YTB INTERNATIONAL, INC. - SB-2/A - 20050803 - BUSINESS
THE BUSINESS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING IN THIS PROSPECTUS, INCLUDING "RISK FACTORS" AS WELL AS
THE EXHIBITS INCORPORATED BY REFERENCE. EACH PROSPECTIVE INVESTOR IS URGED TO
READ THIS PROSPECTUS IN ITS ENTIRETY, INCLUDING THE INCORPORATED EXHIBITS.
THIS EXECUTIVE SUMMARY AND OTHER PARTS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. SEE "NOTE REGARDING FORWARD LOOKING STATEMENTS." FOR
A MORE COMPLETE DISCUSSION OF THE FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE,
SEE "RISK FACTORS."
Overview
We were incorporated in June 1982 as Travel Network, Ltd. in New York and did
business as Global Travel Network. On February 1, 1994, we reincorporated in New
Jersey (at which time the New York corporation was merged into the New Jersey
corporation). The assets of this corporation were transferred to Global Travel
Network, L.L.C. ("GTN") in 1998. GTN was created as a conduit to participate in
the franchise Global Travel Network business of Travel Network, Ltd. Global
Travel Network was merged into a New York Company called Playorena, Inc which
was also a publicly traded corporation trading on the NASDAQ Bulletin Board.
On September 17, 1999, Playorena, Inc. acquired the outstanding equity of GTN in
exchange for 5,063,379 shares of Playorena's common stock (including123,292
shares reserved for issuance upon the exercise of certain
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warrants previously issued by GTN and 4,931,087 shares issued to equity holders
of GTN), representing 94.5% of the issued and outstanding common stock of
Playorena upon completion of the share exchange. Prior to that time, Playorena
operated as a public shell seeking the acquisition of, or merger with, an
existing company. Following the share exchange, we changed our name to
ETRAVNET.COM, Inc. On August 29, 2002, in turn, we changed our name to
REZconnect Technologies, Inc.
On December 8, 2004, we closed on a share exchange and associated merger with
YourTravelBiz.com, Inc. (respectively "YTB" and the "New York Merger"). YTB was
engaged (and now through the Delaware YourTravel.Biz--sometimes called
"Marketing"--operating subsidiary is engaged) in referral marketing, whereby for
a monthly fee, YTB members are provided with an interactive website offering
travel-related products and services whichallows them to sell those products and
services to the general public. YTB negotiates with all vendors, hosts the
website and collects all revenues. Members hosting a website would be paid a
commission on all sales made through their respective websites, as well as
commissions for bringing new members to YTB. YTB was a former client of
REZconnect, whereby REZconnect would service all travel arrangements made
through YTB and its members. Effective January 4, 2005, the Company
reincorporated in Delaware, changed its name to YTB International, Inc. and
increased its authorized common shares to 50,000,000, the preferred remaining at
5,000,000 authorized.
The Company believes it is at the forefront of several growing trends: the
increase in consumer spending in the ravel industry, the boom in home-based
businesses and the growing acceptance of conducting retail business on the
Internet. Tourism accounts for nearly 11% of all consumer spending worldwide.
The travel industry, currently a $5 trillion business, is growing 23% faster
than the global economy and spending on travel is expected to double in the next
5 years. Industry research shows that one "baby boomer", a segment comprised of
nearly a billion people worldwide, will retire every eight seconds for the next
20 years. Luxury cruise ship companies and resort builders are gearing up for
this wave of retirees. Secondly, with job security, as well as an ability to
spend time with the family, an ever-increasing concern, we believe the ability
to own a home-based business is becoming an even more attractive option.
Finally, we believe online travel planning will continue to make tremendous
inroads in the marketplace as more people use the Internet to become better
informed and save time and money.
Our executive offices are located at 560 Sylvan Avenue, Englewood, NJ 07632, but
we also have leased office space at 200 West Third Street Alton, Illinois 62002
and an additional 300 square feet of office space in San Juan, Puerto Rico.
YTB International, Inc.(the "Company") is a publicly traded company.
Through its three operating subsidiaries ("divisions"), post-reincorporation in
Delaware, the Company is a leading Internet provider of online travel stores for
travel agencies and home-based representatives using our services and
technology. It consists of three distinct, wholly-owned Delaware divisions,
respectively REZconnect Technologies, Inc. ("Technologies"); YTB Travel Network,
Inc. ("Booking"); and YourTravelBiz.com, Inc. ("Marketing") Each of those
operating subsidiaries is described below.
REZconnect Technologies, Inc. Division ("Technologies")
Technologies (the successor to REZconnect) is a leading internet provider of
online travel stores for travel agencies and home-based representatives using
our services and technology. It seeks to capitalize on the recent share exchange
and New York merger with Yourtravelbiz.com, Inc. and become the leading provider
of Internet-based travel services and solutions. Technologies has grown the
products and services offered and intends to further grow its product line.
Technologies and the Company believe Technologies can continue to grow its
overall revenues and profitability.
Technologies operates under various trade names, including Travel Network,
Global Travel Network, Travel Network Vacation Central, and operate and uses
these web sites: Bookmytravel.com, REZconnect.com , RezCity.com. Technologies'
customers are provided with a reliable source of travel products and services
through its agreements with selected travel providers, including major airlines,
cruise lines, hotels and car rental agencies, including wholesale travel
providers. In addition, Technologies offers its customers the abil- ity to make
reservations on over 424 airlines, at more than 35,000 hotels and with most
major car rental companies, cruise lines and tour package operators. Very
simply, Technologies is a travel management company using technology and the
Internet for our franchise chain and the online retail consumer.
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Technologies believes it is at the forefront of several growing trends: the
increase in consumer spending in the ravel industry, the boom in home-based
businesses and the growing acceptance of conducting retail business on the
Internet. Tourism accounts for nearly 11% of all consumer spending worldwide.
The travel industry, currently a $5 trillion business, is growing 23% faster
than the global economy and spending on travel is expected to double in the next
5 years. Industry research shows that one "baby boomer", a segment comprised of
nearly a billion people worldwide, will retire every eight seconds for the next
20 years. Luxury cruise ship companies and resort builders are gearing up for
this wave of retirees. Secondly, with job security, as well as an ability to
spend time with the family, an ever-increasing concern, we believe the ability
to own a home-based business is becoming an even more attractive option.
Finally, we believe online travel planning will continue to make tremendous
inroads in the marketplace as more people use the Internet to become better
informed and save time and money.
In 2003, consumers spent over $37 billion on travel web sites. This number was
expected to grow to $50 billion in 2004. Additionally, purchasing over the
Internet has become more widespread, a trend we expect to continue as users
become more comfortable with the process and reliability. Management believes
this large and growing market bodes well for the Company's strategy of
franchising on-line travel agencies offering a wide array of products, services
and information. As the demand for and value of businesses in this sector
continue to increase, Technologies believes it is well positioned to pursue
opportunistic acquisitions, gain new customers and increase its own value.
Our brick and mortar franchisee "Travel Network" and "Global Travel Network"
fees range from $3,000 to $29,900 for domestic franchises, and from $50,000 to
$350,000 for individual international territories. Yearly service fees range
from $2,000 to $9,000 per location. Commission rates paid by travel suppliers
have been approximately 10% for hotel reservations, 5-10% for car rentals, and
10-15% for cruises and vacation packages. Airline tickets are a
non-commissionable item and revenues are earned from service fees, which range
from $4 to $15 per ticket.
We believe there are currently no direct competitors to the REZconnect
technology which YTB was licensing from prior to the New York Merger. Those
reservation systems that do exist, such as Opentables.com in the restaurant
field, Worldres in the hotel industry and Uniglobe.com in the cruise field,
require the use of proprietary computer hardware and/or software and the
maintenance of inventory. The lack of these requirements is a major
distinguishing factor and we believe a selling point for Technologies and our
REZconnect and related "brands."
The Technologies division which builds on-line reservation systems using
proprietary patent pending applications for suppliers within the travel
industry. This division also helps build, develop and maintain all franchise
websites and processes on-line orders, not only for our members but also for
their clients and our own retail clients, as well as "Super Sites" for travel
agents to book their clients travel. As a franchisor of traditional "brick and
mortar" travel agencies, as well as Internet-based, travel- related services and
technology offering proprietary reservation systems for the travel and
entertainment industry, Technologies (and through its predecessor) has signed
contracts with numerous consortium groups to build online "Super Sites" for
their agent base.
Technologies' consumer driven websites provide strong content and "bookability"
with over 60 booking engines incorporated into one site, covering all aspects of
the travel industry. Sites are available 24 hours, 7 days a week, allowing
travel agents the ability to personally follow-up with the online consumer and
provide customer service.
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Technologies typically charges $49.95 per month, on a non-contract basis, to own
and operate on an online travel site. If an agent signs a one year contract, the
cost is reduced and the agent only pays for 11 months of service. The agencies
that pay month to month must pay by credit card while yearly contracts can be
paid either by check or credit card.
Currently, there are over 10,000 consumer websites in operation. Site owners are
permitted to solicit other organizations and associations to clone travel sites
allowing for site owners to earn more revenue. The fee associated with a travel
site clone is $25 per site monthly.
REZcity.com is an extension of Travel Network and builds online travel stores
for consumer use, as well as "Super Sites" for Travel Agents to book their
clients travel. REZcity is an online city guide and travel store for over 53,000
towns throughout the United States, providing a unique model for entrepreneurs
and travel agencies to participate by licensing the local community content with
rights to sell advertising and e-commerce solutions. The pricing of a local town
of 25,000 in population is $1,500 for a one-time fee and an annual hosting fee
of $150.00.
We believe Technologies is the only company in this field offering every postal
zip code in the U.S. with strong rich content provided by over 100 sources,
including weather, entertainment, sports, news, various information guides with
yellow page listings of over 15,000,000 businesses. This site is up and running
and was first available in 1998. Technologies (through its predecessor) took
over the site in 2002 and is currently offering this product to companies within
the travel community. To date, REZcity has signed 249 single unit franchises, 3
area representative units and 4 master units. A single unit franchise consists
of a single town or zip code with a population of 5,000 or less. Franchisees are
required to sell e-commerce and advertising solutions to earn revenue within
their purchased territory and market their website to local residents residing
in the community. An area representative owns a minimum of 20 franchise units in
which he or she is responsible for the same tasks as a single unit franchise
owner. A master owns a minimum of 600 franchise units. A master's primary role
is to sell individual franchise units and Area Representative Units. A master
earns revenue by franchise sales, as well as by sales created by franchisees
within their master territory selling e-commerce and advertising solutions.
Revenues from the sale of area representative units and master unit franchisees
are not usually recorded in our financial statement based on our accounting
policy regarding the recognition of franchise revenues until services have been
rendered and substantial doubt of collectability has been eliminated, usually
upon receipt of payment. Our consumer driven websites provide over 60 booking
engines incorporated into one site, covering all aspects of the travel industry.
Sites are available for use 24 hours, 7 days a week, allowing travel agents the
ability to personally follow-up with the online consumer and provide customer
service any time.
In-house sales personnel have generally handled marketing of travel agency web
sites and franchises for Travel Network and REZcity.com, our online city portal
that provides lodging, travel and entertainment information for over 53,000
communities. All of Technologies' franchised operations are independently owned
and operated. All sales of travel products by Technologies are made through its
web sites, independent agencies and franchisees. Technologies also operates two
company-owned travel agencies. Operational expenses consist of franchise system
sales and support personnel, executive management and minimal administrative
personnel. Management believes Technologies' leading edge technology solutions
provide growth potential for our customers to offer lower cost services and
product support. Through our customer relations management services, our
customers can better serve their customers through customized vacation packages
based on pre-defined customer profiles and prior travel history.
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YTB Travel Network, Inc. Division ("Booking")
The Booking division (the successor to both the REZconnect travel agency and
reservations business and that of YTB Travel & Cruises, Inc.) comprises the
[appointments?] to sell airline tickets, cruise packages and other services plus
the travel sales from the 10,000 web sites hosted by Technologies. Travel
processing, document distribution and commission payments including tracking the
transaction for each of the sites is handled by this division. In addition, bulk
purchasing and deal making are provided by Booking through its Englewood Cliffs
New Jersey personnel. See also discussion below regarding the relationship with
both the Marketing and Technologies divisions.
YourTravelBiz.com, Inc. Division ("Marketing")
The Marketing division (successor to the Illinois-YTB acquired by the Company in
the New York Merger) is operated just as YTB's business was operated prior to
the share exchange and associated merger. This operating subsidiary is
a referral marketing group providing support its sole product is the sale of the
Referring Travel Agent (RTA) business opportunity of (and serviced by) the
booking division. services for the sales representatives currently in the
system. Marketing conducts business through recruitment, enrollment, initial
training and support of its sales force.
Management believes the emerging market shift to the Internet for travel
services presents the opportunity for advancement of products and services by
referral relationships.
By way of background, YTB was initially incorporated on February 16, 2001 in
Illinois and, prior to the merger with the pre-Delaware reincorporated Company,
as a direct marketing company. YTB continues to conduct business through
recruitment, enrollment, initial training, and support of its sales force. There
are currently over 8,400 individuals, known as independent marketing
representatives (each, an "IMR"), who are responsible for enrolling referring
travel agents (each, an "RTA"), most of whom work from their homes. An IMR might
utilize a number of methods of attracting new RTAs, at informational meetings
and events, through newspaper advertising, and one-on-one meetings with
individuals seeking a home based business enterprise. RTAs and IMRs are schooled
through our certified training courses. This is accomplished through a
combination of their company sponsored meetings and training seminars, company
conference calls and e-training modules. A Power Team Leader is an IMR who has
accomplished a higher income level by virtue of sales production.
The marketing division uses a Referral Marketing program that incentivizes the
Rep for bringing others into the system, earns travel commissions from their
site and enjoys travel benefits and tax advantages with owning their own
business.
YTB Travel & Cruises, Inc., in turn, was incorporated on January 19, 2001 in
Illinois as the travel service and fulfillment center for the RTA's, offering an
interactive, real time booking engine and access to preferred deals with leading
travel industry suppliers. Through what is now called the Booking this division,
RTAs have the ability to book individual and group travel, fulfill travel
document needs, maintain the online booking engine and send a weekly travel
newsletter to their customers. RTAs pay a one-time setup fee of $349.95, plus a
monthly recurring fee of $49.95 for the e-commerce equipped online booking
engine and tools. There are currently over 14,000 active RTAs. Revenue is
received through the one-time setup fee, a recurring monthly fee for the online
booking engine, tools, hosting and related activities and commission on the sale
of travel products.
MANAGEMENT
Set forth below are biographies of the current Members of the Board of Directors
(Messrs Brent, Brent and Kestenbaum) and then the biographies of the recently
appointed YTB-affiliate, Messrs. Tomer, Tomer and Sorensen:
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MR. MICHAEL Y. BRENT, CHIEF EXECUTIVE OFFICE AND A DIRECTOR, Graduated from the
University of Miami in June 1965 with a Bachelor of Arts in administration and
accounting. From July 1965 through 1974, he was Director of Convention Sales for
his family hotel business. From 1974 through 1981, Mr. Brent owned and operated
his own travel company. In 1982, he helped start Travel Network, Ltd. (one of
the Company's predecessors) and served as Vice President until June 1989 when he
became its Chief Operating Office and a part owner. In 1994, Mr. Brent became
Chairman, President and Chief Executive Officer of the Company.
MR. DEREK J. BRENT, A DIRECTOR AS WELL AS SECRETARY AND VICE PRESIDENT/SALES,
the son of Michael Y. Brent, graduated from the University of Maryland in June
1993 with a Bachelor of Business Administration and Accounting, majoring in
accounting. Derek Brent has passed all necessary CPA examinations. He joined the
Company's predecessor in May 1993 as sales consultant andd, in 1996, he became
Director of Sales.
MR. HAROLD KESTENBAUM, DIRECTOR, Graduated from the University of Richmond
School of Law in 1975, and is the Company's franchise and general counsel. Mr.
Kestenbaum is engaged primarily in the independent practice of law, specializing
in franchise and distribution law, representing franchisors only, both start-up
and established, from his Garden City, New York offices. He is, among other
professional roles, a founding member of the new York State Bar Association's
Franchising, Distribution and Licensing Law Section.
LLOYD J. TOMER, CHAIRMAN OF THE BOARD OF DIRECTORS, is a seasoned veteran of
direct sales and marketing. After spending thirteen years in the ministry, he
joined the A.L. Williams company (now known as Primerica Financial Services) in
January 1981. He achieved the level of Senior National Sales Director in 1985
and maintained that position through 2001. While at A. L. Williams, he built a
successful sales organization numbering in the thousands, whose combined life
insurance sales was measured in the billions, with assets under management of
$750 million. He sold his A. L. Williams business in January 2002 to devote his
marketing expertise to YourTravelBiz.com., Inc. He attended Anderson College in
Anderson, Indiana.
J. SCOTT TOMER, A DIRECTOR AND PRESIDENT, worked with his father, Lloyd Tomer,
at Primerica Financial Services from 1981- 1993. Scott earned the level of
National Sales Director at Williams and had the responsibility of field support
and training for their sales force, where he trained over 2,000 sales personnel.
He left the Williams organization to become a Certified Financial Planner, which
he continued while specializing in real estate investing prior to co- founding
YourTravelBiz.com, Inc. in 2001.
J. KIM SORENSEN, A DIRECTOR, brings to the Company an extensive and successful
business history. He has owned several businesses, and managed a multi-million
dollar mixed real estate complex across from the Illinois state capital in
Springfield. He was also a professional bowler and bowling proprietor from
1975-1980. He joined AL Williams in 1981 and earned the Sr. Vice President
position in 1985. In 1990 Kim partnered with Lloyd Tomer to provide technical
and management support for his growing sales organization through 2001. He is a
co-founder of YourTravelBiz.com, Inc. and his expertise in computer technology
has led to the development and management of many of the systems at
YourTravlBiz.com., Inc.
The following table sets forth the name, age and position of each of the persons
appointed to the combined Company's Board of Directors and each of the persons
appointed as an Executive Officer of the Company following completion of the New
York Merger described above:
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Name Age Principal Position
- ----------------- --- --------------------------------
Lloyd J. Tomer 70 Chairman of the Board of Directors
Michael Y. Brent* 62 Director and Chief Executive Officer
J. Scott Tomer 46 Director and President
Derek Brent* 33 Director and Secretary
J. Kim Sorensen* 54 Director
Harold Kestenbaum 55 Director
- --------------
o The existing Members of the Company's Board of Directors have served
since November 1989 (Michael Brent); December 1991 (Mr. Kestenbaum);
and April 1995 (Derek Brent).
CAPITALIZATION
The table below sets forth the capitalization as of May 31, 2005. Since any
shares sold will be those of the designated selling shareholder and outstanding
shares will be unaffected by this registered secondary offering, no pro forma
adjustment has been made.
Description
-----------
Actual
------
Shareholders' Equity:
Preferred stock, par value $0.001 per share;
authorized 5,000,000 shares; none issued. --
Common stock par value $0.01 per share;
50,000,000 authorized shares; 24,092,376
issued and outstanding shares (actual); 24,092,376
Additional paid in capital -0-
Accumulated deficit ( 865,003)
Accumulated other comprehensive income (loss) -0-
-----------
Total stockholders' equity and capitalization 24,092,376
*Includes shares of common stock underlying shares of Series B Preferred Stock
issued to shareholders of YTB upon consummation of the share exchange and
associated New York Merger with YTB, but excludes 940,000 option shares for
executives and employees of REZconnect Technologies, Inc. and matching shares
for YourTravelBiz.com, Inc. executive shares issuable upon the exercise of
outstanding options and warrants (whether or not such options and/or warrants
are currently exercisable).
DILUTION
No dilution table has been presented since any shares sold will be those of the
designated selling shareholder. Consequently, no dilution will occur as a result
of this registered secondary offering.
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DIVIDENDS AND DISTRIBUTIONS
The payment of dividends and/or distributions, if any, to shareholders is at our
sole and absolute discretion. Shareholders will be entitled to receive
dividends, if and when declared by us out of funds legally available for such
purpose. Since we intend to continue to retain all of our earnings, if any, to
fund the development and growth of our business, we have no current plans to pay
any cash dividends on our common stock.
Our dividend policy will depend upon our debt and equity structure, earnings
needed for capital in connection with our operations or in connection with
possible future acquisitions and other factors, including economic conditions.
No assurance can be given that dividends in future periods will, in fact, be
paid to shareholders or shareholders or, if paid, that such dividends will not
later be reduced or eliminated.
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect to
the beneficial ownership of each class of the Company's capital stock as of the
date hereof for (1) each person known by the Company to beneficially own more
than 5% of each class of the Company's voting securities, (2) each executive
officer, (3) each of the Company's directors and (4) all of the Company's
executive officers and directors as a group. The number of shares beneficially
owned is determined under rules promulgated by the SEC, and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
those rules, beneficial ownership includes any shares as to which the individual
has sole or shared voting or investment power and also any shares which the
individual has the right to acquire within 60 days of the date hereof, through
the exercise or conversion of any stock option, convertible security, warrant or
other right. Including those shares in the tables does not, however, constitute
an admission that the named shareholder is a direct or indirect beneficial owner
of those shares. The table also presents the number of votes each person is
entitled to cast on any matter submitted to a vote of the holders of common
stock. Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that person's
spouse) with respect to all shares of capital stock listed as owned by that
person or entity. Unless otherwise indicated, the address of each of the
following persons is 560 Sylvan Avenue, Englewood, New Jersey 07632.
Common Stock Voting Power
Name Number Pct. Number Pct.
Michael Y. Brent 5,103,032 10.21% 5,103,032 10.21%
Derek Brent 1,120,234 2.24% 1,120,234 2.24%
Harold Kestenbaum 20,454 0.04% 20,454 0.04%
J. Lloyd Tomer 6,301,538 12.60% 6,301,538 12.60%
J. Scott Tomer 2,295,446 4.59% 2,295,446 4.59%
J. Kim Sorensen 2,319,245 4.64% 2,319,245 4.64%
All directors and
officers as a group 17,159,949 34.32% 17,159,949 34.32%
EXECUTIVE COMPENSATION
The following table summarizes the total compensation paid or to be paid by the
Company and its subsidiaries for services rendered during 2002, 2003 and 2004 to
the six most highly compensated executive officers and contract managers of the
Company or its subsidiaries (collectively, the "Specified Executives"). All
employees are paid a salary commensurate with their responsibility and position.
Certain officers and contract managers are paid a
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bonus (see chart below) based on our net income and such employee's contribution
thereto. The following table sets forth certain information regarding
compensation for the fiscal year ended December 31, 2003, and the two prior
years, earned by or paid to our current Chief Executive Officer, other executive
officers and directors (collectively the "Directors and Officers") and Ori
Klein, an independent contractor manager:
Directors and Officers Fiscal Year Salary Bonus Options
Michael Y. Brent 2004 $236,000 N/A 200,000
2003 $221,000 N/A 200,000
2002 $152,000 $54,000 200,000
Derek J. Brent 2004 $120,000 $N/A 100,000
2003 $46,000 $5,000 100,000
2002 $43,000 $3,000 100,000
Harold L. Kestenbaum 2004 $9,000 N/A 20,000
2003 $9,000 N/A 20,000
2002 $15,000 N/A 20,000
J. Lloyd Tomer 2004 $0 $0 0
2003 $0 $0 0
2002 $0 $0 0
J. Kim Sorensen 2004 $115,108 $0 0
2003 $90,430 $0 0
2002 $56,328 $0 0
J. Scott Tomer 2004 $116,793 $0 0
2003 $80,631 $0 0
2002 $45,800 $0 0
Employment Agreements
We have entered into a long-term employment agreement with each of
Mr. Michael Brent, Mr. J. Kim Sorensen, Mr. J. Scott Tomer and Mr. Derek Brent.
All employment agreements expire December 31, 2009 and subject each officer to
confidentiality provisions, as well as non-raid and non-compete provisions for
an additional two years following termination of employment.
Mr. Michael Brent receives a base annual salary of $240,000, increasing annually
in $12,000 increments. Once the override for Messrs. Sorensen and Tomer (as
discussed below) have resulted in their each receiving an additional $120,000 of
compensation, Mr. Brent receives an override on the RTA sales and monthly fees
generated by "representative position #1" of the YourTravelBiz.com sales
organization equal to 16.69% of the monthly commissions and overrides earned by
said position #1, paid monthly. Additionally, Mr. Brent receives a cash bonus
based on the net pre-tax income of the Company equal to 2% if net pre-tax income
is between $500,000 and $1,500,000, 2.25% if net pre-tax income is between
$1,500,000 and $3,000,000 and 2.5% if net pre-tax income is at least $3,000,000.
Mr. Brent receives a car allowance and health and medical insurance provided by
the Company. The Company has also taken out a term life insurance policy on the
life of Mr. Brent in an amount equal to three times his annual base salary,
payable to beneficiaries designated by him.
Each of Messrs. Sorensen and Tomer receives a base annual salary of $120,000,
increasing annually in $12,000 increments. They each receive an override on RTA
sales and monthly fees generated by "representative position 2" of the
yourtravelbiz.com sales organization equal to 50% of the monthly commissions and
overrides earned by such representative position 2, paid monthly, beginning the
month 10,000 RTAs are active. Once they have each received $120,000 in such
overrides, the override for Mr. Brent applies. Additionally, each of Messrs.
Sorensen and Tomer receives a cash bonus based on the net pre-tax income of the
Company equal to 2% if net pre-tax income is between $500,000 and $1,500,000,
2.25% if net pre-tax income is between $1,500,000 and $3,000,000 and 2.5% if net
pre-tax income is at least $3,000,000. They each receive a car allowance and
health and medical insurance provided by the Company. The Company has also taken
out a term life insurance policy on the lives of Messrs. Sorensen and Tomer in
an amount equal to three times their respective annual base salary, payable to
beneficiaries designated by each.
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Mr. Derek Brent receives a base annual salary of $120,000, increasing annually
in $12,000 increments. Additionally, Mr. Derek Brent receives a cash bonus based
on the net pre-tax income of the Company equal to 2% if net pre-tax income is
between $500,000 and $1,500,000, 2.25% if net pre-tax income is between
$1,500,000 and $3,000,000 and 2.5% if net pre-tax income is at least $3,000,000.
Mr. Brent receives a car allowance and health and medical insurance provided by
the Company.
Employees
We currently have 42 employees, none at parent level (with 12 in the REZconnect
Technologies operating division , 5 in the YTB Travel Network division and 25
employees in the YourTravelBiz.com division).
TRANSFER AGENT
Our transfer agent is American Stock Transfer and Trust Company, 59 Maiden Lane,
Plaza Level, New York, New York 10038.
INDEMNIFICATION
The Company's Certificate of Incorporation and the By-Laws provide for the
indemnification of its directors and officers under certain circumstances and
are incorporated herein by reference.
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
General
Our authorized securities consist of 50,000,000 shares of common stock and
5,000,000 shares of preferred stock. See "Capitalization" with regard to the
Company's capital structure. No preferred stock is outstanding and the common
shares are fully paid and non-assessable. The following outlines the rights of
the holders of common. This summary does not purport to be complete and is
qualified in all respects by the actual text all of the exhibits incorporated
here by reference. Please read these documents in their entirety before making a
decision to subscribe for shares offered by the designated selling shareholder.
Common Stock
VOTING RIGHTS. Holders of common stock are entitled to one vote per
share held of record on all matters to be voted on by the stockholders.
DIVIDENDS. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor, subject to the rights and
preferences of the holders of shares of our preferred stock, if any (of which
there are currently none outstanding).
LIQUIDATION PREFERENCE. In the event we liquidate, dissolve or wind- up, holders
of common stock are entitled to share ratably in all assets remaining after
payment of our liabilities and the liquidation preference, if any, of any then
outstanding shares of our preferred stock. Holders of common stock have no
preemptive rights and no rights to convert their common stock into any other
securities, and there are no redemption or sinking fund provisions with respect
to such shares. The rights, preferences and privileges of holders of common
stock are subject to, and may be materially adversely affected by, the rights of
the holders of shares of any series of our preferred stock or which the Board of
Directors may designate and issue in the future.
28
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock. None are
outstanding at this time. The Board of Directors has the authority to issue the
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of preferred stock, as well as to fix the number of shares constituting
any series and the designations of such series, without any further vote or
action by the stockholders. The Board of Directors, without stockholder
approval, may issue preferred stock with voting and conversion rights which
could materially adversely affect the voting power of the holders of common
stock. The issuance of preferred stock could also decrease the amount of
earnings and assets available for distribution to holders of common stock. In
addition, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company.
LEGAL MATTERS
Carl N. Duncan, Esq., Bethesda, Maryland, is acting as our
securities counsel in connection with this possible secondary offering by the
designated selling shareholder.
EXPERTS
The financial statements for the year ended December 31, 2004, included in this
Registration Statement associated with this
Prospectus has been audited by Dischino & Associates, independent certified
public accountants. Their report contains information regarding our ability to
continue as a going concern.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and, as a consequence, file reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Room of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. Such
material can also be obtained from the SEC's world wide web site at
http://www.sec.gov. our outstanding common shares, You can also obtain
information about us at our web site, www.etravnet.com.
This Prospectus constitutes part of a Registration Statement on Form SB2 filed
by us with the SEC under the Securities Act of 1933. This prospectus does not
contain all of the information set forth in the registration statement, parts of
which are omitted in accordance with the rules and regulations of the SEC. For
further information, reference is made to the registration statement.
INCORPORATION BY REFERENCE
We have incorporated by reference in this Prospectus the following documents
previously filed with the SEC:
29
Forms 8-K filed on December 14, 2004 and January 7, February 3 and 23, 2005
with respect to various material transactions.
The Securities and Exchange Commission has assigned file number 0-18412 to
reports and other information that we file with the SEC pursuant to the Exchange
Act . All documents subsequently filed by us pursuant to Sections 13(a), 13(c),
14 or 15(d) of such Act prior to the termination of any registered secondary
offerings will be deemed to be incorporated by reference in this Prospectus and
to be a part of this Prospectus from the date of filing of such documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference in this Prospectus shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained in this Prospectus, or in any subsequently filed document
which is incorporated or deemed to be incorporated by reference in this
Prospectus, modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus and information incorporated by reference.
We will provide without charge to each person, including any beneficial owner,
to whom a copy of this Prospectus is delivered, upon the written or oral request
of such person, a copy of any or all of the documents incorporated by reference
in this Prospectus, other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into such documents. Requests should
be addressed to:
YTB International, Inc.
Attn: Michael Y. Brent, CEO
560 Sylvan Avenue--Suite 300
Englewood Cliffs, New Jersey 07632
SUPPLEMENTAL DISCLOSURES
Committees of the Board of Directors
The Company will in the future establish an Audit Committee in accordance with
Section 3(a)(58)(A) of the Exchange Act that will be comprised of a majority of
"independent" directors as defined under pertinent securities rules. The Company
and YTB have, under the Shareholder Agreement described above, agreed that, at a
mutually determined future date, respectively shall name one new director (each
of whom will be independent as defined under pertinent securities standards),
and a third independent director will jointly be chosen by the other two
independent directors. Given the period time it is expected to take to complete
the associated due diligence and selection process, including agreement on the
third independent director agreed to be the other two, and given that the
Company is not currently subject to the Sarbanes Oxley Act requiring at least an
Audit Committee be comprised of a majority of independent directors, the Company
and YTB have elected to defer such search until at least until the Company has
obtained directors' and officers' liability coverage (which insurance is
currently out for bids).
Once put in place. the Audit Committee, among other things, will determine
engagement of the independent certified public accountants and review
30
the scope and effect of the audit engagement. Because the Company will
constitute a "controlled company" as defined under the Sarbanes-Oxley Act, the
Company is exempt from being required to create a Compensation Committee or
other committee(s) comprised of a majority of independent directors.
Report of the Board of Directors Regarding Audit Issues
Dischino & Associates has been selected as the Company's independent public
accountants and auditors for 2004, commencing in March 2004. The Board of
Directors has reviewed and discussed with management the Company's audited
consolidated financial statements as of and for the year ended December 31,
2004. The Board of Directors has also discussed with Dischino & Associates the
matters described in the Statement on Auditing Standards No. 61, Communication
with Audit Committees, as amended, as promulgated by the Auditing Standards
Board of the American Institute of Certified Public Accountants. The Board of
Directors has received and reviewed the written disclosures and the letter from
Dischino & Associates described in Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as amended, and has discussed
with Dischino & Associates their independence. Based on the reviews and
discussions described herein, the Board of Directors has included the audited
consolidated financial statements referred to above in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2004 filed with the
Securities and Exchange Commission (as was done in conjunction with the
Company's Annual report on Form 10-KSB for the year ended December 31, 2003
filed with the Securities and Exchange Commission).
Audit Fees
The aggregate fees billed in 2004 for professional services rendered for the
audit of (1) our annual financial statements for the year ending December 31,
2003 and (2) the reviews of our financial statements included in all Forms 10-Q
for 2004, were $17,500.
Financial Information Systems Design and Implementation Fees
The Company made no payments to Dischino & Associates in 2003 or 2004 for
professional services relating to financial information systems design and
implementation.
All Other Fees
The aggregate fees billed in 2004 for services rendered by Dischino &
Associates, other than the services described in this Information Statement
under the headings "Audit Fees" and "Financial Information Systems Design and
Implementation Fees" above, were approximately $17,500. These fees relate
primarily to tax consulting services. The Board of Directors considers the
provision of these services to be compatible with maintaining the independence
of Dischino & Associates.
Section 16(a) of the Exchange Act requires that officers and directors, and
persons who beneficially own more than 10 percent of a registered class of
equity securities of the Company, file certain reports of ownership and changes
in ownership with the SEC. Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms received by us, or representations obtained from certain reporting
persons, we believe that all filings applicable to the officers, directors and
greater than 10 percent beneficial stockholders of the Company are current.
REZCONNECT TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
REZCONNECT TECHNOLOGIES, INC.
TABLE OF CONTENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Page(s)
-------
Independent Auditors' Report F1
Financial Statements (Audited)
Balance Sheets F2
Statements of Operations F3
Statements of Changes in Stockholders' Equity F4
Statements of Cash Flows F5
Notes to Financial Statements F6 - F22
Supplementary Schedules of General and Administrative Expenses F23
Pro Forma Financial Information (Unaudited)
Introduction to Pro Forma Consolidated Financial Statements F24
Pro Forma Consolidated Statement of Operations - 2004 F25
Pro Forma Consolidated Statement of Operations - 2003 F26
Notes to Pro Forma Consolidated Financial Statements F27 - F30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Rezconnect Technologies, Inc.
Englewood Cliffs, New Jersey
We have audited the accompanying balance sheets of Rezconnect Technologies, Inc.
as of December 31, 2004 and 2003, and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 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 Rezconnect Technologies, Inc.
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information on page 22
is presented for purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits 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.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
Fairfield, New Jersey
May 31, 2005
(F1)
REZCONNECT TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(NOTE 12)
ASSETS
2004 2003
------------ ------------
CURRENT ASSETS
Cash ............................................................ $ 25,449 $ 62,718
Available-for-sale securities ................................... 528,311 732,135
Current portion of notes receivable ............................. 24,240 112,490
Accounts receivable (less allowance for doubtful
accounts of $65,009 in 2004 and $4,061 in 2003) ............. 383,033 255,244
Current portion of prepaid commissions .......................... 1,716,958 --
Loans receivable ................................................ 122,195 --
Other current assets ............................................ 15,312 --
------------ ------------
TOTAL CURRENT ASSETS .................................................. 2,815,498 1,162,587
PROPERTY AND EQUIPMENT (NET) .......................................... 73,121 --
INTANGIBLE ASSETS (NET) ............................................... 6,458,333 --
GOODWILL .............................................................. 9,436,118 --
OTHER ASSETS
Capitalized software costs (less accumulated amortization
of $105,222 in 2004 and $54,557 in 2003) ..................... 79,514 72,469
Notes receivable, less current portion .......................... 137,360 637,444
Prepaid commissions, less current portion ....................... 1,845,936 --
Security deposits and other assets .............................. 10,460 13,133
------------ ------------
TOTAL OTHER ASSETS .................................................... 2,073,270 723,046
------------ ------------
TOTAL ASSETS .......................................................... $ 20,856,340 $ 1,885,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt ............................ $ 19,532 $ 20,368
Short-term notes payable ........................................ 202,342 --
Accounts payable and accrued expenses ........................... 743,743 105,776
Current portion of deferred revenue ............................. 1,737,984 112,490
------------ ------------
TOTAL CURRENT LIABILITIES ............................................. 2,703,601 238,634
OTHER LIABILITIES
Long-term debt, less current maturities ......................... 283,221 300,802
Deferred revenue, less current portion .......................... 1,956,324 632,862
Security deposits ............................................... 20,920 26,266
------------ ------------
TOTAL OTHER LIABILITIES ............................................... 2,260,465 959,930
------------ ------------
TOTAL LIABILITIES ..................................................... 4,964,066 1,198,564
STOCKHOLDERS' EQUITY
Preferred stock- Series B convertible, par value $.001; 5,000,000
shares authorized, 4,092,376 shares issued and outstanding .. 4,092 --
Common stock, par value $.001; 20,000,000 shares authorized,
18,976,125 and 10,879,983 shares issued and outstanding ..... 18,976 10,880
Additional paid-in capital in excess of par ..................... 22,055,712 6,574,385
Accumulated deficit ............................................. (6,186,506) (5,898,196)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................................ 15,892,274 687,069
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 20,856,340 $ 1,885,633
============ ============
See independent auditors' report and notes to financial statements
(F2)
REZCONNECT TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(NOTE 12)
2004 2003
------------ ------------
REVENUE
Franchise fees ........................... $ 97,506 $ 115,280
Franchise service and other fees ......... 716,801 569,545
Travel products and services ............. 2,056,617 1,346,930
Online travel income ..................... 507,508 282,471
Advertising and other .................... 2,571 85,862
New RTA sales ............................ 84,656 --
Monthly maintenance fees ................. 248,092 --
Printing and administrative service fees . 54,569 --
------------ ------------
GROSS REVENUE .................................. 3,768,320 2,400,088
LESS: RETURNS AND ALLOWANCES ................... 29,810 --
------------ ------------
NET REVENUE .................................... 3,738,510 2,400,088
OPERATING EXPENSES
Commissions .............................. 1,521,145 906,235
Cost of travel services and products ..... 930,519 526,141
Depreciation and amortization ............ 86,169 376,486
Franchise services and products .......... 153,035 --
Marketing and selling .................... 103,418 31,535
General and administrative ............... 1,237,906 884,076
Impairment of capitalized software costs . -- 783,207
------------ ------------
TOTAL OPERATING EXPENSES ....................... 4,032,192 3,507,680
------------ ------------
LOSS FROM OPERATIONS ........................... (293,682) (1,107,592)
OTHER INCOME (EXPENSES)
Loss from sales of short-term investments (8,458) (14,113)
Interest and dividend income ............. 38,096 18,225
Interest expense ......................... (22,596) (1,885)
------------ ------------
TOTAL OTHER INCOME ............................. 7,042 2,227
------------ ------------
LOSS BEFORE INCOME TAXES ....................... (286,640) (1,105,365)
INCOME TAXES ................................... 1,670 2,118
------------ ------------
NET LOSS ....................................... $ (288,310) $ (1,107,483)
============ ============
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ..... $ (288,310) $ (1,107,483)
============ ============
LOSS PER SHARE:
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 11,867,842 9,912,983
============ ============
BASIC AND DILUTED LOSS PER SHARE ......... $ (0.02) $ (0.11)
============ ============
See independent auditors' report and notes to financial statements
(F3)
REZCONNECT TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
(NOTE 12)
Series B Convertible Additional Total
Preferred Stock Common Stock Paid-In Accumulated Stockholders'
----------------------- --------------------------
Shares Amount Shares Amount Capital Deficit Equity
----------- -------- ------------ ----------- ------------ ------------ -----------
BALANCE AT JANUARY 1, 2003 - $ - 9,362,983 $ 9,362 $ 6,198,963 $ (4,655,773) $ 1,552,552
COMMON SHARES ISSUED
FOR SERVICES - - 1,100,000 1,100 40,900 - 242,000
NET LOSS - - - - - (1,107,483) (1,107,483)
----------- --------- ------------ ----------- ------------ ------------ --------------
BALANCE AT DECEMBER 31, 2003
(AS ORIGINALLY REPORTED) - - 10,462,983 10,462 6,439,863 (5,763,256) 687,069
PRIOR PERIOD ADJUSTMENT - - 417,000 418 134,522 (134,940) -
----------- --------- ------------ ----------- ------------ ------------ --------------
BALANCE AT DECEMBER 31, 2003
(AS RESTATED) - - 10,879,983 10,880 6,574,385 (5,898,196) 687,069
COMMON SHARES ISSUED
FOR SERVICES - - 166,142 166 121,504 - 121,670
ISSUANCE OF COMMON SHARES
TO OFFICERS - - 500,000 500 113,900 - 114,400
SHARES EXCHANGED IN MERGER
WITH YOURTRAVELBIZ.COM, INC. 4,092,376 4,092 7,430,000 7,430 15,245,923 - 15,257,445
NET LOSS - - - - - (288,310) (288,310)
----------- --------- ------------ ----------- ------------ ------------ --------------
BALANCE AT DECEMBER 31, 2004 4,092,376 $ 4,092 18,976,125 $ 18,976 $ 22,055,712 $ (6,186,506) $ 15,892,274
=========== ========= ============ =========== ============ ============ ==============
See independent auditors' report and notes to financial statements
(F4)
REZCONNECT TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(NOTE 12)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................... $ (288,310) $(1,107,483)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization ........................ 86,169 376,486
Impairment of capitalized software costs ............. -- 783,207
Common shares issued for services .................... -- 242,000
Provision for losses on accounts receivable .......... 60,948 --
Loss from sales of short-term investments ............ 8,458 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ....... (188,737) 15,562
Increase in other current assets ................. (15,312) --
Increase in security deposits and other assets ... (2,673) (8,181)
Increase in accounts payable and accrued expenses 87,414 24,163
Increase (decrease) in revenue received in advance (613,938) 228,430
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ............... (865,981) 554,184
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of computer software ....................... (35,947) (297,827)
Principal payments received on notes and loans ....... 316,139 --
Proceeds from sales of short-term investments ........ 554,804 --
Investments in marketable securities ................. (359,438) (20,615)
Loans to franchisees ................................. -- (233,012)
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............... 475,558 (551,454)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ............. 117,084 --
Proceeds from issuance of common stock ............... 666 --
Contributions to capital ............................. 235,404 --
Principal payments on debt ........................... -- (3,330)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............... 353,154 (3,330)
----------- -----------
NET DECREASE IN CASH ........................................... (37,269) (600)
CASH, BEGINNING OF YEAR ........................................ 62,718 63,318
----------- -----------
CASH, END OF YEAR .............................................. $ 25,449 $ 62,718
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid during the year .................................. $ 22,596 $ --
Supplemental schedule of noncash investing and financing activities:
The Company acquired all of the common stock of YourTravelBiz.com, Inc. in
exchange for capital stock valued at $15,257,445. The fair value of the
identifiable assets acquired totaled $15,062,169 and liabilities of $760,891
were assumed.
See independent auditors' report and notes to financial statements
(F5)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - NATURE OF OPERATIONS
Rezconnect Technologies, Inc. (the "Company") was incorporated in the State of
New York on December 4, 1981 under the original name of Playorena, Inc. The
Company is a franchisor of traditional "brick and mortar" travel agencies as
well as internet-based travel-related services and technology offering
proprietary reservation systems for the travel and entertainment industry. The
Company is also a full-service provider of discount travel products and services
to the leisure and small business traveler. The Company operates under various
trade names, including "Your Travel Biz", "YTBnet.com", "Travel Network",
"Global Travel Network" and "Travel Network Vacation Central", as well as
internet websites "Bookmytravel.com", "REZconnect.com" and "RezCity.com". The
Company maintains its corporate headquarters in the State of New Jersey and
currently provides services to customers located throughout the United States,
with the expectation of doing business worldwide in 2005.
On December 8, 2004, the Company acquired 100% of the outstanding common shares
from the stockholders of YourTravelBiz.com, Inc. ("YTB"), following requisite
approval by the Boards of Directors and stockholders, in a business combination
structured as a statutory merger under New York State law and the reorganization
provisions of the Internal Revenue Code. This acquisition, recorded at a total
value of $15,257,445, was effected through an exchange of equity interests, with
the Company exchanging 7,430,000 shares of its common stock and 4,092,376 shares
of its Series B convertible preferred stock for all of the outstanding common
stock of YTB (see Note 11). Each share of such Series B convertible preferred
stock was converted into one share of common stock on January 9, 2005 following
the re-incorporation of the Company and corresponding increase in its number of
authorized shares, as described below.
On January 4, 2005, subsequent to the New York merger between the Company and
YTB, the assets of this combined entity were assigned respectively to three
newly-organized privately-held Delaware corporations, respectively
YourTravelBiz.com, Inc., Rezconnect Technologies, Inc. and YTB Travel Network,
Inc., with each new entity becoming a wholly-owned subsidiary of the Company on
that date.
Further, on January 4, 2005 the Company re-incorporated in the State of Delaware
by means of a "downstream merger" between the Company and a Delaware corporation
named YTB International, Inc. The Company then changed its name to YTB
International, Inc. and increased the number of its authorized common shares to
50,000,000, while maintaining the same 5,000,000 authorized preferred shares. As
a consequence of this Delaware merger and associated re-incorporation, YTB
International, Inc. became the successor to the Company and to the Company's
three subsidiaries, YourTravelBiz.com, Inc. (Delaware), Rezconnect Technologies,
Inc. (Delaware), and YTB Travel Network, Inc. (Delaware), with each subsidiary
becoming a wholly-owned subsidiary of YTB International, Inc. on January 4,
2005.
See independent auditors' report
(F6)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - NATURE OF OPERATIONS (CONTINUED)
Each of the three aforementioned operating subsidiaries was formed to divide the
Company's operations into three basic divisions. The YourTravelBiz.com, Inc.
subsidiary markets online travel agencies on behalf of YTB Travel Network, Inc.
by use of sales representatives. Such allows the representatives to build a
linked-by-sponsorship network of representatives. The Rezconnect Technologies,
Inc. subsidiary owns, maintains and develops online and other booking
technologies for suppliers within the travel industry. It also franchises brick
and mortar travel agencies. The YTB Travel Network, Inc. subsidiary is a travel
agency which books travel transactions, collects payments and licensing fees,
and pays sales commissions.
All of the Company's franchised operations are independently owned and operated.
All sales of travel products by the Company are made through its independent
agencies and franchisees, or through its interactive websites. Operational
expenses consist of franchise system sales and support personnel, executive
management and minimal administrative personnel.
The Company is also engaged in the business of wholesale travel, providing
products and services to its franchisees which are obtained from tour operators
and cruise lines, and operates as a retail travel agency through its booking
subsidiary (Rezconnect), as described in greater detail above.
The Company had signed an exclusive 20-year management agreement with YTB in
2002 to provide travel website hosting to YTB. Upon its acquisition of YTB, the
contract language was modified to eliminate the 20-year exclusivity clause. No
other contract terms or clauses changed as a result of the merger. Fees remain
billable as per the original terms of the agreement and are recorded as
intercompany transactions.
In recent years, the Company began shifting its operations away from franchising
in order to concentrate on developing its internet travel agency business. The
Company's investments in software and technology are directed towards the
enhancement of its online travel agency.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial statements include the income and expense account activity of
YourTravelBiz.com, Inc. from the date of acquisition (December 8, 2004) to
December 31, 2004 (see Notes 1 and 12).
Basis of accounting
The financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, using the accrual method. Accordingly, revenues
are recorded in the period in which they are earned and expenses are recorded in
the period in which they are incurred.
Cash and cash equivalents
Cash and cash equivalents include all highly-liquid investments with original
maturities of three months or less when purchased.
See independent auditors' report
(F7)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include those related to the recoverability of capitalized software
costs and receivables generated from advertising sales.
Revenue recognition
Franchise fees
Payment of an initial franchise fee is due upon the execution of a franchise
agreement with the franchisee. Such franchise fee is assessed for the right of
the franchisee to conduct business by the use of resources provided by the
Company. Payment may be in the form of cash, notes or a combination thereof.
Revenue is deferred until all material conditions prior to the opening of a
franchised business have been satisfied and all substantial doubts of
collectibility have been eliminated, which is generally upon the receipt of
payment. Such conditions include the selection of a site location by the
franchisee and the subsequent execution of a corresponding lease agreement. The
associated rights of customers and the Company's obligations over the period of
the relationship are described in detail in the master franchise agreement.
Additionally, fees paid are non-refundable once a site location has been
selected.
In addition, referring travel agents ("RTAs") purchase business opportunities
from YTB Travel Network, Inc. Each new RTA pays an initial up-front fee, plus a
monthly fee thereafter, so long as the RTA remains in the system. The aggregate
business license and opportunity fee revenues generated from RTAs, both
initially and ongoing, far exceed the revenues generated from the Rezconnect
brick and mortar franchises. For more detail, see the description of same in
Note 1.
Travel products and services
Commissions earned from the sales of travel products and services are recognized
when earned. Revenues earned from all other sales of travel and related
products, where the Company is the credit card merchant of record, are recorded
when earned at their aggregate retail value. Cancellations have not historically
been material.
Advertising and other
Advertising revenue, franchise service fees and other revenues are recognized as
they become due and payable. "Other" revenue consists primarily of
travel-related income from the operation of the Company's retail travel service,
in addition to certain earned commissions.
Online travel income
Online travel income is recognized when earned. Income is recorded on a monthly
basis based on the number of websites hosted.
See independent auditors' report
(F8)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition (continued)
Referring Travel Agent (RTA) sales and fees
YourTravelBiz.com, Inc., the entity acquired by the Company on December 8, 2004,
generates revenue from the selling of online travel agencies, and from providing
maintenance and training services to the new business owners of such online
travel agencies. These online revenues are generated from new RTA sales and
existing RTA maintenance fees. An initial up-front sign-up fee, comprised of
four separate components, is required of each new RTA. However, not one of the
fee components (namely, for the preparation and delivery of training materials;
the establishment of a website; the setup in the online system that permits
immediate tracking of RTA revenue; and also residual RTA benefits) has a
standalone value or represents the culmination of a separate earnings process.
As such, and in accordance with Staff Accounting Bulletin No. 104 (SAB 104) of
the U.S. Securities and Exchange Commission, and with Issue No. 00-21 of the
Emerging Issues Task Force, a committee established by the Financial Accounting
Standards Board (FASB), the recognition of all up-front fees received from new
RTA sales is deferred. Such fees are recognized as income over a period of
thirty-six months, which is the average historical RTA turnover rate. The
current and noncurrent deferred portions of such fees received are reflected as
liabilities in the accompanying balance sheets. A 3-day right-of-return period
is extended to each new RTA; after such time no refund is available. Monthly
hosting and service fees are recognized in the month after the services are
provided; site fees are recognized as revenue in the month that the service is
provided; license fees are recognized 30 days following the expiration of the
license period. The associated rights of customers and obligations of YTB over
the period of the relationship are described in detail in the master franchise
agreement.
Commission income
Commissions and incentives earned from travel sales are recognized upon receipt
and are recorded on a net basis. Commissions earned where the Company acts in
the capacity of a wholesaler are recorded at their gross amount. The cost of
such revenue is recorded separately as an operating expense.
Expense recognition of commission costs
YTB incurs commission costs that are directly related to the origination of new
RTA sales; sales which result in the deferral of revenue. Such incremental
direct commission costs are capitalized in accordance with FASB Technical
Bulletin No. 90-1 (FTB 90-1). In addition, the Company has elected to account
for such commission costs in accordance with SAB 104 and FTB 90-1, by deferring
and charging such costs to expense in proportion to the related revenue
recognized, over the same deferral period of thirty-six months.
Concentration of credit risk
The Company is subject to credit risk through its cash, trade receivables,
short-term investments and notes receivable. The Company maintains its cash
deposits in accounts insured up to $100,000 by the Federal Deposit Insurance
Corporation. Credit risk with respect to trade receivables is minimized due to
the nature of its customer base and geographic dispersion of such customers.
Short-term investments are placed in a highly-rated mutual bond fund to minimize
credit risk. As of December 31, 2004 and 2003, the Company's uninsured
investment value totaled $428,311 and $632,135, respectively.
See independent auditors' report
(F9)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, equipment and depreciation
Property and equipment is stated at cost and is depreciated over the estimated
useful lives of the related assets. Depreciation is computed by use of
straight-line and accelerated methods for both reporting and income tax
purposes. Expenditures for maintenance and repairs are expensed as incurred,
while renewals and improvements that extend the useful life of an asset are
capitalized.
Investments in marketable securities
The Company has adopted FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires certain investments
to be classified into the following three categories: held-to-maturity (recorded
at amortized cost), available-for-sale (recorded at fair market value), and
trading (recorded at fair market value). The Company classifies its marketable
equity securities as "available-for-sale" securities in the current asset
section of its balance sheet. Realized gains and losses, determined by use of
the first-in, first-out (FIFO) method, are included in earnings; unrealized
holding gains and losses are reported as a component of stockholders' equity,
included in accumulated other comprehensive income.
Goodwill and other intangible assets
Goodwill, which is the excess of cost over the fair value of net assets
(including identifiable intangibles) acquired in a business acquisition, is
stated at historical cost less accumulated amortization. Goodwill had been
amortized on a straight-line basis over a five-year period until the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets", on January 1, 2002.
Pursuant to this financial accounting standard, amortization of goodwill has
been discontinued for financial accounting reporting purposes, but is instead
tested for impairment on an annual basis. With respect to recognized intangible
assets other than goodwill, such assets with finite useful lives are amortized
over their useful lives, while assets with indefinite useful lives are not
amortized. All intangible assets are likewise tested for impairment on an annual
basis.
Advertising costs
Pursuant to the provisions of Statement of Position ("SOP") No. 93-7 issued by
the American Institute of Certified Public Accountants, the Company expenses
advertising costs as incurred.
Adoption of other accounting pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 supersedes the accounting and reporting requirements under APB Opinion No.
16, "Business Combinations", by requiring that only the "purchase method" be
used to account for business combinations. More specifically, SFAS No. 141
discusses the application of the purchase method as it relates to a business
combination effected through an exchange of equity interests. Accordingly, the
provisions of SFAS No. 141 have been adopted and employed by the Company in
connection with its merger with YourTravelBiz.com, Inc. on December 8, 2004, as
described in Note 1.
See independent auditors' report
(F10)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of other accounting pronouncements (continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" - an Interpretation of ARB No. 51" ("FIN 46"), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPEs) to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date, and applies in the first fiscal
year or interim period beginning after September 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 is not expected to have a
material impact on the results of operations or financial position of the
Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts modified or entered into after
September 30, 2003, and for hedging relationships designed after September 30,
2003. The Company does not believe that the adoption of SFAS No. 149 will have a
material impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
entities to classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 was effective
beginning with the second quarter of fiscal year 2004; the Company does not
believe that the adoption of SFAS No. 150 will have a material impact on its
financial statements.
Accounts and notes receivable
The Company reflects both accounts and notes receivable at their outstanding
principal balances as of the balance sheet date, as adjusted by any charge-offs
or allowances established as a reserve for potentially uncollectible accounts.
In 2004 the Company recorded an allowance against its notes receivable balances
due from franchisees. During the year ended December 31, 2004, the Company
reported an additional $44,543 of notes receivable from new franchisees.
Comprehensive income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income and its components, when the amount of such comprehensive
income is considered to be material.
See independent auditors' report
(F11)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Profit-sharing plan
The Company sponsors a profit-sharing plan, which is a defined contribution
pension plan, for all eligible employees. All employees who have completed 1,000
hours of service during the plan year may participate. Contributions are accrued
and paid out of the Company's current profits at the discretion of the Company's
Board of Directors. Employees may make voluntary contributions, subject to
statutory limitations. The Company elected not to make any plan contributions
for the years ended December 31, 2004 and 2003.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) requires that companies with stock-based compensation
plans recognize compensation expense based on the "fair value" accounting
method, or to apply the "intrinsic value" method provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees", and to disclose pro forma net income assuming the fair value method
had been applied.
The Company has elected to adopt the disclosure-only provisions of SFAS 123 and,
accordingly, computes compensation expense for employees as prescribed by APB
25. Under APB 25, compensation cost, if any, is measured as the excess of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. For stock options granted to
non-employees, expense is measured based upon the fair value method prescribed
by SFAS 123.
During 2004, the Company issued 900,000 shares of common stock as additional
compensation to its Chief Financial Officer ("CFO"), to cover the shortfall
between actual salary paid to the CFO and the agreed-upon compensation amount,
pursuant to an employment agreement between the CFO and the Company. Such stock
compensation covered periods served during the years 2001 through 2004. Of the
900,000 shares issued, 500,000 of which (valued at $50,400), were issued to
compensate the CFO for services rendered in 2004. The remaining 400,000 shares
pertained to services rendered in years 2001 through 2003, valued at $67,200 in
each of those years.
Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted-average number of
common shares outstanding. Diluted earnings (loss) per share assumes that
outstanding common shares are increased by common shares issuable upon the
exercise of stock options and warrants, and by the conversion of preferred
stock, where such exercise or conversion would be dilutive. For the years ended
December 31, 2004 and 2003, the effects any assumed exercise of stock options
and warrants on the 2004 and 2003 loss per share would be anti-dilutive and,
therefore, are not included in the calculation of the Company's basic loss per
share for the years ended December 31, 2004 and 2003.
See independent auditors' report
(F12)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (loss) per share (continued)
However, the 4,092,376 shares of the Company's Series B convertible preferred
stock that were issued on December 8, 2004 (and subsequently converted into
common shares on January 9, 2005) were considered to be common stock equivalents
on the date of original issuance. Accordingly, all 4,092,376 shares of the
Company's Series B convertible preferred stock have been included in the
calculation of the Company's loss per common share for the year ended December
31, 2004.
Marketing compensation plan
YTB offers a compensation plan to its sales representatives under an arrangement
that pays the representatives direct sales commissions, override compensation
(if qualified) and other bonus incentives based upon the amount of each
representative's sales, or enrolled referrals. Direct sales commissions are paid
on a weekly basis, based upon the amount of the previous week's sales. Residual
commissions are paid on a monthly basis for active representatives, following
the month earned. Bonuses are earned by maintaining a minimum number of personal
enrollments. Commission costs are capitalized and recognized as expense in
proportion to the related revenue recognized, over a period of thirty-six
months.
Capitalized software costs
Pursuant to SOP 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use", the Company capitalizes certain costs incurred
during an internal use software development project, including costs related to
applications, infrastructure, and graphics development for the Company's
websites. Capitalized costs consist of the cost of the software license
agreement (Note 3), and certain external direct costs of materials and licensor
provided services incurred in developing the software for its specific
applications. Capitalized software costs are being amortized over their expected
useful life of thirty-six months.
NOTE 3 - SOFTWARE LICENSE AGREEMENT AND DEVELOPMENT COSTS
During 2004, the Company acquired a software license right to conduct its online
franchise business. The total cost of this software license right was $45,000.
The Company has been given the option to make installment payments of $9,000 per
year for five years. The cost of this software license will be amortized through
its five-year life. During August 2004, the Company acquired a new software
right in the amount of $3,612. The cost of this software right will be amortized
over its expected useful life of thirty-six months.
NOTE 4 - LONG-TERM DEBT
On January 11, 2002, as a result of the events of September 11, 2001, the
Company borrowed $324,500 from the United States Small Business Administration
("SBA") under its disaster relief program. Payments were to have initially
commenced in January 2003. However, the SBA extended the commencement date into
November 2003. The loan is repayable via a monthly installment of $2,607,
including interest at 4% per annum, through October 2017. The loan is personally
guaranteed by the Company's chief executive officer and is collateralized by the
accounts receivable and property and equipment of the Company. The outstanding
loan balance as of December 31, 2004 and 2003 was $302,753 and $321,170,
respectively.
See independent auditors' report
(F13)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 4 - LONG-TERM DEBT (CONTINUED)
Minimum principal payments of long-term debt as of December 31, 2004 are as
follows:
Year ending
December 31, Amount
------------ ------
2005 $ 19,532
2006 20,328
2007 21,156
2008 22,018
2009 22,915
Thereafter 196,804
-------
Total $ 302,753
=======
NOTE 5 - SHORT-TERM OBLIGATIONS
The Company assumed the following short-term debt upon the acquisition of its
acquired entity on December 8, 2004:
--------------------------------------------------------------- -------------
6.25% promissory note in connection with vehicle
purchase. Interest and principal are payable in
monthly installments of $1,000 for 12 months,
due February 28, 2005. $ 44,254
--------------------------------------------------------------- -------------
6.25% promissory note in connection with vehicle
purchase. Interest and principal are payable
in monthly installments of $1,000 for 12 months,
due March 4, 2005. 58,088
-------
--------------------------------------------------------------- -------------
--------------------------------------------------------------- -------------
Total $ 102,342
=======
--------------------------------------------------------------- -------------
Other Short-term Debt
During December 2004, the Company ratified an agreement with an investor to
raise $100,000 of additional capital stock through a private placement
memorandum ("PPM") which took place during February 2005. The investor has paid
upfront for this PPM offering. The Company, therefore, incurred a liability due
to this investor in the amount of $100,000 as of December 31, 2004. The note
will be due upon the completion of PPM and contains no stated interest.
See independent auditors' report
(F14)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under an operating office lease, renewed in 2003 and
extended until April 30, 2008, to pay minimum annual rentals, currently at
$44,000 per year plus real estate taxes and operating cost charges.
In addition, the Company has entered into various operating lease agreements
with Wal-Mart Stores, Inc. (Wal-Mart) for eight locations pursuant to a master
lease agreement. The Company has also entered into sub-lease agreements with
franchisees at many of these Wal-Mart locations. The Company has an option to
renew both the leases with Wal-Mart and the subleases with the franchisees for a
two-year period and, additionally, for three one-year periods.
Following is a summary of net rental income (expense) for the years ended
December 31, 2004 and 2003:
2004 2003
------- -------
Sublease rental income $ 160,863 $ 222,646
Less: minimum rental expense 138,565 248,160
------- -------
Net rental income (expense) $ 22,298 $ (25,514)
======== ========
Minimum future rental payments under non-cancelable operating leases (including
the Wal-Mart location leases), having remaining terms in excess of one year as
of December 31, 2004 are as follows:
The minimum future rental obligation will be reduced by approximately $12,323 of
monthly sublease rentals to be received in the future under non-cancelable
subleases.
Other Lease
The Company assumed a lease of its acquiree for copy machines under
non-cancelable operating leases expiring in various years through 2006. Future
minimum payments under such leases in excess of one year are approximated as
follows:
See independent auditors' report
(F15)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Lease (continued)
-----------------------
Year ending
December 31, Amount
------------ ------
2005 $ 7,914
2006 7,914
------
Total $ 15,828
======
Legal Proceedings
The Company is involved in legal proceedings incurred in the normal course of
business. In the opinion of the Company's legal counsel, there were no
proceedings as of December 31, 2004 or 2003 where the results of which would
have a material effect on the financial position of the Company if adversely
decided.
Employment Agreement
During 2000, the Company entered into a five-year employment agreement with its
Chief Executive Officer ("CEO"). Pursuant to this agreement, the CEO is paid an
annual base salary of $200,000, with an increase of 6% per year, plus a bonus
incentive equal to 10% of all initial franchise fees earned by the Company. This
agreement was cancelled upon the Company's merger with YTB on December 8, 2004
(see Note 1), at such time a new five-year employment agreement with the CEO was
executed (see Note 14). According to the new agreement, the CEO is paid an
annual base salary of $240,000, with an increase of 6% per year. In addition,
the agreement provides the CEO with certain rights in the event of a change in
control of the Company.
Contingencies
During December 2004, the Company entered into an agreement with an investor to
raise an additional $2,000,000 of capital with a condition to subordinate its
SBA loan of approximately $300,000 to YTB. Such loan was executed and
subordinated on February 7, 2005. The Company is contingently liable under the
terms of this agreement for the approximate maximum amount of $278,000 in 2005
if the quoted market price of its stock falls below a specified minimum amount.
Such maximum contingent liability would approximate $667,000 per year in years
2006 and beyond, should such stock price fall below the specified minimum.
See independent auditors' report
(F16)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 7 - STOCK OPTIONS
The number of stock options outstanding as of December 31, 2004 and 2003 was
475,000, with a weighted-average exercise price of $1.08. No options were
granted, exercised, forfeited or canceled during the years ended December 31,
2004 or 2003.
A summary of stock options outstanding and exercisable as of December 31, 2004
are as follows:
-------- ------------ -------------- --------------- ------------ --------------
Options Outstanding Options Exercisable
-------- ------------ -------------- --------------- ------------ --------------
Weighted- Weighted- Weighted-
Exercise Number Average Average Number Average
Price Outstanding Remaining Life Exercise Price Exercisable Exercise Price
-------- ------------ -------------- --------------- ------------ --------------
-------- ------------ -------------- --------------- ------------ --------------
$1.00 410,000 5 Years $1.00 351,000 $1.00
-------- ------------ -------------- --------------- ------------ --------------
$2.00 65,000 5 Years $2.00 45,000 $2.00
-------- ------------ -------------- --------------- ------------ --------------
The fair value of the options granted for the year ended December 31, 2004 was
estimated using the Black-Scholes option pricing model based on the following
weighted-average assumptions:
Merger-related items
Former members of a limited liability company that was a predecessor to the
Company were previously entitled to preferential distributions of $258,000. The
Company issued approximately 1,172,000 shares of its common stock in April 2003
in payment of these preferential distributions.
NOTE 8 - INCOME TAXES
As a result of the Company's operating losses in 2004 and 2003, and loss
carryforwards available in 2004, there is no provision for current income taxes.
In addition, Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, requires a valuation allowance to reduce any deferred tax assets
to their net realizable amounts if, based on the weight of evidence, it is more
likely than not that all or some portion of such deferred tax assets will not be
realized. As of December 31, 2004 and 2003, the Company is uncertain if it will
realize any future tax benefit of its deferred tax assets. Accordingly, a full
valuation allowance has been established as a reserve against the Company's
deferred tax assets and, therefore, no deferred income tax credits have been
recognized in the statements of operations for the years ended December 31, 2004
and 2003.
See independent auditors' report
(F17)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 9 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003, the Company incurred
consulting fee expenses for services provided by an entity owned by the
Company's chief executive officer, a significant shareholder of the Company.
These fees totaled approximately $23,000 and $60,000 for the year ended December
31, 2004 and 2003. Under a new employment agreement reached in December 2004,
such consulting fees have been eliminated.
NOTE 10 - SEGMENT INFORMATION
The Company operates in the following three business segments: providing and
selling management services within the travel industry, including franchising
activities; developing and commercializing internet-based technology programs;
and online travel store services. Although the Company operates franchises in
eight foreign countries, revenue is generated from just three of the countries.
Such revenue generated from these three foreign countries amounts to an
insignificant and immaterial portion of the overall total revenue of the
Company. Accordingly, Company management considers it impracticable to report
such geographic information.
Summarized financial information concerning the Company's reportable segments is
shown in the following tables. The "other" column includes corporate items not
specifically allocated to the segments.
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 11 - BUSINESS COMBINATION
As described more fully in Note 1, a business combination structured as a
statutory merger took place between the Company and YourTravelBiz.com, Inc.
("YTB") on December 8, 2004. This merger was accounted for by the Company under
the "purchase method", as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations. In exchange for all of the
outstanding common stock of YTB, the Company issued common stock (valued at
$9,838,493) and Series B convertible preferred stock (valued at $5,418,952), or
a total value of $15,257,445, to the stockholders of YTB. The total cost of this
acquisition was allocated based upon the estimated fair values of the
identifiable assets acquired and the fair values of the liabilities assumed at
the date of acquisition. The recorded cost of the acquisition was based mainly
on the number of sales representatives on hand at the time of contract
negotiations during August 2004; financial projections of YTB, prepared and
provided by YTB management; and on the estimated value of the Company's software
development regarding two franchise systems, in addition to other intangible
assets.
The total cost of this acquisition exceeded the fair value of the net assets
acquired and liabilities assumed by $9,436,118, which was recorded as
"goodwill". In accordance with SFAS No. 142, goodwill resulting from this
acquisition has been recognized, but will not be amortized. This value
representing goodwill will instead be tested for impairment on an annual basis.
Following is a summary of the allocated cost of the Company's acquisition of
YTB:
Asset
(Liability)
-----------
Property and equipment $ 73,121
Computer software 9,097
Intangible assets (other than goodwill) 6,500,000
Goodwill 9,436,118
Short-term debt (102,342)
Accounts payable and accrued expenses (658,549)
-------------
Net assets acquired $ 15,257,445
==========
Management's primary reasons for acquiring YTB include the long-lasting business
relationship between the two companies, with YTB being the primary customer of
the Company. Other factors include management's belief that there is a larger
growth potential as a combined company than as separate entities, among other
reasons because of the referral marketing component that marketing contributes.
More specifically, the merger is expected to increase travel market share in the
retail sale of travel and travel-related services, a development that is
unlikely using the prior brick and mortar agency business model. By acquiring
marketing and combining the respective existing travel agency businesses of YTB
and the Company, the merged entity provides both a new source of travel booking
agencies plus an additional revenue source in the initial and ongoing monthly
fees paid by the RTAs..
See independent auditors' report
(F19)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 11 - BUSINESS COMBINATION (CONTINUED)
The estimated fair value of the identifiable assets acquired totaled $6,582,218.
Goodwill was recognized in the amount of $9,436,118. Of the $6,500,000 of
identifiable intangible assets acquired, $3,500,000 was assigned to trade names;
$1,500,000 to internet domain names; $1,500,000 to RTA sales agreements. Of
these, only the RTA sales agreements (each of which having an estimated useful
life of thirty-six months) are subject to amortization. With respect to the
acquired intangible assets not subject to amortization, tests for impairment
will be made on an annual basis. As of December 31, 2004, the gross carrying
amount and accumulated amortization of the RTA sales agreements ("agreements")
was $1,500,000 and $41,667, respectively; amortization expense for the period
December 8, 2004 (the date of acquisition) to December 31, 2004 totaled $41,667.
Amortization expense of the agreements for the fiscal years ending December 31,
2005 and 2006 is estimated to be $500,000 in each of those years. The cost of
the agreements will be fully amortized by November 30, 2007.
With respect to the acquired intangible assets recognized as assets apart from
goodwill that are not subject to amortization, the respective gross carrying
amounts as of December 31, 2004 are as follows: trade names - $3,500,000;
internet domain names - $1,500,000. These intangibles have indefinite legal
lives. As such, they are expected to contribute indefinitely to the Company's
cash flows. No impairment losses have been recognized on these unamortized
intangible assets.
The $9,436,118 of goodwill was assigned to the Company's business segments as
follows: $7,022,105 to Franchise and Travel-Related Management Services;
$1,172,679 to Internet-Based Technology Programs; and $1,241,334 to Online
Travel Store Services.
The basis and method for determining the total acquisition cost of $15,257,445
included the following factors:
o YTB's customer-base and related revenue stream.
o YTB's operating system.
o The number of representatives on YTB's sales force and related sales
agreements.
o The estimated value of YTB, based primarily on the above-listed factors, in
comparison to the market value of the Company.
The cost of goodwill and all identifiable intangible assets acquired to be
amortized and deducted for tax purposes for the year ended December 31, 2004 is
expected to be $88,534, which is based on current tax law that mandates use of
the straight-line method over a period of 15 years for such assets. The annual
amortization deduction for tax purposes is expected to be $1,062,408 each year
thereafter, until each asset is fully amortized.
SFAS No. 141 requires the identification of the acquiring entity in a business
combination. In this transaction effected through the exchange of equity
interests, the Company (i.e., Rezconnect Technologies, Inc.) has been identified
as the acquiring entity. Following are among the most pertinent facts and
circumstances considered in the identification of the Company as the "acquiring
entity" which, moreover, provides the rationale for the position taken that this
transaction does not constitute a "reverse acquisition" as addressed in SFAS No.
141:
See independent auditors' report
(F20)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 11 - BUSINESS COMBINATION (CONTINUED)
o Day-to-day control continues to reside in the Company with its Chief
Executive Officer ("CEO") at the parent company level (acknowledging that
each operating subsidiary has its own Board of Directors and, accordingly,
a degree of operational autonomy)..
o The Company's asset value constitutes more than 50% of the resulting total
assets of the combined entity.
o The CEO of the Company has convened and conducted each meeting of The Board
of Directors that has occurred both before and after the merger.
o The CEO of the Company continues to often be the sole signatory on filings
with the Securities and Exchange Commission (SEC) and other documents.
o The CEO of the Company initiated and structured the merger with YTB.
o Most funding and structuring initiatives continue to reside with the
Company's CEO.
o The Company has provided funding to YTB prior to the merger.
o The SEC reporting address and day-to-day operations emanate from the
Company's New Jersey headquarters.
NOTE 12 - ACTIVITY OF ENTITY ACQUIRED IN BUSINESS COMBINATION
Included in the accounts of the Company for the year ended December 31, 2004 is
the income and expense activity of YourTravelBiz.com, Inc. ("YTB"), the entity
acquired via the statutory merger described in Note 1, from the date of
acquisition (December 8, 2004) to December 31, 2004. Following is a summary of
such activity:
Net revenue $ 357,507
Total operating expenses (except depreciation and amortization) (394,648)
Total other income and expenses (net) (3,039)
-----------
Net loss of YTB included in the accounts of the Company $ (40,180)
===========
NOTE 13 - PRIOR PERIOD ADJUSTMENT
Reclassification adjustments, reflected in the statement of changes in
stockholders' equity, have been made to the following beginning equity account
balances at January 1, 2004:
Increase in value of common stock issued $ 418
Increase in amount of additional paid-in capital 134,522
Further decrease in accumulated deficit balance (134,940)
-------------
Net equity effect $ -0-
=============
See independent auditors' report
(F21)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - SUBSEQUENT EVENTS
As more fully described in Note 1, subsequent to the December 8, 2004 merger
between the Company and YourTravelBiz.com, Inc., the assets of this combined
entity were assigned to three newly-formed, wholly-owned subsidiary corporations
on January 4, 2005. Further, on January 4, 2005, the Company re-incorporated in
the State of Delaware by means of a downstream merger with YTB International,
Inc. Concurrent with this re-incorporation, the Company changed its name from
Rezconnect Technologies, Inc. to YTB International, Inc. and increased the
number of its authorized common shares to 50,000,000 on that same date. As a
consequence of this Delaware merger and associated re-incorporation, YTB
International, Inc. became the successor to the Company and its three
subsidiaries on January 4, 2005. (See Note 1).
Also during January 2005, a total of $2,000,000 was received from a prospective
investor. This amount was initially deposited into an escrow fund on behalf of
YTB International, Inc. (YTBL), pursuant to a funds escrow agreement by and
between the YTBL investor, the prospective investor, and the fund's escrow
agent. The funds were subsequently released to the Company also during January
2005.
As described in Note 1, each share of the 4,092,376 shares of the Company's
Series B convertible preferred stock was converted into one share of common
stock as of January 9, 2005.
Following the merger with YTB on December 8, 2004, the Company entered into
long-term employment agreements with J. Lloyd Tomer (its Chairman), Michael Y.
Brent (its CEO), Kim Sorensen (its President), Derek Brent (its Secretary) and
J. Scott Tomer (its Treasurer), collectively the "Senior Executives". Such
agreements became effective on January 1, 2005 and expire December 31, 2009.
Each Senior Executive is subject to confidentiality, non-raid and non-compete
provisions. Mr. Brent's prior 2004 employment agreement was cancelled and
superseded in the context of putting in place these nearly identical employment
agreements with senior management (see Note 6). Each Senior Executive, so long
as they continue to be employed by the Company, will be paid, directly or
indirectly, a combination of (i) a base salary, and (ii) stock options and/or
warrants, as so determined by the Board of Directors, acting as a Compensation
Committee, based on the Company's financial performance. Each Senior Executive
will continue to be subject to their respective confidentiality covenants and,
for 3 years, their non-compete covenants. Additionally, the estate of each
Senior Executive will receive a death benefit in an amount equal to one year's
salary.
See independent auditors' report
(F22)
REZCONNECT TECHNOLOGIES, INC.
SUPPLEMENTARY INFORMATION
SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------- -------------
General and administrative salaries $ 651,464 $ 420,146
Payroll taxes 53,706 31,633
Auto expense 22,350 -
Bad debts 4,018 19,154
Bank fees and service charges 6,692 2,120
Consultant fees 13,865 88,259
Credit card fees 11,719 -
Dues and subscriptions 57,434 23,646
Employee benefits 6,255 -
Equipment lease 6,261 -
Miscellaneous 4,373 2,022
Office rent 47,138 43,792
Travel and entertainment 113,075 76,471
Office supplies and expenses 32,887 24,525
Printing 9,756 15,838
Postage and delivery 33,821 12,118
Insurance 67,240 32,676
Professional fees 67,853 63,633
Training and recruitment 5,056 10,000
Telephone 22,943 18,043
------------- -------------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $ 1,237,906 $ 884,076
============= =============
See independent auditors' report and notes to financial statements
(F23)
REZCONNECT TECHNOLOGIES, INC.
PRO FORMA FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
REZCONNECT TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On December 8, 2004, Rezconnect Technologies, Inc. (the "Company") acquired 100%
of the outstanding common shares from the stockholders of YourTravelBiz.com,
Inc. ("YTB") in a business combination structured as a statutory merger. This
acquisition was effected through an exchange of equity interests at a recorded
cost of $15,257,445 to the Company. Rezconnect Technologies, Inc. was identified
as the acquiring entity. The Company exchanged 7,430,000 shares of its common
stock and 4,092,376 shares of its Series B convertible preferred stock for all
of the outstanding common stock of YTB.
The following unaudited pro forma consolidated statements of operations for the
years ended December 31, 2004 and 2003 give effect to the Company's acquisition
of YTB and reflects the results of YTB's operations as if the acquisition had
occurred and been completed as of January 1, 2004 and 2003, respectively.
The acquisition of YTB was accounted for by the Company under the "purchase
method", as prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 141, Business Combinations. The total cost of this acquisition exceeded the
fair value of the identifiable net assets acquired and liabilities assumed by
$9,436,118, which was recorded as "goodwill". In accordance with SFAS No. 142,
goodwill resulting from this acquisition has been recognized as an asset, but
will not be amortized. Instead, the recorded value of goodwill will be tested
for impairment on an annual basis. Of the $6,500,000 of identifiable intangible
assets acquired, $3,500,000 was assigned to trade names; $1,500,000 to internet
domain names; and $1,500,000 to RTA sales agreements. Of these, only the sales
agreements (each of such agreements having an estimated useful life of
thirty-six months) are subject to amortization. With respect to the acquired
intangible assets not subject to amortization, tests for impairment will be made
on an annual basis.
Following is a summary of the allocated cost of the Company's acquisition of
YTB:
Asset
(Liability)
Property and equipment $ 73,121
Computer software 9,097
Intangible assets (other than goodwill) 6,500,000
Goodwill 9,436,118
Short-term debt (102,342)
Accounts payable and accrued expenses (658,549)
---------------
Net assets acquired $ 15,257,445
===============
The unaudited pro forma consolidated statement of operations for the years ended
December 31, 2004 and 2003 do not represent the results of operations of the
Company for any future date or period. Actual future results could be materially
different from these pro forma results. These unaudited pro forma financial
statements should be read in conjunction with the audited financial statements
of the Company and management's related discussion and analysis of financial
condition and results of operations included in Form 10-K for the year ended
December 31, 2004.
See notes to pro forma financial statements
(F24)
REZCONNECT TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
Rezconnect
Technologies, YourTravel- Pro forma Pro forma
Inc. Biz.com, Inc. Adjustments Consolidated
-------------- --------------------------------------------------
Franchise fees $ 97,506 $ - $ - $ 97,506
Franchise service and other fees 716,801 - - 716,801
Travel products and services 2,056,617 - - 2,056,617
Online travel income 507,508 - (244,000)(e) 263,508
Advertising and other 2,571 - - 2,571
New RTA sales 84,656 1,206,348 - 1,291,004
Monthly maintenance fees 248,092 3,535,302 - 3,783,394
Printing and administrative service fees 54,569 777,614 - 832,183
-------------- --------------- ------------- ------------
3,768,320 5,519,264 (244,000) 9,043,584
Less: returns and allowances 29,810 424,795 - 454,605
-------------- --------------- ------------- ------------
3,738,510 5,094,469 (244,000) 8,588,979
Commissions 1,521,145 2,867,199 - 4,388,344
Cost of travel services and products 930,519 - - 930,519
Depreciation and amortization 86,169 92,660 382,696 (a) 561,525
Franchise services and products 153,035 - - 153,035
Marketing and selling 103,418 - - 103,418
General and administrative 1,237,906 2,756,542 (244,000)(e) 3,750,448
-------------- --------------- ------------- ------------
4,032,192 5,716,401 138,696 9,887,289
-------------- --------------- ------------- ------------
(293,682) (621,932) (382,696) (1,298,310)
Loss from sales of short-term investments (8,458) - - (8,458)
Interest and dividend income 38,096 7,261 - 45,357
Interest expense (22,596) (50,562) - (73,158)
-------------- --------------- ------------- ------------
7,042 (43,301) - (36,259)
-------------- --------------- ------------- ------------
(286,640) (665,233) (382,696) (1,334,569)
1,670 - - 1,670
-------------- --------------- ------------- ------------
$ (288,310) $ (665,233) $ (382,696) $ (1,336,239)
============== =============== ============= ============
$ (1,336,239)
============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 22,634,652
============
BASIC AND DILUTED LOSS PER SHARE $ (0.06)
============
See notes to pro forma consolidated financial statements
(F25)
REZCONNECT TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
Rezconnect
Technologies, YourTravel- Pro forma Pro forma
Inc. Biz.com, Inc. Adjustments Consolidated
-------------- --------------- -------------- --------------
REVENUE
Franchise fees $ 115,280 $ - $ - $ 115,280
Franchise service and other fees 569,545 - - 569,545
Travel products and services 1,346,930 - - 1,346,930
Online travel income 282,471 - (122,000)(e) 160,471
Advertising and other 85,862 - - 85,862
New RTA sales - 551,849 - 551,849
Monthly maintenance fees - 1,797,478 - 1,797,478
Printing and administrative service fees - 133,216 - 133,216
-------------- -------------- ------------ ------------
GROSS REVENUE 2,400,088 2,482,543 (122,000) 4,760,631
Less: returns and allowances - 151,094 - 151,094
-------------- -------------- ------------ ------------
NET REVENUE 2,400,088 2,331,449 (122,000) 4,609,537
OPERATING EXPENSES
Commissions 906,235 808,264 - 1,714,499
Cost of travel services and products 526,141 - - 526,141
Depreciation and amortization 376,486 98,753 418,270 (a) 893,509
Marketing and selling 31,535 27,549 - 59,084
General and administrative 884,076 1,610,328 (122,000)(e) 2,372,404
Impairment of capitalized software costs 783,207 - - 783,207
-------------- -------------- ------------ ------------
TOTAL OPERATING EXPENSES 3,507,680 2,544,894 296,270 6,348,844
-------------- -------------- ------------ ------------
LOSS FROM OPERATIONS (1,107,592) (213,445) (418,270) (1,739,307)
OTHER INCOME (EXPENSES)
Loss from sales of short-term investments (14,113) - - (14,113)
Interest and dividend income 18,225 6,672 - 24,897
Interest expense (1,885) (196,692) - (198,577)
-------------- -------------- ------------ ------------
TOTAL OTHER INCOME (EXPENSES) 2,227 (190,020) - (187,793)
-------------- -------------- ------------ ------------
LOSS BEFORE INCOME TAXES (1,105,365) (403,465) (418,270) (1,927,100)
INCOME TAX (BENEFIT)
Current 2,118 - - 2,118
Deferred - (137,005) - (137,005)
-------------- -------------- ------------ ------------
TOTAL INCOME TAX (BENEFIT) 2,118 (137,005) - (134,887)
-------------- -------------- ------------ ------------
NET LOSS $ (1,107,483) $ (266,460) $ (418,270) $ (1,792,213)
============== ============== ============ ============
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,792,213)
============
LOSS PER SHARE:
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 22,101,959
============
BASIC AND DILUTED LOSS PER SHARE $ (0.08)
============
See notes to pro forma consolidated financial statements
(F26)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
The accounts of YourTravelBiz.com, Inc. ("YTB") include its income and expense
activity for the pre-merger period January 1, 2003 through December 7, 2004. The
activity of YTB from the date of acquisition (December 8, 2004) through December
31, 2004 is included in the 2004 pro forma results of operations of Rezconnect
Technologies, Inc.
1. The following pro forma adjustments summarize the adjustments made to
the pro forma statements of operations for the years ended December 31,
2004 and 2003:
(a) The 2004 and 2003 depreciation and amortization adjustments reflect
these expenses as if the acquisition of YTB had occurred and been
completed as of January 1, 2004 and 2003, respectively. Depreciation
and amortization are computed via the straight-line method over the
following estimated useful lives of the related assets:
Vehicles and equipment 5 to 7 years
Furniture and fixtures 7 years
Computer software and RTA sales agreements 3 years
Allocation of the purchase price of all tangible assets acquired
is as follows:
Charges to 2004 and 2003 depreciation and amortization expense as
if the acquisition of YourTravelBiz.com, Inc. had occurred and
been completed as of January 1, 2004 and 2003, respectively, are
as follows:
Estimated Depreciation/
Useful Life Amortization
Asset (years) Expense
Vehicles and equipment 5 to 7 $ 12,833
Furniture and fixtures 7 1,175
Computer software 3 3,015
RTA Sales agreements 3 500,000
-------
Total $ 517,023
=======
See notes to pro forma financial statements
(F27)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
(a) Depreciation and amortization adjustments (continued)
2004 2003
--------- ---------
Depreciation and amortization expense as if the acquisition
of YourTravelBiz.com, Inc. had occurred and been completed
as of January 1 (as calculated on the preceding page) $ 517,023 $ 517,023
Less: amount recorded by YourTravelBiz.com, Inc. (92,660) (98,753)
Less: amount recorded by Rezconnect Technologies, Inc. (41,667) ( -0- )
--------- ---------
Total depreciation and amortization adjustments $ 382,696 $ 418,270
======= =======
(b) Revenue adjustments
Following is a composition of the total revenue of
YourTravelBiz.com, Inc. for the period December 8, 2004 to
December 31, 2004 that is included in the 2004 pro forma results
of operations of Rezconnect Technologies, Inc.:
New RTA sales $ 84,656
Monthly maintenance fees 248,092
Printing and administrative service fees 54,569
---------
387,317
Less: returns and allowances (29,810)
---------
Total revenue adjustments - 2004 $ 357,507
=======
(c) Operating expense adjustments
Following represents operating expenses (other than depreciation
and amortization) of YourTravelBiz.com, Inc. for the period
December 8, 2004 to December 31, 2004 that are included in the
2004 pro forma results of operations of Rezconnect Technologies,
Inc.:
Commissions $ 201,207
General and administrative 193,441
--------
Total other operating expense adjustments $ 394,648
========
See notes to pro forma financial statements
(F28)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
(d) Other income and expense adjustments
The following represents other (non-operational) items of income
and expense of YourTravelBiz.com, Inc. for the period December 8,
2004 to December 31, 2004 that are included in the 2004 pro forma
results of operations of Rezconnect Technologies, Inc.:
Investment income $ 509
Interest expense (3,548)
-------
Total other income and expense adjustments $ (3,039)
========
(e) Eliminating adjustments
Online travel income of Rezconnect Technologies, Inc., and the
corresponding administrative expense of YourTravelBiz.com, Inc.,
has been eliminated in pro forma consolidation to adjust for the
income earned and the related expense incurred between the two
entities. This amount totaled $244,000 and $122,000 in 2004 and
2003, respectively. A service contract exists between the two
entities whereby the Company provides travel website hosting to
YTB, at a fee of $5.00 per website per month.
2. Recurring expenses
Commission costs are incurred and paid monthly based on a
pre-determined formula based on a percentage of sales. These costs are
capitalized and charged to expense over a period of thirty-six months,
in proportion to the related revenue recognized.
The Company assumed a lease of its acquiree for copy machines under
non-cancelable operating leases expiring in various periods through
December 31, 2006. The lease payments are approximately $659.50 per
month.
3. Income taxes
As a result of the Company's and the acquiree's year 2004 and 2003
operating losses and loss carryforwards available in 2004 and 2003,
there is no provision for current income taxes. In addition, Statement
of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires a valuation allowance to reduce any deferred tax
assets to their net realizable amounts if, based on the weight of
evidence, it is more likely than not that all or some portion of such
deferred tax assets will not be realized. As of December 31, 2004 and
2003, the Company is uncertain if it will realize any future tax
benefit of its deferred tax assets. Accordingly, a full valuation
allowance has been established as a reserve against the Company's
deferred tax assets and, therefore, no deferred income tax credits
have been recognized in the Company's pro forma statements of
operations for the years ended December 31, 2004 and 2003.
See notes to pro forma financial statements
(F29)
REZCONNECT TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
4. Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted-average
number of common shares outstanding. Diluted earnings (loss) per share
assumes that outstanding common shares are increased by common shares
issuable upon the exercise of stock options and warrants, and by the
conversion of preferred stock, where such exercise or conversion would
be dilutive. For the years ended December 31, 2004 and 2003, the
effects any assumed exercise of stock options and warrants on the 2004
and 2003 loss per share would be anti-dilutive and, therefore, are not
included in the calculation of the Company's basic loss per share for
the years ended December 31, 2004 and 2003.
However, the 4,092,376 shares of the Company's Series B convertible
preferred stock that were issued on December 8, 2004 (and subsequently
converted into common shares on January 9, 2005) are considered to be
common stock equivalents on the date of original issuance.
Accordingly, all 4,092,376 shares of the Company's Series B
convertible preferred stock are included in the calculation of the
Company's pro forma weighted-average number of common shares
outstanding as of January 1, 2004 and 2003, and also in the
calculation of the pro forma loss per common share for the years ended
December 31, 2004 and 2003. As such, the pro forma weighted-average
number of common shares used in the calculation of the 2004 and 2003
pro forma loss per common share is 22,634,652 and 22,101,959,
respectively.
5. Employment agreements
Revised employment agreements, becoming effective on January 1, 2005,
were entered into with senior management. The effects of these revised
agreements with the Company executives are immaterial to pro forma
presentation.
See notes to pro forma financial statements
(F30)
YTB INTERNATIONAL, INC.
(FORMERLY REZCONNECT TECHNOLOGIES, INC.)
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Page(s)
-------
Independent Registered Public Accounting Firm's Review Report F1
Financial Statements
Consolidated Balance Sheets F2 - F3
Consolidated Statements of Operations F4
Consolidated Statements of Changes in Stockholders' Equity F5
Consolidated Statements of Cash Flows F6
Notes to Financial Statements F7 - F22
Independent Registered Public Accounting Firm's Report
on Supplementary Information F23
Supplementary Information
Consolidated Schedules of General and Administrative Expenses F24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Boards of Directors and Stockholders of
YTB International, Inc. and Subsidiaries
Englewood Cliffs, New Jersey
We have reviewed the accompanying interim consolidated balance sheets of YTB
International, Inc. (formerly Rezconnect Technologies, Inc.) and subsidiaries as
of March 31, 2005 and 2004, and the related interim consolidated statements of
operations, changes in stockholders' equity, and cash flows for the three-month
periods then ended. These interim financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements for them
to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of YTB
International, Inc. (formerly Rezconnect Technologies, Inc.) and subsidiaries as
of December 31, 2004, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our reissued report dated May 31, 2005, we expressed
an unqualified opinion on those consolidated financial statements.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
Fairfield, New Jersey
June 6, 2005
(F1)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
(UNAUDITED)
ASSETS
2005 2004
------------ ------------
CURRENT ASSETS
Cash .................................................................. $ 1,567,831 $ 43,866
Available-for-sale securities ......................................... 1,484,231 709,831
Current portion of notes receivable ................................... 52,766 112,748
Accounts receivable (less allowance for doubtful
accounts of $65,009 in 2005 and $74,061 in 2004) .................. 389,167 261,625
Loans receivable ...................................................... 336,359 --
Current portion of prepaid commissions ................................ 2,060,514 --
Other current assets .................................................. 301,765 --
------------ ------------
TOTAL CURRENT ASSETS ....................................................... 6,192,633 1,128,070
PROPERTY AND EQUIPMENT (NET) ............................................... 70,381 --
INTANGIBLE ASSETS (NET) .................................................... 6,333,333 --
GOODWILL ................................................................... 9,436,118 --
OTHER ASSETS
Capitalized software costs (less accumulated amortization
of $113,480 in 2005 and $65,670 in 2004) ........................... 62,159 68,082
Notes receivable, less current portion ................................ 300,009 638,908
Prepaid commissions, less current portion ............................. 2,283,409 --
Security deposits and other assets .................................... 10,460 13,133
------------ ------------
TOTAL OTHER ASSETS ......................................................... 2,656,037 720,123
------------ ------------
TOTAL ASSETS ............................................................... $ 24,688,502 $ 1,848,193
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt .................................. $ 49,340 $ 18,738
Short-term notes payable .............................................. 97,962 --
Accounts payable and accrued expenses ................................. 575,846 103,090
Current portion of deferred revenue ................................... 2,080,226 112,061
Other current liabilities ............................................. 12,016 --
------------ ------------
TOTAL CURRENT LIABILITIES .................................................. 2,815,390 233,889
OTHER LIABILITIES
Long-term debt, less current maturities ............................... 2,420,313 297,942
Deferred revenue, less current portion ................................ 2,495,111 635,013
Security deposits ..................................................... 20,920 26,266
------------ ------------
TOTAL OTHER LIABILITIES .................................................... 4,936,344 959,221
------------ ------------
TOTAL LIABILITIES .......................................................... 7,751,734 1,193,110
STOCKHOLDERS' EQUITY
Common stock, par value $.001; 50,000,000 and 20,000,000 shares
authorized; 24,094,153 and 10,879,983 shares issued and outstanding 24,094 10,880
Additional paid-in capital in excess of par ........................... 24,567,872 6,574,385
Accumulated deficit ................................................... (7,653,950) (5,930,182)
Accumulated other comprehensive income ................................ (1,248) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................. 16,936,768 655,083
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 24,688,502 $ 1,848,193
============ ============
See independent accountants' review report and notes to financial statements
(F2)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
(AUDITED)
ASSETS
CURRENT ASSETS
Cash $ 25,449
Available-for-sale securities 528,311
Current portion of notes receivable 24,240
Accounts receivable (less allowance for
doubtful accounts of $65,009) 383,033
Current portion of prepaid commissions 1,716,958
Loans receivable 122,195
Other current assets 15,312
-------------
TOTAL CURRENT ASSETS 2,815,498
PROPERTY AND EQUIPMENT (NET) 73,121
INTANGIBLE ASSETS (NET) 6,458,333
GOODWILL 9,436,118
OTHER ASSETS
Capitalized software costs (less accumulated
amortization of $105,222) 79,514
Notes receivable, less current portion 137,360
Prepaid commissions, less current portion 1,845,936
Security deposits and other assets 10,460
-------------
TOTAL OTHER ASSETS 2,073,270
-------------
TOTAL ASSETS $ 20,856,340
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 19,532
Short-term notes payable 202,342
Accounts payable and accrued expenses 743,743
Current portion of deferred revenue 1,737,984
-------------
TOTAL CURRENT LIABILITIES 2,703,601
OTHER LIABILITIES
Long-term debt, less current maturities 283,221
Deferred revenue, less current portion 1,956,324
Security deposits 20,920
-------------
TOTAL OTHER LIABILITIES 2,260,465
-------------
TOTAL LIABILITIES 4,964,066
STOCKHOLDERS' EQUITY
Preferred stock- Series B convertible, par value
$.001; 5,000,000 shares authorized, 4,092,376
shares issued and outstanding 4,092
Common stock, par value $.001; 20,000,000 shares
authorized, 18,976,125 shares issued and outstanding 18,976
Additional paid-in capital in excess of par 22,055,712
Accumulated deficit (6,186,506)
-------------
TOTAL STOCKHOLDERS' EQUITY 15,892,274
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,856,340
=============
See independent accountants' review report and notes to financial statements
(F3)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ ------------
REVENUE
Commissions .................................... $ 233,185 $ --
Franchise fees ................................. 2,139 3,745
Franchise service and other fees ............... 74,273 139,542
Travel products and services ................... 784,105 325,794
Online travel income ........................... 184,441 106,953
Advertising and other .......................... 39,927 2,349
New RTA sales .................................. 513,602 --
Monthly maintenance fees ....................... 1,449,456 --
Printing and administrative service fees ....... 395,879 --
------------ ------------
GROSS REVENUE ...................................... 3,677,007 578,383
LESS: RETURNS AND ALLOWANCES ....................... 129,813 --
------------ ------------
NET REVENUE ........................................ 3,547,194 578,383
OPERATING EXPENSES
Commissions .................................... 1,411,303 199,807
Cost of travel services and products ........... 232,634 80,108
Depreciation and amortization .................. 145,347 11,112
Marketing and selling .......................... -- 14,874
General and administrative ..................... 1,523,002 302,064
------------ ------------
TOTAL OPERATING EXPENSES ........................... 3,312,286 607,965
------------ ------------
INCOME (LOSS) FROM OPERATIONS ...................... 234,908 (29,582)
OTHER INCOME (EXPENSES)
Gain (loss) from sales of short-term investments (5,671) 536
Interest and dividend income ................... 7,228 3,314
Interest expense ............................... (19,714) (5,297)
------------ ------------
TOTAL OTHER EXPENSES ............................... (18,157) (1,447)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .................. 216,751 (31,029)
INCOME TAXES ....................................... 2,386 957
------------ ------------
NET INCOME (LOSS) .................................. $ 214,365 $ (31,986)
============ ============
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 214,365 $ (31,986)
============ ============
BASIC EARNINGS (LOSS) PER SHARE:
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING ..... 22,760,206 9,912,983
============ ============
BASIC EARNINGS (LOSS) PER SHARE ................ $ 0.01 $ (0.00)
============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
AND DILUTIVE POTENTIAL COMMON SHARES ....... 24,581,917 9,912,983
============ ============
DILUTED EARNINGS (LOSS) PER SHARE .............. $ 0.01 $ (0.00)
============ ============
See independent accountants' review report and notes to financial statements
(F4)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Series B Convertible Additional Total
Preferred Stock Common Stock Paid-In Accumulated Stockholders'
----------------------- --------------------------
Shares Amount Shares Amount Capital Deficit Equity
----------- -------- ------------ ----------- ------------ ------------ -----------
BALANCE AT JANUARY 1, 2005 4,092,376 $ 4,092 18,976,125 $ 18,976 $ 22,055,712 $ (6,186,506) $ 15,892,274
EQUITY RECLASSIFICATIONS RELATED
TO MERGER AND RE-INCORPORATION - - - - 1,681,809 (1,681,809) -
CONVERSION OF PREFERRED STOCK
TO COMMON STOCK (4,092,376) (4,092) 4,092,376 4,092 - - -
COMMON SHARES ISSUED
FOR SERVICES - - 88,152 88 81,289 - 81,377
COMMON SHARES ISSUED
THROUGH PRIVATE
PLACEMENT MEMORANDUM - - 937,500 938 749,062 - 750,000
UNREALIZED HOLDING LOSSES
ARISING DURING THE PERIOD - - - - - - (1,248)
NET INCOME - - - - - 214,365 214,365
----------- --------- ------------ ----------- ------------ ------------ --------------
BALANCE AT MARCH 31, 2005 - $ - 24,094,153 $ 24,094 $ 24,567,872 $ (7,653,950) $ 16,936,768
=========== ========= ============ =========== ============ ============ ==============
BALANCE AT JANUARY 1, 2004 - $ - 10,879,983 10,880 $ 6,574,385 $ (5,898,196) $ 687,069
NET LOSS - - - - - (31,986) (31,986)
----------- --------- ------------ ----------- ------------ ------------ --------------
BALANCE AT MARCH 31, 2004 - $ - 10,879,983 $ 10,880 $ 6,574,385 $ (5,930,182) $ 655,083
=========== ========= ============ =========== ============ ============ ==============
See independent accountants' review report and notes to financial statements
(F5)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) .............................................. $ 214,365 $ (31,986)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization ........................... 145,347 11,112
Common shares issued for services ....................... 81,377 --
Loss (gain) from sales of short-term investments ........ 5,671 (536)
Changes in assets and liabilities:
Increase in accounts receivable ..................... (6,134) (6,381)
Increase in prepaid commissions ..................... (781,029) --
Increase in other current assets .................... (286,453) --
Decrease in accounts payable and accrued expenses ... (167,897) (2,685)
Increase in revenue received in advance ............. 881,029 1,722
Increase in other current liabilities ............... 11,764 --
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.................. 98,040 (28,754)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for software license fee and costs of development -- (6,726)
Proceeds from sales of short-term investments ........... 172,042 22,840
Investments in marketable securities .................... (1,134,881) --
Loans to franchisees and others, net .................... (405,339) (1,722)
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ................. (1,368,178) 14,392
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ................ 2,140,721 --
Proceeds from issuance of common stock .................. 750,000 --
Principal payments on debt .............................. (78,201) (4,490)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ................. 2,812,520 (4,490)
----------- -----------
NET INCREASE (DECREASE) IN CASH .................................. 1,542,382 (18,852)
CASH, BEGINNING OF PERIOD ........................................ 25,449 62,718
----------- -----------
CASH, END OF PERIOD .............................................. $ 1,567,831 $ 43,866
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 19,714 $ 5,297
Income taxes ................................................... $ 2,386 $ 957
See independent accountants' review report and notes to financial statements
(F6)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
YTB International, Inc. ("YTBL", or the "Company") and its three wholly-owned
subsidiaries, YourTravelBiz.com, Inc. ("YTB"), Rezconnect Technologies, Inc.
("Rezconnect") and YTB Travel Network, Inc. ("YTB Travel"), (sometimes hereafter
collectively referred to as the "Company"), are the entities that resulted from
a corporate reorganization that took place on January 4, 2005. On that date,
YTBL re-incorporated in the State of Delaware, while simultaneously effecting a
name change, by means of a "downstream merger" between itself (then incorporated
in the State of New York under its former name of Rezconnect Technologies, Inc.,
hereinafter referred to as "the former Rezconnect" when incorporated as such),
and a Delaware corporation named YTB International, Inc. YTBL then changed its
name to YTB International, Inc. following the merger of the two entities.
On December 8, 2004, prior to the January 4, 2005 merger that formed the current
YTB International, Inc., the former Rezconnect acquired 100% of the outstanding
common shares from the stockholders of YourTravelBiz.com, Inc. ("YTB"),
following requisite approval by the Boards of Directors and stockholders, in a
business combination structured as a statutory merger under New York State law
and the reorganization provisions of the Internal Revenue Code. This
acquisition, recorded at a total value of $15,257,445, was effected through an
exchange of equity interests, with the former Rezconnect exchanging 7,430,000
shares of its common stock and 4,092,376 shares of its Series B convertible
preferred stock for all of the outstanding common stock of YTB.
On January 4, 2005, subsequent to the New York merger between the former
Rezconnect and YTB, the assets of this combined entity were assigned
respectively to three newly-organized privately-held Delaware corporations,
respectively YourTravelBiz.com, Inc., Rezconnect Technologies, Inc. and YTB
Travel Network, Inc., with each new entity becoming a wholly-owned subsidiary of
the former Rezconnect on that date. It was also on this date, subsequent to the
merger between the former Rezconnect and YTB, that YTBL was formed via the
Delaware merger discussed above. As a consequence of this Delaware merger and
associated re-incorporation, YTBL became the successor to the former Rezconnect
Technologies, Inc. and its three aforementioned subsidiaries, with each
subsidiary becoming a wholly-owned subsidiary of YTBL on January 4, 2005.
Following the re-incorporation of the former Rezconnect to the now current YTB
International, Inc., and a corresponding increase in the number of its
authorized common shares from 20,000,000 to 50,000,000, each share of the
aforementioned Series B convertible preferred stock was converted into one share
of YTBL common stock on January 9, 2005.
The Company provides internet-based travel-related services and technology,
which offers proprietary reservation systems for the travel and entertainment
industry, and is also a full-service provider of discount travel products and
services to the leisure and small business traveler. The Company operates under
various trade names, including "Your Travel Biz", "YTBnet.com", "Travel
Network", "Global Travel Network" and "Travel Network Vacation Central", as well
as internet websites "Bookmytravel.com", "REZconnect.com" and "RezCity.com". The
Company provides services to customers located primarily in the United States,
and maintains its corporate headquarters in the State of New Jersey. Two of its
subsidiaries maintain administrative offices in the State of Illinois.
See independent accountants' review report
(F7)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
Each of the three aforementioned operating subsidiaries was formed to divide the
Company's operations into three basic divisions. The YourTravelBiz.com, Inc.
subsidiary markets online travel agencies on behalf of YTB Travel Network, Inc.
by use of sales representatives. Such allows the representatives to build a
linked-by-sponsorship network of representatives. The Rezconnect Technologies,
Inc. subsidiary owns, maintains and develops online and other booking
technologies for suppliers within the travel industry. It also franchises brick
and mortar travel agencies. The YTB Travel Network, Inc. subsidiary is a travel
agency which books travel transactions, collects payments and licensing fees,
and pays sales commissions.
All of the Company's franchised operations are independently owned and operated.
All sales of travel products by the Rezconnect subsidiary are made through its
independent agencies and franchisees, or through its interactive websites.
Operational expenses consist of franchise system sales and support personnel,
executive management and minimal administrative personnel.
The Company is also engaged in the business of wholesale travel, providing
products and services to its franchisees which are obtained from tour operators
and cruise lines, and operates as a retail travel agency through its booking
subsidiary (Rezconnect), as described in greater detail above.
The former Rezconnect had signed an exclusive 20-year management agreement with
YTB in 2002 to provide travel website hosting to YTB. Upon its acquisition of
YTB in December 2004, the contract language was modified to eliminate the
20-year exclusivity clause. No other contract terms or clauses changed as a
result of the merger. Fees remain billable as per the original terms of the
agreement. Such fees are recorded as intercompany transactions and eliminated in
consolidation.
In recent years, the Company began shifting its operations away from franchising
in order to concentrate on developing its internet travel agency business. The
Company's investments in software and technology are directed towards the
enhancement of its online travel agency.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The accompanying consolidated financial statements include the accounts of YTB
International, Inc. and its three wholly-owned subsidiaries, YourTravelBiz.com,
Inc., Rezconnect Technologies, Inc. and YTB Travel Network, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Basis of accounting
The consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, using the accrual method. Accordingly,
revenues are recorded in the period in which they are earned and expenses are
recorded in the period in which they are incurred.
Cash and cash equivalents
Cash and cash equivalents include all highly-liquid investments with original
maturities of three months or less when purchased.
See independent accountants' review report
(F8)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include those related to the recoverability of capitalized software
costs and receivables generated from advertising sales.
Revenue recognition
Franchise fees
Payment of an initial franchise fee is due upon the execution of a franchise
agreement with the franchisee. Such franchise fees are charged for the right of
the franchisee to conduct business by the use of resources provided by the
Rezconnect subsidiary. Payment may be in the form of cash or notes, or in a
combination thereof. Revenue is deferred until all material conditions prior to
the opening of a franchised business have been satisfied and all substantial
doubts of collectibility have been eliminated, the culmination of which is
generally upon the receipt of payment. Such conditions include the selection of
a site location by the franchisee and the subsequent execution of a
corresponding lease agreement. The associated rights of customers and
Rezconnect's obligations over the period of the relationship are described in
detail in the master franchise agreement. Such franchise fees are non-refundable
once a site location has been selected by the franchisee.
In addition, referring travel agents ("RTAs") purchase business opportunities
from YTB Travel. Each new RTA pays an initial up-front fee, plus a monthly fee
thereafter, so long as the RTA remains in the system. The aggregate business
license and opportunity fee revenues generated from RTAs, both initially and
ongoing, far exceed the revenues generated from the Rezconnect brick and mortar
franchises. For more detail, see the description of same in Note 1.
Travel products and services
Commissions earned by the YTB Travel Network, Inc. subsidiary, from the sales of
travel products and services, are recognized when earned. Revenues earned from
all other sales of travel and related products, where the Company is the credit
card merchant of record, are recorded when earned at their aggregate retail
value. Cancellations have not historically been material.
Advertising and other
Advertising revenue, franchise service fees and other revenues are recognized as
they become due and payable. "Other" revenue consists primarily of
travel-related income from the operation of the Company's retail travel service,
in addition to certain earned commissions.
Online travel income
Online travel income is recognized when earned. Income is recorded on a monthly
basis based upon the number of websites hosted.
See independent accountants' review report
(F9)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition (continued)
Referring Travel Agent (RTA) sales and fees
YourTravelBiz.com, Inc. (YTB), the entity acquired by the former Rezconnect on
December 8, 2004, generates revenue from the selling of online travel agencies,
and from providing maintenance and training services to the new business owners
of such online travel agencies. These online revenues are generated from new RTA
sales and existing RTA maintenance fees. An initial up-front sign-up fee,
comprised of four separate components, is required of each new RTA. However, not
one of the fee components (namely, for the preparation and delivery of training
materials; the establishment of a website; the setup in the online system that
permits immediate tracking of RTA revenue; and also residual RTA benefits) has a
standalone value or represents the culmination of a separate earnings process.
As such, and in accordance with Staff Accounting Bulletin No. 104 (SAB 104) of
the U.S. Securities and Exchange Commission, and with Issue No. 00-21 of the
Emerging Issues Task Force, a committee established by the Financial Accounting
Standards Board (FASB), the recognition of all up-front fees received from new
RTA sales is deferred. Such fees are recognized as income over a period of
thirty-six months, which is the average historical RTA turnover rate. The
current and noncurrent deferred portions of such fees received are reflected as
liabilities in the consolidated balance sheets. A 3-day right-of-return period
is extended to each new RTA; after such time no refund is available. Monthly
hosting and service fees are recognized in the month after the services are
provided; site fees are recognized as revenue in the month that the service is
provided; license fees are recognized 30 days following the expiration of the
license period. The associated rights of customers and obligations of YTB over
the period of the relationship are described in detail in the master franchise
agreement.
Commission income
Commissions and incentives earned from travel sales are recognized upon receipt
and are recorded on a net basis. Commissions earned where the Company acts in
the capacity of a wholesaler are recorded at their gross amount. The cost of
such revenue is recorded separately as an operating expense.
Expense recognition of commission costs
YTB incurs commission costs that are directly related to the origination of new
RTA sales; sales which result in the deferral of revenue. Such incremental
direct commission costs are capitalized in accordance with FASB Technical
Bulletin No. 90-1 (FTB 90-1). In addition, the Company has elected to account
for such commission costs in accordance with SAB 104 and FTB 90-1, by deferring
and charging such costs to expense in proportion to the related revenue
recognized, over the same deferral period of thirty-six months.
Concentration of credit risk
The Company is subject to credit risk through its cash, trade receivables,
short-term investments and notes receivable. Credit risk with respect to cash is
minimized, as deposits are maintained in accounts insured up to $100,000 by the
Federal Deposit Insurance Corporation. Credit risk with respect to trade
receivables is minimized due to the nature of its customer base and geographic
dispersion of such customers. Short-term investments are placed in a
highly-rated mutual bond fund to minimize credit risk. As of March 31, 2005 the
Company's uninsured cash balances totaled $1,044,278.
See independent accountants' review report
(F10)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, equipment and depreciation
Property and equipment is stated at cost and is depreciated over the estimated
useful lives of the related assets. Depreciation is computed by the use of
straight-line and accelerated methods for both reporting and income tax
purposes. Expenditures for maintenance and repairs are expensed as incurred,
while renewals and improvements that extend the useful life of an asset are
capitalized.
Investments in marketable securities
The Company has adopted FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires certain investments
to be classified into the following three categories: held-to-maturity (recorded
at amortized cost), available-for-sale (recorded at fair market value), and
trading (recorded at fair market value). The Company classifies and reflects its
marketable equity securities as "available-for-sale" securities in the current
asset section of its consolidated balance sheet. Realized gains and losses,
determined by use of the first-in, first-out (FIFO) method, are included in
earnings; unrealized holding gains and losses are reported as a component of
stockholders' equity, included in accumulated other comprehensive income.
Goodwill and other intangible assets
Goodwill, which is the excess of cost over the fair value of net assets
(including identifiable intangibles) acquired in a business acquisition, is
stated at historical cost less accumulated amortization. Goodwill had been
amortized on a straight-line basis over a five-year period until the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets", on January 1, 2002.
Pursuant to this financial accounting standard, amortization of goodwill has
been discontinued for financial accounting reporting purposes, but is instead
tested for impairment on an annual basis. With respect to recognized intangible
assets other than goodwill, such assets with finite useful lives are amortized
over their useful lives, while assets with indefinite useful lives are not
amortized. All intangible assets are likewise tested for impairment on an annual
basis.
Advertising costs
Pursuant to the provisions of Statement of Position ("SOP") No. 93-7 issued by
the American Institute of Certified Public Accountants, the Company expenses
advertising costs as incurred.
Adoption of other accounting pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 supersedes the accounting and reporting requirements under APB Opinion No.
16, "Business Combinations", by requiring that only the "purchase method" be
used to account for business combinations. More specifically, SFAS No. 141
discusses the application of the purchase method as it relates to a business
combination effected through an exchange of equity interests. Accordingly, the
provisions of SFAS No. 141 have been adopted and employed in connection with the
merger between the former Rezconnect Technologies, Inc. and YourTravelBiz.com,
Inc. on December 8, 2004, as described in Note 1.
See independent accountants' review report
(F11)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of other accounting pronouncements (continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" - an Interpretation of ARB No. 51" ("FIN 46"), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPEs) to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date, and applies in the first fiscal
year or interim period beginning after September 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 is not expected to have a
material impact on the consolidated results of operations or financial position
of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts modified or entered into after
September 30, 2003, and for hedging relationships designed after September 30,
2003. The Company does not believe that the adoption of SFAS No. 149 will
materially impact its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
entities to classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 was effective
beginning with the second quarter of fiscal year 2004; the Company does not
believe that the adoption of SFAS No. 150 will have a material impact on its
consolidated financial statements.
Accounts and notes receivable
The Company reflects both accounts and notes receivable at their outstanding
principal balances as of the balance sheet date, as adjusted by any charge-offs
or allowances established as a reserve for potentially uncollectible accounts.
Comprehensive income
The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components, when
the amount of such comprehensive income is considered to be material.
See independent accountants' review report
(F12)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Profit-sharing plan
The Company sponsors a profit-sharing plan, which is a defined contribution
pension plan, for all eligible employees. All employees who have completed 1,000
hours of service during the plan year may participate. Contributions are accrued
and paid out of the Company's current profits at the discretion of the Company's
Board of Directors. Employees may make voluntary contributions, subject to
statutory limitations. The Company elected not to make any plan contributions
during the three-month periods ended March 31, 2005 and 2004.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) requires that companies with stock-based compensation
plans recognize compensation expense based on the "fair value" accounting
method, or to apply the "intrinsic value" method provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees", and to disclose pro forma net income assuming the fair value method
had been applied.
The Company has elected to adopt the disclosure-only provisions of SFAS 123 and,
accordingly, computes compensation expense for employees as prescribed by APB
25. Under APB 25, compensation cost, if any, is measured as the excess of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. For stock options granted to
non-employees, expense is measured based upon the fair value method prescribed
by SFAS 123.
During 2004, the former Rezconnect issued 900,000 shares of its common stock as
additional compensation to its Chief Financial Officer ("CFO"), to cover the
shortfall between actual salary paid to the CFO and the agreed-upon compensation
amount, pursuant to an employment agreement between the CFO and the Company.
Such stock compensation covered periods served during the years 2001 through
2004. Of the 900,000 shares issued, 500,000 of which (valued at $50,400), were
issued to compensate the CFO for services rendered in 2004. The remaining
400,000 shares pertained to services rendered in years 2001 through 2003, valued
at $67,200 in each of those years.
Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted-average number of
common shares outstanding. Diluted earnings (loss) per share assumes that
outstanding common shares are increased by common shares issuable upon the
exercise of stock options and warrants, and by the conversion of preferred
stock, where such exercise or conversion would be dilutive. For the three-month
period ended March 31, 2005, the effect on the basic earnings per share by the
incremental shares issued from the assumed exercise of stock options and
warrants (amounting to 1,821,711 shares, as determined by use of the "treasury
stock method" prescribed by FASB Statement No. 128) would be dilutive and,
therefore, are included in the calculation of the Company's diluted earnings per
share for that period. Such incremental increase in the number of common shares
would have an anti-dilutive effect on the basic loss per share for the
three-month period ended March 31, 2004.
See independent accountants' review report
(F13)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (loss) per share (continued)
As discussed in Note 1, there were 4,092,376 shares of (the former Rezconnect's)
Series B convertible preferred stock issued on December 8, 2004 that were
subsequently converted into (YTBL) common shares on January 9, 2005. These
preferred shares, however, were considered to be common stock equivalents on the
date of original issuance. Accordingly, all 4,092,376 shares of the Company's
Series B convertible preferred stock are or will be included in the calculation
of the Company's earnings (loss) per common share for all periods presented on
and after December 8, 2004.
Capitalized software costs
Pursuant to SOP 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use", the Company capitalizes certain costs incurred
during an internal use software development project, including costs related to
applications, infrastructure, and graphics development for the Company's
websites. Capitalized costs consist of the cost of the software license
agreement (Note 11), and certain external direct costs of materials and licensor
provided services incurred in developing the software for its specific
applications. Capitalized software costs are being amortized over their expected
useful life of thirty-six months.
Marketing compensation plan
YTB offers a compensation plan to its sales representatives under an arrangement
that pays the representatives direct sales commissions, override compensation
(if qualified) and other bonus incentives based upon the amount of each
representative's sales, or enrolled referrals. Direct sales commissions are paid
on a weekly basis, based upon the amount of the previous week's sales. Residual
commissions are paid on a monthly basis for active representatives, following
the month earned. Bonuses are earned by maintaining a minimum number of personal
enrollments. Commission costs are capitalized and recognized as expense in
proportion to the related revenue recognized, over a period of thirty-six
months.
NOTE 3 - LONG-TERM DEBT
On January 11, 2002, as a result of the events of September 11, 2001, the former
Rezconnect borrowed $324,500 from the United States Small Business
Administration ("SBA") under its disaster relief program. Payments were to have
initially commenced in January 2003. However, the SBA extended the commencement
date into November 2003. The loan is repayable via a monthly installment of
$2,607, including interest at 4% per annum, through October 2017. The loan is
personally guaranteed by the Company's Chief Executive Officer, and is
collateralized by the accounts receivable and property and equipment of the
Company. The outstanding loan balance as of March 31, 2005 and 2004 was $294,932
and $316,680, respectively.
See independent accountants' review report
(F14)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 3 - LONG-TERM DEBT (CONTINUED)
As of March 31, 2005, the Company had outstanding notes payable totaling
$140,721 due to two of its officers who had advanced funds to the Company. The
notes are unsecured and bear interest at the prevailing prime rate. The note
provisions contain no set terms of repayment.
During 2004, the former Rezconnect acquired a software license right to conduct
its online franchise business. The total cost of this software license right was
$45,000. An option to make installment payments of $9,000 per year for five
years, at the prevailing rate of interest, was granted by the provider. The note
is secured by various Company assets. The outstanding balance due on this note
totaled $34,000 as of March 31, 2005.
During December 2004, the former Rezconnect entered into an agreement with an
investor to raise an additional $2,000,000 of capital, via a convertible term
note ("Note"), with a condition to subordinate its SBA loan of approximately
$300,000 to YTB. Such Note was executed and subordinated on February 7, 2005.
Under the terms of the agreement, repayment is to be made either in the form of
cash or stock, or in a combination thereof. The investor has the right to
convert the Note into common shares of YTB International, Inc. ("YTBL"), in
addition to exercising rights under a warrant issued to acquire up to, in the
aggregate, 3,000,000 common shares of YTBL. The Company (that is, YTBL) is
liable under the terms of this agreement for the approximate maximum amount of
$278,000 in 2005, should the quoted market price of its stock fall below a
specified minimum amount. Such maximum liability would approximate $667,000 per
year in years 2006 and beyond, should such stock price fall below the specified
minimum. The balance owed on this Note as of March 31, 2005 remained at
$2,000,000.
Minimum principal payments of long-term debt as of March 31, 2005 are as
follows:
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 4 - SHORT-TERM OBLIGATIONS
The former Rezconnect assumed the short-term debt of its acquired entity on
December 8, 2004. Following are the principal amounts payable on such short-term
debt as of March 31, 2005:
---------------------------------------------------- ---------------------------
6.25% promissory note in connection with vehicle
purchase. Interest and principal are payable in
monthly installments of $1,000 for 12 months,
due February 28, 2005. $ 41,960
---------------------------------------------------- ---------------------------
6.25% promissory note in connection with vehicle
purchase. Interest and principal are payable
in monthly installments of $1,000 for 12 months,
due March 4, 2005. 56,002
-------
---------------------------------------------------- ---------------------------
---------------------------------------------------- ---------------------------
Total $ 97,962
======
---------------------------------------------------- ---------------------------
NOTE 5 - COMMITMENTS
Leases
The Company is obligated under an operating office lease through April 30, 2008,
to pay minimum annual rentals, currently at $44,000 per year plus real estate
taxes and operating cost charges.
In addition, the Company (the former Rezconnect) has entered into various
operating lease agreements with Wal-Mart Stores, Inc. (Wal-Mart) for eight
locations pursuant to a master lease agreement. The Company has also entered
into sub-lease agreements with franchisees at many of these Wal-Mart locations.
The Company has an option to renew both the leases with Wal-Mart and the
subleases with the franchisees for a two-year period and, additionally, for
three one-year periods.
Following is a summary of net rental income (expense) for the three months ended
March 31, 2005 and 2004:
2005 2004
------ ------
Sublease rental income $ 37,569 $ 44,887
Less: minimum rental expense 31,440 51,240
------ ------
Net rental income (expense) $ 6,129 $ (6,353)
======= =======
See independent accountants' review report
(F16)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 5 - COMMITMENTS (CONTINUED)
Minimum future rental payments under non-cancelable operating leases (including
the Wal-Mart location leases), having remaining terms in excess of one year as
of March 31, 2005 are as follows:
Other Lease
The former Rezconnect assumed a lease of its acquiree for copy machines under
non-cancelable operating leases expiring in calendar year 2006. Future minimum
payments in excess of one year are approximated as follows:
Twelve months
ending March 31, Amount
---------------- ------
2006 $ 7,914
2007 5,936
-------
Total $ 13,850
======
Legal Proceedings
The Company is involved in legal proceedings incurred in the normal course of
business. In the opinion of the Company's legal counsel, there were no
proceedings as of March 31, 2005 or 2004 where the results of which would have a
material effect on the financial position of the Company if adversely decided.
Employment Agreements with Senior Management
Following the merger with YTB on December 8, 2004, the former Rezconnect entered
into long-term employment agreements with J. Lloyd Tomer (its Chairman), Michael
Y. Brent (its CEO), Kim Sorensen (its President), Derek Brent (its Secretary)
and J. Scott Tomer (its Treasurer), collectively the "Senior Executives". Such
agreements commenced on January 1, 2005 and expire December 31, 2009. Each
Senior Executive is subject to confidentiality, non-raid and non-compete
provisions. (Mr. Brent's prior 2004 employment agreement was cancelled and
superseded in the context of putting in place these nearly identical employment
agreements with senior management). Each Senior Executive, so long as they
continue to be employed by the Company, will be paid, directly or indirectly, a
combination of (i) a base salary, and (ii) stock options and/or warrants, as so
determined by the Board of Directors, acting as a Compensation Committee, based
on the Company's financial performance. Each Senior Executive will continue to
be subject to their respective confidentiality covenants and, for 3 years, their
non-compete covenants. Additionally, the estate of each Senior Executive will
receive a death benefit in an amount equal to one year's salary.
See independent accountants' review report
(F17)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 6 - STOCK OPTIONS
The number of stock options outstanding as of March 31, 2005 and 2004 was
475,000, with a weighted-average exercise price of $1.08. No options were
granted, exercised, forfeited or canceled during the three month periods ended
March 31, 2005 and 2004.
A summary of stock options outstanding and exercisable as March 31, 2005 are as
follows:
--------- ------------ -------------- -------------- ----------- ---------------
Options Outstanding Options Exercisable
--------- ------------ -------------- -------------- ----------- ---------------
Weighted- Weighted- Weighted-
Exercise Number Average Average Number Average
Price Outstanding Remaining Life Exercise Price Exercisable Exercise Price
--------- ------------ -------------- -------------- ----------- ---------------
--------- ------------ -------------- -------------- ----------- ---------------
$1.00 410,000 5 Years $1.00 351,000 $1.00
--------- ------------ -------------- -------------- ----------- ---------------
$2.00 65,000 5 Years $2.00 45,000 $2.00
--------- ------------ -------------- -------------- ----------- ---------------
The fair value of the options granted for the three months ended March 31, 2005
and 2004 was estimated using the Black-Scholes option pricing model based on the
following weighted-average assumptions:
As a result of the Company's operating losses in 2004 and 2003, and loss
carryforwards available in 2005, there is no provision for current income taxes.
In addition, Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, requires a valuation allowance to reduce any deferred tax assets
to their net realizable amounts if, based on the weight of evidence, it is more
likely than not that all or some portion of such deferred tax assets will not be
realized. As of March 31, 2005 and 2004, the Company is uncertain if it will
realize any future tax benefit of its deferred tax assets. Accordingly, a full
valuation allowance has been established as a reserve against the Company's
deferred tax assets and, therefore, no deferred income tax credits have been
recognized in the statements of operations in either of the three month periods
ended March 31, 2005 or 2004.
See independent accountants' review report
(F18)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 8 - RELATED PARTY TRANSACTIONS
During the three month period ended March 31, 2004, the Company incurred
consulting fee expenses of approximately $6,000 for services provided by an
entity owned by the Company's Chief Executive Officer, a significant shareholder
of the Company. Under a new employment agreement reached in December 2004, such
consulting fees have been eliminated.
NOTE 9 - SEGMENT INFORMATION
The Company operates in the following three business segments: providing and
selling management services within the travel industry, including franchising
activities; developing and commercializing internet-based technology programs;
and online travel store services. Although the Company operates franchises in
eight foreign countries, revenue is generated from just three of the countries.
Such revenue generated from these three foreign countries amounts to an
insignificant and immaterial portion of the overall total revenue of the
Company. Accordingly, Company management considers it impracticable to report
such geographic information.
Summarized financial information concerning the Company's reportable segments is
shown in the following tables. The "other" column includes corporate items not
specifically allocated to the segments. (Note: the amounts for the three months
ended March 2004 reflect pre-merger activity).
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 10 - BUSINESS COMBINATION
As described more fully in Note 1, a business combination structured as a
statutory merger took place between the former Rezconnect Technologies, Inc.
(referred to as the "Company" in this Note) and YourTravelBiz.com, Inc. ("YTB")
on December 8, 2004. This merger was accounted for by use of the "purchase
method", as prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 141, Business Combinations. In exchange for all of the outstanding common
stock of YTB, the Company issued common stock (valued at $9,838,493) and Series
B convertible preferred stock (valued at $5,418,952), or a total value of
$15,257,445, to the stockholders of YTB. The total cost of this acquisition was
allocated based upon the estimated fair values of the identifiable assets
acquired and the fair values of the liabilities assumed at the date of
acquisition. The recorded cost of the acquisition was based mainly on the number
of sales representatives on hand at the time of contract negotiations during
August 2004; financial projections of YTB, prepared and provided by YTB
management; and on the estimated value of the Company's software development
regarding two franchise systems, in addition to other intangible assets.
The total cost of this acquisition exceeded the net of the amounts assigned to
assets acquired and liabilities assumed by $9,436,118, which was recorded as
"goodwill". In accordance with SFAS No. 142, goodwill resulting from this
acquisition has been recognized, but will not be amortized. This value
representing goodwill will instead be tested for impairment on an annual basis.
Following is a summary of the allocated cost of the Company's acquisition of
YTB:
Asset
(Liability)
-----------
Property and equipment $ 73,121
Computer software 9,097
Intangible assets (other than goodwill) 6,500,000
Goodwill 9,436,118
Short-term debt (102,342)
Accounts payable and accrued expenses (658,549)
----------
Net assets acquired $ 15,257,445
==========
Management's primary reasons for acquiring YTB include the long-lasting business
relationship between the two companies, with YTB being the primary customer of
the Company. Other factors include management's belief that there is a larger
growth potential as a combined company than as separate entities, among other
reasons because of the referral marketing component that marketing contributes.
More specifically, the merger is expected to increase travel market share in the
retail sale of travel and travel-related services, a development that is
unlikely using the prior brick and mortar agency business model. By acquiring
marketing and combining the respective existing travel agency businesses of YTB
and the Company, the merged entity provides both a new source of travel booking
agencies plus an additional revenue source in the initial and ongoing monthly
fees paid by the RTAs..
See independent accountants' review report
(F20)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 10 - BUSINESS COMBINATION (CONTINUED)
The estimated fair value of all identifiable assets acquired totaled $6,582,218.
Goodwill was recognized in the amount of $9,436,118. Of the $6,500,000 of
identifiable intangible assets acquired, $3,500,000 was assigned to trade names;
$1,500,000 to internet domain names; and $1,500,000 to RTA sales agreements. Of
these, only the RTA sales agreements (each of which having an estimated useful
life of thirty-six months) are subject to amortization. With respect to the
acquired intangible assets not subject to amortization, tests for impairment
will be made on an annual basis.
As of March 31, 2005, the gross carrying amount and accumulated amortization of
the RTA sales agreements ("agreements") was $1,500,000 and $166,667,
respectively; amortization expense for the three months then ended totaled
$125,000. Amortization expense of the agreements for the fiscal years ending
December 31, 2005 and 2006 is estimated to be $500,000 in each of those years.
The cost of the agreements will be fully amortized by November 30, 2007.
With respect to the acquired intangible assets recognized as assets apart from
goodwill that are not subject to amortization, the respective gross carrying
amounts as of March 31, 2005 are as follows: trade names - $3,500,000; internet
domain names - $1,500,000. These intangibles have indefinite legal lives. As
such, they are expected to contribute indefinitely to the Company's cash flows.
No impairment losses have been recognized on these unamortized intangible
assets.
The $9,436,118 of goodwill was assigned to the Company's business segments as
follows: $7,022,105 to Franchise and Travel-Related Management Services;
$1,172,679 to Internet-Based Technology Programs; and $1,241,334 to Online
Travel Store Services.
The basis and method for determining the total acquisition cost of $15,257,445
included the following factors:
o YTB's customer-base and related revenue stream.
o YTB's operating system.
o The number of representatives on YTB's sales force and related sales
agreements.
o The estimated value of YTB, based primarily on the above-listed factors,
in comparison to the market value of the Company.
The cost of goodwill and all identifiable intangible assets acquired to be
amortized and deducted for tax purposes for the years ending December 31, 2005
through 2018 is expected to be $1,062,408 in each of those years, which is based
on current tax law that mandates use of the straight-line method over a period
of 15 years for such assets. The cost goodwill will be fully amortized by
November 30, 2007.
SFAS No. 141 requires the identification of the acquiring entity in a business
combination. In this transaction effected through the exchange of equity
interests, the Company (i.e., the former Rezconnect Technologies, Inc.) has been
identified as the acquiring entity. Following are among the most pertinent facts
and circumstances considered in the identification of the Company as the
"acquiring entity" which, moreover, provides the rationale for the position
taken that this transaction does not constitute a "reverse acquisition" as
addressed in SFAS No. 141:
See independent accountants' review report
(F21)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 10 - BUSINESS COMBINATION (CONTINUED)
o Day-to-day control continues to reside in the Company with its Chief
Executive Officer ("CEO") at the parent company level (acknowledging that
each operating subsidiary has its own Board of Directors and, accordingly,
a degree of operational autonomy).
o The Company's asset value constitutes more than 50% of the resulting
total assets of the combined entity.
o The CEO of the Company has convened and conducted each meeting of The
Board of Directors that has occurred both before and after the merger.
o The CEO of the Company continues to often be the sole signatory on
filings with the Securities and Exchange Commission (SEC) and other
documents.
o The CEO of the Company initiated and structured the merger with YTB.
o Most funding and structuring initiatives continue to reside with the
Company's CEO.
o The Company has provided funding to YTB prior to the merger.
o The SEC reporting address and day-to-day operations emanate from the
Company's New Jersey headquarters.
NOTE 11 - SOFTWARE LICENSE AGREEMENT AND DEVELOPMENT COSTS
During 2004, the former Rezconnect Technologies, Inc. ("Rezconnect") acquired a
software license right to conduct its online franchise business. The total cost
of this software license right was $45,000. Rezconnect has been given the option
to make installment payments of $9,000 per year for five years. The cost of this
software license is being amortized over its five-year life. During August 2004,
Rezconnect acquired a new software right in the amount of $3,612. The cost of
this software right is being amortized over its expected useful life of
thirty-six months.
NOTE 12 - SUBSEQUENT EVENTS
YTBL issued 262,500 common shares during April 2005, effected through a private
placement memorandum, at a price of $0.80 per share. Proceeds of $210,000 were
received during April 2005.
NOTE 13 - EQUITY RECLASSIFICATION
A reclassification adjustment was made to the consolidated "Additional Paid-in
Capital" and "Accumulated Deficit" balances on January 1, 2005 to adjust for the
post-merger and post-reincorporation of the former Rezconnect Technologies, Inc.
("REZT") to the current YTB International, Inc. The adjustment was made to
correct, in the consolidated "Accumulated Deficit" component of Stockholders'
Equity, the accumulated deficit balance of YourTravelBiz.com, Inc. (the entity
acquired by REZT) as of December 31, 2004, which is an amount that succeeded to
the former REZT upon the merger of these two entities on December 8, 2004.
See independent accountants' review report
(F22)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SUPPLEMENTARY INFORMATION
Our report on our reviews of the basic interim consolidated financial statements
of YTB International, Inc. (formerly Rezconnect Technologies, Inc.) and
subsidiaries as of March 31, 2005 and 2004, and for the three-month periods then
ended, appears on page 1. Our reviews were made for the purpose of expressing
limited assurance that there are no material modifications that should be made
to the interim consolidated financial statements in order for them to be in
conformity with U.S. generally accepted accounting principles. The information
included in the accompanying interim consolidated supplementary schedules is
presented only for supplementary analysis purposes. Such information has been
subjected to the inquiry and analytical procedures applied in the reviews of the
basic interim consolidated financial statements, and we are not aware of any
material modifications that should be made thereto.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
Fairfield, New Jersey
June 6, 2005
(F23)
YTB INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
CONSOLIDATED SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---------- ----------
Administrative salaried and leased employees $ 532,697 $ 125,707
Payroll taxes .............................. 21,055 12,973
Advertising ................................ 5,904 --
Auto expense ............................... 120,725 4,022
Bank fees and service charges .............. 6,265 935
Consultant fees ............................ 61,800 28,260
Contract labor ............................. 110,533 --
Computer expense ........................... 5,123 7,753
Charitable contributions ................... 3,960 --
Credit card fees ........................... 60,016 --
Dues and subscriptions ..................... 7,300 6,845
Employee benefits .......................... 294 --
Equipment leases ........................... 5,038 1,702
Minor equipment ............................ 6,041 2,032
Licenses and permits ....................... 1,161 --
Management fees ............................ 7,917 --
Meeting and convention ..................... 23,615 --
Miscellaneous .............................. 7,101 --
Office rent ................................ 66,790 62,286
Travel and entertainment ................... 72,941 --
Office supplies and expenses ............... 30,791 6,040
Printing ................................... 97,881 2,809
Postage and delivery ....................... 38,868 3,639
Insurance .................................. 18,057 16,455
Professional fees .......................... 64,253 17,450
Training and recruitment ................... 5,000 --
Telephone .................................. 10,066 3,156
Website processing and user fees ........... 131,810 --
---------- ----------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES .. $1,523,002 $ 302,064
========== ==========
See independent accountants' review report and notes to financial statements
(F24)
YOURTRAVELBIZ.COM, INC.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 2004
YOURTRAVELBIZ.COM, INC.
TABLE OF CONTENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
Page
----
Independent Auditors' Report 1
Financial Statements
Balance Sheet 2
Statement of Operations and Accumulated Deficit 3
Statement of Cash Flows 4
Notes to Financial Statements 5 - 10
Independent Auditors' Report on Supplementary Information 11
Supplementary Information
Schedule of Selling, General and Administrative Expenses 12
INDEPENDENT AUDITORS' REPORT
To the Stockholders
YourTravelbiz.com, Inc.
Alton, Illinois
We have audited the accompanying balance sheet of YourTravelbiz.com, Inc. as of
September 30, 2004, and the related statements of operations and accumulated
deficit, and cash flows for the nine months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of YourTravelbiz.com, Inc. as of
September 30, 2004, and the results of its operations and its cash flows for the
nine months then ended, in conformity with accounting principles generally
accepted in the United States of America.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
May 31, 2005
(1)
YOURTRAVELBIZ.COM, INC.
BALANCE SHEET
SEPTEMBER 30, 2004
ASSETS
CURRENT ASSETS
Current portion of prepaid commissions .................. $ 1,488,945
PROPERTY AND EQUIPMENT ........................................ 82,832
OTHER ASSETS
Prepaid commissions, less current portion ............... 1,623,434
Software development costs,
net of accumulated amortization of $27,386 ........... 10,614
Deferred tax asset-Federal .............................. 358,552
Deferred tax asset-State ................................ 50,620
-----------
TOTAL OTHER ASSETS ............................................ 2,043,220
-----------
TOTAL ASSETS .................................................. $ 3,614,997
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ........................................... $ 131,489
Accounts payable and accrued expenses ................... 295,834
Current portion of deferred revenue ..................... 1,488,945
Interest payable ........................................ 11,536
Sales tax payable ....................................... 454
-----------
TOTAL CURRENT LIABILITIES ..................................... 1,928,258
LONG-TERM LIABILITIES
Deferred revenue, less current portion .................. 1,623,434
Due to founder .......................................... 53,053
-----------
TOTAL LONG-TERM LIABILITIES ................................... 1,676,487
-----------
TOTAL LIABILITIES ............................................. 3,604,745
STOCKHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
11,965,000 shares issued and outstanding ............ 1,251,000
Accumulated deficit ..................................... (1,240,748)
-----------
TOTAL STOCKHOLDERS' EQUITY .................................... 10,252
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 3,614,997
===========
See independent auditors' report and notes to financial statements
(2)
YOURTRAVELBIZ. COM, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2004
REVENUE
New RTA sales ........................ $ 855,573
Monthly maintenance fees ............. 2,553,008
Printing and administrative services . 607,332
-----------
4,015,913
Less returns and allowances .......... 339,655
-----------
TOTAL REVENUE .............................. 3,676,258
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,982,020
-----------
LOSS FROM OPERATIONS ....................... (305,762)
OTHER INCOME (EXPENSE)
Interest income ...................... 7,770
Interest expense ..................... (53,245)
-----------
TOTAL OTHER EXPENSE ........................ (45,475)
-----------
NET LOSS ................................... (351,237)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD ... (889,511)
-----------
ACCUMULATED DEFICIT, END OF PERIOD ......... $(1,240,748)
===========
See independent auditors' report and notes to financial statements
(3)
YOURTRAVELBIZ.COM, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................... $ (351,237)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization ....................... 63,276
Changes in assets and liabilities:
Increase in prepaid commissions ................. (1,515,736)
Decrease in interest receivable ................. 8,888
Increase in accounts payable and accrued expenses 105,787
Increase in revenue received in advance ......... 1,515,736
Increase in interest payable .................... 11,536
-----------
NET CASH USED BY OPERATING ACTIVITIES .......................... (161,750)
CASH FLOWS FROM INVESTING ACTIVITIES
Disposition of equipment ............................ 157,428
Acquisition of equipment ............................ (14,094)
Acquisition of vehicles ............................. (92,092)
-----------
NET CASH PROVIDED BY INVESTING ACTIVITIES ...................... 51,242
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short term borrowings ................. 128,656
Repayment of loans from related party ............... 30,000
Cash advances ....................................... (73,354)
Loans to shareholders ............................... (425)
Loan repayments to founder .......................... (94,215)
-----------
NET CASH USED BY FINANCING ACTIVITIES .......................... (9,338)
-----------
NET DECREASE IN CASH ........................................... (119,846)
CASH OVERDRAFT, BEGINNING OF PERIOD ............................ (7,905)
-----------
CASH OVERDRAFT, END OF PERIOD .................................. $ (127,751)
===========
Supplemental disclosure of cash flow information:
Interest paid during the period ............................. $ 2,398
See independent auditors' report and notes to financial statements
(4)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 1 - NATURE OF OPERATIONS
YourTravelbiz.com, Inc. (the "Company") is an Illinois corporation that was
incorporated in February 2001. The Company operates as a leading internet-based
travel store marketing business. Its main product is online travel agencies. It
also provides maintenance and training services related to the operation of
online travel agencies. Its product has been sold across America to hundreds of
brick and mortar franchised travel agents for tens of thousands of dollars. It
operates its business through the power of referral marketing to provide
independent business owners with the ultimate home-based business solutions.
The Company's operation is based on multi-level marketing (MLM). MLM is also
called network marketing - a business model which exemplifies direct marketing.
The Company has adopted this business model in its operation. Typically,
personally sponsored representatives (Reps) become associated with the Company
in a contractor-like relationship. These Reps receive remuneration for referring
new business owners who purchase the online travel agency product. The Company
has structured three teams of Reps who can qualify to earn income. The first
team is built with the help of one of the Company's leaders and is called the
"1st Team". The Reps will become the leaders who build the second team, which is
called the "Power Team". The third team is called the "Dream Team", which is
built by others with some help from the Reps in the Power Team.
The 1st Team is made of personally sponsored sales representatives plus the Reps
they sponsor, and so on. When a Rep is qualified to override, by having four
active personally sold Online Travel Agencies, the Rep will earn a 50% match of
the commissions earned by all personally sponsored Reps in the 1st Team. The 1st
Team is considered complete when this Rep:
o Personally sponsors 3 or more Reps, and
o Has 6 active RTA's (Referred Travel Agency) enrolled by this Rep
and/or this Rep's 1st Team Reps
Once the 1st Team is complete, the sponsored Rep qualifies to start his or her
Power Team with additional Reps. The Power Team includes the 1st Team of every
Rep and the Reps in the Power Team through infinity. When one of the personally
sponsored Reps' Power Team Reps starts a Power Team (regardless of depth), that
Power Team becomes a 1st Generation Dream Team to the sponsored Reps. When a 1st
Generation Rep starts a Power Team (regardless of depth), that Power Team
becomes a 2nd Generation Dream Team to the sponsored Reps. This continues
through six generations of Power Teams, and is called the sponsored Rep's Dream
Team.
In order to operate its electronic commerce business, during the year the
Company signed an exclusive 20-year management agreement to receive travel
website hosting services with a travel technology company. The website hosting
service offers its members with an interactive consumer website. Further, the
service provides its members all travel arrangements from the online sites.
See independent auditors' report
(5)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
These financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, using the accrual method. Accordingly, revenues
are recorded in the period in which they are earned and expenses in the period
in which they are incurred.
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company generates revenue from the selling of online travel agencies, and
from providing maintenance and training services to the new business owners of
such online travel agencies. These online revenues are generated from new
referring travel agent ("RTA") sales and existing RTA maintenance fees. An
initial up-front sign-up fee, comprised of four separate components, is required
of each new RTA. However, not one of the fee components (namely, for the
preparation and delivery of training materials; the establishment of a website;
the setup in the online system that permits immediate tracking of RTA revenue;
and also residual RTA benefits) has a standalone value or represents the
culmination of a separate earnings process. As such, and in accordance with
Issue No. 00-21 of the Emerging Issues Task Force, a committee established by
the Financial Accounting Standards Board (FASB), the recognition of all up-front
fees received from new RTA sales is deferred. Such fees are recognized as income
over a period of thirty-six months, which is the average historical RTA turnover
rate. The current and noncurrent deferred portions of such fees received are
reflected as liabilities in the accompanying balance sheet. A 3-day
right-of-return period is extended to each new RTA; after such time no refund is
available. Monthly hosting and service fees are recognized in the month after
the services are provided; site fees are recognized as revenue in the month that
the service is provided; license fees are recognized 30 days following the
expiration of the license period. The associated rights of customers and
obligations of the Company over the period of the relationship are described in
detail in the master franchise agreement.
Expense recognition of commission costs
The Company incurs commission costs that are directly related to the origination
of new RTA sales; sales which result in the deferral of revenue. Such
incremental direct commission costs are capitalized in accordance with FASB
Technical Bulletin No. 90-1 (FTB 90-1). In addition, the Company has elected to
account for such commission costs in accordance with FTB 90-1, by deferring and
charging such costs to expense in proportion to the related revenue recognized,
over the same deferral period of thirty-six months.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
See independent auditors' report
(6)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, equipment and depreciation
Property and equipment is stated at cost and is depreciated over the estimated
useful lives of the related assets. Depreciation is computed by use of the
double-declining method for both reporting and income tax purposes. Property and
equipment is summarized by major classification as follows:
Capitalized software costs
Pursuant to Statement of Position No. 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, issued by the American
Institute of Certified Public Accountants, the Company capitalizes certain costs
incurred during an internal use software development project, including costs
related to applications, infrastructure, and graphics development for the
Company's website. Capitalized costs consist of the cost of the software license
agreement (Note 3), and certain external direct costs of materials and licensor
provided services incurred in developing the software for its specific
applications. Capitalized software costs are being amortized on a straight-line
basis over their expected useful life of sixty months.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 109, Accounting for Income Taxes, which
requires the recognition of deferred income taxes for differences between the
basis of assets and liabilities for financial statement and income tax purposes.
Deferred tax assets and liabilities represent the future tax consequence for
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
NOTE 3 - SOFTWARE LICENSE AGREEMENT AND DEVELOPMENT COSTS
In November 2002, the Company entered into a two-year agreement to license
software designed for, and expected to be utilized by, the Company in its
electronic commerce activities. In connection therewith, the Company paid the
licensor an aggregate of $38,000 for the development and testing cost, and
$5,000 for additional compensation plan programming cost.
NOTE 4 - LOANS TO STOCKHOLDERS
Loans to stockholders, representing advances to stockholders, bear an eight
percent interest rate and are due in 2009. The balance of these loans as of
September 30, 2004 was $41,925.
See independent auditors' report
(7)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office space from an affiliated company under common
ownership. There are no express terms regarding the rental obligation of the
Company. Total rent expense recognized for the nine months ended September 30,
2004 was $31,000.
In addition, the Company leases its copy machines under non-cancelable operating
leases expiring in various years through 2006. Future minimum payments under
such leases in excess of one year are approximated as follows:
Twelve month period ending September 30, Amount
---------------------------------------- ------
2005 $ 7,914
2006 7,914
------
Total $15,828
======
Legal Proceedings
The Company is involved in legal proceedings incurred in the normal course of
business. At September 30, 2004, in the opinion of management, there are no
proceedings that would have a material effect on the financial position of the
Company if adversely decided.
NOTE 6 - NOTES PAYABLE
Notes payable at September 30, 2004 consist of the following:
5% promissory note in connection with vehicle
purchase. Interest and principal are payable in
monthly installments of $1,000 for 12 months,
due February 28, 2005. $ 46,499
5% promissory note in connection with vehicle
purchase. Interest and principal are payable
in monthly installments of $1,000 for 12 months,
due March 4, 2005. 34,990
3% short term note in connection with operations
financing. Interest and principal became due
August 2, 2004. 50,000
------
Total $ 131,489
=======
See independent auditors' report
(8)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 7 - RELATED PARTY TRANSACTIONS
In the normal course of business, the Company conducts certain transactions with
the shareholders and directors of the Company as well as with other related
parties affiliated by common control.
Since inception, the founder has provided funding to the Company to operate its
business at various times. All loans made by the founder bear a 12% interest
rate. As of September 30, 2004, the balance of these loans amounted to $53,053.
In addition, two of the shareholders of the Company received consulting income
and bonuses in the amount of $10,000 in the year 2004.
NOTE 8 - MARKETING COMPENSATION PLAN
The Company offers a compensation plan to its sales representatives while its
sales revenue multiplies by the power of referral marketing. Representatives are
paid direct sales commissions, override compensation (if qualified) and other
bonus incentives based upon the amount of each representative's sales, or
enrolled referrals.
Direct Sales Commission
Independent Marketing Representatives receive direct sales commissions of $50 on
all personal sales. They also receive an additional $50 Power Team Bonus
beginning with the fourth personal sale. Direct sales commissions are paid on a
weekly basis, based upon the amount of the previous week's sales. Residual
commissions are paid on a monthly basis for active representatives, following
the month earned. Bonuses are earned by maintaining a minimum number of personal
enrollments. Commission costs are capitalized and recognized as expense in
proportion to the related revenue recognized, over a period of thirty-six
months.
First Team Paycheck Match
Reps can also qualify to earn 50% "Paycheck Match" for each personally sponsored
Rep, regardless of how big their checks become. If an independent Rep's
personally sponsored Rep earns $1,000, the second earns $2,000 and the third
earns $5,000 ($8,000 total), the independent Rep's 50% "Paycheck Match" will be
$4,000.
Power Team Bonus
Each independent Rep's Power Team starts with the 4th personally sponsored Rep
and includes the 1st Team of every Rep in the Power Team through infinity.
Qualifiers will earn $50 on the first three sales made by every Rep in the Power
Team. Each independent Rep can either continue placing personally sponsored
people directly to him or her, or under someone in their Power Team. As long as
these RTAs are active, the independent Rep not only makes the Power Team bonus,
but he or she also receives the 50% "Paycheck Match".
See independent auditors' report
(9)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 8 - MARKETING COMPENSATION PLAN (CONTINUED)
Dream Team Bonus
When one of the independent Rep's Power Team members starts their own Power
Team, that Power Team becomes a "1st Generation Team" to the independent Rep.
When a 1st Generation Rep starts his own Power Team, this Power Team becomes
"2nd Generation" to the independent Rep. This continues through six generations
of Power Teams. Qualifiers will earn $10 on every sale made by all Reps through
six generations of Power Teams, otherwise known as "Dream Team".
Monthly Residuals
Each active RTA pays a $49.95 monthly subscriber fee for their virtual online
travel store. Qualified independent Reps earn 4% residual income on every active
RTA subscriber enrolled by any Rep in the independent Rep Power Team and the
Power Teams of the independent Rep 1st, 2nd and 3rd Generation Dream Teams. In
addition, the independent Rep will earn 2% per month on the Power Teams of his
or her 4th, 5th and 6th Generation Dream Teams.
NOTE 9 - STOCKHOLDERS' EQUITY
In February 2004, the Company issued 2,000,000 shares of no par value common
stock, no proceeds were received. As of September 30, 2004, the Company has
11,965,000 shares of common stock issued and outstanding.
NOTE 10 - SUBSEQUENT EVENTS
Beginning October 1, 2004, the Company increased its new RTA sign up fee from
$349.95 to $399.95. In November 2004, the Company extended its software license
right for one additional year in connection with its MLM online business. Such
licensing revenue is immaterial in relation to the overall revenues of the
Company.
On December 8, 2004, the Company was acquired by Rezconnect Technologies, Inc.
("Rezconnect"), a publicly-held New York corporation, in a business combination
structured as a statutory merger under New York State law and the reorganization
provisions of the Internal Revenue Code. This acquisition, recorded at a total
value of $15,257,445, was effected through an exchange of equity interests, with
Rezconnect exchanging 7,430,000 shares of its common stock and 4,092,376 shares
of its Series B convertible preferred stock for 100% of the outstanding common
stock of the Company.
On January 4, 2005, the assets of this combined entity were assigned
respectively to three newly-organized privately-held Delaware corporations, with
each new entity becoming a wholly-owned subsidiary of Rezconnect on that date.
Further, on January 4, 2005 Rezconnect re-incorporated in the State of Delaware
and changed its name to YTB International, Inc. ("YTBL"). As a consequence of
this Delaware merger and associated re-incorporation, YTBL became the successor
to Rezconnect and its three subsidiaries, with each subsidiary becoming a
wholly-owned subsidiary of YTBL on that date.
See independent auditors' report
(10)
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Stockholders
YourTravelbiz.com, Inc.
Alton, Illinois
Our report on our audit of the basic financial statements of YourTravelbiz.com,
Inc. as of September 30, 2004, and for the nine months then ended, 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 accompanying schedule of
selling, general and administrative expenses is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has not been subjected to the auditing procedures
applied in the audit of the basic financial statements and, accordingly, we
express no opinion on it.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
May 31, 2005
(11)
YOURTRAVEL BIZ.COM, INC.
SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
NINE MONTHS ENDED SEPTEMBER 30, 2004 (11)
Advertising $ 2,923
Apparel 25,713
Audio and video 37,288
Auto 38,486
Bank charges 9,525
Commissions and bonuses 1,737,339
Conventions and presentations 47,655
Copier maintenance and supplies 4,559
Credit card processing fees 114,856
Depreciation and amortization 63,276
Equipment rental 6,294
Insurance 3,336
Legal and professional 95,097
Licenses and permits 217
Meals and entertainment 19,262
Meeting expenses 13,717
Office expense 50,059
Operating expenses 957
Outside services 347,085
Payroll taxes 56,632
Postage and freight 99,637
Printing and reproduction 73,918
Processing fees 97,387
Promotional expenses 4,704
Rent 31,000
Repairs and maintenance 1,274
Telephone 35,950
Travel 94,150
Travel agency 4,794
Training 35,847
Utilities 178
Wages 566,324
Web fees 262,581
-----------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 3,982,020
=================
See independent auditors' report and notes to financial statements
YOURTRAVELBIZ.COM, INC.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
YEAR ENDED DECEMBER 31, 2003
YOURTRAVELBIZ.COM, INC.
TABLE OF CONTENTS
YEAR ENDED DECEMBER 31, 2003
Page
----
Independent Auditors' Report 1
Financial Statements
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6 - 11
Independent Auditors' Report on Supplementary Information 12
Supplementary Information
Schedule of Selling, General and Administrative Expenses 13
INDEPENDENT AUDITORS' REPORT
To the Stockholders
YourTravelbiz.com, Inc.
Alton, Illinois
We have audited the accompanying balance sheet of YourTravelbiz.com, Inc. as of
December 31, 2003, and the related statements of operations and accumulated
deficit, changes in stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of YourTravelbiz.com, 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.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
May 31, 2005
(1)
YOURTRAVELBIZ.COM, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS
Current portion of prepaid commissions .................. $ 752,141
PROPERTY AND EQUIPMENT ........................................ 192,803
OTHER ASSETS
Prepaid commissions, less current portion ............... 844,502
Software development costs,
net of accumulated amortization of $22,838 .............. 15,162
Deferred tax assets ..................................... 409,172
Due from shareholders ................................... 41,500
Other assets ............................................ 115,421
-----------
TOTAL OTHER ASSETS ............................................ 1,425,757
-----------
TOTAL ASSETS .................................................. $ 2,370,701
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ........................................... $ 2,834
Accounts payable and accrued expenses ................... 56,543
Current portion of deferred revenue ..................... 752,141
Payroll and sales taxes payable ......................... 14,111
-----------
TOTAL CURRENT LIABILITIES ..................................... 825,629
LONG-TERM LIABILITIES
Deferred revenue, less current portion .................. 844,502
Due to founder .......................................... 339,081
-----------
TOTAL LONG-TERM LIABILITIES ................................... 1,183,583
-----------
TOTAL LIABILITIES ............................................. 2,009,212
STOCKHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
9,965,000 shares issued and outstanding ............. 1,251,000
Accumulated deficit ..................................... (889,511)
-----------
TOTAL STOCKHOLDERS' EQUITY .................................... 361,489
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 2,370,701
===========
See independent auditors' report
(2)
YOURTRAVELBIZ. COM, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
REVENUE
New RTA sales ........................ $ 551,849
Monthly maintenance fees ............. 1,797,478
Printing and administrative services . 133,216
-----------
2,482,543
Less returns and allowances .......... 151,094
-----------
TOTAL REVENUE .............................. 2,331,449
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,544,894
-----------
LOSS FROM OPERATIONS ....................... (213,445)
OTHER INCOME (EXPENSE)
Interest income ...................... 6,672
Interest expense ..................... (196,692)
-----------
TOTAL OTHER EXPENSE ........................ (190,020)
-----------
LOSS BEFORE INCOME TAXES ................... (403,465)
INCOME TAXES
Deferred tax benefit - Federal ....... (120,056)
Deferred tax benefit - State ......... (16,949)
-----------
TOTAL INCOME TAX BENEFIT ................... (137,005)
-----------
NET LOSS ................................... $ (266,460)
===========
See independent auditors' report
(3)
YOURTRAVELBIZ.COM, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003
Common Accumulated
Stock Deficit Total
----------- ----------- -----------
Balance, beginning of year .............. $ 1,000 $ (623,051) $ (622,051)
Common stock issued during the year ..... 1,250,000 -- 1,250,000
Net loss for the year ................... -- (266,460) (266,460)
----------- ----------- -----------
Balance, end of year .................... $ 1,251,000 $ (889,511) $ 361,489
=========== =========== ===========
See independent auditors' report
(4)
YOURTRAVELBIZ.COM, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................... $ (266,460)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization ....................... 98,753
Accrued interest included in loans .................. 188,244
Changes in assets and liabilities:
Increase in prepaid commissions ................. (734,422)
Increase in deferred tax assets ................. (137,005)
Increase in interest receivable ................. (6,672)
Decrease in accounts payable and accrued expenses (5,883)
Increase in revenue received in advance ......... 734,422
-----------
NET CASH USED BY OPERATING ACTIVITIES .......................... (129,023)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of furniture and equipment .................. (6,672)
Cash advances ........................................... (45,500)
Loans to shareholders ................................... (74,833)
-----------
NET CASH USED BY INVESTING ACTIVITIES .......................... (127,005)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of principal portion of loans ................ (247,903)
Proceeds from issuance of common stock .................. 1,250,000
Loan repayments to founder .............................. (718,694)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................... 283,403
-----------
NET INCREASE IN CASH ........................................... 27,375
CASH OVERDRAFT, BEGINNING OF YEAR .............................. (35,280)
-----------
CASH OVERDRAFT, END OF YEAR .................................... $ (7,905)
===========
Supplemental disclosure of cash flow information:
Interest paid during the year ............................... $ 8,448
See independent auditors' report
(5)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
NOTE 1 - NATURE OF OPERATIONS
YourTravelbiz.com, Inc. (the "Company") is an Illinois corporation that was
incorporated in February 2001. The Company operates as a leading internet-based
travel store marketing business. Its main product is online travel agencies. It
also provides maintenance and training services related to the operation of
online travel agencies. Its product has been sold across America to hundreds of
brick and mortar franchised travel agents for tens of thousands of dollars. It
operates its business through the power of referral marketing to provide
independent business owners with the ultimate home-based business solutions.
The Company's operation is based on multi-level marketing (MLM). MLM is also
called network marketing - a business model which exemplifies direct marketing.
The Company has adopted this business model in its operation. Typically,
personally sponsored representatives (Reps) become associated with the Company
in a contractor-like relationship. These Reps receive remuneration for referring
new business owners who purchase the online travel agency product. The Company
has structured three teams of Reps who can qualify to earn income. The first
team is built with the help of one of the Company's leaders and is called the
"1st Team". The Reps will become the leaders who build the second team, which is
called the "Power Team". The third team is called the "Dream Team", which is
built by others with some help from the Reps in the Power Team.
The 1st Team is made of personally sponsored sales representatives plus the Reps
they sponsor, and so on. When a Rep is qualified to override, by having four
active personally sold Online Travel Agencies, the Rep will earn a 50% match of
the commissions earned by all personally sponsored Reps in the 1st Team. The 1st
Team is considered complete when this Rep:
o Personally sponsors 3 or more Reps, and
o Has 6 active RTA's (Referred Travel Agency) enrolled by this Rep
and/or this Rep's 1st Team Reps
Once the 1st Team is complete, the sponsored Rep qualifies to start his or her
Power Team with additional Reps. The Power Team includes the 1st Team of every
Rep and the Reps in the Power Team through infinity. When one of the personally
sponsored Reps' Power Team Reps starts a Power Team (regardless of depth), that
Power Team becomes a 1st Generation Dream Team to the sponsored Reps. When a 1st
Generation Rep starts a Power Team (regardless of depth), that Power Team
becomes a 2nd Generation Dream Team to the sponsored Reps. This continues
through six generations of Power Teams, and is called the sponsored Rep's Dream
Team.
In order to operate its electronic commerce business, during the year the
Company signed an exclusive 20-year management agreement to receive travel
website hosting services with a travel technology company. The website hosting
service offers its members with an interactive consumer website. Further, the
service provides its members all travel arrangements from the online sites.
See independent auditors' report
(6)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
These financial statements have been prepared in accordance with U.S.generally
accepted accounting principles, using the accrual method. Accordingly, revenues
are recorded in the period in which they are earned and expenses in the period
in which they are incurred.
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company generates revenue from the selling of online travel agencies, and
from providing maintenance and training services to the new business owners of
such online travel agencies. These online revenues are generated from new
referring travel agent ("RTA") sales and existing RTA maintenance fees. An
initial up-front sign-up fee, comprised of four separate components, is required
of each new RTA. However, not one of the fee components (namely, for the
preparation and delivery of training materials; the establishment of a website;
the setup in the online system that permits immediate tracking of RTA revenue;
and also residual RTA benefits) has a standalone value or represents the
culmination of a separate earnings process. As such, and in accordance with
Issue No. 00-21 of the Emerging Issues Task Force, a committee established by
the Financial Accounting Standards Board (FASB), the recognition of all up-front
fees received from new RTA sales is deferred. Such fees are recognized as income
over a period of thirty-six months, which is the average historical RTA turnover
rate. The current and noncurrent deferred portions of such fees received are
reflected as liabilities in the accompanying balance sheet. A 3-day
right-of-return period is extended to each new RTA; after such time no refund is
available. Monthly hosting and service fees are recognized in the month after
the services are provided; site fees are recognized as revenue in the month that
the service is provided; license fees are recognized 30 days following the
expiration of the license period. The associated rights of customers and
obligations of the Company over the period of the relationship are described in
detail in the master franchise agreement.
Expense recognition of commission costs
The Company incurs commission costs that are directly related to the origination
of new RTA sales; sales which result in the deferral of revenue. Such
incremental direct commission costs are capitalized in accordance with FASB
Technical Bulletin No. 90-1 (FTB 90-1). In addition, the Company has elected to
account for such commission costs in accordance with FTB 90-1, by deferring and
charging such costs to expense in proportion to the related revenue recognized,
over the same deferral period of thirty-six months.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
See independent auditors' report
(7)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, equipment and depreciation
Property and equipment is stated at cost and is depreciated over the estimated
useful lives of the related assets. Depreciation is computed by use of the
double-declining method for both reporting and income tax purposes. Property and
equipment is summarized by major classification as follows:
Capitalized software costs
Pursuant to Statement of Position No. 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, issued by the American
Institute of Certified Public Accountants, the Company capitalizes certain costs
incurred during an internal use software development project, including costs
related to applications, infrastructure, and graphics development for the
Company's website. Capitalized costs consist of the cost of the software license
agreement (Note 3), and certain external direct costs of materials and licensor
provided services incurred in developing the software for its specific
applications. Capitalized software costs are being amortized on a straight-line
basis over their expected useful life of sixty months.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 109, Accounting for Income Taxes, which
requires the recognition of deferred income taxes for differences between the
basis of assets and liabilities for financial statement and income tax purposes.
Deferred tax assets and liabilities represent the future tax consequence for
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
NOTE 3 - SOFTWARE LICENSE AGREEMENT AND DEVELOPMENT COSTS
In November 2002, the Company entered into a two-year agreement to license
software designed for, and expected to be utilized by, the Company in its
electronic commerce activities. In connection therewith, the Company paid the
licensor an aggregate of $38,000 for the development and testing cost, and
$5,000 for additional compensation plan programming cost.
See independent auditors' report
(8)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
NOTE 4 - LOANS TO STOCKHOLDERS
Loans to stockholders, representing advances to stockholders, bear an eight
percent interest rate and are due in 2009. The balance of these loans as of
December 31, 2003 was $41,500.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office space from an affiliated company under common
ownership. There are no express terms regarding the rental obligation of the
Company. Total rent expense recognized in the year ended December 31, 2003 was
$3,000.
In addition, the Company leases its copy machines under non-cancelable operating
leases expiring in various years through 2006. Future minimum payments under
such leases in excess of one year are approximated as follows:
Year Ending December 31, Amount
------------------------ ------
2004 $ 7,914
2005 7,914
2006 7,914
------
Total $ 23,742
======
Legal Proceedings
The Company is involved in legal proceedings incurred in the normal course of
business. As of December 31, 2003, in the opinion of management, there are no
proceedings that would have a material effect on the financial position of the
Company if adversely decided.
NOTE 6 - NOTES PAYABLE
Notes payable at December 31, 2003 consist of the following:
8.75% note payable in connection with vehicle
purchase. Interest and principal are payable in
monthly installments of $477.41 for 36 months,
due March 1, 2004. $ 917
18% note payable in connection with phone
system purchase. Interest and principal are
payable in monthly installments of $490 for 1,917
-----
36 months, due September 1, 2004.
Total $ 2,834
=====
See independent auditors' report
(9)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
NOTE 7 - RELATED PARTY TRANSACTIONS
In the normal course of business, the Company conducts certain transactions with
the shareholders and directors of the Company as well as with other related
parties affiliated by common control.
Since inception, the founder has provided funding to the Company to operate its
business at various times. All loans made by the founder bear a 12% interest
rate. As of December 31, 2003, the balance of these loans amounted to $339,081.
Also during 2003, the Company loaned $45,500 to one of its affiliated companies
related through common ownership. The loan bears no interest and is payable on
demand.
In addition, two of the shareholders of the Company received consulting income
in the amount of $17,750 in the year 2003.
NOTE 8 - MARKETING COMPENSATION PLAN
The Company offers a compensation plan to its sales representaives while its
sales revenue multiplies by the power of referral marketing. Representatives are
paid direct sales commissions, override compensation (if qualified) and other
bonus incentives based upon the amount of each representative's sales, or
enrolled referrals.
Direct Sales Commissions
Independent Marketing Representatives receive direct sales commissions of $50 on
all personal sales. They also receive an additional $50 Power Team Bonus
beginning with the fourth personal sale. Direct sales commissions are paid on a
weekly basis, based upon the amount of the previous week's sales. Residual
commissions are paid on a monthly basis for active representatives, following
the month earned. Bonuses are earned by maintaining a minimum number of personal
enrollments. Commission costs are capitalized and recognized as expense in
proportion to the related revenue recognized, over a period of thirty-six
months.
First Team Paycheck Match
Reps can also qualify to earn 50% "Paycheck Match" for each personally sponsored
Rep, regardless of how big their checks become. If an independent Rep's
personally sponsored Rep earns $1,000, the second earns $2,000 and the third
earns $5,000 ($8,000 total), the independent Rep's 50% "Paycheck Match" will be
$4,000.
Power Team Bonus
Each independent Rep's Power Team starts with the 4th personally sponsored Rep
and includes the 1st Team of every Rep in the Power Team through infinity.
Qualifiers will earn $50 on the first three sales made by every Rep in the Power
Team. Each independent Rep can either continue placing personally sponsored
people directly to him or her, or under someone in their Power Team. As long as
these RTAs are active, the independent Rep not only makes the Power Team bonus,
but he or she also receives the 50% "Paycheck Match".
See independent auditors' report
(10)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
NOTE 8 - MARKETING COMPENSATION PLAN (CONTINUED)
Dream Team Bonus
When one of the independent Rep's Power Team members starts their own Power
Team, that Power Team becomes a "1st Generation Team" to the independent Rep.
When a 1st Generation Rep starts his own Power Team, this Power Team becomes
"2nd Generation" to the independent Rep. This continues through six generations
of Power Teams. Qualifiers will earn $10 on every sale made by all Reps through
six generations of Power Teams, otherwise known as "Dream Team".
Monthly Residuals
Each active RTA pays a $49.95 monthly subscriber fee for their virtual online
travel store. Qualified independent Reps earn 4% residual income on every active
RTA subscriber enrolled by any Rep in the independent Rep Power Team and the
Power Teams of the independent Rep 1st, 2nd and 3rd Generation Dream Teams. In
addition, the independent Rep will earn 2% per month on the Power Teams of his
or her 4th, 5th and 6th Generation Dream Teams.
NOTE 9 - STOCKHOLDERS' EQUITY
During the year ended December 31, 2003, the Company issued an additional
9,545,000 shares of no par value common stock, which were recorded at their fair
value of $1,250,000 at the time of issuance. In addition, on February 11, 2003,
the Company's Board of Directors approved and ratified the purchase of 800,000
shares from Rezconnect Technology, Inc. in exchange for an exclusive contract to
service the Company's web-sites and travel services over a 20-year period.
NOTE 10 - SUBSEQUENT EVENTS
On December 8, 2004, the Company was acquired by Rezconnect Technologies, Inc.
("Rezconnect"), a publicly-held New York corporation, in a business combination
structured as a statutory merger under New York State law and the reorganization
provisions of the Internal Revenue Code. This acquisition, recorded at a total
value of $15,257,445, was effected through an exchange of equity interests, with
Rezconnect exchanging 7,430,000 shares of its common stock and 4,092,376 shares
of its Series B convertible preferred stock for 100% of the outstanding common
stock of the Company.
On January 4, 2005, the assets of this combined entity were assigned
respectively to three newly-organized privately-held Delaware corporations, with
each new entity becoming a wholly-owned subsidiary of Rezconnect on that date.
Further, on January 4, 2005 Rezconnect re-incorporated in the State of Delaware
and changed its name to YTB International, Inc. ("YTBL"). As a consequence of
this Delaware merger and associated re-incorporation, YTBL became the successor
to Rezconnect and its three subsidiaries, with each subsidiary becoming a
wholly-owned subsidiary of YTBL on that date.
See independent auditors' report
(11)
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Stockholders
YourTravelbiz.com, Inc.
Alton, Illinois
Our report on our audit of the basic financial statements of YourTravelbiz.com,
Inc. as of December 31, 2003, and for the year then ended, 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 accompanying schedule of selling,
general and administrative expenses is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has not been subjected to the auditing procedures applied in the
audit of the basic financial statements and, accordingly, we express no opinion
on it.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
May 31, 2005
(12)
YOURTRAVELBIZ.COM, INC.
SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31, 2003
Advertising $ 367
Audio and video 27,389
Auto 11,724
Bank charges 9,669
Commissions and bonuses 808,264
Conventions 41,599
Copier maintenance and supplies 6,542
Credit card processing fees 73,313
Depreciation and amortization 98,753
Dues and subscriptions 200
Equipment rental 6,767
Legal and professional 129,203
Licenses and permits 342
Meals and entertainment 12,120
Meeting expenses 26,575
Office expense 53,123
Operating expenses 48,503
Outside services 129,052
Payroll taxes 53,066
Postage and freight 78,885
Printing and reproduction 55,445
Processing fees 11,953
Professional development 12,177
Programming 7,500
Promotional expenses 27,182
Rent 3,000
Rep tracker 1,960
Repairs and maintenance 1,589
Software 3,703
Telephone 43,463
Travel 38,718
Wages 514,190
Web fees 208,558
---------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 2,544,894
===============
See independent auditors' report and notes to financial statements
(13)
YOURTRAVELBIZ.COM, INC.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
YEAR ENDED DECEMBER 31, 2002
YOURTRAVELBIZ.COM, INC.
TABLE OF CONTENTS
YEAR ENDED DECEMBER 31, 2002
Page
----
Independent Auditors' Report 1
Financial Statements
Balance Sheet 2
Statement of Operations and Accumulated Deficit 3
Statement of Cash Flows 4
Notes to Financial Statements 5 - 10
Independent Auditors' Report on Supplementary Information 11
Supplementary Information
Schedule of Selling, General and Administrative Expenses
12
INDEPENDENT AUDITORS' REPORT
To the Stockholders
YourTravelbiz.com, Inc.
Alton, Illinois
We have audited the accompanying balance sheet of YourTravelbiz.com, Inc. as of
December 31, 2002, and the related statements of operations and accumulated
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of YourTravelbiz.com, Inc. as of
December 31, 2002, 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.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
May 31, 2005
(1)
YOURTRAVELBIZ.COM, INC.
BALANCE SHEET
DECEMBER 31, 2002
ASSETS
CURRENT ASSETS
Current portion of prepaid commissions .................. $ 336,388
PROPERTY AND EQUIPMENT ........................................ 274,776
OTHER ASSETS
Prepaid commissions, less current portion ............... 525,833
Software development costs,
net of accumulated amortization of $12,730 .............. 25,270
Deferred tax assets ..................................... 272,168
Due from shareholders ................................... 17,700
Other assets ............................................ 12,216
-----------
TOTAL OTHER ASSETS ............................................ 853,187
-----------
TOTAL ASSETS .................................................. $ 1,464,351
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of notes payable ........................ $ 80,133
Accounts payable and accrued expenses ................... 91,466
Current portion of deferred revenue ..................... 336,388
Payroll and sales taxliabilities ........................ 12,447
-----------
TOTAL CURRENT LIABILITIES ..................................... 520,434
LONG-TERM LIABILITIES
Notes payable, less current portion ..................... 170,604
Deferred revenue, less current portion .................. 525,833
Due to founder .......................................... 869,531
-----------
TOTAL LONG-TERM LIABILITIES ................................... 1,565,968
-----------
TOTAL LIABILITIES ............................................. 2,086,402
STOCKHOLDERS' DEFICIT
Common stock, no par value, 20,000,000 shares authorized,
420,000 shares issued and outstanding ................... 1,000
Accumulated deficit ..................................... (623,051)
-----------
TOTAL STOCKHOLDERS' DEFICIT ................................... (622,051)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................... $ 1,464,351
===========
See independent auditors' report
(2)
YOURTRAVELBIZ. COM, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31, 2002
REVENUE
New RTA sales ........................ $ 133,939
Monthly maintenance fees ............. 689,748
Printing and administrative services . 102,380
-----------
926,067
Less returns and allowances .......... 42,453
-----------
TOTAL REVENUE .............................. 883,614
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,358,664
-----------
LOSS FROM OPERATIONS ....................... (475,050)
OTHER INCOME (EXPENSE)
Interest income ...................... 2,216
Interest expense ..................... (75,700)
-----------
TOTAL OTHER EXPENSE ........................ (73,484)
-----------
LOSS BEFORE INCOME TAXES ................... (548,534)
INCOME TAXES
Deferred tax benefit - Federal ....... (238,497)
Deferred tax benefit - State ......... (33,671)
-----------
TOTAL INCOME TAX BENEFIT ................... (272,168)
-----------
NET LOSS ................................... (276,366)
ACCUMULATED DEFICIT, BEGINNING OF YEAR,
BEFORE ADJUSTMENT ...................... (411,136)
PRIOR PERIOD ADJUSTMENT .................... 64,451
-----------
ACCUMULATED DEFICIT, BEGINNING OF YEAR,
AS RESTATED ................................ (346,685)
-----------
ACCUMULATED DEFICIT, END OF YEAR ........... $ (623,051)
===========
See independent auditors' report
(3)
YOURTRAVELBIZ.COM, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................... $(276,366)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization ....................... 133,806
Prior period adjustment ............................. 64,451
Accrued interest included in loans .................. 75,700
Changes in assets and liabilities:
Increase in prepaid commissions ................. (862,221)
Increase in deferred tax assets ................. (272,168)
Increase in interest receivable ................. (2,216)
Increase in accounts payable and accrued expenses 41,154
Increase in revenue received in advance ......... 862,221
Decrease in commissions payable ................. (29,385)
---------
NET CASH USED BY OPERATING ACTIVITIES .......................... (265,024)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of furniture and equipment ...................... (13,866)
Acquisition of software rights .............................. (38,000)
Cash advances ............................................... (27,700)
---------
NET CASH USED BY INVESTING ACTIVITIES .......................... (79,566)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of principal portion of loans .................... (86,278)
Loans from founder .......................................... 418,048
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................... 331,770
---------
NET DECREASE IN CASH ........................................... (12,820)
CASH OVERDRAFT, BEGINNING OF YEAR .............................. (22,460)
---------
CASH OVERDRAFT, END OF YEAR .................................... $ (35,280)
=========
See independent auditors' report
(4)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 1 - NATURE OF OPERATIONS
YourTravelbiz.com, Inc. (the "Company") is an Illinois corporation that was
incorporated in February 2001. The Company operates as a leading internet-based
travel store marketing business. Its main product is online travel agencies. It
also provides maintenance and training services related to the operation of
online travel agencies. Its product has been sold across America to hundreds of
brick and mortar franchised travel agents for tens of thousands of dollars. It
operates its business through the power of referral marketing to provide
independent business owners with the ultimate home-based business solutions.
The Company's operation is based on multi-level marketing (MLM). MLM is also
called network marketing - a business model which exemplifies direct marketing.
The Company has adopted this business model in its operation. Typically,
personally sponsored representatives (Reps) become associated with the Company
in a contractor-like relationship. These Reps receive remuneration for referring
new business owners who purchase the online travel agency product. The Company
has structured three teams of Reps who can qualify to earn income. The first
team is built with the help of one of the Company's leaders and is called the
"1st Team". The Reps will become the leaders who build the second team, which is
called the "Power Team". The third team is called the "Dream Team", which is
built by others with some help from the Reps in the Power Team.
The 1st Team is made of personally sponsored sales representatives plus the Reps
they sponsor, and so on. When a Rep is qualified to override, by having four
active personally sold Online Travel Agencies, the Rep will earn a 50% match of
the commissions earned by all personally sponsored Reps in the 1st Team. The 1st
Team is considered complete when this Rep:
o Personally sponsors 3 or more Reps, and
o Has 6 active RTA's (Referring Travel Agents) enrolled by this Rep
and/or this Rep's 1st Team Reps
Once the 1st Team is complete, the sponsored Rep qualifies to start his or her
Power Team with additional Reps. The Power Team includes the 1st Team of every
Rep and the Reps in the Power Team through infinity. When one of the personally
sponsored Reps' Power Team Reps starts a Power Team (regardless of depth), that
Power Team becomes a 1st Generation Dream Team to the sponsored Reps. When a 1st
Generation Rep starts a Power Team (regardless of depth), that Power Team
becomes a 2nd Generation Dream Team to the sponsored Reps. This continues
through six generations of Power Teams, and is called the sponsored Rep's Dream
Team.
In order to operate its electronic commerce business, during the year the
Company signed an exclusive 20-year management agreement to receive travel
website hosting services with a travel technology company. The website hosting
service offers its members with an interactive consumer website. Further, the
service provides its members all travel arrangements from the online sites.
See independent auditors' report
(5)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
These financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, using the accrual method. Accordingly, revenues
are recorded in the period in which they are earned and expenses are recorded in
the period in which they are incurred.
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company generates revenue from the selling of online travel agencies, and
from providing maintenance and training services to the new business owners of
such online travel agencies. These online revenues are generated from new
referring travel agent ("RTA") sales and existing RTA maintenance fees. An
initial up-front sign-up fee, comprised of four separate components, is required
of each new RTA. However, not one of the fee components (namely, for the
preparation and delivery of training materials; the establishment of a website;
the setup in the online system that permits immediate tracking of RTA revenue;
and also residual RTA benefits) has a standalone value or represents the
culmination of a separate earnings process. As such, and in accordance with
Issue No. 00-21 of the Emerging Issues Task Force, a committee established by
the Financial Accounting Standards Board (FASB), the recognition of all up-front
fees received from new RTA sales is deferred. Such fees are recognized as income
over a period of thirty-six months, which is the average historical RTA turnover
rate. The current and noncurrent deferred portions of such fees received are
reflected as liabilities in the accompanying balance sheet. A 3-day
right-of-return period is extended to each new RTA; after such time no refund is
available. Monthly hosting and service fees are recognized in the month after
the services are provided; site fees are recognized as revenue in the month that
the service is provided; license fees are recognized 30 days following the
expiration of the license period. The associated rights of customers and
obligations of the Company over the period of the relationship are described in
detail in the master franchise agreement.
Expense recognition of commission costs
The Company incurs commission costs that are directly related to the origination
of new RTA sales; sales which result in the deferral of revenue. Such
incremental direct commission costs are capitalized in accordance with FASB
Technical Bulletin No. 90-1 (FTB 90-1). In addition, the Company has elected to
account for such commission costs in accordance with FTB 90-1, by deferring and
charging such costs to expense in proportion to the related revenue recognized,
over the same deferral period of thirty-six months.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
See independent auditors' report
(6)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, equipment and depreciation
Property and equipment is stated at cost and is depreciated over the estimated
useful lives of the related assets. Depreciation is computed by use of the
double-declining method for both reporting and income tax purposes. Property and
equipment is summarized by major classification as follows:
Capitalized software costs
Pursuant to Statement of Position No. 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, issued by the American
Institute of Certified Public Accountants, the Company capitalizes certain costs
incurred during an internal use software development project, including costs
related to applications, infrastructure, and graphics development for the
Company's website. Capitalized costs consist of the cost of the software license
agreement (Note 3), and certain external direct costs of materials and licensor
provided services incurred in developing the software for its specific
applications. Capitalized software costs are being amortized on a straight-line
basis over their expected useful life of sixty months.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 109, Accounting for Income Taxes, which
requires the recognition of deferred income taxes for differences between the
basis of assets and liabilities for financial statement and income tax purposes.
Deferred tax assets and liabilities represent the future tax consequence for
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
NOTE 3 - SOFTWARE LICENSE AGREEMENT AND DEVELOPMENT COSTS
In November 2002, the Company entered into a two-year agreement to license
software designed for, and expected to be utilized by, the Company in its
electronic commerce activities. In connection therewith, the Company is required
to pay the licensor an aggregate of $38,000 for the development and testing
cost, and $5,000 for additional compensation plan programming cost. Such amounts
were paid in 2002.
NOTE 4 - LOANS TO STOCKHOLDERS
Loans to stockholders, representing advances to stockholders, bear an eight
percent interest rate and are due in 2009. The balance of these loans as of
December 31, 2002 was $17,700.
See independent auditors' report
(7)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office space from an affiliated company under common
ownership. There are no express terms regarding the rental obligation of the
Company. Total rent expense recognized in the year ended December 31, 2002 was
$10,000.
In addition, the Company leases its copy machines under non-cancelable operating
leases expiring in various years through 2006. Future minimum payments under
such leases in excess of one year are approximated as follows:
Year ending December 31, Amount
------------------------ ------
2003 $ 7,914
2004 7,914
2005 7,914
2006 7,914
------
Total $ 31,656
======
Legal Proceedings
The Company is involved in legal proceedings incurred in the normal course of
business. At December 31, 2002, in the opinion of management, there are no
proceedings that would have a material effect on the financial position of the
Company if adversely decided.
NOTE 6 - NOTES PAYABLE
Notes payable at December 31, 2002 consist of the following:
8.75% note payable in connection with vehicle
purchase. Interest and principal are payable in
monthly installments of $477.41 for 36 months,
due March 1, 2004. $ 6,307
18% note payable in connection with phone
system purchase. Interest and principal are
payable in monthly installments of $490 for
36 months, due September 1, 2004. 6,948
8% note payable in connection with the purchase
of printing equipment. Interest and principal are
payable in monthly installments of $7,182.63 for
60 months, due May 11, 2006. 237,482
--------
Total notes payable 250,737
Less: current portion 80,133
--------
Noncurrent portion $ 170,604
========
See independent auditors' report
(8)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 6 - NOTES PAYABLE (CONTINUED)
Maturities of notes payable as of December 31, 2002 are as follows:
In the normal course of business, the Company conducts certain transactions with
the shareholders and directors of the Company as well as with other related
parties affiliated by common control. Since inception, the founder has provided
funding to the Company to operate its business at various times. All loans made
by the founder bear a 12% interest rate. As of December 31, 2002, the balance of
these loans amounted to $869,531. In addition, one of the shareholders of the
Company received consulting income in the amount of $11,000 in the year 2002.
NOTE 8 - MARKETING COMPENSATION PLAN
The Company offers a compensation plan to its sales representatives while its
sales revenue multiplies by the power of referral marketing. Representatives are
paid direct sales commissions, override compensation (if qualified) and other
bonus incentives based upon the amount of each representative's sales, or
enrolled referrals.
Direct Sales Commissions
Independent Marketing Representatives receive direct sales commissions of $50 on
all personal sales. They also receive an additional $50 Power Team Bonus
beginning with the fourth personal sale. Direct sales commissions are paid on a
weekly basis, based upon the amount of the previous week's sales. Residual
commissions are paid on a monthly basis for active representatives, following
the month earned. Bonuses are earned by maintaining a minimum number of personal
enrollments. Commission costs are capitalized and recognized as expense in
proportion to the related revenue recognized, over a period of thirty-six
months.
First Team Paycheck Match
Reps can also qualify to earn 50% "Paycheck Match" for each personally sponsored
Rep, regardless of how big their checks become. If an independent Rep's
personally sponsored Rep earns $1,000, the second earns $2,000 and the third
earns $5,000 ($8,000 total), the independent Rep's 50% "Paycheck Match" will be
$4,000.
See independent auditors' report
(9)
YOURTRAVELBIZ.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 8 - MARKETING COMPENSATION PLAN (CONTINUED)
Power Team Bonus
Each independent Rep's Power Team starts with the 4th personally sponsored Rep
and includes the 1st Team of every Rep in the Power Team through infinity.
Qualifiers will earn $50 on the first three sales made by every Rep in the Power
Team. Each independent Rep can either continue placing personally sponsored
people directly to him or her, or under someone in their Power Team. As long as
these RTAs are active, the independent Rep not only makes the Power Team bonus,
but he or she also receives the 50% "Paycheck Match".
Dream Team Bonus
When one of the independent Rep's Power Team members starts their own Power
Team, that Power Team becomes a "1st Generation Team" to the independent Rep.
When a 1st Generation Rep starts his own Power Team, this Power Team becomes
"2nd Generation" to the independent Rep. This continues through six generations
of Power Teams. Qualifiers will earn $10 on every sale made by all Reps through
six generations of Power Teams, otherwise known as "Dream Team".
Monthly Residuals
Each active RTA pays a $49.95 monthly subscriber fee for their virtual online
travel store. Qualified independent Reps earn 4% residual income on every active
RTA subscriber enrolled by any Rep in the independent Rep Power Team and the
Power Teams of the independent Rep 1st, 2nd and 3rd Generation Dream Teams. In
addition, the independent Rep will earn 2% per month on the Power Teams of his
or her 4th, 5th and 6th Generation Dream Teams.
NOTE 9 - SUBSEQUENT EVENTS
On December 8, 2004, the Company was acquired by Rezconnect Technologies, Inc.
("Rezconnect"), a publicly-held New York corporation, in a business combination
structured as a statutory merger under New York State law and the reorganization
provisions of the Internal Revenue Code. This acquisition, recorded at a total
value of $15,257,445, was effected through an exchange of equity interests, with
Rezconnect exchanging 7,430,000 shares of its common stock and 4,092,376 shares
of its Series B convertible preferred stock for 100% of the outstanding common
stock of the Company.
On January 4, 2005, the assets of this combined entity were assigned
respectively to three newly-organized privately-held Delaware corporations, with
each new entity becoming a wholly-owned subsidiary of Rezconnect on that date.
Further, on January 4, 2005 Rezconnect re-incorporated in the State of Delaware
and changed its name to YTB International, Inc. ("YTBL"). As a consequence of
this Delaware merger and associated re-incorporation, YTBL became the successor
to Rezconnect and its three subsidiaries, with each subsidiary becoming a
wholly-owned subsidiary of YTBL on that date.
See independent auditors' report
(10)
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Stockholders
YourTravelbiz.com, Inc.
Alton, Illinois
Our report on our audit of the basic financial statements of YourTravelbiz.com,
Inc. as of December 31, 2002, and for the year then ended, 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 accompanying schedule of selling,
general and administrative expenses is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has not been subjected to the auditing procedures applied in the
audit of the basic financial statements and, accordingly, we express no opinion
on it.
Dischino & Associates, P.C.
Certified Public Accountants
and Business Consultants
May 31, 2005
(11)
YOURTRAVELBIZ.COM, INC.
SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31, 2002
Advertising $ 343
Audio and video 2,075
Auto 14,355
Commissions and bonuses 270,040
Conventions 18,718
Copier maintenance and supplies 7,221
Credit card processing fees 35,736
Depreciation and amortization 133,806
Dues and subscriptions 2,178
Equipment rental 401
Gifts 1,679
Insurance 410
Legal and professional 39,483
Licenses and permits 125
Meals and entertainment 3,939
Meeting expenses 29,108
Miscellaneous 774
Office expense 58,301
Outside services 28,890
Payroll taxes 31,888
Postage and freight 37,018
Printing and reproduction 39,979
Promotional expenses 25,796
Reimbursed and moving expenses 1,877
Rent 10,000
Rep tracker 15,220
Repairs and maintenance 622
Software 2,630
Telephone 34,331
Training 3,350
Travel 49,640
Travel agency 8,468
Bank charges 8,862
Wages 318,890
Web fees 122,511
----------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 1,358,664
================
See independent auditors' report and notes to financial statements
No dealer, salesperson or other individual has been authorized
to give any information or to make any representations not Selling Shareholders May
contained in this Prospectus in connection with the Secondary Be Selling Up to 3,000,000 Shares
Offering covered by this Prospectus. If given or made, such Of Common Stock
information or representation must not be relied upon as
having been authorized by the Company. This Prospectus does
not constitute as an offer to sell, or a solicitation of an
offer to buy, the common stock in any jurisdiction where, or
to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an
implication that there has not been any change in the facts
set forth in this Prospectus or in the affairs of the Company
since the date hereof.
YTB INTERNATIONAL, INC.
PROSPECTUS
TABLE OF CONTENTS
Descriptive Title Page
Prospectus Summary.............................__
Executive Summary..............................__ August ____, 2005
Selling
Shareholder....................................__
Plan of Distribution...........................__
Risk
Factors........................................__
Certain Relationships and Related Transactions.__
Fiduciary Responsibility of Management.........__
The Business..................................__
Management.....................................__
Capitalization.................................__
Dilution.......................................__
Dividends and Distributions...................__
Description of Securities......................__
Legal Matters..................................__
Where You Can Find More Information............__
Incorporation by Reference.....................__
Until September ___, 2005 (25 days after the date hereof),all
dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be
required to deliver a current copy of this Prospectus This
delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Reference is made to "Fiduciary Responsibility of Registrant's Management" and
"Description of Capital Stock" contained in the Prospectus relating to the
indemnification of Registrant's officers, directors, stockholders, employees and
affiliates. The Registrant is prohibited from indemnifying its affiliates for
liabilities resulting from violations or alleged violations of the Securities
Act of 1933 or any state securities laws in connection with the issuance or sale
of the shares of common stock, except in the case of successful defense of an
action in which such violations are alleged, and then only if a court approves
such indemnification after being appraised of relevant regulatory positions on
indemnification.
Specifically, each director or officer of Registrant will be indemnified against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the director or officer in
connection with the defense or settlement of any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, in which he is involved by reason of the fact that he is or was a
director or officer of Registrant; such indemnification, of course, is
conditioned upon such officer or director having acted in good faith and in a
manner that he reasonably believed to be in or not opposed to the best interests
of Registrant and, with respect to any criminal action or proceeding, if he had
no reasonable cause to believe that his conduct was unlawful. If, however, any
threatened, pending or completed action, suit or proceeding is by or in the
right of Registrant, the director or officer shall not be indemnified in respect
to any claim, issue or matter as to which he is adjudged to be liable to us
unless a court determines otherwise.
Moreover, the Delaware Certificate of Incorporation of Registrant provides that
no director of Registrant shall be personally liable to us or any of our
shareholders for monetary damages for any breach of fiduciary duty as a
director, except with respect to: (i) any breach of the director's duty of
loyalty to us or its shareholders; (ii) for acts or omissions that are not in
good faith or involve intentional misconduct or a knowing violation of the law;
(iii) violation of the Uniform Securities Act; or (iv) for any transaction from
which the director derived an improper personal benefit. In addition, such
Certificate of Incorporation authorizes us to indemnify any person to the
fullest extent permitted by the Delaware General Corporation Law.
Item 25. Other Expenses of Issuance and Distribution. *
The following table sets forth an itemized statement of all cash expenses in
connection with the issuance and distribution of the securities being
registered:
SEC registration fee $ 473.15
Blue sky fees and expenses* -0-
Printing and related costs* 750.00
Legal fees* 17,500.00
Accounting fees and expenses* -0-
Transfer Agent's fees -0-
Miscellaneous* 1,276.85
TOTAL $20,000.00**
* Estimated.
** Expenses will be the same irrespective of the number of shares, if any,
actually sold by selling shareholders.
Item 26. Recent Sales of Unregistered Securities
There has been an established trading market for the Registrant's common stock
since September 29, 1999. While changing over time, Registrant's trading symbol
is now YTBL. The last reported sale price for Registrant's common stock on July
29, 2005 was $2.35. As of July 29, Registrant had approximately [487]
shareholders of record owning, on a fully diluted basis, its [26,132,376]
out-standing shares of common stock.
On December 8, 2004, Registrant closed on its Merger and Stock Exchange
Agreement dated September 17, 2004 (the "Merger Agreement" and the associated
"Merger") by and among REZconnect Technologies, Inc. (the Registrant prior to
the recapitalization herein described, YourTravelBiz.com, Inc., a privately held
Illinois corporation ("YTB"), and all of the stockholders of YTB. As amended
November 19, 2004, the stockholders of YTB received in the Merger, in exchange
for 100% of YTB's capital stock, 11,522,376 newly issued shares of Registrant's
SB-2-1
capital stock (the "Merger Stock"). The Merger Stock consisted of 7,430,000
shares of common stock of the Company and 4,092,376 shares of Series B
Convertible Preferred Stock of the Company ("Series B Stock"). Each share of
Series B Stock was convertible into one share of Common Stock, subject to
adjustment, and has voting rights on an as converted basis. The issuance of the
Merger Stock to the 18 YTB shareholders was not registered as the transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933. In turn, the subsequent issuance of the shares in the reincorporated and
renamed YTB International, Inc. was an exchange with its existing shareholders
effected as of January 8, 2005 pursuant to Section 3(a)(9) of the Securities Act
of 1933.
On January 26, 2005, the Registrant authorized the sale to Laurus Master Fund,
Ltd. ("Laurus") of a Secured Convertible Term Note in the principal amount of
two million dollars ($2,000,000), which is convertible into the Registrant's
common stock at an initial fixed conversion price of $0.80 per share (the "Term
Note"). Laurus also acquired a Common Stock Purchase Warrant for the purchase of
up to 800,000 shares of Common Stock, exercisable until January 26, 2012 at a
price of $1.25 per share on the first 400,000 shares and $1.58 on the 400,000
share balance (the "Warrant"). The Term Note matures on January 26, 2008 and is
secured by a first priority lien on all collateral of the Registrant and its
wholly-owned subsidiaries, including inventory, accounts receivable, raw
materials and all of its ownership interests in REZconnect Technologies, Inc.,
YourTravelBiz.com, Inc. and YTB Travel Network, Inc., Registrant's wholly-owned
subsidiaries. The Term Note is also guaranteed by each of the Registrant's
wholly-owned subsidiaries. The Term Note accrues interest at a rate per annum
equal to the "prime rate" published in The Wall Street Journal from time to
time, plus three percent (3%), but shall in no event be less than eight percent
(8%) per annum. The Registrant also granted Laurus the right, on or prior to
October 26, 2005 (270 days following the closing) to issue an additional note in
the aggregate principal amount of $1,000,000 on the same terms and conditions
(including the same interest rate and fixed conversion price of $1.25). Finally
, the Registrant has granted Laurus registration rights with respect to all
shares of Common Stock underlying the Term Note and Warrant. Closing and funding
occurred on January 26, 2005. No underwriter was employed in connection with the
offer and sale of the shares. Registrant claimed the exemption from registration
in connection with such private placement offering provided under Section 4(2)
of the Act and Rule 505 of Regulation D thereunder. 500,000 shares of common
stock (paid as a finder's fees associated with the Laurus funding described
above) was also exempt from registration pursuant to Section 4(2) of the Act.
On February 8, 2005, Registrant commenced an offering of Units comprised of
12,500 shares of its common stock (@ $1.20 per share) and a warrant to purchase
12,500 shares of its common stock at an aggregate price of $15,000 per Unit. The
minimum offering is $300,000 and the maximum offering is $960,000. The warrants
attached to this Unit offering are exercisable for five years from the date of
issuance at an exercise price of $1.75 per share of underlying common stock. No
underwriter is being employed in connection with the offer and sale of the
shares. Registrant is claiming the exemption from registration in connection
with such private placement offering provided under Section 4(2) of the Act and
Rule 505 of Regulation D thereunder.
During the preceding twelve months, in the regular course of business,
Registrant has issued and sold (at varying prices tied to the average and bid
prices over the period of the services) 258,726 shares of common stock to three
service providers for services rendered (117,500 shares), seven employees in
lieu of reduced salaries (21,179 shares) and two master franchisors (120,047
shares). No underwriter was employed in connection with the offer and sale of
the shares. Registrant claimed the exemption from registration in connection
with such private placement offering provided under Section 4(2) of the Act and
Rule 505 of Regulation D thereunder.
Item 27. Index to Exhibits
(a)(1) Financial Statements - included in the Prospectus:
Consolidated Balance Sheet as of December 31, 2004 and 2003.
Consolidated Statements of Operations for the twelve months ended
December 31, 2004 and 2003.
Consolidated Statement of Cash Flows for the twelve months ended
December 31, 2004 and 2003.
Notes to Financial Statements.
Consolidated Balance Sheet as of March 31, 2004 and 2003.
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003.
Consolidated Statement of Cash Flows for the three months ended
March 31, 2004 and 2003.
Notes to Financial Statements.
YOURTRAVELBIZ.COM, INC.FINANCIAL STATEMENTSN INE MONTHS ENDED
SEPTEMBER 30, 2004
YOURTRAVELBIZ.COM, INC.FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31,2003
YOURTRAVELBIZ.COM, INC.FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31,2002
(a)(2) Included Separately from Prospectus: Consent of Independent Public
Accountants. (See Exhibit 23.2 below.)
SB-2-2
(b) Exhibits:
* 3.1 Certificate of Incorporation of Registrant.
* 3.2 Bylaws of Registrant.
* 3.3 Form of Stock Certificate.
5.1 Opinion of Counsel as to the legality of the Shares.
* 10.1 Employment Agreement between Registrant and Its Executive
Officers.
23.1 Consent of Counsel (Carl N. Duncan, Esq.).
23.2 Consent of Auditors (Dischino & Co., CPAs, P.C.).
* Incorporated by reference into prior filings made pursuant to
the Securities and Exchange Act of 1934
Item 28. Undertakings
A. Certificates: Inapplicable
B. Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement to: (i) include any prospectus required by Section
10(a) (3) of the Securities Act of 1933 (the "1933 Act"); (ii)
reflect in the Prospectus any facts or events which, together,
represent a fundamental change in the information in the
Registration Statement; and (iii) include any additional or
changed material information on the plan of distribution.
(2) For determining liability under the 1933 Act, treat each
post-effective amendment as a new Registration Statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that re- main unsold at the end of the
offering.
C. Request for Acceleration of Effective Date
The Registrant may elect to request acceleration of the effective date
of the Registration Statement under Rule 461 of the 1933 Act.
D. Indemnification
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, Regis- trant has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemni- fication is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
E. Rule 430A
The undersigned Registrant will, for determining any liability under
the Securities Act, treat the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of a Prospectus filed by the Registrant under Rule 424(b)
(1) or (4) or 497(h) under the Act as part of this Registration Statement as of
the time the Commission declared it effective.
SB-2-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 (via Amendment No. 2 thereto and has duly
caused this Amendment No. 2 to the Form SB-2 Registration Statement to be signed
on its behalf by the Undersigned, thereunto duly authorized, in the City of
Englewood Cliffs, State of New Jersey, on the 1st day of August , 2005.
YTB INTERNATIONAL, inc.
By: /s/ Michael Y. Brent
-------------------------
Michael Y. Brent, Chief Executive Officer
Pursuant to the requirements of the of the Securities Act of 1933, this Form
SB-2 (and associated Amendment to the Form S-3 filed February 22, 2005,
withdrawing the latter) Registration Statement has been signed below by the
following persons in their respective capacity as officer and/or director of the
Registrant on the date indicated.
Signatures/Title Date
---------------- ----
/s/ Lloyd J. Tomer August 1, 2005
------------------
Lloyd J. Tomer, Chairman of the Board
/s/ Michael Y. Brent August 1, 2005
--------------------
Michael Y. Brent, Director and Chief Executive Officer
/s/ J. Scott Tomer August 1, 2005
------------------
J. Scott Tomer, Director and President
/s/ J. Kim Sorensen August 1, 2005
-------------------
J. Kim Sorensen, Director and Treasuer
/s/ Derek J. Brent August 1, 2005
------------------
Derek J. Brent, Director and Secretary
/s/ Harold Kestenbaum August 1, 2005
---------------------
Harold Kestenbaum, Director
YTB International, Inc.
560 Sylvan Avenue--Suite 300
Englewood Cliffs, New Jersey 07632
Re: YTB International, Inc. Registration Statement on Form SB-2 Relating to
the Secondary Offering and Sale of Up To 3,000,000 Shares of Common
Stock by Laurus Master Fund, Ltd.
Ladies and Gentlemen:
Since March 31, 2000, undersigned has acted as securities counsel for
YTB International , Inc. , a recently re-incorporated Delaware company (and
successor to REZconnect Technologies, Inc., ETRAVNET.COM, Inc. and Playorena,
Inc., a New York corporation)--the "Company--in connection with the registration
under the Securities Act of 1933, as amended, of up to 3,000, 000 shares of
common stock of beneficial interest, par value $.001 per share (the "Shares"),
in the Company. Such Shares are those described in the Registration Statement
filed on the date hereof on Form SB-2 (the "Registration Statement"), with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act") proposed to be sold by Laurus Master Fund, Ltd., the
denoted selling shareholder ( not the Company), pur-suant to the referenced
Registration Statement.
You have requested our opinion regarding the legality of the Shares
registered pursuant to the Registration Statement. We have examined originals or
copies, certified to our satisfaction, of such records, agreements and other
instruments of the Company, certificates or public officials, certificates of
the officers or other representatives of the Company, and other documents, as we
have deemed necessary as a basis for the opinions hereinafter set forth. As to
various questions of fact material to such opinions, we have, when relevant
facts were not independently established, relied upon written factual
representations of officers and directors, including (but not limited to)
statements contained in the Registration Statement.
My opinion, insofar as it addresses issues of Delaware and New York
law, respectively, are based solely upon our review of (i) the records of the
Company; (ii) the New York General Business Law; and (iii) the Delaware General
Corporation Law. I do not express our opinion herein concerning any law other
than the laws of Delaware, New York and the United States.
I have assumed the genuineness of all signatures on documents reviewed
by or presented to me, the legal capacity of natural persons, the authenticity
of all items submitted as originals and the conformity with originals of all
items submitted as copies.
Based upon and subject to the foregoing and to the assumptions,
conditions and limitations set forth herein, I am of the opinion that the Common
Shares have been duly authorized and, when the Common Shares are sold in the
manner described in the Registration Statement, will be legally issued, fully
paid and non-assessable.
Specifically, I am of the opinion that:
1. The Company is a duly organized, validly existing corporation under the
laws of Delaware; and
2. The Shares of the Company to be offered by the selling shareholder
pursuant to the Prospectus forming a part of the Registration Statement
are validly authorized and, when sold, will be validly issued, fully
paid and non-assessable under the law of Delaware.
I hereby consent to the reference to our firm in the "Legal Matters"
section of the Prospectus and to the inclusion of this opinion as an Exhibit to
the Registration Statement.
By:/s/ Carl N. Duncan
-------------------
Carl N. Duncan, Esq.
EXHIBIT 23.1
CONSENT OF COUNSEL
I hereby consent to the reference to me under the caption "Legal Matters" in the
Prospectus which constitutes part of this Amendment No. 3 to this Form SB-2
Registration Statement for YTB International, Inc.
Bethesda, Maryland /s/ CARL N. DUNCAN, ESQ.
August 1, 2005
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Registration Statement of our reissued
report dated May 31, 2005 on the financial statements of REZconnect
Technologies, Inc., as of December 31, 2004, and to the reference to our firm
under the heading "Experts" in the Prospectus.
DISCHINO & ASSOCIATES, P.C.
Fairfield, New Jersey /s/ DISCHINO & ASSOCIATES, P.C., CPAs
August 1,2005
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