U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB/A
---------------
Amendment No. 1
---
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2003
333-62690
(Commission File No.)
--------------
Commission File Number: 333-62690
CYBERADS, INC.
-----------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its Charter)
Florida 65-1000634
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21073 Powerline Road, Suit 57, Boca Raton, Florida 33433
--------------------------------------------------------
(Address of principal executive offices)
Phone #(561) 672 2193
--------------
(Issuer's telephone number)
(Former Name, former address and former fiscal year,
if changed since last Report.)
Securities Registered Under Section 12 (b) of the Act: None
Securities Registered Under Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB |X|.
Revenues for the year ended December 31, 2003: $4,197,128.
The aggregate market value of voting stock held by non-affiliates of
CyberAds, Inc. ("CYAD") common stock, as of March 31, 2004 was approximately
$14,000,000 (based on the last sale price of such stock as reported by OTC
Bulletin Board). The number of shares outstanding of the registrant's common
stock, as of March 31, 2004 was 18,325,777.
Documents incorporated by reference: Registration Statement on Form
SB-2, File No. 333-62690 and Registration Statement on Form SB-2, File No.
333-82104 information incorporated by reference into Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format (check one): Yes|_|No|X|
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS...............................................3
ITEM 2. DESCRIPTION OF PROPERTY...............................................4
ITEM 3. LEGAL PROCEEDINGS.....................................................4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................4
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS........5
ITEM 7. FINANCIAL STATEMENTS..................................................9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.........................9
ITEM 8A. CONTROLS AND PROCEDURES...............................................9
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................10
ITEM 10. EXECUTIVE COMPENSATION...............................................11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.........12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................13
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................15
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...............................15
SIGNATURES....................................................................16
INDEX TO EXHIBITS.............................................................16
PART F/S
INDEX TO FINANCIAL STATEMENTS
Auditor's Report.............................................................F-1
Balance Sheets as of December 31, 2003 and 2002.............................F-2
Statement of Operations for the years ended December 31, 2003 and 2002......F-4
Statement of Changes in Stockholder's Equity for the years ended December 31,
2003 and 2002................................................................F-5
Statement of Cash Flows for the years ended December 31, 2003 and 2002.......F-7
Notes to Financial Statements................................................F-9
2
PART I
FORWARD LOOKING INFORMATION
This Form 10-KSB contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate," or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties and actual results may differ materially depending on a
variety of factors, many of which are not within CYAD's control. These factors
include, but are not limited to, economic conditions generally and in the
industries in which CYAD's future customers participate; competition within
CYAD's industry, including competition from much larger competitors;
technological advances which could render CYAD's products less competitive or
obsolete; failure by CYAD to successfully develop new products or to anticipate
current or prospective customers' product needs; price increases or supply
limitations for components purchased by CYAD for use in its products; and
delays, reductions, or cancellation of orders that may be placed with CYAD.
There can be no assurance that CYAD will be able to develop its products or
markets for its products in the future.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
CyberAds, Inc., a Florida corporation ("CYAD" or the "Company"), was
organized on April 12, 2000, under the laws of the State of Florida. CYAD
initially compiled member lists through an Internet-based opt-in e-mail list
found on our website "www.sportsforcash.com." "Internet-based opt-in e-mail"
creates member lists by requiring website visitors to provide us with certain
personal information and consent to receiving e-mails from our company in order
to gain access to our website. Our goal was to sell the member lists to direct
marketers seeking to target promotional campaigns to large groups of people via
electronic mail. We initially had the concept of awarding prizes to attract
potential members to our website www.sportsforcash.com. However, we terminated
our prize program after determining that our business model was not profitable.
This segment of our operations has been recently discontinued.
In December 2000 we began utilizing member lists internally through our
wholly-owned subsidiary, IDS Cellular, Inc. to market cellular phone services.
When we began generating revenues from our cellular phone marketing services, we
decided to focus exclusively on this line of business. We started an affiliate
program to expand our potential customer base. Our affiliate program works by
paying participating third party websites commissions for referring cellular
phone customers to our "idscellular.com" website. A third party website will
receive a commission if a customer it refers to us purchases a cellular phone or
cellular services.
All of our revenues are derived from our cellular phone marketing
services. Our business now focuses exclusively on marketing cell phone services
to potential consumers we are introduced to through our affiliate program and
other third party telemarketing services.
3
In December 2003 we acquired a 22% interest in The Vineyards Country
Club ("The Vineyards"), a real estate development project located adjacent to
Palm Springs, California. The Vineyards is a luxury motor coach facility
including a recently completed clubhouse, swimming pool, tennis court, and
nine-hole regulation size golf course. Phase One at The Vineyards is
substantially complete and consists of 69 luxury coach sites. . Within 3 to 5
years we expect to add an additional 200+ sites, thus expanding The Vineyards to
well over 300 sites. The Vineyards project also includes 30 acres of commercial
property immediately adjacent to the development with plans for an extended-stay
hotel, retail, and an entertainment complex, all within walking distance to the
existing Trump Casino.
GOVERNMENT REGULATION
At present, there are no specific regulations or approvals required by
or from the Federal Government or state agencies for marketing the cellular
services we offer. We are aware of no proposed regulations that may have an
effect upon our business as a seller of cellular phone services.
Laws and regulations that apply to Internet communications, commerce
and advertising are becoming more prevalent. These regulations could affect the
cost of communicating on the Internet and negatively affect the demand for our
direct marketing solutions or otherwise harm business. Laws and regulations may
be adopted covering issues such as user privacy, pricing, libel, acceptable
content, taxation, and quality of products and services. This legislation could
hinder growth in the use of the Internet generally and decrease the acceptance
of the Internet as a communications, commercial, and direct marketing medium.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws apply to the Internet and Internet advertising. In
addition, the growth and development of the market for Internet commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad. This may impose additional burdens on companies conducting
business over the Internet.
PERSONNEL
As of the date of this report, CYAD has three full time employees as
well as a number of part time relationships with contractors for certain
services. None of CYAD's personnel are covered by collective bargaining
agreements.
ITEM 2. PROPERTIES
On April 6, 2002 we relocated all of our operations to a 2,000 square
foot facility located at 21073 Powerline Road, Suite 57, Boca Raton, Florida.
This property is leased from 6001, LLC. The term of the lease is through April
1, 2005. We pay approximately $4,200 per month for the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal United States market for CYAD's common stock is the OTC
Bulletin Board. The following is the high and low closing sale prices for CYAD
common stock:
FISCAL 2003 HIGH LOW
------- -------
Fourth Quarter (through December 31, 2003)......... $ 2.10 $ 0.85
Third Quarter (through September 30, 2003)......... $ 1.50 $ 0.27
Second Quarter (through June 30, 2003)............. $ 0.51 $ 0.02
First Quarter (through March 31, 2003)............. $ 0.13 $ 0.04
FISCAL 2002
Fourth Quarter (through December 31, 2002)......... $ 0.19 $ 0.02
Third Quarter (through September 30, 2002)......... $ 0.50 $ 0.06
Second Quarter (through June 30, 2002)............. $ 2.60 $ 0.25
First Quarter (through March 31, 2002)............. $ 3.60 $ 1.00
The above prices presented are bid prices that represent prices between
broker-dealers and do not include retail mark-ups and markdowns for any
commissions paid to the dealer. These prices may not reflect actual
transactions.
There are 80 shareholders of record of the Company's Common Stock, not
including shareholders who hold common stock in street name. The holders of
common stock are entitled to one vote per share of common stock on all matters
to be vote on by the stockholders. There are no cumulative voting rights.
Subject to preferences that may be applicable to any outstanding preferred
stock, the holders of common stock are entitled to receive dividends, if any, as
may be declared by the board of directors out of funds legally available for
dividends. In the event of a liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in the net assets remaining after
payment in full of all liabilities, subject to the prior rights of preferred
stock, if any, then outstanding. There are no redemption or sinking fund
provisions applicable to the common stock.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The
declaration and payment of dividends is within the discretion of the Company's
board of directors and will depend, among other factors, on earnings and debt
service requirements as well as the operating and financial condition of the
Company. At the present time, the Company's anticipated working capital
requirements are such that it intends to follow a policy of retaining earnings
in order to finance the development of its business. Accordingly, the Company
does not expect to pay a cash dividend within the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
CyberAds markets cellular phone services and plans to consumers. Our
cellular phone services are marketed through an affiliate program. We attract
third party websites to become part of our affiliate program by offering
commissions for sales of cell phones and cell phone services in which they
initiated the contact with the consumer. A website becomes an affiliate of our
company by placing freecellular-phone.com advertising materials and banners on
their websites. These advertisements and banners promote our cellular phone
services. When a consumer on an affiliate's site clicks on our banner or
advertising they are directed to freecellular-phone.com.
When a visitor enters our website, they are asked to provide personal
credit information in order to qualify for a cellular phone service. In
addition, this information determines whether the visitor is in a coverage area
for any of the cell phone carriers that we refer applicants to. Once a coverage
area is determined, the applicant will choose a respective calling plan and
telephone. If the consumer provides this information, it is delivered to
Inphonic where it is processed and a credit check is made. Depending on the
consumer's credit history, the application is either approved or denied. An
approved application is then further processed and directed to one of the
carriers with whom Inphonic is associated.
The cellular providers have distinct standards and qualifications
regarding the credit history of individuals in which they will provide services.
5
CYBERADS CELLULAR OPERATIONS
DIRECT SUPPLIERS
On March 10th, 2003, CyberAds, Inc entered into an agreement with
Inphonic, Inc that allows CyberAds to utilize all of Inphonic's cellular
agreements. They include AT&T, Cingular, T-Mobile, Verizon and Alltel. This in
effect increased the coverage area and provides our customers greater choices
when selecting cellular service.
As a result of this agreement CyberAds, Inc. will no longer continue a
direct relationship with the carriers. Instead we will work as a sales agent of
Inphonic. Inphonic will be responsible for all order fulfillment including
shipping, customer care, sales and verification. They will also provide
Marketing and Creative support if required.
CUSTOMER BASE
The majority of our potential customers are identified through our
affiliate program. To build our potential consumer base, we started an affiliate
based marketing program which allows other Internet based businesses to refer
potential consumers to our cellular website,
www.freecellular-phone.com. If a customer purchases and receives cellular phone
service, the affiliate whom provided the referral will receive a commission from
the sale. All visitors and sales are tracked through an administration portion
of a site. Each affiliate has their own linking code to track their statistics.
We presently have approximately 300 affiliates.
There are no contractual obligations under our affiliate program and we
have not entered into written contracts with our affiliates. Third party
websites elect to join our affiliate program by submitting to us an e-mail
information form found on our freecellular-phone.com website. Upon submitting
the form via e-mail, the third party website receives a banner to place on its
website describing our services and linking our services to its website. The
affiliate will receive a commission for each sale initiated through the banner
on its website. Commissions are paid to our affiliates on a monthly basis, 20
days after the month's end.
The average commission paid to an affiliate for an approved cellular
sale ranges between $40.00-$55.00.
Since we derive the majority, if not all of our customers, from our
affiliate program, commissions paid will continue to be a material cost for our
company. We have historically paid high commissions in order to attract websites
to our affiliate program.
CELLULAR PHONE INVENTORY
As a result of the agreement with Inphonic we are no longer required to
purchase Phones or maintain inventory. Inphonic assumes that responsibility.
RELATED PARTIES AND RELIANCE ON CERTAIN CELLULAR PROVIDERS
We rely on Inphonic as our provider for equipment for all of the
carriers they have an affiliation with.
6
RECENT EVENTS
As noted above we entered into a partnership with Inphonic, Inc. on
March 10, 2003 to handle all order fulfillment, sales, customer service,
verification and marketing. As a result of this agreement, CyberAds was able to
reduce staffing levels by 90% and reduce payroll by over 80%. Furthermore,
commissions - net of cost of goods sold - were at a comparable level. Our
cellular footprint increased due to Inphonic having agreements with more
cellular carriers. Cash flow improved significantly because Inphonic pays every
15 days and the carriers an average of every 45 days. During the 4th quarter of
2003 Management determined the cost per application model it was paying to the
Affiliates was inconsistent with the sales results for shipped cell phones.
Management took steps to reduce the applications by reducing the application fee
it paid to Affiliates. Further, we required the applications to include credit
card information which reduced the applications submitted. Prior to this change
the company was experiencing a less than 2% conversion rate from Applications to
Sales. When the change was implemented the conversion rate increased to 5%.
Management believes the requirement of credit card information will have a
materially negative impact on the number of applications it receives from
Affiliates/Consumers going forward. Management is reviewing alternative
application acquisition models at this time and will continue with the current
requirements of credit card information for the foreseeable future.
In December 2003 we acquired a 22% interest in The Vineyards Country Club ("The
Vineyards"), a real estate development project located adjacent to Palm Springs,
California. Our investment in The Vineyards was acquired by our wholly owned
subsidiary, The Vineyards, LLC. The Vineyards is a luxury motor coach facility
including a recently completed clubhouse, swimming pool, tennis court, and
nine-hole regulation size golf course. Phase One at The Vineyards is
substantially complete and consists of 69 luxury coach sites. . Within 3 to 5
years we expect to add an additional 200+ sites, thus expanding The Vineyards to
well over 300 sites. The Vineyards project also includes 30 acres of commercial
property immediately adjacent to the development with plans for an extended-stay
hotel, retail, and an entertainment complex, all within walking distance to the
existing Trump Casino. The property value was determined by an "as is" appraisal
of the land plus the net cost of the improvements. No allowance was deemed
necessary because of the company's minority position in the project.
During the fourth quarter the company's lender entered into an
agreement with the company to convert its secured position to an ownership of
836, 000 convertible preferred shares. The share will have no voting rights and
will, after the first anniversary of the closing have the right to convert at
any time into fully paid and nonassessable shares of Common Stock obtained by
dividing 115% of the liquidation value of the shares to be converted, by the
average bid and ask price of a share of Common Stock during the 30 day period
immediately prior to the conversion date.
During the fourth quarter an unsecured creditor of the company agreed
to convert its $400,000 debt to 440000 common restricted shares.
PATENTS AND PROPRIETARY RIGHTS
We do not hold any trademark, copyright or patent protection.
RESULTS OF OPERATIONS
7
YEARS ENDED DECEMBER 31, 2003 AND 2002
We reported revenues of $4,197,128 and $8,326,211 for the years ending
December 31, 2003 and 2002, respectively, losses of $457,835 and $15,873,201
during the years ended December 31, 2003 and 2002, respectively. The reduction
in revenue from 2002 to 2003 is attributed to the change in revenue associated
to the Inphonic agreement whereby CyberAds receives a net commission instead of
the revenue for each phone. The reduction in losses for 2003 was the direct
result of reduction in G & A expenses and Salaries attributed to the agreement
with Inphonic that allowed CyberAds to rely on the fulfillment processes at
Inphonic reducing the requirement of employee related expenses at CyberAds.
LIQUIDITY AND CAPITAL RESOURCES
CYAD has not been profitable and has experienced negative cash flow
from operations due to its development stage, substantial on-going investment in
research and development efforts. Consequently, CYAD has been dependent on the
sales of equity to fund cash requirements.
On January 5, 2002, we issued 50,000 shares of common stock and options
to purchase 50,000 shares of our common stock exercisable at $1.00 to Atlas
Pearlman, P.A. as consideration for legal services provided to our company. The
securities were issued under an exemption from registration pursuant to Section
4(2) of the Securities Act. The securities issued contain a legend restricting
their transferability absent registration or an available exemption. Atlas
Pearlman, P.A. had access to information about our company and had the
opportunity to ask questions about our company.
During the three months ended March 31, 2002, we issued an aggregate of
124,000 shares of common stock for an aggregate amount of $90,400. These shares
were issued to two option holders pursuant to the exercise of options with
exercise prices ranging from $.60 to $1.00. The shares were issued under an
exemption from registration pursuant to Section 4(2) of the Securities Act. The
shares issued contain a legend restricting their transferability absent
registration or an available exemption. The option holders had access to
information about our company and had the opportunity to ask questions about our
company.
On January 6, 2002, we entered into a business consulting agreement
with Gene Foland, under which Mr. Foland will provide our company with business
consulting services. Mr. Foland received options to purchase 1,300,000 shares of
our common stock exercisable at $1.00 per share in exchange for these services.
The options are exercisable for a six- month period commencing on the date of
the agreement. The options were issued under an exemption from registration
pursuant to Section 4(2) of the Securities Act. The options issued contain a
legend restricting their transferability absent registration or available
exemption. Mr. Foland had access to information about our company and had the
opportunity to ask questions about our company.
On January 6, 2002, we entered into a product and sales development
consulting agreement with James L. Ricketts, under which Mr. Ricketts received
options to purchase 200,000 shares of our common stock exercisable at $1.00 per
share and options to purchase 1,100,000 shares of our common stock exercisable
at $2.00 per share in exchange for these services. The options are exercisable
for a six-month period commencing on the date of the agreement. The options were
issued under an exemption from registration pursuant to Section 4(2) of the
Securities Act. The options issued contain a legend restricting their
transferability absent registration or available exemption. Mr. Ricketts had
access to information about our company and had the opportunity to ask questions
about our company.
8
On January 6, 2002, we entered into a product and sales development
consulting agreement with James L. Copley, under which Mr. Copley received
options to purchase 300,000 shares of our common stock exercisable at $2.00 per
share in exchange for these services. The options are exercisable for a
six-month period commencing on the date of the agreement. The options were
issued under an exemption from registration pursuant to Section 4(2) of the
Securities Act. The options issued contain a legend restricting there
Transferability absent registration or available exemption. Mr. Copley had
access to information about our company and had the opportunity to ask questions
about our company.
On January 7, 2002, we issued an option to purchase 50,000 shares
exercisable at $1.00 per share to our controller. Our controller received these
options for services performed. The options were issued under an exemption from
registration pursuant to Section 4(2) of the Securities Act. The options issued
Contain a legend restricting their transferability absent registration or
available exemption. Our controller had access to information about our company
and had the opportunity to ask questions about our company.
On January 8, 2002, we issued options to purchase an aggregate of
125,000 shares of our common stock exercisable at $1.00 per share to our current
officers and directors. The options were issued under an exemption from
registration pursuant to Section 4(2) of the Securities Act. The options issued
contain a legend restricting their transferability absent registration or
available exemption.
On January 8, 2002, we issued an option to purchase 5,000,000 shares of
our common stock exercisable at $1.00 per share to Lawrence Levinson. This
option was issued in consideration for the advances that Mr. Levinson and his
affiliates have made to our company and personal guarantees Mr. Levinson has
made in favor of our company. The options were issued under an exemption from
registration pursuant to section 4(2) of the Securities Act. The options issued
contain a legend restricting their transferability.
On January 21, 2002, the Company intended to issue 625,000 shares of
series a convertible preferred stock to Lawrence Levinson as consideration for a
$625,000 promissory note made by Mr. Levinson in favor of our company. The
preferred shares were never issued.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of CYAD are included (with an index listing
all such statements) in a separate financial section at the end of the Annual
Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Weinberg & Company, P.A., by letter dated August 13, 2003, was dismissed as the
independent accountant for the Company. On August 13, 2003, the Company engaged
Timothy L. Steers, CPA as its new independent accountant.
In connection with the audits for the two most recent fiscal years and in
connection with Weinberg's review of the subsequent; interim period preceding
dismissal on August 13, 2003, there have been no disagreements between the
Company and Weinberg on any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or procedure, which would have
caused Weinberg; to make a reference thereto in its report on the Company's
financial statements for those periods. During the two most recent fiscal years
and prior to August 13, 2003, the Company had no reportable events (as defined
in Item 304(a)(1)(v) of Regulation S-B).
ITEM 8A. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer (who also effectively serves
as the Chief Financial Officer), of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
concluded that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in the reports we file under the Securities Exchange Act of 1934, within the
time periods specified in the SEC's rules and forms.
9
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors hold office until the next succeeding annual meeting of
shareholders, and until there successors have been elected and qualified.
The directors, executive officers, significant employees and
consultants of CYAD, their respective ages and positions with CYAD are as
follows:
NAME AGE POSITION
---- --- --------
Lawrence Levinson 56 Chairman of the Board and Chief Executive Officer
Director and Executive Officers
Lawrence Levinson has served as our chief executive officer and
director since inception. Since June 1999, he has been consultant to
International Dialing Services, Inc., an international facilities-based
telephone circuit provider, whose major customer is a cable and wireless
industry leader. From 1990 until June 1999, Mr. Levinson was a founder and
executive officer of Communication Concepts & Investments, Inc., Crown
Communications Two, Inc. and Global Collections, Inc. (collectively
Communications & Collections), communications companies with switches and
billing contracts with major local telcos in the United States. From 1982 until
1986, Mr. Levinson was the owner/operator of two restaurants in the Chicago
area. From 1976 to 1982, Mr. Levinson owned and operated a temporary help
services company in Chicago with over 200 corporate clients.
The Company's Bylaws currently authorize up to seven directors. Each
director is elected for one year at the annual meeting of stockholders and
serves until the next annual meeting or until a successor is duly elected and
qualified. Executive officers serve at the discretion of our board of directors.
There are no family relationships among any of the directors and executive
officers.
CODE OF ETHICS.
Effective February 24, 2004, the Board of Directors adopted a
Code of Ethics for Senior Financial Officers. The Code of Ethics was adopted
pursuant to the requirements of the Sarbanes-Oxley Act of 2002 and the rules and
regulations of the Securities and Exchange Commission thereunder. A copy of the
Code of Ethics will be made available upon request at no charge. Requests should
be directed in writing to the Company at Powerline Road, Suite 57, Boca Raton,
Florida 33433
10
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information relating to salary we paid
during the past fiscal year to our chief executive officer; and to each of our
executive officers that earned more than $100,000 during the fiscal year ended
December 31, 2003. Other than salary and stock options, we paid no other form of
compensation to our executive officers and directors. No stock options were
exercised during the fiscal year ended December 31, 2003.
Name Position Salary Stock Options
---- -------- ------ -------------
Lawrence Levinson CEO $ 43,000 None
Ronald Trautman Asst to Pres $ 174,993 None
Robert Kline Pres $ 75,600 None
James Baumhart COO $ 78,264 None
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
On November 1, 2001, we implemented a 2001 Incentive and Non-Qualified
Stock Option Plan. We have reserved 500,000 shares of our common stock for
issuance under this plan. This plan authorizes the granting of awards of up to
500,000 shares of common stock to our key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code of 1986), restricted stock awards, deferred stock awards,
stock appreciation rights and other stock-based awards, as described in the
plan. As of the date of this prospectus, no stock options are outstanding under
the plan.
The plan is administered by our board of directors which determines the
persons to whom awards will be granted, the number of awards to be granted and
the specific terms of each grant, including their vesting schedule, subject to
the provisions of the plan.
In connection with incentive stock options, the exercise price of each
option may not be less than 100% of the fair market value of the common stock on
the date of grant (or 110% of the fair market value in the case of a grantee
holding more than 10% of our outstanding stock). The aggregate fair market value
of shares for which incentive stock options are exercisable for the first time
by an employee during any calendar year may not exceed $100,000. Nonqualified
stock options granted under the plan may be granted at a price determined by the
board of directors, not to be less than the fair market value of the common
stock on the date of grant.
OPTION EXERCISES AND HOLDINGS
The following tables set forth information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 2002 to our chief executive officer and to each of our executive
officers who earned more than $100,000 during the fiscal year ended December 31,
2001.
Employment Agreements. We have entered into employment agreements with
several of our officers, directors and key employees. The initial agreements
were entered into in 2000 and expired on various dates between September and
November 2001. The agreements have been orally extended. A summary of the
material agreements is as follows:
11
Larry Levinson. Commencing September 2000, we agreed to pay Mr.
Levinson $120,000 per year, payable monthly. In addition, Mr. Levinson has
received options to purchase 50,000 shares of common stock exercisable for a 5
year term at $1.00 per share. Also, Mr. Levinson will be reimbursed for all
travel expenses. Effective January 1, 2002, we have orally agreed to extend Mr.
Levinson's employment agreement through December 31, 2002. Under this oral
agreement, Mr. Levinson will be paid an annual salary of $240,000, payable
weekly. Effective December 31, 2003, Mr. Levinson, although a director, until
new directors are elected, no longer maintained any direct Management
responsibilities.
Robert B. Kline. Commencing September 1, 2000, we agreed to pay Mr.
Kline $48,000 per year, payable monthly. In addition, Mr. Kline has received
options to purchase 50,000 shares of common stock exercisable for a 5 year term
at $1.00 per share. Mr. Kline will be reimbursed for all traveling expenses.
Effective February 1, 2002, we have orally agreed to extend Mr. Kline's
employment agreement through February 1, 2003. Under this oral agreement, Mr.
Kline will be paid an annual salary of $104,000, payable weekly. Mr. Kline's
active participation ceased during the fourth quarter of 2004.
Michael Magno. Commencing November 1, 2000, we agreed to pay Mr. Magno
$42,000 per year, payable monthly. In addition, Mr. Magno has received options
to purchase 50,000 shares of common stock exercisable for a 5 year term at $1.00
per share. Mr. Magno will be reimbursed for all traveling expenses. Effective
January 1, 2002, we have orally agreed to extend Mr. Magno's employment
agreement through December 31, 2002. Under this oral agreement, Mr. Magno will
be paid an annual salary of $60,000, payable weekly. Mr. Magno's active
participation ceased during the second quarter of 2004.
Director Compensation. On January 8, 2002, our board of directors
agreed to issue options to purchase 25,000 shares of common stock exercisable at
$1.00 per share to each member of our board and our corporate secretary.
Effective January 8, 2002, we issued options to purchase an aggregate of 125,000
shares of our common stock exercisable at $1.00 per share to Messrs. Levinson,
Kline, Zimmerman, Modansky and Magno. In addition, effective January 8, 2002,
members of our board of directors will be paid $500 and reimbursed travel
expenses for attendance at each meeting of our board of directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information known to us, as of the date
of this report, relating to the beneficial ownership of shares of common stock
by: each person who is known by us to be the beneficial owner of more than five
percent of the outstanding shares of common stock; each director; each executive
officer; and all executive officers and directors as a group. Unless otherwise
indicated, the address of each beneficial owner in the table set forth below is
care of CyberAds, Inc., 21073 Powerline Road, Suite 57, Boca Raton, Florida
33433.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as being owned
by them.
Under securities laws, a person is considered to be the beneficial
owner of securities owned by him, his spouse and others to whom the law
attributes ownership, as well as securities that can be acquired by him within
60 days from the date of this prospectus, including upon the exercise of
options, warrants or convertible securities. We determine a beneficial owner's
percentage ownership by assuming that options, warrants or convertible
securities that are held by him, but not those held by any other person, and
which are exercisable within 60 days of the date of this prospectus, have been
exercised or converted.
12
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Lawrence Levinson 6,357,000(1)(2)(3) 34.69%
3350 NW 2nd Avenue, Ste.A-44
Boca Raton Fl. 33431
Inphonic, Inc. 1,250,000 6.8%
1010 Wisconson Ave. #250
Washington, D.C. 20007
Four Star Financial Services 1,352,000(4) 7.4%
1000 Marina Blvd. Ste. 600
Brisbane, CA 94005
Maxmin, Inc. 1,183,333(4) 6.5%
415 E. Hyman Ste 201
Aspen CO 81611
Jordan Levinson 1,000,000 5.5%
21257 Rock Ridge Drive
Boca Raton Fl.33428
Executive Officers and
Directors (as a group of 1) 6,357,000 34.69%
(1) Includes options to purchase 75,000 shares of common stock exercisable at
$1.00 per share. (2) Includes 4,482,000 shares that are subject to a Stock
Purchase Agreement between the owner and Novanet Media Inc.
(3) Includes 800,000 shares which have been optioned to a private party.
(4) Includes 200,000 and 33,333 shares respectively which have been issued
pursuant to financing and consulting agreements to be exercised at $.50 per
share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In a stock purchase agreement effective December 31, 2000, we acquired
all of the issued and outstanding shares (an aggregate of 1,000,000 shares) of
IDS Cellular, Inc. in return for 7,500,000 shares of our common stock. We
acquired the IDS Cellular shares directly from each of IDS Cellular's
shareholders. These shareholders were Lawrence Levinson, Robert Kline and Barry
Garlin, who were serving as our executive officers, directors and principal
shareholders at the time of the transaction. We believe the consideration paid
for the outstanding shares of IDS Cellular was fair and reasonable at the time
of the stock purchases.
As of December 31, 2003, the amount due on various loans from
previously related parties approximately $800,000.This amount is secured by the
company's assignment of its agreement with its fulfillment provider.
13
On January 8, 2002 we issued a five year option to purchase 5,000,000
shares of our common stock exercisable at $1.00 per share to Lawrence Levinson.
This option was issued in consideration for the advances that Mr. Levinson and
his affiliates have made to our company and personal guarantees Mr. Levinson has
made in favor of our company. This option agreement was terminated without any
shares being exercised.
On June 22, 2001, we entered into a loan and security agreement with
Four Star Financial Services, LLC, a California limited liability company. Under
this agreement we received a loan in the amount of $150,000. The term of the
loan was for a period commencing on June 22, 2001 and ending on December 17,
2001. Under the terms of the loan and security agreement we paid interest to
Four Star Financial Services, LLC on the daily outstanding principal balance of
the loan at a rate of 33% per annum. The loan was secured by all of our assets
and accounts receivable. In addition, our chairman and his wife personally
guaranteed payment of the principal amount of the loan and interest. The
personal guarantee included a mortgage on our chairman's principal residence. As
a further consideration for entering into the loan and security agreement, we
issued Four Star Financial Services, LLC an option to acquire 300,000 shares of
our common stock exercisable at $.50 per share for a term of five years. The
option expires on June 22, 2006. The loan has been repaid in accordance with its
terms.
On January 6, 2002 we issued options to purchase 1,300,000 shares of
our common stock to Gene Foland as consideration for advertising and marketing
consulting services provided by Mr. Foland. The options were exercisable at
$1.00 per share for a term of six months. Mr. Foland exercised 625,000 of these
options and allowed 675,000 of the options to expire.
On January 6, 2002 we issued options to purchase 1,300,000 shares of
our common stock to James Ricketts as consideration for Latin American sales
development consulting services provided by Mr. Ricketts. The options are
exercisable at either $1.00 or $2.00 for a term of six months. Based upon the
current number of outstanding shares of our common stock upon exercise of these
options, Mr. Ricketts would be a beneficial owner of more than 5% of our
outstanding common stock. These options subsequently expired without being
exercised.
On January 8, 2002 we appointed Robert Modansky to serve on our board
of directors. Mr. Modansky's accounting firm has provided accounting services to
our company and has accrued approximately $16,000 in fees for services performed
during fiscal year 2001. Mr Modansly resigned during the third quarter of 2003.
14
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
------ -----------------------
2.2 Stock Purchase Agreement with IDS Cellular and its shareholders(1)
3.1(a) Articles of Incorporation(1)
3.1(b) Articles of Amendment(1)
3.1(c) Designation of Series A Convertible Preferred Stock(2)
3.2 Bylaws(1)
4.0 Form of Stock Certificate(1)
4.1 Loan Agreement with Four Star Financial Services, LLC(1)
4.2 Loan Agreement with Levinson(1)
10.1 Employment/Consulting Agreement with Levinson(1)
10.2 Agreements with American Cellular, Inc. and GT Global Communications,
Inc.(1)
10.3 Agreement with Triton PCS(1)
10.4 Agreement with Regal Marketing International(1)
10.6 Agreement with Beck Management, Inc.(1)
10.7 Consulting Agreement with Gene Foland(2)
10.8 Consulting Agreement with James L. Ricketts(2)
10.9 Consulting Agreement with James L. Copley(2)
10.10 Sales Agency Agreement with MCI WorldCom Wireless(2)
21.0 Subsidiaries of Registrant(1)
31 Rule 15d-14(a) certification of Walter Tatum.
32 Section 1350 certification of Walter Tatum.
(1) Previously filed in Registration Statement on Form SB-2, File No. 333-62690
(2) Previously filed in Registration Statement on Form SB-2, File No. 333-82104
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the period covered
by this report.
August 21, 2003
Item 4. Changes in Registrant's Certifying Accountant
Item 7. Financial Statements, ProForma Financial Information and
Exhibits.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Boca Raton, Florida on April 22, 2004.
CYBERADS, INC.
By:/s/ WALTER TATUM
-------------------
Walter Tatum
Chairman, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ WALTER TATUM President 4/22/04
--------------------
Walter Tatum
16
CYBERADS, INC.
Years ended December 31, 2003 and 2002
CONTENTS
Page
----------
Report of Independent Auditor's....................................... F-1
Consolidated Financial Statements:
Balance sheets..................................................... F-2 - F-3
Statements of operations........................................... F-4
Statements of changes in stockholders' equity (deficit)............ F-5 - F-6
Statements of cash flows........................................... F-7 - F-8
Notes to consolidated financial statements.........................F-9 - F-22
REPORT OF INDEPENDENT AUDITORS'
To the Board of Directors
CyberAds, Inc.
We have audited the accompanying consolidated balance sheets of CyberAds, Inc.
as of December 31, 2003 and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of CyberAds, Inc. as of December 31, 2002, were audited by other
auditors whose report dated May 13, 2003, expressed an unqualified opinion of
those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above present
fairly in all material respects, the financial position of CyberAds, Inc. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company had a loss from continuing
operations of $1,201,111 and a working capital deficiency of $2,720,748. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
TIMOTHY L. STEERS, CPA, LLC
April 6, 2004
Portland, OR
F-1
CYBERADS, INC.
Consolidated Balance Sheet
December 31
-------------------------------------
2003 2002
----------------- -----------------
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful
accounts of $486,000 in 2002 $ 20,380 $ 2,016,054
Inventories - 156,234
-------------- --------------
Total current assets 20,380 2,172,288
Property and equipment, net 14,171 210,659
Other assets:
Hold-to-maturity investments 10,700,000 -
Deposits 8,585 77,251
Intangible asset - 75,000
Other assets - 24,785
-------------- --------------
Total other assets 10,708,585 177,036
-------------- --------------
$ 10,743,136 $ 2,559,983
============== ==============
Continued on next page.
F-2
CYBERADS, INC.
Consolidated Balance Sheet (continued)
December 31
-------------------------------------
2003 2002
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash overdraft $ - $ 112,649
Outstanding checks in excess of cash in bank 1,207 -
Note payable 120,000 -
Accounts payable 697,748 1,783,712
Accounts payable - related parties - 831,625
Accrued liabilities 944,658 1,597,906
Unearned revenue 130,960 -
Factor payable, net - 613,423
Advances from related parties 786,555 1,101,158
Due to officers - 146,250
Loans payable - convertible debentures 60,000 60,000
-------------- --------------
Total current liabilities 2,741,128 6,246,723
Advances from stockholder 157,634 -
Commitments
Stockholders' equity (deficit):
Preferred stock, $.001 par value, authorized 5,000,000 shares, of which
1,000,000 has been designated as Series A Convertible, issued and
outstanding 835,660 shares in 2003 (no shares in 2002) 836 -
Common stock, $.001 par value, authorized 50,000,000 shares, issued and
outstanding 18,325,777 shares in 2003 (14,774,777 shares in 2002) 18,326 14,775
Common stock to be issued 11,140,000 -
Additional paid-in capital 15,399,238 13,818,415
Accumulated deficit (18,714,026) (17,512,915)
Deferred financing costs - (7,015)
-------------- --------------
Total stockholders' equity (deficit) 7,844,374 (3,686,740)
-------------- --------------
$ 10,743,136 $ 2,559,983
============== ==============
See accompanying notes.
F-3
CYBERADS, INC.
Consolidated Statement of Operations
Years ended December 31
2003 2002
--------------- -----------------
Net revenues $ 4,197,128 $ 8,326,211
Cost of revenues 1,177,111 3,939,359
------------- --------------
Gross profit 3,020,017 4,386,852
Selling expenses 1,845,967 2,506,943
General and administrative expenses 1,941,578 16,650,719
------------- --------------
Loss from continuing operations (767,528) (14,770,810)
Other income (expenses):
Gain on theft of assets - 1,203
Gain on settlement with former employee - 8,250
Impairment of property and equipment (265,961) (77,627)
Other income, net 16,176 636
Interest expense and financing costs, net (183,798) (538,146)
Loss on acquisition not consummated - (300,000)
------------- --------------
Total other expenses (433,583) (905,684)
------------- --------------
Net loss from continuing operations (1,201,111) (15,676,494)
Loss from discontinued operations - (196,707)
------------- --------------
Net loss $ (1,201,111) $ (15,873,201)
============= ==============
Basic and diluted loss per common share:
Loss from continuing operations $ (.07) $ (1.10)
Loss from discontinued operations - (0.01)
------------- --------------
$ (.07) $ (1.11)
============= ==============
See accompanying notes.
F-4
CYBERADS, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 2003 and 2002
Convertible
preferred stock Common stock Common Additional Deferred Total
----------------- ----------------------- stock to paid-In Accumulated financing stockholders'
Shares Amount Shares Amount be issued capital deficit costs equity (deficit)
-------- -------- ------------ ---------- ----------- ------------ ------------- ----------- ----------------
Balance at
December 31,
2001 - $ - 13,384,777 $ 13,385 $ - $ 1,301,870 $ (1,639,714) $ - $ (324,459)
Shares issued for
cash, net of
offering costs - - 40,000 40 - 39,960 - - 40,000
Shares and
options issued
for services - - 315,000 315 - 12,091,620 - - 12,091,935
Shares and options
issued for accrued
liabilities - - 50,000 50 - 50,950 - - 51,000
Options exercised - - 585,000 585 - 14,415 - - 15,000
Convertible
debentures - - - - - 20,000 - (7,015) 12,985
Share Issued for
acquisition not
consummated - - 400,000 400 - 299,600 - - 300,000
Net loss - - - - - - (15,873,201) - (15,873,201)
-------- -------- ------------ ---------- ----------- ------------ ------------- ----------- ----------------
Balance at
December 31,
2002 - $ - 14,774,777 $ 14,775 $ - $13,818,415 $(17,512,915) $ (7,015) $ (3,686,740)
======== ======== ============ ========== =========== ============ ============= =========== ================
Continued on next page.
F-5
CYBERADS, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 2003 and 2002
Convertible
preferred stock Common stock Common Additional Deferred Total
----------------- ----------------------- stock to paid-In Accumulated financing stockholders'
Shares Amount Shares Amount be issued capital deficit costs equity (deficit)
-------- -------- ------------ ---------- ----------- ------------ ------------- ----------- ----------------
Balance at
December 31,
2002 - $ - 14,774,777 $ 14,775 $ - $ 13,818,415 $(17,512,915) $ (7,015) $ (3,686,740)
Shares issued for
debt 835,660 836 - - - 834,824 - - 835,660
Amortization of
deferred financing
costs - - - - - - - 7,015 7,015
Shares issued or to
be issued for debt - - 1,250,000 1,250 440,000 86,250 - - 527,500
Shares issued in
exchange for
services - - 2,275,000 2,275 - 606,475 - - 608,750
Shares issued for
interest on
convertible
debentures - - 26,000 26 - 53,274 - - 53,300
Shares to be issued
for hold-to-maturity
investments - - - - 10,700,000 - - - 10,700,000
Net loss - - - - - - (1,201,111) - (1,201,111)
-------- -------- ------------ ---------- ----------- ------------ ------------- ----------- ----------------
Balance at
December 31, 2003 835,660 $ 836 18,325,777 $ 18,326 $11,140,000 $ 15,399,238 $(18,714,026) $ - $ 7,844,374
======== ======== ============ ========== =========== ============ ============= =========== ================
See accompanying notes.
F-6
CYBERADS, INC.
Consolidated Statement of Cash Flows
Years ended December 31
2003 2002
--------------- -----------------
Cash flows from operating activities:
Net loss $ (1,201,111) $ (15,873,201)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Provision for doubtful accounts 382,217 223,310
Impairment of long-lived assets 265,961 77,627
Impairment of inventories 120,879 -
Depreciation 19,494 39,805
Amortization of deferred financing costs 7,015 -
Common stock issued for services 608,750 12,091,935
Common stock issued for interest 53,300 -
Loss on acquisition not consummated - 300,000
Beneficial conversion of convertible debentures - 12,985
Gain on settlement with former employee - (8,250)
Gain on theft of assets - (1,203)
Changes in assets and liabilities:
Accounts receivable 671,163 737,857
Inventories 35,355 227,438
Deposits 68,666 (61,338)
Other assets 24,785 (24,785)
Outstanding checks in excess of cash in bank 1,207 -
Accounts payable (1,390,089) 1,855,061
Accrued liabilities 289,046 481,477
Unearned revenue 130,960 -
------------- --------------
87,598 78,718
Cash flows from investing activities:
Purchase of intangible asset - (75,000)
Cash received for stolen equipment - 22,245
Purchases of property and equipment (13,967) (307,170)
------------- --------------
(13,967) (359,925)
Cash flows from financing activities:
Cash overdraft (112,649) 112,649
Net proceeds from factored accounts receivable 342,237 66,382
Advances from related parties - 884,896
Repayments to related parties (314,603) (814,938)
Proceeds from officers - 2,250
Repayments to officers (146,250) -
Repayments to third parties - (125,000)
Proceeds from convertible debentures - 60,000
Net advances from stockholder 157,634 -
Proceeds from sale of common stock - 55,000
------------- --------------
(73,631) 241,239
------------- --------------
Net decrease in cash $ - $ (39,968)
============= ==============
Continued on next page.
F-7
CYBERADS, INC.
Consolidated Statement of Cash Flows (continued)
Cash at beginning of year $ - $ -
Net decrease in cash - (39,968)
------------- --------------
Cash at end of year $ - $ -
============= ==============
Supplemental disclosure of cash flow information -
cash paid during the year for interest and financing costs $ 206,697 $ 479,689
============= ==============
Supplemental disclosure of non-cash investing and financing activities:
Common stock to be issued in exchange for hold-to-maturity investments $ 10,700,000 $ -
============= ==============
Factor payable renegotiated into notes payable $ 120,000 $ -
============= ==============
Preferred stock issued in exchange for factor payable $ 835,660 $ -
============= ==============
Common stock issued or to be issued in exchange for debt $ 527,500 $ -
============= ==============
Common stock and common stock options issued in
exchange for accrued liabilities $ - $ 51,000
============= ==============
See accompanying notes.
F-8
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
1. Business and summary of significant accounting policies
-------------------------------------------------------
Business: CyberAds, Inc. ("CyberAds") was incorporated in the state of
Florida on April 12, 2000. The Company earns commissions from selling
approved contracts to subscribers for cellular telephone service.
Commissions are received either from master dealers or cellular phone
service providers, not the subscriber. Applications for cellular
telephone services are obtained from advertising banners placed at
various websites. The Company does business with cellular phone service
providers as well as master dealers that have contracted with various
other carriers and with several website hosts, who receive a commission
for each completed contract for cellular phone service.
In December 2000, the Company acquired IDS Cellular, Inc. ("IDS") in a
business combination accounted for as entities under common control
because both entities had common ownership interests. All of the
operations or IDS was moved to CyberAds and IDS is currently dormant.
In January 2002, the Company acquired 80% or Cyad Cellular
Distributors, Inc. ("Cyad") a newly formed entity. Cyad began
developing the business of wholesaling cellular phones. In August 2002,
Cyad's operations were discontinued.
Principles of consolidation: The accompanying consolidated financial
statements for 2003 include the accounts of CyberAds and its wholly
owned subsidiary IDS. The accompanying consolidated financial
statements for 2002 include the accounts of CyberAds, its wholly owned
subsidiary IDS, and its 80% owned subsidiary Cyad. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Cash and cash equivalents: For purposes of the cash flow statement, the
Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
Inventories: Inventories consist primarily of cellular telephones and
are valued at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method. Provision for potentially obsolete
or slow moving inventory is made based on management's analysis of
inventory levels and future sales forecasts.
In March 2003, cellular phone service providers, or a fulfillment
company, began shipping cellular telephones directly to the Company's
subscribers. As a result, the Company recognized an impairment loss of
approximately $120,900 during 2003 for inventories deemed to have no
value (no impairment loss was recognized during 2002).
F-9
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
Property and equipment: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided for over the
estimated useful life of the assets of five to seven years. Leasehold
improvements are amortized over the lesser of the original term of the
related lease or their estimated useful life.
Investments: Investments are accounted for under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
SFAS 115 requires that all applicable investments be classified as
trading securities, available-for-sale securities, or hold-to-maturity
securities. The statement further requires that: (1) trading securities
be reported at fair market value, with unrealized gains or losses
recognized as a component of operating results, (2) available-for-sale
securities be reported at fair market value, with unrealized gains and
losses excluded from earnings but reported in a separate component of
shareholders' equity (net of the effects of income taxes) until they
are disposed of or sold; at the time of disposal or sale, any gains or
losses, calculated by the specific identification method, are
recognized as a component of operating results, and (3)
hold-to-maturity securities be reported at amortized cost.
The Company's hold-to-maturity investments as of December 31, 2003
consisted of a 22% interest in a limited liability company that owns
real estate.
Fair value of financial instruments: The Company discloses certain
information about the fair value of financial instruments as required
by SFAS 107, "Disclosure About Fair Value of Financial Instruments".
Accounts receivable, accounts payable, accrued expenses, factor payable
and loans and advances payable to related and non-related parties are
reflected in the financial statements at fair value because of the
short-term maturity of the instruments.
Impairment of long-lived assets: The Company assess the recoverability
of long-lived assets under SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" by determining whether the depreciation
and amortization of the asset's balance over its remaining life can be
recovered through projected undiscounted future cash flows. The amount
of impairment, if any, is measured based on fair value and charged to
operations in the period in which the impairment is determined by
management. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less cost to sell.
The Company recorded an impairment loss of approximately $266,000
during 2003 ($77,600 during 2002) for assets that became idle as a
result of staff reductions.
Revenue recognition: The Company records revenue on a "net" basis when
contracts are submitted to master dealers. The phones are shipped from
the dealers to the subscriber and the Company does not bear the risk of
loss on the cellular
F-10
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
Revenue recognition (continued): phone. Revenue is recognized when the
master dealer ships the phones to the subscriber.
The Company records revenue on a "gross" basis when contracts are
submitted directly to cellular phone service providers. The phones are
shipped from the Company to the subscriber and the Company bears the
risk of loss on the cellular phone. Under the gross method commission
and related cost of goods sold for the cellular phone is recognized
when the Company ships the phones.
Advertising costs: The Company expenses the cost of advertising as
incurred as selling expenses. Advertising expenses were approximately
$9,500 for 2003 ($313,700 for 2002).
Stock options and warrants: The Company accounts for stock based
compensation to employees under SFAS No. 123, "Accounting for Stock
Based Compensation". SFAS 123 defines a fair value based method of
accounting for stock based compensation. However, SFAS 123 allows an
entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of
accounting prescribed by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees". Entities electing
to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. The Company
has elected to account for its stock based compensation to employees
under APB 25.
During 2003, the Company adopted SFAS 148 that amended SFAS 123 to
provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amended the disclosure
provisions of SFAS 123 requiring prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amended APB
28, "Interim Financial Reporting", to require disclosure about those
effects in interim financial information. The adoption of SFAS 148 had
no effect on the Company's financial position or results of operations.
The Company accounts for stock options and warrants issued to
non-employees for services under the fair value method of SFAS 118.
Website development costs: The Company accounts for website development
costs under Emerging Issues Task Force ("EITF") Issue No. 00-2,
"Accounting for Web Site Development Costs". Under EITF 00-2, costs
that involve design of the web page that do not change the content are
capitalized and amortized over there
F-11
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
Website development costs (continued): estimated useful life. Costs
incurred in operating a web site that has no future benefits are
expensed in the current period. The Company accounts for costs incurred
in operating their website under the American Institute of Certified
Public Accountants Statement of Position ("SOP") No. 98-1. Under SOP
98-1, costs that have a future benefit are capitalized and amortized
over the estimated future periods that are expected to benefit from
website changes.
Income taxes: The Company files a consolidated tax return that includes
CyberAds and IDS. The consolidated tax liability, determined without
taking credits into account, is allocated based on each company's
contribution to consolidated taxable income. Tax credits are allocated
on a pro rata basis equal to each company's contribution to the
consolidated tax credits determined to be available each year.
Income taxes are determined using the liability method whereby deferred
tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and
reported amounts of assets and liabilities. Deferred tax assets and
liabilities are computed using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides a
valuation allowance for certain deferred tax assets, if it is more
likely than not that the Company will not realize tax assets through
future operations.
Reporting consolidated comprehensive income (loss): The Company reports
and displays consolidated comprehensive income (loss) and its
components as separate amounts in the consolidated financial statements
with the same prominence as other financial statements. Consolidated
comprehensive income (loss) includes all changes in equity during the
year that results from recognized transactions and other economic
events other than transactions with owners. There were no components of
consolidated comprehensive income to report for the years ended
December 31, 2003 and 2002.
Segment Reporting: The Company and its subsidiary reports information
about operating segments and related disclosures about products and
services, geographic areas and major customers under SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information".
Operating segments are defined as components of an enterprise for which
separate financial information is available that is evaluated regularly
by management in deciding how to allocate resources and in assessing
performance. The Company views its operations and manages its business
in principally one segment, obtaining cellular phone applications.
F-12
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
Net loss per common share: Net loss per common share is computed by
dividing net loss by the weighted average number of common shares
outstanding during the period as defined by SFAS 128, "Earnings Per
Share". The weighted average number of common stock shares outstanding
was 16,074,986 for 2003 (14,333,944 for 2002). Convertible debentures,
convertible preferred stock, common stock options, and common stock to
be issued are considered common stock equivalents. Common stock
equivalents have not been included in the computation of diluted loss
per share as the effect on net loss per common share would be
anti-dilutive.
Use of Estimates: The process of preparing financial statements in
conformity with accounting principles generally accepted in the United
States of America requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses.
Accordingly, upon settlement, actual results may differ from estimated
amounts.
Reclassifications: Certain 2002 balances have been reclassified in the
accompanying consolidated financial statements to conform to the 2003
presentation.
2. Going concern
-------------
The Company has experienced recurring losses from operations and as of
December 31, 2003 had a working capital deficit of $2,720,748. The
Company was also in default with respect to certain debt agreements and
has unpaid payroll related taxes due to the Internal Revenue Service as
of December 31, 2003.
Effective September 9, 2003, a major shareholder and officer of the
Company sold a substantial portion of his shares to Novanet Media,
Inc., a California corporation, under a Stock Purchase Agreement
("Novanet Agreement"). Under the terms of the Novanet Agreement, all
then-existing officers of the Company resigned and were replaced with
new management. Under new management, approximately $1,483,200 of debt
has been renegotiated into notes payable or converted to capital stock
of the Company. New management has also eliminated unprofitable
products and reduced overhead.
New management of the Company plans to continue to restructure debt,
seek profitable products, reduce operating expenses, and seek
additional capital and debt financing until operations achieve
profitability. Management of the Company believes the above actions,
along with other plans, will allow them to continue operations until
the Company can recover assets and satisfy debt through normal
operations. Until then, the Company is dependent upon its ability to
restructure operations and obtain additional financing.
F-13
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
2. Going concern (continued)
-------------------------
The consolidated financial statements do not reflect adjustments
relating to the recorded asset amounts, or the amounts of liabilities
that would be necessary should the Company not be able to continue in
existence.
3. Property and equipment
----------------------
Property and equipment consisted of the following at December 31:
2003 2002
----------- -------------
Furniture and fixtures $ 2,598 $ 51,318
Machinery and equipment - 72,227
Leasehold improvements 20,085 8,076
Computer equipment 19,551 53,951
Property and equipment - idle - 58,931
--------- ----------
42,234 244,503
Less accumulated depreciation (28,063) (33,844)
--------- ----------
$ 14,171 $ 210,659
========= ==========
4. Note payable
------------
Effective November 12, 2003, the Company entered into a Debt Paydown
and Equity Conversion Agreement ("Debt Paydown Agreement") for the
purpose of renegotiating their factor payable. Under the Debt Paydown
Agreement, the Company paid an aggregate of $45,000 to reduce the debt;
converted $835,660 of debt into 835,660 shares of the Company's Series
A preferred stock; and converted $120,000 of the debt into an
installment note.
The note bears interest at the rate of 10% per annum and is payable in
installments of $5,000 on January 15, 2004 and February 15, 2004, plus
interest. Final payment is due March 15, 2004, plus interest. The note
is secured by all of the Company's accounts receivable, inventories,
and computer hardware and software and is guaranteed by two former
officers of the Company. The Company is currently in default with
respect to the agreement.
5. Accrued expenses
----------------
Accrued expenses consisted of the following at December 31:
2003 2002
---------- ------------
Payroll and payroll related liabilities $ 548,195 $ 579,535
Interest - 76,077
Commission charge-backs 361,463 942,294
Professional fees 35,000 -
---------- ------------
$ 944,658 $ 1,597,906
========== ============
F-14
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
5. Accrued expenses (continued)
----------------------------
The Company is non-compliant with respect to certain federal and state
payroll related taxes. Included in accrued payroll and payroll related
liabilities is approximately $540,800 of unpaid payroll taxes.
6. Advances from related parties
-----------------------------
Advances from related parties consisted of the following at December
31:
2003 2002
------------ --------------
Advance due to a corporation owned by a former officer
of the Company, bearing interest at 10% per annum,
due on demand and unsecured. $ 54,000 $ 360,549
Advance due to a former officer of the Company, bearing
interest at 10% per annum, due on demand and
unsecured. 732,555 734,322
Advance due to a former officer of the Company. - 6,287
---------- ------------
$ 786,555 $ 1,101,158
========== ============
In January 2002, the Company issued options to the former officer of
the Company in consideration for unpaid interest. Accordingly, under
APB 25, no expense was recognized. Interest expense on the above
advances was approximately $59,500 for 2002, of which approximately
$26,600 was recorded as leased car payments under an arrangement with
the former officer to pay those payments in lieu of interest.
7. Loans payable - convertible debentures
--------------------------------------
Loans payable - convertible debentures consists of unsecured loans from
two individuals whereby the principal of the note is convertible into
the Company's common stock at the option of the holder. Interest on
borrowings is payable quarterly at a rate of 20% per annum.
The notes were originally convertible on or after May 13, 2003 at a
conversion rate of 75% of the closing bid price of the Company's common
stock one trading day prior to conversion. The beneficial conversion
feature of the convertible debentures was valued at $20,000 on the date
of issuance and was amortized over the original one-year life of the
debentures.
The due date of the convertible debentures was extended to February 13,
2004. In consideration for the extension, the repayment of one of the
notes was increased by $5,000 representing additional interest and the
Company issued the holders an aggregate of 26,000 shares of its common
stock for unpaid interest.
F-15
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
7. Loans payable - convertible debentures (continued)
--------------------------------------------------
The notes were due in installments of $15,000 on November 13, 2003,
$13,750 on December 13, 2003 and January 13, 2004, with final payment
due February 13, 2004. The Company is currently in default with respect
to the agreement.
Interest expense was $3,300 for the year ended December 31, 2003
($12,985 for 2002 and $7,015 was reflected as a deferred interest
expense component of equity).
8. Advances from stockholder
-------------------------
Notes payable to stockholder consists of advances from Novanet Media,
Inc. for working capital purposes. The advances are unsecured,
non-interest bearing and due on demand; however, Novanet Media, Inc.
has agreed not to demand repayment of the advances before May 2005 and
unless cash is available from a merger, capital stock exchange, asset
acquisition, or other business combination, or from operations.
9. Commitments
-----------
The Company leases its office facilities under a non-cancelable lease
agreement that expires in March 2005. Management of the Company
renegotiated the lease and moved to small facilities where the payments
are $4,200 per month.
Future minimum lease payments under the non-cancelable operating lease
are as follows:
Years ending December 31:
-------------------------
2004 $ 50,400
2005 12,600
---------
$ 63,000
=========
Rent expense was approximately $181,000 for the year ended December 31,
2003 ($234,000 for 2002).
10. Capital stock transactions
--------------------------
In October 2003 and in connection with the Debt Paydown Agreement, the
Company designated 1,000,000 shares of its preferred stock as Series A
Convertible Preferred Stock. The Series A Convertible Preferred Stock
is non-voting and dividends accrue at a rate of 10% per annum payable
quarterly. Unpaid accrued dividends are cumulative. The Series A
Convertible Preferred Stock is convertible all or in part into the
number of shares of the Company's common stock equal to 115% of the
value of the preferred stock plus any cumulative dividends.
F-16
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
10. Capital stock transactions (continued)
--------------------------------------
On March 7, 2003, the Company issued 1,250,000 shares of its common
stock in exchange for debt of $87,500 owed to the provider of its
cellular phone service.
On April 4, 2003, the Company issued 25,000 shares of its common stock
upon signing an investment banking agreement for services. The weighted
average issuance price of the shares was $.05 per share. Management of
the Company estimated the value the shares issued based on the closing
bid price of the Company's common stock at the date of issuance, the
historical trend of the trading prices for its common stock and the
volume of shares traded. The Company recorded professional fees
aggregating $1,250 during 2003 as a result of the issuance.
On September 30, 2003, the Company issued 1,000,000 shares of its
common stock to a major shareholder of Novanet Media, Inc. in exchange
for management services. The weighted average issuance price of the
shares was $.30 per share. Management of the Company estimated the
value the shares issued based on the closing bid price of the Company's
common stock at the date of issuance, the historical trend of the
trading prices for its common stock and the volume of shares traded.
The Company recorded professional fees aggregating $300,000 during 2003
as a result of the issuance.
On December 31, 2003, the Company issued 250,000 shares of its common
stock to an investment-banking firm for services. The weighted average
issuance price of the shares was $1.15 per share. Management of the
Company estimated the value the shares issued based on the closing bid
price of the Company's common stock at the date of issuance, the
historical trend of the trading prices for its common stock and the
volume of shares traded. The Company recorded professional fees
aggregating $287,500 for 2003 as a result of the issuance.
In December 2003, the Company agreed to issue 440,000 shares of its
common stock in exchange for debt of $440,000.
In December 2003, the Company agreed it issued 8,000,000 shares of its
common stock in exchange for a 22% interest in a limited liability
company that owns real estate. The weighted average issuance price of
the shares was $1.34 per share. Management of the Company estimated the
value the shares issued based on the closing bid price of the Company's
common stock at the date of issuance, the historical trend of the
trading prices for its common stock and the volume of shares traded.
The Company recorded $10,700,000 of hold-to-maturity investments as a
result of the agreement.
During 2002, the Company issued 84,000 shares of common stock in
exchange for consulting services. The weighted average issuance price
of the shares was $.60
F-17
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
10. Capital stock transactions (continued)
--------------------------------------
per share. Management of the Company estimated the value the shares
issued based on the closing bid price of the Company's common stock at
the date of issuance, the historical trend of the trading prices for
its common stock and the volume of shares traded. The Company recorded
professional fees aggregating $50,400 for 2002 as a result of the
issuance.
During 2002, the Company issued 15,000 shares of its common stock and
options to purchase 50,000 shares of common stock, having an exercise
price of $1.25 per share, in exchange for advisory, investor relations
and public relations services. The weighted average issuance price of
the shares was $.25 per share. Management of the Company estimated the
value the shares issued based on the closing bid price of the Company's
common stock at the date of issuance, the historical trend of the
trading prices for its common stock and the volume of shares traded.
The Company recorded professional fees aggregating $23,535 for 2002 as
a result of the issuance.
During 2002, the Company issued 50,000 shares of its common stock and
options to purchase 50,000 shares of common stock, having an exercise
price of $1.00 per share for an aggregate value of $51,000 in exchange
for debt owed for legal services.
During 2002, the Company issued an aggregate of 400,000 shares of its
common stock in connection with an acquisition later rescinded by the
Company. The weighted average issuance price of the shares was $.75 per
share. Management of the Company estimated the value the shares issued
based on the closing bid price of the Company's common stock at the
date of issuance, the historical trend of the trading prices for its
common stock and the volume of shares traded. The Company recorded a
loss of $300,000 for 2002 for the issuances.
During 2002, the Company granted options to non-employees to purchase
3,450,000 shares of its common stock at exercise prices of $.25 and
$1.00. The Company recorded professional fees aggregating $295,000 for
2002 as a result of these share grants. The fair value of the options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the year ended
December 31, 2002:
Expected life of the option 1 year to 4 years
Risk-free interest rate 1.54% to 4.57%
Expected volatility 0% to 285%
Expected dividend yield 0%
F-18
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
11. Stock based compensation
------------------------
During 2003, the Company issued 1,000,000 shares of its common stock to
a former officer as compensation for services through September 14,
2003. The weighted average issuance price of the shares was $.02 per
share. Compensation expense of $20,000 was recorded for 2003 for the
intrinsic value of the services rendered.
During 2002, the Company issued an aggregate of 16,000 shares of its
common stock to an employee and a member of the Board of Directors as
compensation for services. Compensation expense of $23,000 was recorded
for 2002 for the intrinsic value of the services rendered.
During 2002, the Company granted options to purchase 6,350,000 of its
common stock to certain employees. The Company applies APB No. 25 and
related interpretations in accounting for stock options issued to
employees. Accordingly, compensation cost has been recognized for
options issued to employees only for the intrinsic value of those
options in the amount of $11,500,000 for 2002.
Had compensation cost been determined based on the fair market value at
the grant date, consistent with SFAS 148, the Company's net loss would
have changed to the following pro-forma amount for the years ended
December 31:
2003 2002
--------------- -----------------
Net loss as reported $ (1,201,111) $ (15,873,201)
Pro-forma effect (280,000) (872,000)
------------- --------------
Pro-forma net loss $ (1,481,111) $ (16,745,201)
============= ==============
Basic and diluted net loss per share as reported $ (.07) $ (1.11)
Pro-forma effect (.02) (.06)
------------- --------------
Pro-forma basic and diluted net loss per share $ (.09) $ (1.17)
============= ==============
F-19
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
12. Stock options
-------------
The Company's stock option activity for options granted to employees
and non-employees is summarized as follows for the years ended December
31:
Weighted Weighted
average average
exercise Shares exercise
Shares price exercisable price
--------------- ----------- --------------- -----------
Outstanding at
January 1, 2002 1,300,000 $ .70 1,300,000 $ .70
=============== ===========
Granted 9,800,000 1.03
Expired (2,325,000) 1.87
Exercised (625,000) 1.00
---------------
Outstanding at
December 31, 2002 8,150,000 .82 8,150,000 $ .82
=============== ===========
Cancelled (5,000,000) -
Expired (225,000) .70
---------------
Outstanding at
December 31, 2003 2,925,000 $ .48 2,925,000 $ .48
=============== =========== =============== ===========
The Company's stock option outstanding and exercisable at December 31,
2003 is summarized as follows:
Options outstanding Options exercisable
----------------------------------------------------------- -----------------------------------
Weighted average
----------------------------- Weighted
Range remaining exercise average
of prices Shares life price Shares exercise price
-------------- ----------- -------------- ------------- --------------- -----------------
$.04 - $.99 1,625,000 1 year $.23 1,625,000 $.23
============ ======= ==== ====
$.99 - $1.25 1,300,000 2 years $.91 1,300,000 $.91
============ --------- ======= ==== --------- ====
$.04 - $1.25 2,925,000 2 years $.48 2,925,000 $.48
============ ========= ======= ==== ========= ====
13. Income taxes
------------
Deferred income taxes consisted of the following at December 31:
2003 2002
---------------- ---------------
Deferred tax asset - net operating loss carryovers $ 6,362,600 $ 5,954,400
Valuation allowance for deferred tax asset (6,362,600) (5,954,400)
-------------- -------------
Net deferred income taxes $ - $ -
============== =============
F-20
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
13. Income taxes
------------
As a result of the Company's continued losses and uncertainties
surrounding the utilization of the net operating loss carryovers,
management has determined that the realization of deferred tax assets
is uncertain. Accordingly, a valuation allowance equal to the net
deferred tax asset amount has been recorded as of December 31, 2003 and
2002.
Reconciliation of income taxes computed at the Federal statutory rate
of 34% to the provision for income taxes is as follows for the years
ended December 31:
2003 2002
------------- ---------------
Tax at statutory rates $ (408,378) $ (5,396,888)
Differences resulting from:
Non-deductible and other items 178 (12)
Change in deferred tax valuation allowance 408,200 5,396,900
------------- ---------------
Provision for income taxes $ - $ -
============= ===============
At December 31, 2003, the Company had net operating loss carryovers of
approximately $18,713,500 available to offset future Federal taxable
income, if any, expiring through 2023. The utilization of the net
operating loss carryovers could be limited due to restrictions imposed
under Federal tax laws upon a change in ownership. The amount of the
limitation, if any, has not been determined at this time.
14. Concentrations of credit risk
-----------------------------
The Company sold approximately 80% of its products to five customers
for 2002. As December 31, 2002, accounts receivable from those
customers aggregated approximately $2,326,400.
15. Settlements
-----------
The Company entered into a consulting agreement in September 2002 for
advisory, investor relations and public relations services. The
consulting firm and the Company have taken the position that the other
is in default of the agreement. The Company and the consulting firm
reached a settlement in April 2004 whereby the Company will issue
100,000 shares of its common stock granted to the consulting firm under
the original consulting agreement; however, the consulting firm is
restricted from reselling the shares. Under the terms of the settlement
agreement the consulting firm may resell no more than 3,000 share of
the Company's common stock per week and no more than an aggregate of
50,000 shares over a period of 120 days from the date of the
settlement. They are further restricted from reselling the Company's
common stock until September 13, 2004 at which time they may
F-21
CYBERADS, INC.
Notes to Consolidated Financial Statements
December 31, 2003
15. Settlements (continued)
-----------------------
resell no more than 3,000 shares of the Company's common stock per week
and no more than an aggregate of 50,000 shares over a period of 120
days. The settlement had no effect on the accompanying financial
statements as the stock options granted under the original consulting
agreement where previously reflected.
In April 2004, the Company agreed to indemnify a former officer of the
Company for any loss he sustained in a settlement reached with a
cellular phone service provider against IDS and him personally. Under
the indemnification, the Company is obligated to pay an aggregate of
$72,261 in installments of $5,000 each on or before August 1, 2004 and
September 1, 2004 with the balance due October 1, 2004. The
indemnification had no effect on the accompanying financial statements
as the amount owed to the cellular phone service provider was
previously recorded as accounts payable in the records of IDS.
In April 2004, the Company reached a settlement with a cellular phone
service provider whereby the Company has agreed to issue the provider
250,000 shares of common stock previously granted. However, the Company
and the cellular phone service provider are currently negotiating
mutually acceptable share resale terms. The settlement had no effect on
the accompanying financial statements as the stock options granted to
the cellular phone service provider where previously reflected.
F-22