CETCON, INC.
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
for the nine months ended September 30, 2007
and for the years ended
December 31, 2006, 2006, and 2004
[Logo] McCauley Nicolas
CONTENTS
--------
Independent Auditors' Report 2
Financial Statements:
Balance Sheets 3
Statements of Income and Accumulated Deficit 4
Statements of Cash Flows 5
Notes to Financial Statements 6-10
[Logo] McCauley, Nicolas & Company, LLC The Solution is One Good Move Away
Certified Public Accountants & Advisors
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and
Stockholders of
Cetcon, Inc.
Cincinnati, Ohio
We have audited the accompanying balance sheets of Cetcon, Inc. as of September
30, 2007, December 31, 2006, 2005, and 2004, and the related statements of
income and accumulated deficit 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 Cetcon, Inc. 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
CETCON, INC.
BALANCE SHEETS
September 30, 2007 and December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31,
2007 2006 2005 2004
------------- ------------ ------------ ------------
ASSETS
------
CURRENT ASSETS
Cash $ 48,977 $ 43,488 $ 14,456 $ 1,605
Accounts receivable, net 352,738 420,857 209,733 214,316
--------- --------- --------- ---------
TOTAL CURRENT ASSETS 401,715 464,345 224,189 215,921
--------- --------- --------- ---------
PROPERTY AND EQUIPMENT
Equipment 89,653 75,815 71,542 88,657
Furniture and fixtures 42,321 42,321 42,944 40,173
Vehicles 136,173 38,199 38,199 --
--------- --------- --------- ---------
268,147 156,335 152,685 128,830
Less accumulated depreciation (98,517) (85,472) (83,893) (94,312)
--------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET 169,630 70,863 68,792 34,518
--------- --------- --------- ---------
OTHER ASSETS
Deposits 3,014 3,014 3,014 3,014
Accounts receivable long-term, net -- -- 19,909 574
--------- --------- --------- ---------
TOTAL OTHER ASSETS 3,014 3,014 22,923 3,588
--------- --------- --------- ---------
TOTAL ASSETS $ 574,359 $ 538,222 $ 315,904 $ 254,027
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term bank borrowings $ -- $ 86,440 $ 277,700 $ 322,286
Current portion of long-term debt 35,980 75,821 11,592 47,033
Accounts payable 15,062 12,285 20,226 32,026
Accrued liabilities 24,598 -- -- --
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 75,640 174,546 309,518 401,345
Long-term debt, less current portion 251,596 112,936 14,308 --
--------- --------- --------- ---------
TOTAL LIABILITIES 327,236 287,482 323,826 401,345
--------- --------- --------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 850 shares
authorized, 210 issued and outstanding 100 100 100 100
Paid-in capital 274,000 274,000 274,000 274,000
Accumulated deficit (26,977) (23,360) (282,022) (421,418)
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 247,123 250,740 (7,922) (147,318)
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 574,359 $ 538,222 $ 315,904 $ 254,027
========= ========= ========= =========
See notes to financial statements.
3
CETCON, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
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 $ 1,243,552 $ 1,816,075 $ 1,580,089 $ 1,523,037
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries and wages 540,004 744,920 775,104 717,209
Commissions and fees 95,500 91,500 -- --
Contract labor -- 7,590 2,555 74,859
Employee benefits 5,317 3,679 8,535 7,842
Payroll taxes 51,699 69,983 62,331 54,977
Insurance 46,252 65,446 55,526 63,055
Rent 37,923 45,038 48,717 45,885
Professional fees 10,263 9,674 12,058 6,880
Project expenses 169,426 240,372 310,466 251,972
Depreciation 26,003 20,050 17,859 9,111
Telephone 22,611 27,736 29,998 37,215
Utilities 7,979 9,048 7,475 6,360
Office and postage expense 5,908 10,131 8,869 7,566
Travel and lodging 28,844 30,945 17,121 36,094
Automobile expense 1,659 7,615 8,668 19,945
Miscellaneous expenses 7,075 6,115 2,388 7,483
Dues and subscriptions 14,759 11,170 9,588 3,120
Repairs and maintenance 1,457 3,191 1,587 2,775
Advertising and marketing 1,055 6,979 6,348 30,286
Bad debt expense -- -- 107 61,650
Meals and entertainment 2,618 3,723 4,733 7,364
Equipment lease expense -- -- 9,875 20,682
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,076,352 1,414,905 1,399,908 1,472,330
----------- ----------- ----------- -----------
OPERATING INCOME 167,200 401,170 180,181 50,707
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest expense (17,776) (27,789) (33,285) (29,423)
Gain (loss) on disposal of property and equipment (10,241) (1,319) -- 77
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSES) (28,017) (29,108) (33,285) (29,346)
----------- ----------- ----------- -----------
NET INCOME 139,183 372,062 146,896 21,361
ACCUMULATED DEFICIT, beginning of year/period (23,360) (282,022) (421,418) (442,779)
Distributions (142,800) (113,400) (7,500) --
----------- ----------- ----------- -----------
ACCUMULATED DEFICIT, end of year/period $ (26,977) $ (23,360) $ (282,022) $ (421,418)
=========== =========== =========== ===========
See notes to financial statements.
4
CETCON,
INC.
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 $ 139,183 $ 372,062 $ 146,896 $ 21,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 26,003 20,050 17,859 9,111
(Gain) loss on disposal of property and equipment 10,241 1,319 -- (77)
Bad debt expense -- -- 107 61,650
(Increase) decrease in:
Accounts receivable 68,119 (191,215) (14,859) (17,002)
Deposits -- -- -- 124
Increase (decrease) in:
Accounts payable 2,777 (7,941) (11,800) (16,143)
Accrued liabilities 24,598 -- -- --
--------- --------- --------- ---------
Net cash provided by operating activities 270,921 194,275 138,203 59,024
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (53,839) (23,915) (17,103) (18,774)
Proceeds from disposal of property and equipment 15,000 475 -- 300
--------- --------- --------- ---------
Net cash (used) by investing activities (38,839) (23,440) (17,103) (18,474)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on short-term bank borrowings, net (86,440) (191,260) (44,586) (2,714)
Proceeds from Issuance of long-term debt 200,000 200,000 -- --
Principal payments on long-term debt (197,353) (37,143) (56,163) (36,581)
Distributions (142,800) (113,400) (7,500) --
--------- --------- --------- ---------
Net cash (used) by financing activities (226,593) (141,803) (108,249) (39,295)
--------- --------- --------- ---------
NET INCREASE IN CASH 5,489 29,032 12,851 1,255
CASH AT BEGINNING OF YEAR/PERIOD 43,488 14,456 1,605 350
--------- --------- --------- ---------
CASH AT END OF YEAR/PERIOD $ 48,977 $ 43,488 $ 14,456 $ 1,605
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and equipment:
Cost of property and equipment $(150,011) $ (23,915) $ (52,133) $ (18,774)
Property and equipment purchased with debt 96,172 -- 35,030 --
Net cash used to acquire property and equipment $ (53,839) $ (23,915) $ (17,103) $ (18,774)
========= ========= ========= =========
SUPPLEMENTARY INFORMATION
Cash payments for:
Interest paid $ 17,776 $ 27,789 $ 33,285 $ 29,423
========= ========= ========= =========
See notes to financial statements.
5
CETCON, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Cetcon, Inc. (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, located in Cincinnati, Ohio, is an engineering consulting company
that works with commercial and government clients to design and implement their
voice, data, video, and security infrastructures and systems. The Company
provides single source expertise in the design and project management of
communication implementations, domestically and internationally.
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 $-0- at September 30, 2007 and $25,000 at December
31, 2006, 2005, and 2004.
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 5 years for equipment, 10 years for furniture and fixtures, and 5
years for vehicles.
6
CETCON, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Revenue Recognition
- -------------------
Revenue is recognized under the accrual method as the services are rendered to
the customer.
Advertising
- -----------
Advertising costs are charged to expense as incurred.
Sales tax
- ---------
Sales tax is recognized net of revenues received.
NOTE 2--SHORT-TERM BANK BORROWINGS
During 2007, the Company had an open line of credit with Integra Bank in the
amount of $250,000, due upon demand, expiring June 26, 2008. Interest is
calculated using the 30-day LIBOR rate plus 2.4% (7.675% at September 30, 2007).
The line of credit is secured by all business assets. No amount was outstanding
on this line of credit as of September 30, 2007.
During 2006, the Company had an open line of credit with Fifth Third Bank in the
amount of $125,000, due upon demand, expiring July 18, 2007. Interest is
calculated using Fifth Third's "prime rate" plus 1.5% (9.75% at December 31,
2006). The line of credit was secured by all business assets. The outstanding
line of credit at December 31, 2006 was $86,440.
During 2005, the Company had an open line of credit with Fifth Third Bank in the
amount of $325,000, due upon demand, expiring April 18, 2006. Interest is
calculated using Fifth Third's "prime rate" plus 3% (10% at December 31, 2005).
The line of credit was secured by all business assets. The outstanding line of
credit at December 31, 2005 was $277,700.
During 2004, the Company had an open line of credit with Fifth Third Bank in the
amount of $325,000, due upon demand, expiring April 18, 2005. Interest is
calculated using Fifth Third's "prime rate" plus 3% (8.25% at December 31,
2004). The line of credit was secured by all business assets. The outstanding
line of credit at December 31, 2004 was $322,286.
7
CETCON, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 3--LONG-TERM DEBT
Long-term debt is summarized as follows:
September 30,
2007 2006 2005 2004
------------- --------- --------- ---------
Note payable dated June 2007,
payable in monthly installments
of $2,466 including interest at
8.2%, maturing July 2012.
The note is secured by all
business assets. $ 198,254 $ -- $ -- $ --
Note payable dated May 2007, payable
in monthly installments of $1,261
including interest at 7.5%,
maturing May 2011. The note is
secured by a 2007 Lexus LS460. 48,371 -- -- --
Note payable dated May 2007, payable
in monthly installments of $1,040
including interest at 6.29%,
maturing May 2011. The note is
secured by a 2007 Cadillac Escalade. 40,951 -- -- --
Note payable dated February 2005,
payable in monthly installments
of $531 including interest at 5.6%,
matured April 2007. The note was
secured by a 2002 Chevy Tahoe. -- 7,174 12,950 --
Note payable dated February 2005,
payable in monthly installments
of $531 including interest at 5.6%,
matured April 2007. The note was
secured by a 2002 Chevy Tahoe. -- 7,174 12,950 --
Note payable dated July 2006, payable
in monthly installments of $6,360
including interest at 8.75%. This
note was paid-off June 2007. The
note was secured by all business
assets. -- 174,409 -- --
Note payable dated October 2003,
payable in monthly installments of
$4,115 including interest at 6.75%,
matured October 2005. The note was
secured by all business assets. -- -- -- 47,033
--------- --------- --------- ---------
Total long-term debt 287,576 188,757 25,900 47,033
Less current portion of long-term debt (35,980) (75,821) (11,592) (47,033)
--------- --------- --------- ---------
Total noncurrent portion of long-term debt $ 251,596 $ 112,936 $ 14,308 $ --
========= ========= ========= =========
Long-term debt as of September 30, 2007 matures as follows:
September 30:
2008 $ 35,980
2009 38,757
2010 41,739
2011 35,863
2012 135,237
--------
$287,576
========
8
CETCON, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 4--RETIREMENT PLAN
The Company has a 401 (k) retirement plan for all employees who meet certain
requirements as to age and length of service. Under this Plan, the Company
contributes $0.25 for every $1 contributed by the employee up to 6% of the
annual salary for all eligible employees. Pension expenses charged to operations
and included in "employee benefits" are as follows:
September 30,
2007 2006 2005 2004
------------- ------ ------ ------
Pension plan expenses $3,817 $3,275 $8,535 $7,124
====== ====== ====== ======
NOTE 5--LEASED PREMISES
The Company leases its office space from an unrelated party under an operating
lease with varying lease terms expiring October 2010. Total rent expenses under
this lease are as follows:
September 30,
2007 2006 2005 2004
------------- ------- ------- -------
Rent expense $37,923 $45,038 $48,717 $45,885
======= ======= ======= =======
Future rental payments under the lease as of September 30, 2007 are as follows:
September 30:
2008 $ 42,651
2009 43,408
2010 44,691
2011 3,733
--------
$134,483
========
NOTE 6--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. Additionally, the states in which the Company operates recognize
the S Corporation status. Accordingly, no provision has been made for federal or
state income taxes in the accompanying financial statements.
9
CETCON, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 7--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. There were no uninsured amounts at September 30, 2007.
Major Customers
- ---------------
Two recurring customers accounted for approximately 50%, 51%, 35% and 38% of the
Company's sales for the period ended September 30, 2007 and years ended December
31, 2006, 2005 and 2004, respectively. The nature of the Company's business is
such that major customers will vary due to technology needs.
NOTE 8--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, inventory, furniture,
customers, customer lists, contracts, business names, trademarks and
intellectual property) to an unrelated party for a sales price of $2,200,000.
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.
10