EXHIBIT 99.2
INTEREXCHANGE, INC. AND
COMBINED AFFILIATES
For the Three Months Ended
March 31, 1998 and 1997
(Unaudited)
Page
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Combined Balance Sheet 1
Combined Statements of Operations 2
Combined Statements of Stockholders' Equity 3
Combined Statements of Cash Flows 4
Notes to Combined Financial Statements 5
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Balance Sheet
March 31, 1998
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 523,056
Accounts receivable 818,308
------------
1,341,364
Equipment, net of accumulated depreciation 5,326,352
Other assets 36,154
------------
$ 6,703,870
------------
------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 2,610,091
Current maturities of long-term debt 502,839
Accrued expenses and other current liabilities 945,282
Accrued taxes payable 700,000
Income taxes payable 333,498
------------
5,091,710
------------
Long-term debt, net of current maturities 430,006
Deferred income taxes 112,000
Stockholders' equity
Common stock 600
Retained earnings 1,069,554
------------
Total stockholders' equity 1,070,154
------------
$ 6,703,870
------------
------------
See accompanying notes to combined financial statements.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Operations
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
------------ ------------
Revenues $ 3,811,900 $ 2,884,490
Costs and expenses
Direct cost of services 1,165,843 1,040,452
Selling, general and administrative expenses 1,321,281 886,483
Depreciation 543,825 658,784
------------ ------------
3,030,949 2,585,719
------------ ------------
Earnings from operations 780,951 298,771
Other income (expense)
Interest income 6,959 4,611
Interest expense (52,771) (10,939)
------------ ------------
(45,812) (6,328)
------------ ------------
Earnings before income taxes 735,139 292,443
Income taxes 308,000 120,000
------------ ------------
Net income $ 427,139 $ 172,443
------------ ------------
------------ ------------
See accompanying notes to combined financial statements.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Stockholders' Equity
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
Common Stock
--------------------- Total
Number of Retained Stockholders'
Shares Amount Earnings Equity
-------- -------- ---------- -----------
Balance - January 1, 1997 500 $ 500 $ 268,992 $ 269,492
Net income - - 172,443 172,443
Stock issued - Blue Sky Software, Inc. 100 100 - 100
Distributions to stockholders - - (9,138) (9,138)
-------- -------- ---------- -----------
Balance - March 31, 1997 600 $ 600 $ 432,297 $ 432,897
-------- -------- ---------- -----------
-------- -------- ---------- -----------
Balance - January 1, 1998 600 $ 600 $ 645,715 $ 646,315
Net income - - 427,139 427,139
Distributions to stockholders - - (3,300) (3,300)
-------- -------- ---------- -----------
Balance - March 31, 1998 600 $ 600 $1,069,554 $ 1,070,154
-------- -------- ---------- -----------
-------- -------- ---------- -----------
See accompanying notes to combined financial statements.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
---------- ----------
Cash flows from operating activities
Net income $ 427,139 $ 172,443
---------- ----------
Adjustment to reconcile net income to net
cash from operating activities:
Depreciation 543,825 658,784
Deferred income taxes - (157,000)
(Increase) decrease in
Accounts receivable (360,782) (17,568)
Other assets - 18
Increase (decrease) in
Accounts payable (575,583) (393,021)
Accrued expenses and other current liabilities (170,403) (84,144)
Accrued taxes payable - 50,000
Income taxes payable 105,459 100,810
Customer deposits (350,000) 350,000
---------- ----------
Total adjustments (807,484) 507,879
---------- ----------
(380,345) 680,322
---------- ----------
Cash flows from investing activities
Payments for purchase of property and equipment - (562,733)
Retirement of property and equipment 87,301 -
---------- ----------
87,301 (562,733)
---------- ----------
Cash flows from financing activities
Principal payments of long-term debt (129,784) -
Distributions to stockholders (3,300) (9,138)
Proceeds from issuance of common stock - 100
---------- ----------
(133,084) (9,038)
---------- ----------
Net change in cash and cash equivalents (426,128) 108,551
Cash and cash equivalents - beginning 949,184 81,416
---------- ----------
Cash and cash equivalents - ending $ 523,056 $ 189,967
---------- ----------
---------- ----------
See accompanying notes to combined financial statements.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The combined financial statements include the accounts of
InterExchange, Inc. ("IX"), Doublestone Computing Enterprises,
Inc., Blue Sky Software, Inc., Altom Associates, Inc. and Mikulynec
Associates, Inc. (the "Company"). All significant intercompany
balances and transactions have been eliminated in the combination.
OPERATIONS
The Company is principally engaged in providing technology and
management services to telecommunications service providers,
including management of debit cards and switching services to
customers in the United States and internationally.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue for management of debit cards and switching services is
recognized as service is provided.
DIRECT COSTS OF REVENUES
Direct cost of revenues consists primarily of connectivity costs
and related costs of personnel.
EQUIPMENT
Equipment and software is recorded at cost and are depreciated
using accelerated methods over the estimated useful lives of the
assets which is five years.
The Company's telecommunications equipment is subject to
technological risks and rapid market changes due to new products
and services and changing customer demand. These changes may result
in future adjustments to the estimated useful lives of these assets.
SOFTWARE DEVELOPMENT COSTS
Costs for the internal development of new software and substantial
enhancements to existing software are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes on the liability method as
required by Statement of Financial Accounting Standards ("SFAS")
No. 109 Accounting for Income Taxes. Under this method, deferred
tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and
liabilities.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(continued)
INCOME TAXES - (continued)
All of the combined affiliates, except for IX, have elected to be
taxed as an S-Corporation under the Internal Revenue Code. Under
this election, the profits, losses, credits and deductions of the
Company are passed through to the individual stockholders.
STOCK BASED COMPENSATION
The Company has adopted the disclosure only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. The Company applies
ABB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations in accounting for stock options. Adoption
of the statement had no impact on the Company's financial position,
results of operations or liquidity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Note 2 - CONCENTRATION OF CASH BALANCE
A cash balance of $363,000 at March 31, 1998, was maintained in a
bank account insured by the Federal Deposit Insurance Corporation
(FDIC). This balance exceeds the insured amount of $100,000.
Note 3 - EQUIPMENT
1998
-----------
Computer and telecommunications
equipment and related software $ 9,661,362
Leasehold improvements 149,000
-----------
9,810,362
Accumulated depreciation (4,484,010)
-----------
Net equipment $ 5,326,352
-----------
-----------
Note 4 - RELATED PARTY TRANSACTIONS
The Company provided services to several companies with common
ownership. Revenues from these companies were $290,000 and
$185,000 for 1998 and 1997.
A major shareholder of IX entered into a five year employment
contract with a major customer of the Company (IDT Corporation),
which started in September 1997.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
1998
-----------
Payroll and bonuses $ 875,282
Legal 70,000
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$ 945,282
-----------
-----------
Note 6 - LONG-TERM DEBT
1998
-----------
Term loan through February 1999, payable quarterly at $48,593
including imputed interest at 6.5%, collateralized by various
equipment. $ 141,072
Term loan through April 2000, payable monthly at $19,261 including
imputed interest at a 11%, collateralized by various
equipment. 397,644
Term loan through May 2000, payable monthly at $11,652 including
imputed interest at a fixed rate of 10%, collateralized
by various equipment. 271,218
Term loan through July 2000, payable monthly
at $4,730 including interest at 8.75%. 122,911
-----------
Less current maturities 502,839
-----------
Long-term debt, net of current maturities $ 430,006
-----------
-----------
The approximate aggregate amount of all long-term debt maturities
for the years ending March 31, follows:
1999 $ 504,000
2000 364,000
2001 65,000
Note 7 - OPERATING LEASES
The Company leases office space under a ten year lease expiring
June 2006 with a renewal option for two five-year periods. Monthly
payments under the current lease are $22,470. The Company is
required to pay property taxes, utilities, insurance and
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
other costs relating to the leased facilities. Rent expense was
$57,000 and $36,000 for 1998 and 1997.
The Company leases equipment under operating leases with terms
ranging from two to three year periods expiring through 2000.
Monthly payments under the leases currently aggregate approximately
$23,500. Equipment lease expense was $70,000 and $55,000 for 1998
and 1997.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of
March 31, 1998:
For the Years Ending
March 31,
--------------------
1999 $ 469,000
2000 300,000
2001 275,000
2002 297,000
2003 306,000
Thereafter 993,000
-----------
Total minimum payments required $ 2,640,000
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-----------
Note 8 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
MAJOR CUSTOMERS
One customer accounted for 78% and 76% of revenues during 1998 and
1997. Such customer was 93% of accounts receivable as of March 31,
1998.
On June 29, 1997, a service agreement was entered into with this
major customer, PT-1 Communications, Inc. ("PT-1"). In connection
with the agreement, PT-1 granted certain warrants for the purchase
of shares of Common Stock to four principals of IX. These warrants
are exercisable for shares of Common Stock with an aggregate fair
market value (as defined) equal to (i) $1,000,000 at a nominal
exercise price and (ii) $2.0 million, at an aggregate exercise
price equal to $1,000,000. Such warrants with respect to one-third
of the Warrant Shares vest and become exercisable upon each of: (i)
the earlier to occur of the closing of a stock offering of PT-1 or
March 31, 1998, (ii) January 1, 1999 and (iii) December 1, 1999, in
each case, if the IX Agreement has not been terminated. These
warrants expire upon the fifth anniversary of their respective
vesting dates. These warrants, in the event of change in control of
PT-1 will immediately vest and become exercisable.
In connection with these warrants, the Company will record revenues
and compensation expense of approximately $2.0 million, the
difference between the exercise price and market value, over the
vesting period applicable to each portion of
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
the grant. The Company has recorded $220,000 revenue and $220,000
compensation expense, related to these warrants for the three
months ended March 31, 1998.
Note 9 - SUPPLEMENTAL DISCLOSURE STATEMENT OF CASH FLOWS
NONCASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 1997, the Company
purchased equipment for $362,000. In conjunction with this
purchase, liabilities of $362,000 were assumed.
Supplemental disclosure of cash paid.
1998 1997
--------- ---------
Interest expense $ 52,771 $ 10,939
Income taxes 200,000 55,000
Note 10 - CONTINGENCIES
RELATED PARTY GUARANTEE
The Company has guaranteed the obligations of a related entity
under common control. At March 31, 1998, the related party's total
future minimum payments, guaranteed by IX amounted $520,000.
REGULATORY ENVIRONMENT
The Company is subject to regulation by various government
agencies and jurisdictions and believes it is in compliance with
all applicable laws and regulations. However, implementation and
interpretation of the Telecommunications Act of 1996 (the Act) is
ongoing and subject to litigation by various federal and state
agencies and courts. As a result, the impact of the Act on the
Company is not yet completely determinable and future
interpretations and rulings may impact the financial position and
results of operations of the Company.
ACCRUED TAXES PAYABLE
The taxation of the Company's operations which is related to
telecommunications is evolving. The Company believes it has
adequately provided for any such taxes it may ultimately be
required to pay. Legislation may be enacted which would
specifically provide for taxation of such operations or may
interpret current laws in a manner resulting in additional tax
liabilities.
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INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 11 - SUBSEQUENT EVENT
MERGER AGREEMENT
On April 8, 1998, IX announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of
April 7, 1998, pursuant to which IX would merge with a wholly
owned subsidiary of IDT Corporation ("IDT") (the "Merger") and IX
would become a wholly owned subsidiary of IDT. Immediately prior
to the execution and delivery of the Merger Agreement, IX entered
into binding agreements with the stockholders of the four combined
affiliated companies to purchase all of the shares of common stock
of such companies in exchange for common stock of IX.
Pursuant to the Merger Agreement, all of the outstanding shares of
the common stock of IX (the "IX Common Stock") will be exchanged
for an aggregate of 3,242,323 newly issued shares (the "IDT
Shares") of common stock, par value $.01 per share, of IDT (the
"IDT Common Stock", and $20 million in cash (the "Cash
Consideration"). The IX Common Stock, the Cash Consideration and
the IDT Common Stock will be held in escrow until the satisfaction
of the conditions set forth in the Merger Agreement. The Merger is
expected to be consummated prior to June 6, 1998. A portion of the
IDT Shares will remain in escrow until October 2002 in order to
satisfy certain possible indemnification obligations that certain
stockholders of IX may have under the Merger Agreement. The Merger
will be treated as a purchase for accounting purposes on IDT and
is intended to qualify as a tax-free reorganization under the
provisions of Section 368 of the Internal Revenue Code of 1986, as
amended.
MAJOR CUSTOMER
Following the public announcement of the Merger, PT-1 has
indicated its position that the Merger violates IX's service
agreement with PT-1 (see Note 8). However, PT-1 has taken no
action with respect to such claim.
RESTRICTED STOCK AWARD
Immediately prior to signing of the Merger Agreement, IX issued
shares of restricted common stock to certain individuals. Such
restricted stock will be replaced by 77,277 shares of IDT common
stock after the merger is completed subject to certain defined
restrictions. These restrictions include conclusion of the merger
by a certain date and continued service of the participant with
the Company or its affiliates through April 7, 1999.
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