REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
InterConnect West, Inc.
Salt Lake City, Utah
We have audited the accompanying balance sheet of InterConnect West, Inc. (an S
Corporation), as of December 31, 1995, and the related statements of operations,
stockholders' equity and cash flows for the period April 21, 1995 (date of
inception) to December 31, 1995. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
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 audit provides 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 InterConnect West, Inc. (an S
Corporation) as of December 31, 1995, and the results of its operations and cash
flows for the period April 21, 1995 (date of inception) to December 31, 1995, in
conformity with generally accepted accounting principles.
October 31, 1996
Salt Lake City, Utah
B-1
INTERCONNECT WEST, INC.
BALANCE SHEET
December 31, 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $17,782
Accounts receivable, net of allowance
for doubtful accounts of $5,357 .......................... 17,770
Total Current Assets .................................. 35,552
PROPERTY AND EQUIPMENT, at cost, net
of accumulated depreciation (Notes 2 and 3) ................. 23,638
$59,190
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................ $ 4,822
Accrued expenses ................................................ 21,629
Current portion of long-term debt (Note 4) ...................... 4,284
Total Current Liabilities .................................... 30,735
LONG-TERM DEBT (Note 4) ............................................ 25,716
COMMITMENTS AND CONTINGENCIES
(Notes 6, 7 and 8) .............................................. --
STOCKHOLDERS' EQUITY
Common stock, $1,00 par value; authorized
1,000,000 shares; issued and outstanding 1,000 shares (Note 5) .. 1,000
Additional paid-in capital (Note 5) ............................. 3,764
Retained deficit ................................................ (2,025)
Total Stockholders' Equity ................................... 2,739
$ 59,190
The accompanying notes are an integral part of these financial statements.
B-2
INTERCONNECT WEST, INC.
STATEMENT OF OPERATIONS
For the Period April 21, 1995 (Date of Inception) to December 31, 1995
REVENUES
Advertising income ......................................... $ 103,854
Consulting income .......................................... 22,419
Graphics design income ..................................... 19,944
Other income ............................................... 196
Total Revenues .......................................... 146,413
COST OF SALES ................................................. 80,613
GROSS PROFIT .................................................. 65,800
GENERAL AND ADMINISTRATIVE EXPENSES
Auto expense ............................................... 3,760
Bad debt expense ........................................... 5,357
Depreciation ............................................... 4,882
Insurance .................................................. 732
Interest ................................................... 3,685
Meals and entertainment .................................... 1,253
Other 3,765
Office supplies ............................................ 2,985
Professional ............................................... 2,204
Rent ....................................................... 6,951
Recruiting expense ......................................... 6,287
Telephone .................................................. 17,255
Wages and employee benefits ................................ 8,709
Total General and Administrative Expenses ............... 67,825
Net loss ............................................... $ (2,025)
Loss per share (Note 2) ................................. $ (2.03)
Weighted average number of shares outstanding ........... 1,000
The accompanying notes are an integral part of these financial statements.
B-3
INTERCONNECT WEST, INC.
STATEMENT OF CASH FLOWS
For the Period April 21, 1995 (Date of Inception) to December 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (2,025)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation ................................................. 4,882
Bad debt expense ............................................. 5,357
Changes in operating assets and liabilities:
Accounts receivable .......................................... (23,127)
Accounts payable ............................................. 4,822
Accrued expenses ............................................. 21,629
Net Cash Provided by Operating Activities ................. 11,538
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment - net ..................... (23,756)
Net Cash Used in Investing Activities ..................... (23,756)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt ...................................... 30,000
Net Cash Provided by Financing Activities ................. 30,000
Net increase in cash and cash equivalents ....................... 17,782
Cash and cash equivalents at beginning of period ................ --
Cash and Cash Equivalents at End of Period ................ $ 17,782
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfer of assets and assumption of liabilities
in exchange for 1,000 shares of common stock (See Note 5) . $ 4,764
The accompanying notes are an integral part of these financial statements.
B-4
INTERCONNECT WEST, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period April 21, 1995 (Date of Inception) to December 31, 1995
Additional
Common Stock Paid-in Retained
Shares Amount Capital Deficit Total
Issuance of common shares
for assets and the assumption
of liabilities ($4.76 per share)
(Note 5) ..................... 1,000 $ 1,000 $ 3,764 $ -- $ 4,764
Net loss for the period April 21,
1995 (date of inception) to
December 31, 1995 ............ -- -- -- (2,025) (2,025)
Balance at December 31, 1995 .... 1,000 $ 1,000 $ 3,764 $(2,025) $ 2,739
The accompanying notes are an integral part of these financial statements.
B-5
INTERCONNECT WEST, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION AND BUSINESS ACTIVITY
Interconnect West, Inc. (the Company) was organized under the laws of the State
of Utah on April 21, 1995. The Company provides Internet marketing services
including the graphic design of web sites, consulting and Internet connection
services. The Company also sells store front sites in an on-line mall displayed
on the world wide web designed and operated by the Company called Access Market
Square.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of less than three months to be cash equivalents.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the shareholders are
liable for individual federal income taxes on their respective share of the
Company's taxable income.
As described in Note 7 to the financial statements, on June 17, 1996, the
Company entered into an agreement with Eurotronics Holdings Incorporated (EHI)
whereby, the Company would exchange all of its issued and outstanding shares of
capital stock for 90% of the issued and outstanding common stock of EHI. As a
result, the Company will lose its "S" status classification and will be taxed as
a "C" corporation under the Internal Revenue Code.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets. Maintenance
and repairs are charged to operations when incurred. Betterments and renewals
are capitalized.
Dividend Policy
The Company anticipates that for the foreseeable future its earnings will be
retained for use in its business and no cash dividends will be paid. Declaration
and payment of dividends will remain within the discretion of the Company's
board of directors and will depend upon the Company's growth , profitability,
financial condition and other factors which the board of directors may deem
appropriate.
INTERCONNECT WEST, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)-
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
Loss Per Share
The computation of primary loss per share is based on the weighted average
number of shares outstanding during the period.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995:
Equipment $29,920
Office furniture 969
--------
30,889
Less accumulated depreciation (7,251)
$23,638
=======
Depreciation expense for the period April 21, 1995 (date of inception) to
December 31, 1995 was $4,882.
4. LONG-TERM DEBT
At December 31, 1995, long-term debt consisted of a note payable to an
individual in the amount of $30,000, with interest at 12% per annum. All accrued
and unpaid interest shall be paid on the first day of each twelve full calender
months following June 1, 1995. Thereafter, the principal amount and accrued and
unpaid interest shall be payable in 36 monthly installments of $996, payable on
the first day of each calender month beginning on July 1, 1996, and ending on
June 1, 1999, on which date all outstanding principal and accrued and unpaid
interest will be due and payable. A late charge of 5% of any late payment will
be due if payment has not been received within five days of its due date. The
note is unsecured.
INTERCONNECT WEST, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995
4. LONG-TERM DEBT (Continued)
The annual maturities of long-term debt for the next five years are as follows:
Year ending
December 31 Amount
1996 $ 4,284
1997 10,209
1998 11,619
1999 3,888
2000 -
$30,000
=======
5. COMMON STOCK
On April 21, 1995 (date of inception), the Company's primary stockholder
transferred assets and liabilities to the Company in the net amount of $4,764
(valued at the stockholder's basis) in exchange for 1,000 shares of the common
stock of the Company.
6. LEASES
The Company is obligated under one operating lease for rental of office space as
follows:
Rental expense for an operating lease for the period April 21, 1995 (date of
inception) to December 31, 1995 approximated $7,000. The Company is obligated
under the operating lease agreement to pay lease payments of $876 per month for
the period January 1, 1996 through June 30, 1996 and $924 per month for the
period July 1, 1996 through December 31, 1996. The Company may extend the lease
for one additional year by giving the landlord sixty days written notice prior
to the expiration of the lease.
INTERCONNECT WEST, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995
6. LEASES (Continued)
Future minimum lease payments under the noncancellable operating lease as of
December 31, 1995 are as follows:
Year ending
December 31 Amount
1996 $10,300
1997 -
1998 -
1999 -
2000 -
Total minimum lease payments $10,300
========
7. SUBSEQUENT EVENT
On June 17, 1996, the Company entered into an agreement with Eurotronics
Holdings Incorporated (EHI) whereby, the Company would exchange all of its
issued and outstanding shares of capital stock for 90% of the issued and
outstanding common stock of EHI which shall be issued pursuant to Rule 144 under
the Securities Act of 1933. From the date of closing, the Company will become a
wholly-owned subsidiary of EHI and the name of EHI will be changed to Access
Market Square, Inc. Both parties agree to utilize the services of Canton
Financial Services Corporation (CFSC) in connection with the Agreement. EHI and
the Company agree to issue to James Tilton (the president of EHI) 10% of the
then currently issued and outstanding common stock. The total amount of common
stock then currently issued and outstanding, including Mr. Tilton's shares, will
then be reduced to 2.5% of EHI's issued and outstanding by the issuance of 4000%
of the quantity of common stock then issued and outstanding, including 3600% to
the Company and 400% to CFSC. CFSC will also receive $100,000 payable at EHI's
option in either cash or common stock issued pursuant to Form S-8 under the
Securities Act of 1933. CFSC shall also be reimbursed for expenses incurred
during and in relation to the furtherance of this transaction.
8. LITIGATION
On February 3, 1995, Milne Jewelry Company asserted through Counsel that the
Company infringed its trade dress and copyright in and to its Internet web site
by its involvement in a so called "Santa Fe Silver Trading Post" web site. The
Company responded by denying the allegations and by taking
INTERCONNECT WEST, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995
8. LITIGATION (Continued)
steps to have the allegedly offending material removed. Counsel for Milne
Jewelry Company posted a letter dated February 23, 1995 continuing its
allegations. No action has been taken subsequent to that by either party.
Counsel for the Company states that no meaningful evaluation as to the range of
potential loss resulting from an unfavorable outcome can be made.