. The pro forma
adjustments described in the accompanying notes are based on estimates derived
from information currently available.
The pro forma unaudited condensed combined financial statements should
be read in conjunction with the notes thereto and the historical financial
statements of Glyphics included in Item 7(b) of this Form 8-K/A. In addition,
reference should be made to the historical consolidated financial statements of
iLinc included in Form 10-K for the year ended March 31, 2004 as filed with the
Securities and Exchange Commission.
ILINC COMMUNICATIONS, INC. AND GLYPHICS COMMUNICATIONS, INC.
PRO FORMA UNAUDITED CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2004
(IN THOUSANDS)
Pro Forma Pro Forma
iLinc Glyphics Adjustments as Adjusted
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 292 $ -- $ (100) (A) $ 192
Accounts receivable, net 1,097 632 -- 1,729
Prepaid expenses and other current assets 108 108 -- 216
Notes receivable 25 -- -- 25
Assets of discontinued operations -- 187 -- 187
------------ ------------ ------------ ------------
Total current assets 1,522 927 (100) 2,349
Property and equipment, net 310 1,356 253 (A) 1,919
Goodwill 9,190 -- 789 (A) 9,979
Intangible assets, net 1,061 -- 1,981 (A) 3,042
Notes receivable 25 -- -- 25
Other assets 51 54 (54) (A) 51
Assets of discontinued operations 301 -- -- 301
------------ ------------ ------------ ------------
Total assets $ 12,460 $ 2,337 $ 2,869 $ 17,666
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ -- $ 66 $ -- $ 66
Current portion of long term debt 961 747 -- 1,708
Accounts payable and accrued liabilities 2,301 1,277 (185) (A) 3,393
Deferred revenue 1,084 -- -- 1,084
Current portion of capital lease liabilities 289 188 -- 477
Liabilities of discontinued operations -- 81 -- 81
------------ ------------ ------------ ------------
Total current liabilities 4,635 2,359 (185) 6,809
Long term debt, less current maturities and
net of discount 4,444 -- -- 4,444
Capital lease liabilities, less current maturities 15 269 -- 284
------------ ------------ ------------ ------------
Total liabilites 9,094 2,628 (185) 11,537
------------ ------------ ------------ ------------
Commitments and contingencies -- -- -- --
Shareholders' equity (deficit):
Preferred stock, 150,000 shares issued and outstanding -- -- -- --
Common stock, 19,257,304 (historical) and
22,076,659 (pro forma) shares issued and outstanding 19 10 (7) (A) 22
Additional paid-in capital 36,395 867 1,893 (A) 39,155
Accumulated deficit (31,640) (992) 992 (A) (31,640)
Less: Treasury shares, 1,432,412 at cost (1,408) (176) 176 (A) (1,408)
------------ ------------ ------------ ------------
Total shareholders' equity (deficit) 3,366 (291) 3,054 6,129
------------ ------------ ------------ ------------
Total liabilities and shareholders'
equity (deficit) $ 12,460 $ 2,337 $ 2,869 $ 17,666
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
5
ILINC COMMUNICATIONS, INC. AND GLYPHICS COMMUNICATIONS, INC.
PRO FORMA UNAUDITED CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA AS
ILINC GLYPHICS ADJUSTMENTS ADJUSTED
------------ ------------ ------------ ------------
Revenues
Licenses ............................... $ 2,241 $ -- $ -- $ 2,241
Service and maintenance ................ 3,665 -- -- 3,665
Conferencing and Seminars .............. -- 3,726 (21) (B) 3,705
------------ ------------ ------------ ------------
Total revenue ...................... 5,906 3,726 (21) 9,611
------------ ------------ ------------ ------------
Operating expenses
Research and development ............... 2,754 -- (21) (B) 2,733
Sales and marketing .................... 1,840 1,225 -- 3,065
General and administrative ............. 2,237 4,015 -- 6,252
Depreciation and amortization .......... 462 563 419 (C) 1,444
------------ ------------ ------------ ------------
Total operating expenses ............. 7,293 5,803 398 13,494
------------ ------------ ------------ ------------
Loss from operations ...................... (1,387) (2,077) (419) (3,883)
------------ ------------ ------------ ------------
Interest expense .......................... (1,233) (70) -- (1,303)
Interest income and other ................. 6 4 -- 10
Net gain on settlement of debt and other
obligations ............................ 349 -- -- 349
Loss on asset disposal .................... -- (73) -- (73)
Loss on foreign currency translation ...... (28) -- -- (28)
------------ ------------ ------------ ------------
(906) (139) -- (1,045)
------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes ........................... (2,293) (2,216) (419) (4,928)
Income tax expense ........................ -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations ........... (2,293) (2,216) (419) (4,928)
Income from discontinued operations ....... 275 1,600 -- 1,875
------------ ------------ ------------ ------------
Net loss .................................. (2,018) (616) (419) (3,053)
Preferred stock dividends ................. (75) -- -- (75)
Imputed preferred stock dividends ......... (247) -- -- (247)
------------ ------------ ------------ ------------
Net loss available to common shareholders . $ (2,340) $ (616) $ (419) $ (3,375)
============ ============ ============ ============
Earnings (loss) per common share,
basic and diluted
From continuing operations ............. $ (0.16) $ (0.27)
From discontinued operations ........... 0.02 0.10
------------ ------------
Net earnings (loss) per common share ... $ (0.14) $ (0.17)
============ ============
Number of shares used in calculation of
earnings (loss) per share
basic and diluted: ................... 16,743 (D) 19,563
============ ============
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
6
NOTES TO PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
On June 3, 2004, iLinc executed an asset purchase agreement to acquire
substantially all of the assets of and assume certain liabilities of Glyphics
Communications, Inc., a Utah based private company. The acquisition had a stated
effective date of June 1, 2004 and was fully consummated on June 14, 2004. The
purchase price, which was originally estimated to total $5.568 million, is based
on a multiple of the Glyphics' 2003 annual audio conferencing business revenues
(as defined in the asset purchase agreement). The purchase price was to be paid
with the assumption of specific liabilities, with the balance paid using iLinc's
common stock at the fixed price of $1.05 per share. ILinc's plans to continue to
pursue the business formerly conducted by Glyphics on an integrated basis with
its existing Web conferencing products.
In exchange for the assets received iLinc assumed $2.1 million in debt
and issued 2.8 million shares of our common stock. An additional 704,839 shares
of the Company's common stock is currently being held in escrow and is subject
to the claims of the Company for: (1) the amount, if any, that the audited audio
conferencing business revenues (as defined in the asset purchase agreement)
earned by the Company during the twelve months after the closing date are less
than the audited audio conferencing business revenues (as defined in the asset
purchase agreement) recorded by Glyphics during the twelve months ending with
the closing date of the acquisition, (2) the representations and warranties made
by Glyphics' and its shareholders in the asset purchase agreement, and (3) the
amount if any that the liabilities accrued or paid by the Company are in excess
of those specifically scheduled and assumed as part of the asset purchase
agreement. Those contingent escrow shares shall be returned to the Company by
the escrow agent in the event that those revenue performance targets and
contingent liability requirements are not achieved.
The purchase price is calculated as if the purchase was consummated on
March 31, 2004, as follows (in thousands):
Issuance of iLinc common stock valued at $0.98 per share.. $ 2,763
Acquisition costs......................................... 100
-----------
Net purchase price, including acquisition costs........ 2,863
Assumed liabilities....................................... 2,443
-----------
Total purchase price................................... $ 5,306
===========
The following is a summary of the significant assumptions and
adjustments used in preparing the pro forma unaudited condensed combined balance
sheet as of March 31, 2004 and the pro forma unaudited condensed combined
statement of operations for the year ended March 31, 2004.
(A) The total purchase price has initially been allocated to assets
acquired and liabilities assumed based upon their estimated fair values
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations." The excess purchase price over the
estimated fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed has been assigned to goodwill.
7
The purchase price of Glyphics has initially been allocated as follows:
PURCHASE
HISTORICAL PRICE PRO FORMA
AMOUNT ALLOCATION ADJUSTMENT
------------- -------------- -------------
(IN THOUSANDS)
Current assets................................... $ 927 $ 827 $ (100)
Property and equipment........................... 1,356 1,609 253
Goodwill ........................................ -- 789 789
Other assets .................................... 54 -- (54)
Identifiable intangible assets .................. -- 1,981 1,981
Current liabilities.............................. (2,359) (2,174) 185
Capital leases................................... (269) (269) --
Common stock..................................... (10) (3) 7
Capital in excess of par value................... (867) (2,760) (1,893)
Accumulated deficit.............................. 992 -- (992)
Treasury Shares.................................. 176 -- (176)
------------- -------------- -------------
$ -- $ -- $ --
============= ============== =============
(B) Reflects the elimination of sales between iLinc and Glyphics prior to
the acquisition.
(C) Reflects additional amortization and depreciation of the identifiable
tangible and intangible assets recorded as part of the Glyphics
acquisition.
(D) Pro forma weighted average shares of common stock outstanding is
summarized below:
YEAR ENDED
MARCH 31, 2004
----------------
iLinc historical weighted average common shares:
Basic and diluted........................................ 16,743
iLinc shares issued for the acquisition of
Glyphics................................................. 2,820
----------------
Pro forma weighted average common shares:
Basic and diluted........................................ 19,563
================
8
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Glyphics Communications, Inc.
We have audited the accompanying balance sheets of Glyphics Communications, Inc
as of December 31, 2003 and 2002, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also 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, 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 Glyphics Communications, Inc.
as of December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/S/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
July 22, 2004
9
GLYPHICS COMMUNICATIONS INC.
BALANCE SHEETS
DECEMBER 31,
---------------------------
2003 2002
- ------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 91,828
Accounts receivable, net of allowance for doubtful
accounts of $29,288 and $33,331, respectively 631,783 375,312
Prepaid expenses 107,953 59,519
Assets of discontinued operations 186,888 596,824
- ------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 926,624 1,123,483
- ------------------------------------------------------------------------------------------
OTHER ASSETS
Property and equipment, less accumulated
depreciation of $2,343,292 and $1,826,628, respectively 1,356,338 1,195,730
Deposits 43,186 34,346
Other assets 10,466 11,366
- ------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,409,990 1,241,442
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,336,614 $ 2,364,925
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ 65,931 $ --
Accounts payable 1,127,459 911,870
Deposits received 39,641 23,506
Accrued expenses 109,672 248,786
Notes payable- current portion 746,721 494,608
Obligations under capital leases- current portion 188,067 36,728
Liabilities of discontinued operations 81,313 285,218
- ------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,358,804 2,000,716
- ------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Notes payable- long-term portion -- 34,006
Obligations under capital lease- long-term portion 268,970 5,515
- ------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 268,970 39,521
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,627,774 2,040,237
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
Common shares - $1 par value; 10,000 shares authorized,
issued and outstanding 10,000 10,000
Additional paid in captial 867,189 867,189
Treasury stock - 3,333 shares at cost (175,800) (175,800)
Accumulated deficit (992,549) (376,701)
- ------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (291,160) 324,688
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 2,336,614 $ 2,364,925
==========================================================================================
The accompanying notes are an integral part of these financial statements.
10
GLYPHICS COMMUNICATIONS, INC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2003 2002
- --------------------------------------------------------------------------------
Revenue $ 3,726,181 $ 2,618,182
COST OF REVENUE 1,999,453 1,713,613
- --------------------------------------------------------------------------------
GROSS PROFIT 1,726,728 904,569
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Commissions 666,572 784,473
General administrative and other selling expense 3,137,523 2,727,352
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,804,095 3,511,825
- --------------------------------------------------------------------------------
OPERATING LOSS (2,077,367) (2,607,256)
OTHER INCOME (EXPENSE)
Loss on asset disposal (72,368) --
Interest expense (69,965) (43,964)
Interest income 3,733 4,082
- --------------------------------------------------------------------------------
NET OTHER EXPENSE (138,600) (39,882)
- --------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (2,215,967) (2,647,138)
INCOME FROM DISCONTINUED OPERATIONS 1,600,119 2,517,367
- --------------------------------------------------------------------------------
NET LOSS $ (615,848) $ (129,771)
================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE
Continuing operations (332.38) (397.05)
Discontinued operations 240.01 377.59
- --------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE (92.37) (19.46)
================================================================================
NUMBER OF SHARES USED IN CALCULATION OF LOSS
PER SHARE BASIC AND DILUTED 6,667 6,667
================================================================================
The accompanying notes are an integral part of these financial statements.
11
GLYPHICS COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
COMMON SHARES TREASURY SHARES TOTAL
-------------------- ADDITIONAL --------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2001 10,000 $ 10,000 $ 867,189 (1,000) $(50,000) $ (246,930) $ 580,259
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase of shares - - - (2,333) (125,800) - (125,800)
Net loss - - - - - (129,771) (129,771)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2002 10,000 10,000 867,189 (3,333) (175,800) (376,701) 324,688
Net loss - - - - - (615,848) (615,848)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2003 10,000 $ 10,000 $ 867,189 (3,333) $ (175,800) $ (992,549) $ (291,160)
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
12
GLYPHICS COMMUNICATIONS, INC
STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
2003 2002
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(2,215,967) $(2,647,138)
Adjustments to reconcile net loss from continuing
operations to net cash from operating activities:
Depreciation 559,329 501,238
Change in allowance for doubtful accounts (4,043) 12,564
Loss from asset disposal 72,368 --
Changes in operating assets and liabilities
Accounts receivable (252,428) (89,863)
Prepaid expenses (48,434) (15,569)
Accounts payable 215,589 (124,454)
Deposits received 16,135 (9,827)
Accrued liabilities (139,114) 43,631
- -------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (1,796,565) (2,329,418)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (178,713) (330,499)
Change in other assets and deposits (7,940) 2,300
- -------------------------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (186,653) (328,199)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdraft 65,931 --
Proceeds from notes payable 623,748 20,000
Payments on notes payable and capital leases (604,439) (110,390)
- -------------------------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 85,240 (90,390)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM CONTINUING OPERATIONS (1,897,978) (2,748,007)
CASH FLOWS FROM DISCONTINUED OPERATIONS 1,806,150 2,576,830
- -------------------------------------------------------------------------------------------------
NET CHANGE IN CASH (91,828) (171,177)
CASH AT BEGINNING OF YEAR 91,828 263,005
- -------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ -- $ 91,828
=================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 69,965 $ 43,964
=================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital lease $ 613,592 $ --
Acquisition of treasury stock with a note payable $ -- $ 125,800
=================================================================================================
The accompanying notes are an integral part of these financial statements.
13
GLYPHICS COMMUNICATIONS, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Glyphics Communications, Inc., (the "Company"), was incorporated under the laws
of the State of Utah in August 1998. The Company provides business communication
services for everyday business meetings and events to individuals and companies
throughout the United States. The Company's services include automated audio
conferencing and tele conferencing with simple web controls and presentation
tools.
NOTE 2 - DISCONTINUED OPERATIONS
In July 2003, the Company sold all of its long distance customer accounts to an
unrelated entity. Under the terms of sale the buyer agreed to pay the Company
amount equal to 2.25 times service revenue for certain bill cycles which
originally totaled $543,558 and subsequently renegotiated to $437,698. Through
December 31, 2003 the Company had received proceeds of $250,810 and had a
remaining receivable of $186,888. In accordance with SFAS 144 "Accounting for
Impairment on Disposal of Long-lived Assets", the Company has restated its
historical results to reflect its long distance business segment as a
discontinued operation.
A summary of the results from discontinued operations for the years ended
December 31, 2003 and 2002 are as follows:
YEAR ENDED DECEMBER 31,
2003 2002
- --------------------------------------------------------------------------------
Net revenue $ 1,541,913 $ 3,446,578
Operating expenses (379,492) (929,211)
- --------------------------------------------------------------------------------
Income from operations 1,162,421 2,517,367
Gain on sale of long distance 437,698 --
Income tax expense -- --
- --------------------------------------------------------------------------------
NET INCOME FROM DISCONTINUED OPERATIONS $ 1,600,119 $ 2,517,367
================================================================================
A summary of the assets and liabilities of the Company's discontinued operations
are as follows:
DECEMBER 31,
------------------------
2003 2002
- --------------------------------------------------------------------------------
ASSETS
Receivable from buyers of long distance segment $ 186,888 $ --
Accounts receivable, net of allowance for doubtful
accounts of $0 and $53,002, respectively -- 596,824
- --------------------------------------------------------------------------------
$ 186,888 $ 596,824
- --------------------------------------------------------------------------------
LIABILITIES
Accrued expenses $ 81,313 $ 285,218
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
are used in these financial statements to determine the allowance for doubtful
accounts, useful lives of depreciable assets and the valuation allowance for
deferred tax assets.
14
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the ordinary course of business. As shown in the financial
statements, during the years ended December 31, 2003 and 2002, the Company
incurred losses from continuing operations of $2,215,967 and $2,647,138,
respectively. During the years ended December 31, 2003 and 2002, the Company's
continuing operations used $1,796,565 and $2,329,418 of cash, respectively. The
Company's ability to continue as a going concern is dependent upon its ability
to generate sufficient cash flows to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations. Management has addressed this concern by selling
substantially all the assets of the Company to iLinc Communications, Inc.
(iLinc) for a yet-to-be determined purchase price. Also, as part of the purchase
iLinc will assume $2.114 million in specific liabilities.
REVENUE RECOGNITION
AUDIO CONFERENCING - Revenue for the Company's Audio Conferencing service is
generally based upon the actual time that each participant is on the phone. In
addition, the Company charges customers a fee for additional services such as
call taping, digital replay, participant lists and transcription services. The
Company recognizes usage revenue and related fees from its Operator Assisted
Conferencing service in the period the call is completed.
TELE SEMINAR - The Company records revenue from tele seminars on the net basis
in accordance with EITF 99-19 REPORTING REVENUE GROSS AS A PRINCIPAL VERSUS NET
AS AN AGENT. As a service to the tele seminar sponsor, the Company collects all
fees from tele seminar customers. Upon the conclusion of the tele seminar, the
Company retains an agreed upon fee plus phone usage charges and remits the
remaining fees collected to the tele seminar sponsor. Under the net method of
recognizing revenue, only the agreed upon tele seminar fee and phone usage
charges are recorded as revenue upon completion of the tele seminar. Any fees
received in advance of the seminar are classified as deposits received in the
Company's accompanying financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company records an allowance for doubtful
accounts to provide for losses on accounts receivable due to customer credit
risk. Increases to the allowance for doubtful accounts are charged to other
operating expense as bad debt expense. Losses on accounts receivable due to
financial distress or failure of the customer are charged to the allowance for
doubtful accounts. The allowance estimate is based on an analysis of the
historical rate of credit losses. The accuracy of the estimate is dependent on
the future rate of credit losses being consistent with the historical rate. If
the rate of future credit losses is greater than the historical rate, then the
allowance for doubtful accounts may not be sufficient to provide for actual
credit losses. The allowance for doubtful accounts for the Company from
continuing operations was $29,288 and $33,331, respectively, as of December 31,
2003 and 2002.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with remaining
maturities of three months or less at the date of acquisition to be cash
equivalents.
The Company maintains cash balances in various accounts at one financial
institution. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. The Company's accounts at these
institutions may, at times, exceed the federally insured limit.
The Company also, at times, issues disbursements to vendors in excess of cash
deposited in bank creating a bank overdraft. Bank overdrafts are classified as a
current liability in accompanying financial statement.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation is calculated on an accelerated method
over the estimated useful lives of three to seven years. Leasehold improvements
are amortized over the shorter of related lease terms or their estimated useful
lives. Depreciation expense includes capital lease amortization charges. Upon
retirement or sale, the cost of the assets disposed and the related accumulated
depreciation is removed from the accounts and any resulting gain or loss is
included in operations in the period realized.
15
The Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The carrying amount of a long-lived asset is considered impaired
when anticipated undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. No such
impairment charges were recorded for the years ended December 31, 2003 and 2002.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Total advertising expense was
$51,992 and $29,149 for the years ended December 31, 2003 and 2002,
respectively.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes in
accordance with SFAS No. 109 ACCOUNTING FOR INCOME TAXES. Under this method,
deferred taxes are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted marginal tax rates currently in effect when the differences reverse.
The Company has recorded a full valuation allowance to reduce the carrying value
of its net deferred tax assets because it has concluded that it is more likely
than not that it will not be realized due to continuing operating losses. The
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance. In
the event the Company was to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase net income in the period
such a determination was made.
TREASURY STOCK
The Company records treasury stock purchases under the cost method whereby the
entire cost of the acquired stock is recorded as treasury stock. The FIFO method
is used on the subsequent reissue of shares and any resulting gains or losses
are credited or charged to capital.
BASIC AND DILUTED LOSS PER SHARE
Basic loss per common share is computed by dividing net loss available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Due to the Company having no contracts to issue common stock,
diluted loss per share is the same as basic loss per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivables and
accounts payable approximate fair values due to the short-term maturities of
these instruments (presented in assets both from continuing and discontinued
operations). The carrying amounts of the Company's long-term borrowings and
capital lease obligations as of December 31, 2003 and 2002, approximate their
fair value based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's financial position, results of operations, or cash flows.
On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104, REVENUE
RECOGNITION ("SAB 104"), which supersedes SAB 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, ACCOUNTING FOR
REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES. The adoption of SAB 104 did not
have a material impact the Company's financial position or results of
operations.
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NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
--------------------------
2003 2002
- --------------------------------------------------------------------------------
Equipment $ 3,469,821 $ 2,782,868
Furniture and fixtures 182,939 161,399
Tenant improvements 46,870 78,091
- --------------------------------------------------------------------------------
3,699,630 3,022,358
Less: accumulated depreciation (2,343,292) (1,826,628)
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $ 1,356,338 $ 1,195,730
================================================================================
Depreciation expense for the years ended December 31, 2003 and 2002 was $559,329
and $501,238, respectively.
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31,
--------------------------
2003 2002
- --------------------------------------------------------------------------------
Notes payable to a former shareholder; interest rate
of 6.75%; paid subsequent to December 31, 2003. $ 27,006 $ 112,789
Notes payable to partnership; interest rate of
8%; due upon final sale of assets; unsecured. 20,693 --
Note payable from a commercial bank; interest rate
at prime (4.0% at December 31, 2003); originally
due March 2004, subsequently extended to March 2005;
secured by personal guarantees and a life insurance
policy. 400,000 400,000
Promissory note to bank (in shareholders' name);
interest rate of prime plus 1.0% (5.0% at December 31,
2003); orginally due May 2004, extended through
completion of acquisition; secured by personal
guarantees. 250,000 --
Line of credit from a commericial bank; with an
interest rate at prime plus 2.0% (6.0% at December
31, 2003); currently due; unsecured. 49,022 15,825
- --------------------------------------------------------------------------------
746,721 528,614
Less: current portion of notes payable (746,721) (494,608)
- --------------------------------------------------------------------------------
LONG-TERM PORTION OF NOTES PAYABLE $ -- $ 34,006
================================================================================
NOTE 6 - TREASURY STOCK
During 2001, the Company purchased 1,000 shares back from a shareholder for
$50,000 cash. During 2002, the Company repurchased an additional 2,333 shares of
common stock from this same individual for $125,800 under a note payable.
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NOTE 7 - INCOME TAXES
The Company did not incur any income tax expense for the years ended December
31, 2003 and 2002. Significant components of the Company's deferred tax assets
were as follows:
DECEMBER 31,
-----------------------------
2003 2002
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Reserves for uncollectible accounts $ 10,924 $ 32,202
Deferred revenue 14,786 8,768
Net operating loss carryforward 353,708 82,856
- --------------------------------------------------------------------------------
Total deferred tax assets 379,418 123,826
Less: valuation allowance (379,418) (123,826)
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ -- $ --
================================================================================
The differences between the statutory federal tax rate and the Company's
effective tax rate on continuing operations were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2003 2002
- --------------------------------------------------------------------------------
Tax benefit at U.S. Statutory rate (34%) (780,356) (900,027)
State income benefit, net of federal benefit (75,740) (87,356)
Nondeductible expenses and other 3,659 10,837
Change in valuation allowance, net 852,437 976,546
- --------------------------------------------------------------------------------
TOTAL TAX BENEFIT -- --
================================================================================
At December 31, 2003, the Company had federal net operating loss carryovers for
income tax purposes of approximately $948,278. These loss carryovers may be
subject to annual limitation on their usage and expire 2022 through 2023.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a portion of its property and equipment under the terms of
capital and operating leases.
Assets recorded under capital leases, at December 31, 2003, consisted of the
following:
Cost $ 667,768
Less: accumulated depreciation (139,047)
- --------------------------------------------------------------------------------
$ 528,721
================================================================================
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Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms of one or more years consisted of the
following at December 31, 2003:
CAPITAL OPERATING
- --------------------------------------------------------------------------------
Year ending December 31,
2004 $ 211,075 $ 142,551
2005 187,020 144,227
2006 93,510 151,016
2007 -- 160,232
- --------------------------------------------------------------------------------
Total minimum lease payments 491,605 $ 598,026
Less: amounts representing interest (34,568) ===========
- ----------------------------------------------------------------
Present value of minimum lease payments 457,037
Less: current portion (188,067)
- ----------------------------------------------------------------
OBLIGATION UNDER CAPITAL LEASE- LONG TERM $ 268,970
================================================================
The Company incurred rent expense of $281,091 and $226,862 during the years
ended December 31, 2003 and 2002, respectively.
SUBLEASE RENTALS
During 2003, the Company subleased space to various companies for storing
servers and related equipment in an "offsite" environment. The amounts received
for these subleases are netted against lease expense. The Company received
$79,197 in sublease rentals during the year ended December 31, 2003. None of
these sublease rentals have commitments that extend beyond one year.
CHANGE IN ESTIMATE
Based on settlements and the receipt of additional information received
subsequent to December 31, 2002 and 2001, certain accrued liabilities at
December 31, 2002 and 2001 were either partially or fully relieved. These items
have been accounted for as a change in estimate and adjusted through
discontinued operations during the years ended December 31, 2003 and 2002. The
effect of these changes in estimate was an increase in income from discontinued
operations and decrease to net loss totaling $523,970 and $203,905 during the
years ended December 31, 2003 and 2002, respectively.
CONCENTRATION OF SUPPLIERS
For the year ended December 31, 2003, the Company had two suppliers of telecom
services that represented 12% and 14%, respectively, of cost of revenue. For the
year ended December 31, 2002, the Company had one supplier of telecom services
that represented 31% of cost of revenue.
NOTE 9 - SUBSEQUENT EVENTS
On June 3, 2004, the Company entered into an agreement with iLinc
Communications, Inc. (iLinc) whereby iLinc agreed to buy substantially all of
the assets and assume certain liabilities of the Company. The acquisition had a
stated effective date of June 1, 2004. The purchase price will be based on a
multiple of the Company's business revenues. The purchase price will be paid
with iLinc's common stock and the assumption of $2.114 million in specific
liabilities of the Company.
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