<PAGE>
FINANCIAL STATEMENTS
Immediate Results Through Intuitive Systems, LLC
Year ended December 31, 1999
with Report of Independent Auditors
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Immediate Results Through Intuitive Systems, LLC
Financial Statements
Year ended December 31, 1999
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.................................................... 1
Balance Sheets as of December 31, 1999 (Audited) and June 30, 2000 (Unaudited).... 2
Statements of Operations and Members' Deficit for the year ended December 31,
1999 (Audited) and the six months ended June 30, 2000
and 1999 (Unaudited)........................................................... 3
Statements of Cash Flows for the year ended December 31, 1999 (Audited)
and the six months ended June 30, 2000 and 1999 (Unaudited).................... 4
Notes to Financial Statements..................................................... 5
</TABLE>
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Report of Independent Auditors
The Members of Immediate Results Through Intuitive Systems, LLC
We have audited the accompanying balance sheet of Immediate Results Through
Intuitive Systems, LLC as of December 31, 1999, and the related statements of
operations and members' 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. 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 Immediate Results Through
Intuitive Systems, LLC as of December 31, 1999, 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.
ERNST & YOUNG LLP
Reno, Nevada
September 15, 2000
1
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Immediate Results Through Intuitive Systems, LLC
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 60,452 $ 41,067
Accounts receivable 196,377 182,170
Prepaid expenses and other assets 10,158 30,194
------------------- -------------------
Total current assets 266,987 253,431
Property and equipment, net of accumulated depreciation and
amortization of $321,138 and $446,250, respectively 394,746 422,930
Intangible assets, net of accumulated amortization of $103,980 and
$131,708, respectively 62,387 34,659
------------------- -------------------
$ 724,120 $ 711,020
=================== ===================
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 52,078 $ 204,330
Accrued liabilities 205,385 208,187
Line of credit 45,862 159,275
Note payable 9,229 -
Deferred revenue 1,536,106 1,650,861
Customer deposits 157,005 -
Current portion of capital lease obligations 25,172 96,328
------------------- -------------------
Total current liabilities 2,030,837 2,318,981
Deferred revenue 471,870 507,529
Capital lease obligations 125,020 109,802
Commitments and contingency (Note 7)
Members' deficit (1,903,607) (2,225,292)
------------------- -------------------
$ 724,120 $ 711,020
=================== ===================
</TABLE>
SEE ACCOMPANYING NOTES.
2
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Immediate Results Through Intuitive Systems, LLC
Statements of Operations and Members' Deficit
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ----------------------------
1999 2000 1999
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues $ 3,537,196 $ 2,195,833 $ 1,823,825
Cost and expenses:
Cost of software 1,103,693 625,619 435,500
Operating expenses 2,585,399 1,674,921 1,255,576
------------ ----------- ------------
3,689,092 2,300,540 1,691,076
------------ ----------- ------------
Income (loss) from operations (151,896) (104,707) 132,749
Interest expense, net (39,480) (16,978) (13,845)
------------ ----------- ------------
Net income (loss ) (191,376) (121,685) 118,904
Members' deficit, beginning of period (1,712,231) (1,903,607) (1,712,231)
Distribution to members - (200,000) -
------------ ----------- ------------
Members' deficit, end of period $(1,903,607) $(2,225,292) $(1,593,327)
============ =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
3
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Immediate Results Through Intuitive Systems, LLC
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1999 2000 1999
------------------ ------------------ -------------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (191,376) $ (121,685) $ 118,904
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 275,738 152,840 91,317
Increase (decrease) in operating assets and
liabilities:
Accounts receivable (119,815) 14,207 (111,098)
Accounts payable (29,523) 152,252 (24,996)
Accrued liabilities 82,671 2,802 33,968
Prepaid expenses and other assets 770 (1,350) 20
Customer deposits 160,338 (175,691) 5,027
Deferred revenue 309,768 150,414 116,085
------------------ ------------------ -------------------
Net cash provided by operating activities 488,571 173,789 229,227
INVESTING ACTIVITIES
Purchase of property and equipment (156,172) (60,296) (37,880)
------------------ ------------------ -------------------
Net cash used in investing activities (156,172) (60,296) (37,880)
FINANCING ACTIVITIES
Payments on capital lease obligations (30,296) (37,062) -
Payment on note payable (107,217) (9,229) -
Payment on line of credit (156,667) - (145,480)
Distribution to members - (200,000) -
Proceeds from line of credit - 113,413 -
------------------ ------------------ -------------------
Net cash used in financing activities (294,180) (132,878) (145,480)
------------------ ------------------ -------------------
Net increase (decrease) in cash 38,219 (19,385) 45,867
Cash, beginning of period 22,233 60,452 22,233
------------------ ------------------ -------------------
Cash, end of period $ 60,452 $ 41,067 $ 68,100
================== ================== ===================
Supplemental disclosure of cash flow information:
Acquisition of property and equipment through the
incurrence of capital lease obligations $ 121,770 $ 93,000 $ 96,880
Cash paid for interest $ 39,480 $ 16,978 $ 13,845
</TABLE>
SEE ACCOMPANYING NOTES.
4
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Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Immediate Results Through Intuitive Systems, LLC (the "Company"), a California
limited liability corporation was formed on March 15, 1996.
Under the terms of the L.L.C. Agreement and the laws of the State of California,
the liability of the Company's members is limited to the extent of the positive
balances in their respective members' equity accounts.
The Company is scheduled to terminate on December 31, 2025, unless terminated
sooner in accordance with the provisions of the L.L.C. Agreement.
The Company has the right of first refusal to purchase individual members'
respective equity interest in the Company pursuant to certain terms specified in
the L.L.C. Agreement. In the event the Company does not exercise its right to
purchase a member's interest, the remaining members have the right to purchase
the interest in proportion to their ownership interest.
The Company develops, supports and markets software applications specific to the
real estate industry.
The Company was acquired in July 2000 by HomeSeekers.com Incorporated.
INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements as of June 30, 2000 and for the six
months ended June 30, 2000 and 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000.
5
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Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), as amended by Statement of Position
98-4, Deferral of the Effective Date of a Provision of SOP 97-2 ("SOP 98-4"),
and Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions ("SOP 98-9"). The Company
derives revenue from the sale of software and post-contract support ("support").
Support includes telephone technical support and rights to unspecified updates.
Revenue from sale of software and support is recognized when persuasive evidence
of an agreement exists, shipment of the product has occurred, the fee is fixed
or determinable and collectibility is probable.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The
SAB states that all registrants are expected to apply the accounting and
disclosures described in it. The SEC staff, however, will not object if
registrants that have not applied this accounting do not restate prior financial
statements provided they report a change in accounting principle in accordance
with APB Opinion No. 20, Accounting Changes, by cumulative catch-up adjustments
no later than the fourth fiscal quarter of the fiscal year beginning after
December 15, 1999. The Company is currently evaluating the impact, if any, of
SAB 101 on its financial statements.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for the costs of developing software products to be sold in
accordance with Statement of Financial Accounting Standards 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" which
requires the capitalization of costs only during the period from the
establishment of technological feasibility to the time at which the product is
available for general release to customers. In addition, improvements that
significantly enhance or lengthen a product's life are capitalized. Minor
improvements and routine maintenance are not capitalized, and have been charged
to operating expenses in the accompanying statements of operations.
6
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Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products to the real estate industry throughout the United
States. The Company reviews customers' ongoing credit histories before extending
credit and generally does not require collateral. Management believes that an
adequate allowance for doubtful accounts has been provided. As the accounts
receivable are unsecured, nonperformance by the customers would result in losses
up to the recorded amount of the related receivables. The Company maintains all
its cash at financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include capital lease obligations,
short-term borrowings, cash and equivalents, accounts receivable and accounts
payable. The amounts of capital lease obligations approximate their fair values,
which have been determined by the use of discounted cash flow analyses. The
carrying values of the Company's short-term borrowings approximated their fair
values, based on current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amounts of cash and equivalents, accounts
receivable and accounts payable approximate fair value, based upon their
short-term nature.
7
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Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is a partnership for federal and state income tax purposes.
Accordingly, taxable income and losses of the Company are reportable on the
income tax returns of the members, and no provision for federal taxes has been
recorded on the accompanying financial statements. The Company is subject to a
tax on gross receipts in the state of California which amounted to approximately
$13,000 for the period from inception (March 15, 1996) through December 31,
1999.
ADVERTISING COSTS
The Company accounts for advertising costs as expenses in the period in which
they are incurred. Advertising expense for the year ended December 31, 1999
totaled approximately $270,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1999:
<TABLE>
<S> <C>
Furniture, fixtures and equipment $ 435,076
Developed software 280,808
-------------------
715,884
Less accumulated depreciation and amortization (321,138)
-------------------
$ 394,746
===================
</TABLE>
8
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Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1999:
<TABLE>
<S> <C>
Purchased technology $ 116,367
Customer list 50,000
-------------------
166,367
Less: accumulated amortization (103,980)
-------------------
$ 62,387
===================
</TABLE>
The Company acquired customer lists and purchased technology in connection with
an acquisition in 1998. The estimated fair value of the customer list was
determined by management based on the discounted adjusted operating income
stream that would have otherwise been subject to competition. The intangible
assets are being amortized on a straight-line basis over the remaining term of
the related agreement which is three years. Total amortization expense for the
year ended December 31, 1999 was $55,456.
4. LINE OF CREDIT
The Company entered into a revolving, unsecured, variable-rate line of credit
agreement (the "Line") with a bank, whereby the Company may borrow up to
$150,000. Interest on the Line is due monthly, calculated at 9.50%. The Line
matures on October 25, 2000. There were borrowings outstanding of $45,862 as of
December 31, 1999.
5. NOTE PAYABLE
The Company had an unsecured note payable bearing interest at 10%, in the amount
of $9,229 as of December 31, 1999, and maturing in February 2000.
9
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Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
6. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital leases with a net book value
of $231,157 at December 31, 1999. Amortization expense for such equipment
amounted to $39,543 for the year ended December 31, 1999.
The future minimum lease payments under all capital leases are as follows:
<TABLE>
<S> <C>
Years ending December 31:
2000 $ 73,275
2001 71,697
2002 39,712
-------------------
Total minimum lease payments 184,684
Less: amount representing interest (34,492)
-------------------
Present value of future minimum lease payments 150,192
Less: current portion (25,172)
-------------------
Long-term portion $ 125,020
===================
</TABLE>
7. COMMITMENTS AND CONTINGENCY
OPERATING LEASES
The Company leases its facility under an operating lease expiring in November
2001. Future minimum rental payments under this operating lease as of December
31, 1999 are as follows:
<TABLE>
<S> <C>
Year Ending December 31:
2000 $ 108,062
2001 141,675
-------------------
$ 249,737
===================
</TABLE>
Rent expense totaled $89,814 for the year ended December 31, 1999 and has been
included in operating expenses.
10
<PAGE>
Immediate Results Through Intuitive Systems, LLC
Notes to Financial Statements
December 31, 1999
(Information relating to June 30, 2000 and the Six Months ended
June 30, 1999 and 2000 is unaudited)
7. COMMITMENTS AND CONTINGENCY (CONTINUED)
CONTINGENCY
The Company is in negotiations concerning the settlement of a claim against it
for alleged unpaid license fees. Management of the Company does not believe that
any payment resulting from the settlement will be significant to the Company's
financial position or results of operations.
8. BUSINESS SEGMENTS
During the year ended December 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement established
standards for reporting information on operating segments in interim and annual
financial statements. The Company currently operates in one business segment,
software and support.
9. YEAR 2000 ISSUE (UNAUDITED)
During 1999, the Company completed its assessment of the impact of the
accounting for the Year 2000 on its computer software and hardware systems used
in the Company's operating and accounting functions. Subsequent to year end, the
Company experienced no significant problems regarding Year 2000 computer issues.
11
