cyberTours Inc.
AUDIT OF FINANCIAL STATEMENTS
AND ADDITIONAL INFORMATION
SIX MONTHS ENDED JUNE 30, 1999
cyberTours Inc.
AUDIT OF FINANCIAL STATEMENTS
AND ADDITIONAL INFORMATION
SIX MONTHS ENDED JUNE 30, 1999
FINANCIAL STATEMENTS PAGE
- -------------------- ----
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEET 2 - 3
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT 4
STATEMENT OF CASH FLOWS 5 - 6
NOTES TO FINANCIAL STATEMENTS 7 - 12
ADDITIONAL INFORMATION
- ----------------------
INDEPENDENT AUDITOR'S REPORT 13
SCHEDULES OF COST OF SALES AND OPERATING EXPENSES 14
INDEPENDENT AUDITOR'S REPORT
July 19, 1999
To the Stockholders
cyberTours Inc.
Kennebunk, Maine
We have audited the accompanying balance sheet of cyberTours Inc. as of June 30,
1999, and the related statements of operations and accumulated deficit and cash
flows for the six months then ended. These financial statements are the
responsibility of cyberTours Inc.'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 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 cyberTours Inc. as of June 30,
1999, and the results of its operations and its cash flows for the six months
then ended in conformity with generally accepted accounting principles.
Certified Public Accountants
cyberTours Inc.
BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS
Cash, Note 1 $ 16,260
Accounts receivable, less allowance for doubtful
accounts of $2,623, Notes 1 and 7 128,585
Inventory held for resale, Notes 1 and 7 3,445
----------
Total Current Assets 148,290
----------
PROPERTY AND EQUIPMENT, Notes 1, 4, 5 and 7
Leasehold improvements 33,308
Furniture and fixtures 50,845
Machinery, equipment and software 1,361,053
----------
1,445,206
Less accumulated depreciation (316,920)
----------
Total Property and Equipment 1,128,286
----------
OTHER ASSETS
Customer lists, net of amortization of $90,977,
Notes 1 and 7 323,916
Deferred taxes on income, Notes 1 and 3 190,000
Other assets 34,842
Financing costs, net of amortization of
$3,692, Note 1 15,340
Organization costs, net of amortization of $350,
Notes 1 and 7 150
----------
Total Other Assets 564,248
----------
Total Assets $1,840,824
==========
See Notes to Financial Statements
- 2 -
cyberTours Inc.
BALANCE SHEET
JUNE 30, 1999
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable, trade $ 359,700
Notes payable, Note 4 200,000
Current portion long-term debt 57,000
Current portion capital leases payable 256,000
Unearned service revenue, Note 1 669,431
Advance customer receipts 29,832
Accrued payroll and payroll taxes 61,153
Accrued expenses 16,727
-----------
Total Current Liabilities 1,649,843
-----------
LONG-TERM LIABILITIES
Long-term debt, Note 7 708,240
Capital leases payable, Note 5 751,059
Less current portion long-term debt (57,000)
Less current portion capital leases payable (256,000)
-----------
Total Long-Term Liabilities 1,146,299
-----------
Total Liabilities 2,796,142
-----------
Commitments, Notes 6 and 11
STOCKHOLDERS' DEFICIT
Capital stock, no par value, 4,000 shares
authorized, 3,000 shares issued and
outstanding 4,000
Additional paid in capital 9,673
Accumulated deficit (948,991)
-----------
(935,318)
Treasury stock, at cost, 1000 shares (20,000)
-----------
Total Stockholders' Deficit (955,318)
-----------
Total Liabilities and Stockholders' Deficit $ 1,840,824
===========
See Notes to Financial Statements
- 3 -
cyberTours Inc.
STATEMENT OF OPERATIONS AND
ACCUMULATED DEFICIT
SIX MONTHS ENDED JUNE 30, 1999
NET SALES, Note 1 $ 2,311,629
COST OF SALES, Note 10 935,723
-----------
GROSS PROFIT ON SALES 1,375,906
OPERATING EXPENSES, Notes 6, 8 and 9 1,675,901
-----------
OPERATING LOSS (299,995)
-----------
OTHER INCOME (EXPENSE)
Other income 957
Rental income 6,875
Interest income 43
Loss on sale of assets (3,595)
Interest expense (74,402)
-----------
Total Other Income (Expense) (70,122)
-----------
NET LOSS BEFORE TAXES (370,117)
INCOME TAX BENEFIT, Notes 1 and 3
Current --
Deferred (50,000)
-----------
Total Income Tax Benefit (50,000)
-----------
NET LOSS (320,117)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD (628,874)
-----------
ACCUMULATED DEFICIT, END OF PERIOD $ (948,991)
===========
See Notes to Financial Statements
- 4 -
cyberTours Inc.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(320,117)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization expense 199,224
Provision for deferred income taxes (50,000)
Loss on sale of equipment 3,595
Change in operating assets and liabilities:
(Increase) in accounts receivable (33,119)
(Increase) in inventory held for resale (495)
Increase in accounts payable 23,684
Increase in unearned service revenues 83,906
(Decrease) in accrued expenses (2,333)
Increase in advance customer receipts 6,393
Increase in accrued payroll 23,526
---------
Net Cash Used by Operating Activities (65,736)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Customer lists acquired (4,400)
Purchases of property and equipment (27,854)
Proceeds on sale of equipment 4,800
Change in other assets (21,796)
---------
Net Cash Used by Investing Activities (49,250)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt borrowings 200,000
Proceeds from long-term debt borrowings 30,000
Principal payments on capital leases (62,978)
Principal payments on long-term debt (25,213)
Principal payments on short-term debt (25,000)
---------
Net Cash Provided by Financing Activities 116,809
---------
INCREASE IN CASH 1,823
CASH, Beginning of Period 14,437
---------
CASH, End of Period $ 16,260
=========
See Notes to Financial Statements
- 5 -
cyberTours Inc.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
Supplemental Schedules of Cash Flow Information:
- ------------------------------------------------
Cash paid for taxes $ -
=======
Cash paid for interest $71,327
=======
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
The following noncash transactions occurred during the six months ended June
30, 1999:
Acquisition of equipment with capital leases $642,018
========
Refinanced capital leases $138,952
========
See Notes to Financial Statements
- 6 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
Note 1 - Summary of Accounting Policies
cyberTours Inc. (Company) provides retail and wholesale Internet access,
telecommunications services, value added resales, and custom software. The
Company is incorporated in the State of Maine with headquarters in Kennebunk,
Maine. The Company maintains multiple manned and unmanned points of presence and
is expanding regionally throughout New England.
The accounting policies used by the Company conform to generally accepted
accounting principles. Significant policies are described below:
Cash - For balance sheet and cash flows purposes, cash and cash equivalents
include money market accounts and highly liquid debt instruments purchased
with a maturity of three months or less. At June 30, 1999, the Company had
deposits at several banks of $241,905, of which $134,445 exceeded FDIC
insurance coverage.
Concentrations of Credit Risk - Financial instruments which potentially
expose the Company to concentrations of credit risk, as defined by Statement
of Financial Accounting Standards No. 105, consist primarily of trade
accounts receivable. The Company's customer base includes individuals,
businesses, non-profit organizations, and local governments primarily located
throughout Maine. Management does not believe that significant credit risk
exists at June 30, 1999.
Revenue Recognition - Revenues are principally generated from the provision
of Internet access, Web site hosting and other related data services. These
revenues are recognized at the time services are provided. Service plans
range from one month to one year. Advance collections relating to future
access services are recorded as deferred revenue and recognized as revenue
when earned. Revenues related to non-recurring installation and activation
fees are recorded when the services are provided. These fees are a result of
the one-time events related to the set-up of a new customer service. In
certain situations the Company waives non-recurring installation and
activation fees. The Company expenses the related direct costs of
installation and activation as incurred.
Depreciation - Depreciation for financial reporting and income tax purposes
is computed using the declining balance and straight-line methods over the
estimated useful lives of the assets.
Amortization - Organization costs, customer lists and financing costs are
being amortized using the straight line method from three to fifteen years
for both for financial reporting purposes and for income tax purposes.
Deferred Taxes on Income - Deferred taxes on income relate to net operating
loss carryovers and the Company's differences in calculating depreciation and
amortization and in amortizing or expensing commissions paid to resellers for
income tax and financial reporting purposes.
Use of Estimates - Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenue and expenses.
Inventory - Inventory consists of electronic equipment which was held for
resale at June 30, 1999 and is valued at the lower of cost or market using
the first in, first out method (FIFO).
Property and Equipment - Property and equipment are carried at cost. Major
improvements are included in property accounts while maintenance and repairs
which do not improve or extend the life of the assets are expensed currently.
- 7 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
Note 2 - Related Party Activity
On December 22, 1998, cyberTours Inc. entered into a software license agreement
with a company (Licensor) owned 100% by one of the Company's stockholders. The
fee for the Program is not to exceed $55,000. No payments were made in 1999.
cyberTours Inc. shall receive a 9% royalty on net sales by Licensor.
United Systems Access, Inc. (USA) is an entity owned by the same stockholders as
cyberTours Inc. USA Ednet is a wholly owned subsidiary of USA. There were no
transactions between cyberTours Inc. and USA Ednet or USA for the six months
ended June 30, 1999.
Note 3 - Income Tax Benefit on Loss
Income tax benefits for the six months ended June 30, 1999, consisted of the
following:
1999
-----------------------------
Federal State Total
------- ----- -----
Currently payable $ -- $ -- $ --
Estimated deferred taxes
due to timing differences, Note 1 (38,000) (12,000) (50,000)
-------- -------- --------
$(38,000) $(12,000) $(50,000)
======== ======== ========
For income tax purposes, the Company has an estimated net operating loss
carryover of $1,063,938 of which an estimated $357,403 expires December 31,
2019, $697,732 expires December 31, 2018 and $8,803 expires December 31, 2010.
No valuation allowance is considered necessary.
Note 4 - Notes Payable
At June 30, 1999, the Company has a note payable due on demand of $200,000 with
a corporation having an interest rate of 8.5%. The note payable has a junior
lien on all business assets.
The Company has a line of credit for $30,000 which was unused at June 30, 1999.
No amounts were borrowed against this line of credit during the six months ended
June 30, 1999. Bank advances on the line-of-credit are payable on demand
including interest at a rate of 9.5%. The line-of-credit expires September 16,
1999. The line-of-credit has a junior lien on all business assets and is
personally guaranteed by three of the Company's stockholders. This note was
executed simultaneously and in connection with the Bank's issuance of an
irrevocable standby letter of credit issued for the benefit of a vendor which
also expires September 16, 1999.
- 8 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
Note 5 - Obligations under Capital Leases
The Company leases various equipment under eleven capital leases. The economic
substance of the leases is that the Company is financing the acquisition of the
equipment through the leases and, accordingly, the equipment and leases are
recorded in the Company's assets and liabilities. Included in machinery and
equipment on the accompanying balance sheet as of June 30, 1999, is equipment
acquired under the capital leases with a capitalized cost of $931,899 with
accumulated depreciation of $124,390.
The following is a schedule by years of future minimum payments required under
the leases together with their present value as of June 30, 1999:
Years Ending
December 31,
------------
July 1 through December 31, 1999 $181,500
2000 323,200
2001 299,000
2002 100,300
2003 1,522
--------
Total minimum lease payments 905,522
Less amount representing interest (154,463)
--------
Present value of minimum lease payments 751,059
Less current portion (256,000)
--------
Long-term portion $495,059
========
Note 6 - Operating Leases
Office, Telecommunications and Retail Space -
The Company leases office and telecommunication space located in Kennebunk,
Maine. The lease is for a five year period beginning September 15, 1996 with an
annual base rent of $9,015 in years one and two and $10,500 in years three
through five.
The Company leases office space located in Kennebunk, Maine. The lease is for
the period beginning January 1, 1998 and expiring September 14, 2001 with an
annual base rent of $14,445.
- 9 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
Note 6 - Operating Leases (continued)
The Company leases telecommunications space located in Springvale, Maine. The
lease is for a five year period beginning January 1, 1998 with an annual base
rent of $1,224.
The Company leases telecommunications and retail space located in Portland,
Maine. The lease is for a five year period commencing on September 1, 1998 with
an annual base rent of $75,284 for years one and two, $77,712 for years three
and four, and $82,569 for year five.
Equipment -
The Company leases office equipment for a term of fifty-one months beginning
June 11, 1998 with three monthly payments of $337 and forty-eight monthly
payments of $436.
The Company leases office equipment for five years beginning May 19, 1998.
Monthly payments are as follows: first three payments at $559, the next three
payments at $1,117, the next six payments at $1,955 and the final forty-eight
payments at $1,340.
The future minimum lease expense under these agreements are as follows:
Year Space Equipment Total
---- ----- --------- -----
July 1 through December 31, 1999 $ 50,726 $ 12,388 $ 63,114
2000 102,262 21,978 124,240
2001 96,168 21,978 118,146
2002 80,555 20,670 101,225
2003 55,046 6,978 62,024
In addition to the aforementioned leases, the Company leases various
telecommunication sites as a tenant at will.
Total rental expense for office, telecommunications and retail space for the six
months ended June 30, 1999 was $90,819.
Total rental expense for equipment for the six months ended June 30, 1999 was
$17,470.
Note 7 - Long-Term Debt
Long-term debt at June 30, 1999 consists of the following:
80% SBA guaranteed note payable to a bank, as
amended, commencing December 1, 1998. The amended
note requires monthly payments of principal and
interest of $495 based on 10.5% fixed interest
rate. The note is secured by a first security
interest in all equipment and machinery, furniture
and fixtures, and inventory of the Company and is
due August 1, 2006. This note is guaranteed by the
Company's stockholders. $ 29,680
- 10 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
Note 7 - Long-Term Debt (continued)
50% SBA guaranteed note payable to a bank, as
amended, commencing December 1, 1998. This amended
note requires monthly payments of principal and
interest of $1,092. Interest is based on Wall
Street Journal Prime Rate plus 2% as adjusted
monthly. Secured by a second security interest in
all equipment and machinery, furniture and
fixtures, and inventory of the Company and is due
April 1, 2007. This note is guaranteed by the
Company's stockholders. 70,553
Note payable to a bank, as amended, commencing
November 26, 1998. The amended note requires
monthly payments of principal and interest of $892
based on fixed interest rate of 9.5%. The note is
secured by a first security interest on purchased
equipment and is due September 26, 2007. This note
is guaranteed by the Company's stockholders. 60,735
75% SBA guaranteed note payable to a bank. The
note requires monthly payments of principal and
interest of $3,487 based on 9.5% fixed interest
rate. The bank and SBA have a first security
interest in all equipment purchased, all
inventory, accounts receivable and intangibles of
the Company and assignment of Keyman life
insurance. The note is due September 28, 2008.
This note is guaranteed by the Company's
stockholders. 255,099
75% SBA guaranteed note payable to a bank. The
note requires monthly payments of principal and
interest of $1,743 based on 9.5% fixed interest
rate. The bank and SBA have a junior security
interest in all inventory, accounts receivable,
equipment and intangibles of the Company and
assignment of Keyman life insurance. The note is
due October 14, 2008. This note is guaranteed by
the Company's stockholders. 129,248
Note payable to a bank. The note requires monthly
payments of principal and interest of $1,826 based
on 9.5% fixed interest rate. The bank has a first
security interest in all inventory, accounts
receivable, equipment and intangibles of the
Company and is due October 14, 2008. This note is
guaranteed by the Company's stockholders. 134,533
Note payable to a bank. The note requires monthly
payments of principal and interest of $623 based
on 9% fixed interest rate. This note is guaranteed
by the Company's stockholders. 28,392
--------
Total $708,240
========
Maturities are as follows:
July 1 through December 31, 1999 $ 27,300
2000 59,500
2001 65,300
2002 71,800
2003 79,000
January 1 through June 30, 2004 39,900
Thereafter 365,440
--------
$708,240
========
- 11 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
Note 8 - Depreciation and Amortization Expense
Depreciation and amortization expense was $199,224 for the six months ended June
30, 1999.
Note 9 - Advertising
The Company did not participate in any direct-response advertising during the
six months ended June 30, 1999 and no advertising costs are capitalized as of
June 30, 1999. Advertising expense was $35,629 for the six months ended June 30,
1999.
Note 10 - Major Suppliers
Purchases from a vendor during the six months ended June 30, 1999 amounted to
$635,723 or 70% of cost of sales. At June 30, 1999, the Company had accounts
payable to this vendor of $256,839.
Note 11 - Commitments
As of June 30, 1999, the Company had commitments to purchase hardware and
software with a cost of approximately $218,000.
Note 12 - Subsequent Event - Stock Purchase Agreement
On July 2, 1999 the stockholders of cyberTours Inc. entered into a Stock
Purchase Agreement with Log on America, Inc., whereby Log On America, Inc. has
agreed to purchase all of the outstanding stock of cyberTours Inc. in exchange
for stock of Log On America valued at the purchase price to be determined under
the agreement. Subject to the provisions of the Stock Purchase Agreement, the
closing is scheduled to take place August 15, 1999. The Stock Purchase Agreement
is conditioned upon, among other things, further due diligence procedures, the
buyer's fulfillment of all legal requirements and filings in connection with the
contemplated transaction, non-compete agreements to be executed by the current
stockholders of cyberTours Inc., and consents to the transaction from Kennebunk
Savings Bank and Bar Harbor Trust Company.
- 12 -
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
July 19, 1999
To the Stockholders
cyberTours Inc.
Kennebunk, Maine
Our report on the basic financial statements of cyberTours Inc. for the six
months ended June 30, 1999 appears on page 1. That audit was conducted for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedules of cost of sales and operating expenses are presented for
the purpose of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Certified Public Accountants
- 13 -
cyberTours Inc.
SCHEDULES OF COST OF SALES AND OPERATING EXPENSES
SIX MONTHS ENDED JUNE 30, 1999
COST OF SALES
-------------
Customer Network $675,410
Infrastructure 173,921
Purchases for resale 8,639
Agent fees 77,753
--------
Total Cost of Sales $935,723
========
OPERATING EXPENSES
------------------
Advertising expense $ 35,629
Bad debt expense 2,623
Bank and MTOT service charges 39,309
Conferences 365
Contributions 75
Depreciation and amortization 199,224
Dues and subscriptions 1,865
Employee benefits 29,283
Employee recognition 4,065
Equipment rental 17,470
Hardware purchases 13,587
Insurance 12,594
Licenses and fees 6,915
Miscellaneous (1,684)
Office supplies and expense 25,536
Payroll tax expense 87,982
Postage and freight 15,259
Professional fees 75,679
Public relations 5,243
Rent: Real Estate 90,819
Salaries and wages 881,978
Software purchases 1,179
Taxes: use and property 1,282
Technical support 12,893
Telephone 83,221
Travel and entertainment 19,011
Utilities 14,499
----------
Total Operating Expenses $1,675,901
==========
See Independent Auditor's Report on Page 13
- 14 -
cyberTours Inc.
AUDIT OF FINANCIAL STATEMENTS
AND ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 1998 AND 199
cyberTours Inc.
AUDIT OF FINANCIAL STATEMENTS
AND ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 1998 AND 1997
FINANCIAL STATEMENTS PAGE
- -------------------- ----
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEETS 2 - 3
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT) 4
STATEMENTS OF CASH FLOWS 5 - 6
NOTES TO FINANCIAL STATEMENTS 7 - 14
ADDITIONAL INFORMATION
- ----------------------
INDEPENDENT AUDITOR'S REPORT 15
SCHEDULES OF COST OF SALES AND OPERATING EXPENSES 16
INDEPENDENT AUDITOR'S REPORT
February 26, 1999
(except for Note 11, as to which the date is August 3, 1999)
To the Stockholders
cyberTours Inc.
Kennebunk, Maine
We have audited the accompanying balance sheets of cyberTours Inc. as of
December 31, 1998 and 1997, and the related statements of operations and
retained earnings (accumulated deficit) and cash flows for the years then ended.
These financial statements are the responsibility of cyberTours Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of cyberTours Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Cummings, Lamont & McNamee, P.A.
Certified Public Accountants
Kennebunk, Maine
cyberTours Inc.
BALANCE SHEETS
DECEMBER 31,
ASSETS
------
1998 1997
---- ----
CURRENT ASSETS
Cash, Note 1 $ 14,437 $20,250
Accounts receivable, no allowance for doubtful
accounts considered necessary, Note 7 95,466 76,076
Inventory held for resale, Notes 1 and 7 2,950 -
---------- --------
Total Current Assets 112,853 96,326
---------- --------
PROPERTY AND EQUIPMENT, Notes 1, 5 and 7
Leasehold improvements 18,491 5,484
Furniture and fixtures 14,916 6,355
Machinery and equipment 909,912 580,249
---------- --------
943,319 592,088
Less accumulated depreciation (328,280) (122,635)
---------- --------
Total Property and Equipment 615,039 469,453
---------- --------
OTHER ASSETS
Deposits 13,046 200
Accrued interest receivable - 2,192
Organization costs, net of amortization of
$300 and $200 at December 31, 1998
and 1997, respectively, Notes 1 and 7 200 300
Software licenses, net of amortization of $232
at December 31, 1998, Notes 1 and 7 8,102 -
Customer lists, net of amortization of $49,525
and $2,500 at December 31, 1998 and
1997, respectively, Notes 1 and 7 360,968 147,500
Financing costs, net of amortization of $2,302
and $292 at December 31, 1998 and 1997,
respectively, Note 1 16,730 8,474
Deferred taxes on income, Notes 1 and 3 140,000 19,000
---------- --------
Total Other Assets 539,046 177,666
---------- --------
Total Assets $1,266,938 $743,445
========== ========
See Notes to Financial Statements
- 2 -
cyberTours Inc.
BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND ACCUMULATED DEFICIT
-----------------------------------
1998 1997
---- ----
CURRENT LIABILITIES
Accounts payable, trade $ 336,016 $ 81,311
Note payable, Note 4 25,000 -
Current portion long-term debt 48,500 144,000
Current portion capital leases payable 88,500 21,563
Unearned service revenue, Note 1 585,525 174,846
Advance customer receipts 23,439 -
Accrued payroll 37,627 -
Accrued expenses 19,060 16,097
---------- --------
Total Current Liabilities 1,163,667 437,817
---------- --------
LONG-TERM LIABILITIES
Long-term debt, Note 7 703,453 500,154
Accrued interest payable - 3,898
Capital leases payable, Note 5 172,019 68,502
Less current portion long-term debt (48,500) (144,000)
Less current portion capital leases payable (88,500) (21,563)
---------- --------
Total Long-Term Liabilities 738,472 406,991
---------- --------
Total Liabilities 1,902,139 844,808
---------- --------
Commitments, Note 6
ACCUMULATED DEFICIT
Capital stock, no par value, 4,000 shares
authorized, 3,000 shares issued and
outstanding 4,000 4,000
Additional paid in capital 9,673 9,673
Accumulated Deficit (628,874) (95,036)
---------- --------
(615,201) (81,363)
Treasury stock, 1000 shares (20,000) (20,000)
---------- --------
Total Accumulated Deficit (635,201) (101,363)
---------- --------
Total Liabilities and Accumulated Deficit $1,266,938 $743,445
========== ========
See Notes to Financial Statements
- 3 -
cyberTours Inc.
STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
NET SALES, Note 1 $2,945,428 $943,713
COST OF SALES, Note 10 1,167,613 328,360
---------- --------
GROSS PROFIT ON SALES 1,777,815 615,353
OPERATING EXPENSES, Notes 2, 6, and 9 2,349,114 711,607
---------- --------
OPERATING (LOSS) (571,299) (96,254)
---------- --------
OTHER INCOME (EXPENSE)
Interest income - 2,706
(Loss) on sale of assets - (2,376)
Interest expense (83,539) (25,953)
---------- --------
Total Other Income (Expense) (83,539) (25,623)
---------- --------
NET LOSS BEFORE TAXES (654,838) (121,877)
---------- --------
INCOME TAX BENEFIT, Notes 1 and 3
Current - -
Deferred (121,000) (20,600)
---------- --------
Total Income Tax Benefit (121,000) (20,600)
---------- --------
NET LOSS (533,838) (101,277)
RETAINED EARNINGS,
BEGINNING OF YEAR (95,036) 6,241
---------- --------
ACCUMULATED DEFICIT,
END OF YEAR $ (628,874) $(95,036)
========== ========
See Notes to Financial Statements
- 4 -
cyberTours Inc.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(533,838) $(101,277)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization expense 255,011 109,358
Provision for deferred income benefit (121,000) (20,600)
Loss on sale of equipment - 2,376
Change in operating assets and liabilities:
(Increase) in accounts receivable (19,390) (31,563)
Decrease in other receivables - 5,400
(Increase) decrease in inventory held for resale (2,950) 5,054
Decrease (increase) in accrued interest receivable 2,192 (1,452)
Increase in accounts payable 254,705 3,847
Increase in unearned service revenues 410,679 174,846
(Decrease) increase in accrued expenses (935) 16,376
Increase in advance customer receipts 23,439 -
Increase in accrued payroll 37,627 -
--------- ---------
Net Cash Provided by Operating Activities 305,540 162,365
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Customer lists acquired (260,493) (150,000)
Financing costs incurred (10,265) (8,767)
Software licenses acquired (8,334) -
Purchases of property and equipment (190,676) (357,227)
Proceeds on sale of equipment - 16,200
Deposits paid (12,846) -
--------- ---------
Net Cash (Used) by Investing Activities (482,614) (499,794)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt borrowings 312,898 -
Proceeds from long-term debt borrowings 542,800 440,000
Principal payments on capital leases (57,038) (1,693)
Principal payments on long-term debt (339,501) (52,701)
Principal payments on short-term debt (287,898) (30,000)
--------- ---------
Net Cash Provided by Financing Activities 171,261 355,606
--------- ---------
(DECREASE) INCREASE IN CASH (5,813) 18,177
CASH, Beginning of Year 20,250 2,073
--------- ---------
CASH, End of Year $ 14,437 $ 20,250
========= =========
See Notes to Financial Statements
- 5 -
cyberTours Inc.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
Supplemental Schedules of Cash Flow Information:
- ------------------------------------------------
Cash paid for taxes $ - $ -
======== =======
Cash paid for interest $ 83,678 $23,613
======== =======
Supplemental Schedule of Noncash Investing
and Financing Activities
- ------------------------------------------
The following noncash transactions occurred for the
year ended December 31,
Acquisition of equipment with capital leases $171,261 $70,196
======== =======
Disposal of equipment at book value $ - $ 5,550
======== =======
See Notes to Financial Statements
- 6 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of Accounting Policies
cyberTours Inc. (Company) provides retail and wholesale Internet access,
telecommunications services, value added resales, and custom software. The
Company is incorporated in the State of Maine with headquarters in Kennebunk,
Maine. The Company, which operates in one reportable segment, maintains multiple
manned and unmanned points of presence and is expanding regionally throughout
New England.
The accounting policies used by the Company conform to generally accepted
accounting principles. Significant policies are described below:
Business Combination - The merger with a subsidiary, cyberTours L.A., Inc.,
has been accounted for as a pooling of interests under Accounting Principles
Board Opinion No. 16. Accordingly, prior period consolidated financial
statements have been restated to include the combined results of operations,
financial position and cash flows of the subsidiary as though it has always
been a part of cyberTours Inc.
Cash Equivalents - For balance sheet and cash flows purposes, cash and cash
equivalents include money market accounts and highly liquid debt instruments
purchased with a maturity of three months or less.
Concentrations of Credit Risk - Financial instruments which potentially
expose the Company to concentrations of credit risk, as defined by Statement
of Financial Accounting Standards No. 105, consist primarily of trade
accounts receivable. The Company's customer base includes individuals,
businesses, non-profit organizations, and local governments primarily located
throughout Maine. Management does not believe that significant credit risk
exists at December 31, 1998 and 1997.
Revenue Recognition - Revenues are principally generated from the provision
of Internet access, Web site hosting and other related data services. These
revenues are recognized at the time services are provided. Service plans
range from one month to one year. Advance collections relating to future
access services are recorded as deferred revenue and recognized as revenue
when earned. Revenues related to non-recurring installation and activation
fees are recorded when the services are provided. These fees are a result of
the one-time events related to the set-up of a new customer service. In
certain situations the Company waives non-recurring installation and
activation fees. The Company expenses the related direct costs of
installation and activation as incurred.
Depreciation - Depreciation for financial reporting and income tax purposes
is computed using the declining balance and straight-line methods over the
estimated useful lives of the assets. Depreciation expense for 1998 and 1997
was $205,646 and $106,466, respectively.
Amortization - Organization costs, customer lists, software licenses and
financing costs are being amortized using the straight line method for
financial reporting purposes and for income tax purposes from three to
fifteen years.
Deferred Taxes on Income - Deferred taxes on income relate to net operating
loss carryovers and the Company's differences in calculating depreciation and
amortization and in amortizing or expensing commissions paid to resellers for
income tax and financial reporting purposes.
Use of Estimates - Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenue and expenses.
- 7 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of Accounting Policies (continued)
Inventory - Inventory consists of electronic equipment which was held for
resale at December 31, 1998 and is valued at the lower of cost or market
using the first in, first out method (FIFO).
Property and Equipment - Property and equipment are carried at cost. Major
improvements are included in property accounts while maintenance and repairs
which do not improve or extend the life of the assets are expensed currently.
Note 2 - Related Party Activity
One of the Company's stockholders borrowed and repaid loans totaling
approximately $12,000 and $12,700 during 1998 and 1997, respectively.
During 1998, the Company borrowed and repaid loans totaling $8,110 to one of the
Company's stockholders.
On December 22, 1998, cyberTours Inc. entered into a software license agreement
with a company (Licensor) owned 100% by one of the Company's stockholders. The
fee for the Program is not to exceed $55,000. No payments were made in 1998.
cyberTours, Inc. shall receive a 9% royalty on net sales by Licensor.
During 1997, the Company incurred approximately $8,000 of subcontracting expense
to a company owned 100% by one of the Company's stockholders.
Note 3 - Taxes on Income
Taxes on income for the years ended December 31, consisted of the following:
1998 1997
---------------------------------- --------------------------------
Federal State Total Federal State Total
------- ----- ----- ------- ----- -----
Currently payable $ - $ - $ - $ - $ - $ -
Deferred taxes
due to timing, Note 1 (101,000) (20,000) (121,000) (17,300) (3,300) (20,600)
--------- -------- --------- -------- ------- --------
$(101,000) $(20,000) $(121,000) $(17,300) $(3,300) $(20,600)
========= ======== ========= ======== ======= ========
For income tax purposes, the Company has a net operating loss carryover of
$706,535 of which $591,880 expires December 31, 2018, $105,852 expires December
31, 2012, and $8,803 expires December 31, 2010.
- 8 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 3 - Taxes on Income ( continued)
The following reconciles the federal statutory income tax rate to the effective
income tax rate reflected in the statement of income:
1998 1997
---- ----
Federal statutory tax rate 34.0% 34.0%
State income taxes, net 2.0 1.8
Net operating loss with no benefit (20.5) (18.9)
Other, net 3.0 .
---- ----
Effective income tax rate 18.5% 16.9%
==== ====
The components of cyberTour's net deferred tax
asset were as follows:
1998 1997
---- ----
Deferred Tax Liability:
Fixed assets depreciation $24,205 $11,335
------- -------
Deferred Tax Assets:
Intangibles, amortization 13,510 730
Timing of other expense deductions,
principally commissions 28,430 5,130
Net Operating Loss Carryforwards 276,960 44,945
-------- -------
Total Deferred Tax Assets 318,900 50,805
-------- -------
Valuation allowance for deferred tax assets (154,695) (20,470)
-------- -------
Net Deferred Tax Assets $140,000 $19,000
======== =======
The net change in the valuation allowance was $134,225 and $20,470 in 1998 and
1997 respectively.
Note 4 - Notes Payable, Bank
At December 31, 1998, the Company has a note payable with a bank of $25,000
having an interest rate of 9.5%, on which payment was due December 18, 1998. The
note payable including interest was subsequently paid on January 12, 1999. The
note payable had a junior lien on all business assets and was personally
guaranteed by three of the Company's shareholders. No notes payable were owed at
December 31, 1997.
During 1998 the Company established a line of credit for $30,000 which was
unused at December 31, 1998. Bank advances on the line-of-credit are payable on
demand including interest at a rate of 9.5%. The line-of-credit expires
September 16, 1999. The line-of-credit has a junior lien on all business assets
and is personally guaranteed by three of the Company's shareholders. This note
was executed simultaneously and in connection with the Bank's issuance of an
irrevocable standby letter of credit issued for the benefit of vendor which also
expires September 16, 1999.
-9-
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 5 - Obligations under Capital Leases
The Company leases various equipment under five capital leases. The economic
substance of the leases is that the Company is financing the acquisition of the
equipment through the lease and, accordingly, the equipment is recorded in the
Company's assets and liabilities. Included in machinery and equipment on the
accompanying balance sheet as of December 31, 1998 and 1997, is equipment
acquired under the capital leases with a capitalized cost of $230,751 and
$70,196 with accumulated depreciation of $54,311 and $8,564, respectively.
The following is a schedule by years of future minimum payments required under
the leases together with their present value as of December 31, 1998:
Years Ending
December 31,
------------
1999 $104,756
2000 85,161
2001 3,786
--------
Total minimum lease payments 193,703
Less amount representing interest (21,684)
--------
Present value of minimum lease payments 172,019
Less current portion (88,500)
--------
Long-term portion $83,519
========
The Company has the option to acquire the leased equipment at fair market value
at the termination of the leases.
Note 6 - Operating Leases
Office, Telecommunications and Retail Space -
The Company leases office and telecommunication space located in Kennebunk,
Maine. The lease is for a five year period beginning September 15, 1996 with an
annual base rent of $9,015 in years one and two and $10,500 in years three
through five.
The Company leases office space located in Kennebunk, Maine. The lease is for
the period beginning January 1, 1998 and expiring September 14, 2001 with an
annual base rent of $14,445.
The Company leases telecommunications space located in Springvale, Maine. The
lease is for a five year period beginning January 1, 1998 with an annual base
rent of $1,224.
The Company leases telecommunications and retail space located in Portland,
Maine. The lease is for a five year period commencing on September 1, 1998 with
an annual base rent of $75,284 for years one and two, $77,712 for years three
and four, and $82,569 for year five.
- 10 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 6 - Operating Leases (continued)
Equipment -
The Company leases office equipment for a term of fifty-one months beginning
June 11, 1998 with three monthly payments of $337 and forty-eight monthly
payments of $436.
The Company leases office equipment for five years beginning May 19, 1998.
Monthly payments are as follows: first three payments at $559, the next three
payments at $1,117, the next six payments at $1,955 and the final forty-eight
payments at $1,340.
The future minimum lease expense under these agreements are as follows:
Year Space Equipment Total
---- ----- --------- -----
1999 $101,452 $24,776 $126,228
2000 102,262 21,978 124,240
2001 96,168 21,978 118,146
2002 80,555 20,670 101,225
2003 55,046 6,978 62,024
In addition to the aforementioned leases, the Company lease various
telecommunication sites as a tenant at will.
Total rental expense for office, telecommunications and retail space for 1998
and 1997 was $104,542 and $20,570, respectively.
Total rental expense for equipment for 1998 and 1997 was $40,953 and $781,
respectively.
Note 7 - Long-Term Debt
Long-term debt at December 31, consists of the following: 1998 1997
---- ----
80% SBA guaranteed note payable to a bank as
amended commencing December 1, 1998. The amended
note requires monthly payments of principal and
interest of $495 based on 10.5% fixed interest
rate. The note is secured by a first security
interest in all equipment and machinery, furniture
and fixtures, and inventory of the Company and is
due August 1, 2006. This note is guaranteed by the
Company's stockholders. $31,040 $62,248
- 11 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 7 - Long-Term Debt (continued) 1998 1997
- ----------------------------------- ---- ----
50% SBA guaranteed note payable to a bank as
amended commencing December 1, 1998. This amended
note requires monthly payments of principal and
interest of $1,092. Interest is based on Wall
Street Journal Prime Rate plus 2% as adjusted
monthly. Secured by a second security interest in
all equipment and machinery, furniture and
fixtures, and inventory of the Company and is due
April 1, 2007. This note is guaranteed by the
Company's stockholders. 73,506 89,572
Note payable to a bank as amended commencing
November 26, 1998. The amended note requires
monthly payments of principal and interest of $892
based on fixed interest rate of 9.5%. The note is
secured by a first security interest on purchased
equipment and is due September 26, 2007. This note
is guaranteed by the Company's stockholders. 63,101 88,093
Note paid in full to a financing company during
1998. The note was secured by equipment purchased
and all other assets subordinate to interests held
by a bank and SBA. This note was guaranteed by the
Company's stockholders. - 90,241
75% SBA guaranteed note payable to a bank. The
note requires monthly payments of principal and
interest of $3,487 based on 9.5% fixed interest
rate. The bank and SBA has a first security
interest in all equipment purchased, all
inventory, accounts receivable and intangibles of
the Company and assignment of Keyman life
insurance. The note is due September 28, 2008.
This note is guaranteed by the Company's
stockholders. 263,526 -
75% SBA guaranteed note payable to a bank. The
note requires monthly payments of principal and
interest of $1,743 based on 9.5% fixed interest
rate. The bank and SBA has a junior security
interest in all inventory, accounts receivable,
equipment and intangibles of the Company and
assignment of Keyman life insurance. The note is
due October 14, 2008. This note is guaranteed by
the Company's stockholders. 133,378 -
Note payable to a bank. The note requires monthly
payments of principal and interest of $1,826 based
on 9.5% fixed interest rate. The bank has a first
security interest in all inventory, accounts
receivable, equipment and intangibles of the
Company and is due October 14, 2008. This note is
guaranteed by the Company's stockholders. 138,902 -
- 12 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 7 - Long-Term Debt (continued)
Note paid in full to a bank during 1998. The note
was secured by a first security interest all
accounts and general intangibles of assets
purchased with such loan proceeds and a junior
security interest in all other business assets.
This note was guaranteed by the Company's
stockholders. - 150,000
Note paid in full to a former stockholder during
1998 with interest accruing at 7% per annum. - 20,000
-------- --------
Total $703,453 $500,154
======== ========
Maturities are as follows:
1999 $ 48,500
2000 55,000
2001 60,500
2002 66,500
2003 73,000
Thereafter 399,953
--------
$703,453
========
Note 8 - Subsequent Events
Leases -
During January, 1999 the Company entered into a lease for various computer
equipment for three years. Monthly payments are $1,755.
Debt -
In February, 1999 the Company borrowed $30,000, payable to a bank at an
interest rate of 9%. The note requires monthly payments of principal and
interest of $623 and is due in February 2004.
Other -
In January, 1999 the Company acquired a customer list for $4,400.
In February, 1999 the Company acquired a customer list and equipment for
$1.
Note 9 - Advertising
The Company did not participate in any direct-response advertising during 1998
or 1997 and no advertising costs are capitalized as of December 31, 1998 or
1997. Advertising expense was $119,893 and $38,358 during 1998 and 1997,
respectively.
- 13 -
cyberTours Inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 10 - Major Suppliers
Purchases from a vendor during 1998 amounted to $856,462 or 73% of cost of
sales. At December 31, 1998, the Company had accounts payable to this vendor of
$188,670.
Note 11 - Subsequent Events
On June 25, 1999 the Company borrowed $200,000 payable on demand to an unrelated
corporation at an interest rate of 8.5% per annum. The corporation has a
security interest all accounts receivable, general intangibles, inventory and
equipment of the Company and is personally guaranteed by the stockholders.
Additionally on August 3, 1999, 100% of the outstanding stock of cyberTours,
Inc. was acquired by Log On America, Inc.
- 14 -
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
February 26, 1999
To the Stockholders
cyberTours Inc.
Kennebunk, Maine
Our report on the basic financial statements of cyberTours Inc. for 1998 and
1997 appears on page 1. That audit was conducted for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedules of cost of sales and operating expenses are presented for the purposes
of additional analysis and are not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Certified Public Accountants
- 15 -
cyberTours Inc.
SCHEDULES OF COST OF SALES AND OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
COST OF SALES
-------------
Customer Network $ 782,762 $142,348
Infrastructure 285,384 146,424
Purchases for resale 29,788 19,732
Subcontract service - 3,500
Commissions 69,679 16,356
---------- --------
Total Cost of Sales $1,167,613 $328,360
========== ========
OPERATING EXPENSES
Advertising expense $119,893 $38,358
Bad debt expense 600 6,107
Bank and MTOT service charges 50,021 14,816
Building expenses - 2,010
Commissions - 3,508
Conferences 5,977 3,778
Contributions 565 -
Employee benefits 32,546 11,621
Employee recognition 14,461 6,666
Equipment rental 40,953 781
Office supplies and expense 50,522 16,041
Postage and freight 22,839 7,732
Rent: Real Estate 104,542 20,570
Hardware purchases 14,892 5,669
Travel and entertainment 32,475 14,451
Miscellaneous 1,557 4,111
Utilities 9,889 3,015
Telephone 113,716 35,783
Depreciation and amortization 255,011 109,358
Insurance 15,672 4,029
Professional fees 79,746 27,674
Software purchases 5,605 8,202
Dues and subscriptions 4,211 1,794
Public relations 1,948 -
Subcontract fees and labor - 26,716
Licenses and fees 2,993 710
Salaries and wages 1,257,384 308,288
Payroll tax expense 101,608 29,819
Taxes: use, property 9,488 -
---------- --------
Total Operating Expenses $2,349,114 $711,607
========== ========
See Independent Auditor's Report on Page 15
- 16 -