ADVANCE DATA SYSTEMS, INC.
d/b/a ADSnetcurve
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
for the nine months ended September 30, 2007
and for the years ended
December 31, 2006, 2005, and 2004
[Logo] McCauley Nicolas
CONTENTS
--------
Independent Auditors' Report 2
Financial Statements:
Balance Sheets 3
Statements of Income 4
Statements of Changes in Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7-11
[Logo] McCauley Nicolas & Company, LLC The Solution Is One Good Move Away
Certified Public Accountants & Advisors
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders of
Advance Data Systems, Inc.
d/b/a ADSnetcurve
Louisville, KY
We have audited the accompanying balance sheets of Advance Data Systems, Inc.
d/b/a ADSnetcurve as of September 30, 2007, and December 31, 2006, 2005, and
2004, and the related statements of income and changes in stockholders' equity
and cash flows for the nine months and 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 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 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 Advance Data Systems, Inc.
d/b/a ADSnetcurve as of September 30, 2007, December 31, 2006, 2005, and 2004,
and the results of its operations and its cash flows for the nine months and
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ McCauley, Nicolas & Company, LLC
McCauley, Nicolas & Company, LLC
Certified Public Accountants
Jeffersonville, Indiana
November 26, 2007
702 North Shore Drive, Suite 500 Jeffersonville, IN 47130-3104
812-288-6621 fax 812-288-2885 www.mnccpa.com
Kenneth N. Nicolas, CPA Ronald F Barnes, CPA, PFS Lee E. Pieper, CPA
J. Patrick Byrne, CPA John C. Pieper, CPA Daniel K. McCauley, CPA, ABV
J. Michael Grinnan, CPA Kenneth W. Coyle, CPA R. Kenneth Adams, CPA
MEMBER
PKF North American Network American Institute of CPAs AICPA PCPS Division
Indiana CPA Society Kentucky Society of CPAs
ADVANCE DATA SYSTEMS, INC.
d/b/a ADSnetcurve
BALANCE SHEETS
September 30, 2007 and December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31,
ASSETS 2007 2006 2005 2004
------ ------------- ------------ ------------ ------------
CURRENT ASSETS
Cash $ 164,952 $ 1,145,053 $ 130,356 $ 1,347
Accounts receivable, net 200,845 531,133 212,699 265,779
Other receivables 7,998 5,046 6,828 1,021
Prepaid expenses 23,813 42,634 41,644 33,857
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 397,608 1,723,866 391,527 302,004
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT
Office equipment 165,817 222,045 186,375 184,875
Leasehold improvements 7,763 64,660 57,476 57,476
----------- ----------- ----------- -----------
173,580 286,705 243,851 242,351
Accumulated depreciation (140,544) (240,446) (221,933) (192,132)
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 33,036 46,259 21,918 50,219
----------- ----------- ----------- -----------
OTHER ASSETS
Deposits 12,253 12,253 25,175 6,478
Investment in Accella Learning, LLC 54,000 -- -- --
Goodwill -- -- 414,900 414,900
----------- ----------- ----------- -----------
TOTAL OTHER ASSETS 66,253 12,253 440,075 421,378
----------- ----------- ----------- -----------
TOTAL ASSETS $ 496,897 $ 1,782,378 $ 853,520 $ 773,601
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Line of credit $ -- $ -- $ -- $ 30,000
Current portion of long-term debt -- 117,708 117,708 163,428
Accounts payable 11,364 4,810 14,852 47,155
Accrued expenses 47,233 119,225 74,429 17,088
Other liabilities 3,465 26,576 4,750 164,000
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 62,062 268,319 211,739 421,671
Long-term debt, less current portion -- 645,184 772,672 688,222
----------- ----------- ----------- -----------
TOTAL LIABILITIES 62,062 913,503 984,411 1,109,893
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $10 par value, 500 shares authorized,
200 issued and outstanding (2005 and 2004), 192
outstanding (2007 and 2006) 1,920 1,920 2,000 2,000
Additional paid in capital 200,000 200,000 200,000 200,000
Retained earnings (deficit) 232,915 666,955 (332,891) (538,292)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 434,835 868,875 (130,891) (336,292)
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 496,897 $ 1,782,378 $ 853,520 $ 773,601
=========== =========== =========== ===========
See notes to financial statements
3
ADVANCE DATA SYSTEMS, INC.
d/b/a ADSnetcurve
STATEMENTS OF INCOME
for the nine months ended September 30, 2007
and for the years ended December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31,
2007 2006 2005 2004
------------- ------------ ------------ ------------
NET SALES $ 1,311,181 $ 1,766,121 $ 1,440,181 $ 1,361,873
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries and wages 529,497 849,227 796,914 735,267
Contract labor 47,902 69,135 70,592 79,367
Payroll taxes 41,825 59,287 57,943 61,575
Insurance 58,040 77,768 59,250 52,654
Rent 46,885 77,509 114,812 147,522
Consulting fees 22,500 30,000 21,000 44,013
Professional fees 8,871 29,880 3,638 2,000
Project expenses 4,295 16,557 3,500 19,842
Depreciation 12,614 18,513 29,801 50,617
Telephone 30,232 26,669 17,646 51,105
Office and postage expense 13,258 17,923 16,491 18,651
Travel and lodging 6,275 15,333 14,989 7,404
Miscellaneous expenses 1,375 4,499 7,790 8,334
Dues and subscriptions 2,507 6,357 8,519 5,117
Advertising and marketing 498 2,680 6,804 3,628
Bad debt expense 84,653 -- -- 24,616
Research and development 256,426 -- -- --
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,167,653 1,301,337 1,229,689 1,311,712
----------- ----------- ----------- -----------
OPERATING INCOME 143,528 464,784 210,492 50,161
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest income 4,351 -- -- --
Interest expense (16,358) (66,978) (59,744) (55,716)
Loss on disposal of property (837) -- -- (7,643)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSES) (12,844) (66,978) (59,744) (63,359)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 130,684 397,806 150,748 (13,198)
PROVISION FOR INCOME TAXES 8,880 29,263 14,925 --
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 121,804 368,543 135,823 (13,198)
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS
Income from discontinued Diya operations -- 181,712 196,942 209,473
Gain from disposal of Diya operations -- 820,064 -- --
----------- ----------- ----------- -----------
-- 1,001,776 196,942 209,473
Less: Provision for Income taxes -- 75,248 19,784 --
----------- ----------- ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS -- 926,528 177,158 209,473
----------- ----------- ----------- -----------
NET INCOME $ 121,804 $ 1,295,071 $ 312,981 $ 196,275
=========== =========== =========== ===========
See notes to financial statements.
4
ADVANCE DATA SYSTEMS, INC.
d/b/a ADSnetcurve
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the nine months ended September 30, 2007
and for the years ended December 31, 2006, 2005, and 2004
Retained Total
Additional Paid- Earnings Stockholders'
Common Stock in Capital (Deficit) Equity
----------- ---------------- ----------- -----------
Balance (Deficit), December 31, 2003 $ 2,000 $ -- $ (734,567) $ (732,567)
Contributed capital -- 200,000 -- 200,000
Net income -- -- 196,275 196,275
----------- ----------- ----------- -----------
Balance (Deficit), December 31, 2004 2,000 200,000 (538,292) (336,292)
Distributions -- -- (107,580) (107,580)
Net income -- -- 312,981 312,981
----------- ----------- ----------- -----------
Balance (Deficit), December 31, 2005 2,000 200,000 (332,891) (130,891)
Shares redeemed under purchase agreement (80) -- (99,920) (100,000)
Distributions -- -- (195,305) (195,305)
Net income -- -- 1,295,071 1,295,071
----------- ----------- ----------- -----------
Balance December 31, 2006 1,920 200,000 666,955 868,875
Distributions -- -- (555,844) (555,844)
Net income -- -- 121,804 121,804
----------- ----------- ----------- -----------
Balance September 30, 2007 $ 1,920 $ 200,000 $ 232,915 $ 434,835
=========== =========== =========== ===========
See notes to financial statements.
5
ADVANCE DATA SYSTEMS, INC.
d/b/a ADSnetcurve
STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2007
and for the years ended December 31, 2006, 2005 and 2004
September 30, December 31, December 31, December 31,
2007 2006 2005 2004
------------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 121,804 $ 1,295,071 $ 312,981 $ 196,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,614 18,513 29,801 50,617
Bad debt expense 84,653 -- -- 24,616
Loss on disposal of property 837 -- -- 7,643
Gain on disposal of Diya operations -- (820,064) -- --
(Increase) decrease in:
Accounts receivable 245,635 (193,434) 53,080 (66,701)
Other receivables (2,952) 1,782 (5,807) (689)
Prepaid expenses 18,821 (990) (7,787) (15,431)
Deposits -- 12,922 (18,697) (6,478)
Increase (decrease) in:
Accounts payable 6,554 (10,042) (32,303) (31,326)
Accrued expenses (71,992) 44,796 57,341 596
Other liabilities (23,111) 21,826 (159,250) 6,000
----------- ----------- ----------- -----------
Net cash provided by operating activities 338,863 370,380 229,359 165,122
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (978) (42,854) (1,500) (24,875)
Proceeds from disposal of property and equipment 750 -- -- 2,210
Proceeds from sale of Diya operations -- 1,109,964 -- --
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities (228) 1,067,110 (1,500) (22,665)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing (proceeds) from line of credit -- -- (30,000) (181,730)
Proceeds from issuance of long-term debt -- -- 1,008,044 --
Principal payments on long-term debt (762,892) (127,488) (969,314) (159,380)
Purchase of shareholder stock -- (100,000) -- --
Additional contributed capital -- -- -- 200,000
Distributions (555,844) (195,305) (107,580) --
----------- ----------- ----------- -----------
Net cash (used) by financing activities (1,318,736) (422,793) (98,850) (141,110)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (980,101) 1,014,697 129,009 1,347
CASH AT BEGINNING OF YEAR/PERIOD 1,145,053 130,356 1,347 --
----------- ----------- ----------- -----------
CASH AT END OF YEAR/PERIOD $ 164,952 $ 1,145,053 $ 130,356 $ 1,347
=========== =========== =========== ===========
SUPPLEMENTARY INFORMATION Cash payments for:
Interest $ 16,358 $ 66,978 $ 59,744 $ 55,716
=========== =========== =========== ===========
Income taxes $ 83,641 $ 57,075 $ 7,384 $ --
=========== =========== =========== ===========
See notes to financial statements.
6
ADVANCED DATA SYSTEMS, INC.
d/b/a ADSnetcurve
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Advance Data Systems, Inc.
d/b/a ADSnetcurve (the Company) is presented to assist in understanding the
financial statements. The financial statements and notes are representations of
the Company's management, who is responsible for its integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in
the United States of America and have been consistently applied in the
preparation of the financial statements.
The more significant accounting policies are as follows:
Nature of Operations
- --------------------
The Company specializes in application development services, information
technology management and hosting services, and business support services. The
Company began doing business in 1982 and is headquartered in Louisville,
Kentucky, with an additional location in Mangalore, India.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities (and disclosure of contingent assets and liabilities, if any) 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.
Cash Equivalents
- ----------------
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. There were no cash equivalents at
September 30, 2007, December 31, 2006, 2005, and 2004.
Accounts Receivable
- -------------------
The Company uses the allowance for bad debts method of valuing doubtful accounts
receivable which is based on historical experience, coupled with a review of the
current status of existing receivables. Management has determined the allowance
for doubtful receivables was $84,653 at September 30, 2007 and $24,616 at
December 31, 2004. No allowance was determined to be necessary at December 31,
2006 and 2005.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Maintenance and repairs are charged
to expense as incurred; renewals or betterments are capitalized. Gain or loss on
retirements or disposition of assets is credited or charged to operations, and
the respective costs and accumulated depreciation are eliminated from the
accounts.
Depreciation is provided on the basis of estimated useful lives of the assets
using the straight-line and declining-balance methods. The estimated useful
lives are 3-7 years for office equipment and 3-5 years for leasehold
improvements.
7
ADVANCED DATA SYSTEMS, INC.
d/b/a ADSnetcurve
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Intangible Assets
- -----------------
In July 2001, the FASB issued Statements of Financial Accounting Standards
("Statement") No. 142, "Goodwill and Other Intangible Assets." This Statement
changed the accounting for goodwill by requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. Intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The goodwill that existed as of December 31, 2005 and 2004 was
sold in 2006. See Note 7 for more information.
Revenue Recognition
- -------------------
Revenue is recognized under the accrual method as the services are rendered to
the customer.
Research and Development
- ------------------------
Research and development costs are charged to operations when incurred and are
included in operating expenses.
Advertising
- -----------
Advertising costs are charged to expense as incurred.
Sales tax
- ---------
Sales tax is recognized net of revenues received.
NOTE 2--INVESTMENT IN ACCELLA LEARNING, LLC
On January 1, 2007, the Company acquired a 5% ownership of Accella Learning, LLC
(Accella) valued at $54,000. Additionally, the Company is providing both project
and administrative management services for Accella. Revenue totaling
approximately $82,000, with respect to these services, is included in Net Sales
on the Statement of Income during the period ended September 30, 2007.
NOTE 3--SHORT-TERM BANK BORROWINGS
During 2004, the Corporation had an open line of credit with Fifth Third Bank in
the amount of $225,000, due upon demand which expired May 15, 2005. Interest was
calculated using Fifth Third's "prime rate" (5.75% at December 31, 2004). The
line of credit was secured by all business assets. The outstanding line of
credit at December 31, 2004 was $30,000.
8
ADVANCED DATA SYSTEMS, INC.
d/b/a ADSnetcurve
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 4--LONG-TERM DEBT
There was no outstanding long-term debt at September 30, 2007. Long-term debt at
December 31, 2006, 2005 and 2004 consisted of the following:
2007 2006 2005 2004
----- --------- --------- ---------
Note payable dated February 11, 2005,
payable in monthly installments
of $9,809, including interest at
5.5%, with lump sum of $483,009.
The original maturity was
February 11, 2008. The note was
paid off in 2007. The note was
secured by all business assets. $ -- $ 598,892 $ 726,380 $ --
Note payable dated February 11, 2005,
payable in monthly interest installments
at 5.5%, with lump sum of $164,000.
The original maturity was February 11,
2008. The note was paid off in 2007.
The note was secured by all business
assets. -- 164,000 164,000 --
Note payable dated October 2003, payable
in monthly installments of $17,625
including interest at 5.75%, maturing
May 15, 2005. The note was secured by
all business assets. -- -- -- 851,650
----- --------- --------- ---------
Total long-term debt -- 762,892 890,380 851,650
Less current portion of long-term debt -- (117,708) (117,708) (163,428)
----- --------- --------- ---------
Total noncurrent debt $ -- $ 645,184 $ 772,672 $ 688,222
===== ========= ========= =========
NOTE 5--RETIREMENT PLAN
The Company has a 401 (k) plan for all eligible employees. Eligible employees
are those who have attained the age of 21 with enrollments occurring on January
1 and July 1 of each year. Contributions to the Plan are made at the discretion
of the owners. There were no contributions for the nine months ended September
30, 2007 or for the years ended December 31, 2006, 2005 and 2004.
9
ADVANCED DATA SYSTEMS, INC.
d/b/a ADSnetcurve
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 6--LEASED PREMISES
The Company entered into a lease for office space under a lease expiring
February 2008. Total lease expense under this lease for the nine months ended
September 30, 2007 and for the years ended December 31, 2006, 2005, and 2004 is
as follows:
September 30,
2007 2006 2005 2004
------------- ---------- ---------- ----------
Minimum rentals $ 92,316 $ 127,815 $ 120,212 $ 167,051
Less: Sublease rentals (45,431) (50,306) (5,400) (19,529)
--------- --------- --------- ---------
Total rent expense $ 46,885 $ 77,509 $ 114,812 $ 147,522
========= ========= ========= =========
Future rental payments under the lease are:
From October 2007
through February 2008 $47,944
=======
Total minimum lease payments have not been reduced by $16,855 to be received in
the future under non-cancelable subleases.
The Company also has an incubator lease for office space in India under a lease
expiring February 2008. The payments for this lease have been included in Diya
systems expenses. Future rental payments under this lease are Rupees Six Hundred
Thirty Thousand (approximately $16,014).
NOTE 7--DISCONTINUED OPERATIONS
Effective December 29, 2006, the Company sold assets of Diya Systems, a division
of the Company. The Company originally purchased Diya Systems in 2003 which
included $414,900 of Goodwill as reflected on the Balance Sheets. The sale of
the division removed the Goodwill and the remaining gain has been shown as
discontinued operations on the Statements of Income.
NOTE 8--INCOME TAXES
The Company, with the consent of its stockholders, elected to be taxed as an S
Corporation under the provisions of the Internal Revenue Code. Under those
provisions, taxable income is reported on the tax returns of the individual
stockholders.
The Company was subject to both Kentucky and local income taxes. The provision
for this tax for the nine-month period and years ended September 30, 2007,
December 31, 2006 and 2005 was $8,880, $104,511 and $34,709, respectively, and
is reflected as an expense in the Statements of Income within both continuing
and discontinuing operations.
10
ADVANCED DATA SYSTEMS, INC.
d/b/a ADSnetcurve
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 9--STOCKHOLDERS' EQUITY
During 2006, the Company entered into an agreement with a previous stockholder
to repurchase 8 shares of the Company's stock at $12,500 per share. The total
redemption of $100,000 was finalized in December 2006.
NOTE 10--CONCENTRATION OF CREDIT RISK
Cash Concentration Risk
- -----------------------
The Company maintains its cash balances at financial institutions, which at
times may be in excess of FDIC (Federal Deposit Insurance Corporation) insured
limits.
Major Customers
- ---------------
Sales to two major customers during the period ended September 30, 2007 totaled
approximately 64% of the total sales income. Sales to the major customers, for
the years ended December 31, 2006, 2005 and 2004 were approximately 68%, 68% and
65% of the total sales income, respectively.
NOTE 11--SALE OF OPERATING ASSETS UNDER AN OUTSTANDING LETTER OF INTENT
The Company has entered into a letter of intent to sell substantially all of the
business assets (including but not limited to equipment, furniture, customers,
customer lists, contracts, business names, trademarks and intellectual property)
to an unrelated party for a sales price of approximately $1,600,000. This amount
will be paid with a combination of cash, stock and a promissory note. If
consummated, the transaction is scheduled to be completed in December 2007.
11