STRATEGIC COMMUNICATIONS, LLC
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 Operations and Members' Deficit 4
Statements of Cash Flows 5
Notes to Financial Statements 6-11
[Logo] McCauley, Nicolas & Company, LLC The Solution is One Good Move Away
Certified Public Accountants & Advisors
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Members of
Strategic Communications, LLC
Louisville, Kentucky
We have audited the accompanying balance sheets of Strategic Communications, LLC
as of September 30, 2007, and December 31, 2006, 2005, and 2004, and the related
statements of operations and members' 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 audits 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 Strategic Communications, LLC
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
STRATEGIC COMMUNICATIONS, LLC
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 $ -- $ -- $ 28,865 $ --
Accounts receivable, net 334,445 348,397 592,799 164,799
Inventory, current portion 409,377 363,087 256,810 295,398
Other current assets 10,831 16,734 34,330 13,896
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 754,653 728,218 912,804 474,093
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT
Machinery and equipment 317,595 311,248 300,818 242,402
Furniture and fixtures 72,009 72,009 49,342 45,305
Leasehold improvements 18,027 16,914 7,227 39,353
Vehicles 89,470 89,471 44,266 7,678
497,101 489,642 401,653 334,738
Less accumulated depreciation (235,654) (187,709) (132,808) (90,031)
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 261,447 301,933 268,845 244,707
----------- ----------- ----------- -----------
OTHER ASSETS
Inventory, less current portion 58,056 56,502 49,625 50,780
Intangible asset 46,642 46,642 -- --
Other assets 13,555 12,505 21,264 12,989
----------- ----------- ----------- -----------
TOTAL OTHER ASSETS 118,253 115,649 70,889 63,769
----------- ----------- ----------- -----------
TOTAL ASSETS $ 1,134,353 $ 1,145,800 $ 1,252,538 $ 782,569
=========== =========== =========== ===========
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 140,000 $ 140,000 $ 2,400 $ --
Current portion of capital lease obligation 16,663 16,051 -- --
Bank overdraft 34,456 3,784 -- 15,982
Accounts payable 1,192,653 1,018,317 877,933 806,385
Accrued liabilities 274,790 147,400 156,240 127,445
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,658,562 1,325,552 1,036,573 949,812
----------- ----------- ----------- -----------
LONG TERM LIABILITIES
Capital lease, less current portion 12,331 24,905 -- 3,095
Loan payable to members 212,092 374,778 491,887 357,058
----------- ----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 224,423 399,683 491,887 360,153
----------- ----------- ----------- -----------
TOTAL LIABILITIES 1,882,985 1,725,235 1,528,460 1,309,965
TOTAL MEMBERS' DEFICIT (748,632) (579,435) (275,922) (527,396)
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND MEMBERS' DEFICIT $ 1,134,353 $ 1,145,800 $ 1,252,538 $ 782,569
=========== =========== =========== ===========
See notes to financial statemersts.
3
STRATEGIC COMMUNICATIONS, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
for the nine months ended September 30, 2007
and the years ended December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31,
2007 2006 2005 2004
------------- ------------ ------------ ------------
NET SALES $ 2,486,265 $ 5,097,414 $ 6,657,947 $ 5,037,075
DIRECT MATERIAL COSTS 994,333 2,645,756 3,905,061 2,433,786
----------- ----------- ----------- -----------
GROSS PROFIT 1,491,932 2,451,658 2,752,886 2,603,289
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries and wages 751,748 1,445,990 1,162,778 1,466,246
Commissions -- 120,000 -- --
Contract labor 259,183 137,127 148,665 490,183
Payroll taxes 57,767 83,689 160,710 65,716
Insurance 94,539 149,168 159,041 117,334
Rent 50,188 76,191 82,939 77,081
Professional fees 37,218 109,539 60,114 23,886
Depreciation 47,945 72,118 49,125 42,105
Telephone and internet 35,408 59,646 80,615 89,718
Utilities 1,693 6,083 19,547 18,044
Office and postage expense 6,864 17,249 12,688 22,374
Travel and lodging 68,856 68,147 109,907 43,916
Automobile expenses 96,674 160,356 148,586 211,847
Bank service charges 18,686 15,876 6,082 9,475
Freight 16,401 39,198 38,046 21,158
Miscellaneous expenses 2,455 15,792 20,720 20,125
Penalties 40,879 39,588 47,558 79,080
Dues and subscriptions 971 1,985 5,613 6,342
Taxes and licenses 3,056 7,925 8,239 7,801
Repairs and maintenance 3,395 6,272 5,129 8,637
Advertising and marketing 15,662 28,198 20,195 42,307
Bad debt expense 10,898 4,874 40,588 51,795
Contributions 1,300 3,900 6,060 9,756
Lease payments 1,203 1,289 14,687 --
Moving expenses -- 3,982 2,744 3,730
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,622,989 2,674,182 2,410,376 2,928,656
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (131,057) (222,524) 342,510 (325,367)
OTHER INCOME (EXPENSES)
Interest expense (47,572) (64,340) (78,034) (38,602)
Miscellaneous income 9,432 7,953 29,224 20,695
Loss on sale of equipment -- (27,199) (45,469) (8,919)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSES) (38,140) (83,586) (94,279) (26,826)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (169,197) (306,110) 248,231 (352,193)
MEMBERS' DEFICIT, beginning of year (579,435) (275,922) (527,396) (172,469)
Distributions -- -- -- (24,456)
Contributed capital -- 2,597 3,243 21,722
----------- ----------- ----------- -----------
MEMBERS' DEFICIT, end of year $ (748,632) $ (579,435) $ (275,922) $ (527,396)
=========== =========== =========== ===========
See notes to financial statements.
4
STRATEGIC COMMUNICATIONS, LLC
STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2007
and 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 (loss) $(169,197) $(306,110) $ 248,231 $(352,193)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 47,945 72,118 49,125 42,105
Loss on sale of equipment -- 27,199 45,469 8,919
Bad debt expense 10,898 4,874 40,588 51,795
Increase (decrease) in:
Accounts receivable 3,054 239,528 (468,588) 69,194
Inventory (47,844) (63,782) 39,743 38,145
Other assets 4,853 26,355 (28,709) 41,682
Increase (decrease) in:
Accounts payable 174,336 140,384 71,548 303,819
Bank overdraft 30,672 3,784 (15,982) 15,982
Accrued liabilities 127,390 (8,840) 28,795 (90,495)
--------- --------- --------- ---------
Net cash provided by operating activities 182,107 135,510 10,220 128,953
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (7,459) (33,358) (116,332) (54,591)
Proceeds from disposal of property and equipment -- 1,480 -- --
Cash paid to acquire Uplink Technology, Inc. -- (2,500) -- --
--------- --------- --------- ---------
Net cash (used) by investing activities (7,459) (34,378) (116,332) (54,591)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term bank borrowings -- -- -- (400,000)
Principal payments on long-term debt -- (2,400) -- --
Principal payments on capital lease obligations (11,962) (13,085) (3,095) (53,356)
Net advances (payments) from / to members (162,686) (117,109) 134,829 357,058
Distributions -- -- -- (24,456)
Contributed capital -- 2,597 3,243 21,722
--------- --------- --------- ---------
Net cash provided (used) by financing activities (174,648) (129,997) 134,977 (99,032)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH -- (28,865) 28,865 (24,670)
CASH AT BEGINNING OF YEAR/PERIOD -- 28,865 -- 24,670
--------- --------- --------- ---------
CASH AT END OF YEAR/PERIOD $ -- $ -- $ 28,865 $ --
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and equipment:
Cost of property and equipment $ (7,459) $ (33,358) $(118,732) $ (54,591)
Property and equipment purchased with debt -- -- 2,400 --
--------- --------- --------- ---------
Net cash used to acquire property and equipment $ (7,459) $ (33,358) $(116,332) $ (54,591)
========= ========= ========= =========
Acquisition of Uplink Technology, Inc.
Inventory $ -- $ (49,372) $ -- $ --
Equipment -- (100,527) -- --
Customer list -- (46,642) -- --
Capital lease obligation assumed -- 54,041 -- --
Acquisition purchased with long term debt -- 140,000 -- --
--------- --------- --------- ---------
Cash paid to acquire Uplink Technology, Inc. $ -- $ (2,500) $ -- $ --
========= ========= ========= =========
See notes to financial statements.
5
STRATEGIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Strategic Communications, LLC
(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 their 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 combined financial statements.
The more significant accounting policies are as follows:
Nature of Operations
- --------------------
The Company specializes in voice, video and data communications system solutions
to customers. Headquartered in Louisville, Kentucky, the Company services the
region including Greater Cincinnati, Ohio; Lexington, Kentucky; and
Indianapolis, Indiana. The Company's vision has been to provide a total
end-to-end communications solution to its customers.
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 $34,000, $34,000, $72,200 and $39,300 at September
30, 2007, December 31, 2006, 2005, and 2004, respectively.
Inventory
- ---------
Inventory is valued at the lower of cost or market, determined by using the
first-in, first-out method. Market represents the lower of replacement cost or
estimated net realizable value.
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.
6
STRATEGIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF-SIGNIFICANT ACCOUNTING POLICIES--Continued
Property and Equipment Continued
- --------------------------------
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 to 15 years for machinery and equipment, 10 years for furniture and
fixtures, 5 years for vehicles, and 10-40 years for leasehold improvements.
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. Management has determined the carrying value of the intangible
assets (customer list) was not impaired at September 30, 2007, and December 31,
2006 and has a value of $46,642.
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--INVENTORY
Inventory which is shown on the Balance Sheets consists of various telephone,
electrical and other supply parts used in the communication system. The
inventory listed as noncurrent represents that portion of inventory on hand that
is not expected to be immediately sold, but still has value. The total amount of
inventory on hand is as follows:
September 30,
2007 2006 2005 2004
------------- -------- -------- --------
Current $409,377 $363,087 $256,810 $295,398
Non-current 58,056 56,502 49,625 50,780
-------- -------- -------- --------
Total inventory $467,433 $419,589 $306,435 $346,178
======== ======== ======== ========
7
STRATEGIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 3--ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 30,
2007 2006 2005 2004
------------- -------- -------- --------
Accrued payroll and payroll taxes $212,921 $128,159 $ 74,543 $ 61,245
Accrued penalties 13,480 6,632 53,733 63,514
Accrued interest 17,953 187 27,374 --
Accrued other expenses 30,436 12,422 590 2,686
-------- -------- -------- --------
$274,790 $147,400 $156,240 $127,445
======== ======== ======== ========
NOTE 4--LONG-TERM DEBT
The loan agreement relating to the long-term note payable of $140,000 to Uplink
Technology, Inc., as further discussed in Note 12, contains various covenants
(terms) pertaining to the payment of the note. At September 30, 2007 and
December 31, 2006, the Company was in breach of the covenant for payment and, as
a result, Uplink Technology, Inc. has the right to call the note. Accordingly,
the entire amount of the note is reflected as a current liability on the Balance
Sheets.
NOTE 5--CAPITAL LEASES
In March 2006, the Company began leasing vehicles under agreements that are
classified as capital leases. The cost of these vehicles under capital leases
totaling $57,984 is included on the Balance Sheets as part of property and
equipment. Accumulated amortization of the leased vehicles at September 30, 2007
and December 31, 2006 was $18,362 and $9,664, respectively, and is included as
part of accumulated depreciation. Additionally, amortization of capital leases
is included in "Depreciation" expense on the Statements of Operations and
Members' Deficit.
The future minimum lease payments required under the capital leases and the
present value of the minimum lease payments as of September 30, 2007 is as
follows:
September 30:
2008 $17,734
2009 12,578
-------
Total minimum lease payments 30,312
Less amount representing interest (1,318)
-------
Present value of minimum lease payments 28,994
Current portion of long-term capital lease obligations (16,663)
-------
Long-term capital lease obligations, less current portion $12,331
=======
8
STRATEGIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 6--LOAN PAYABLE TO MEMBERS
The Company has unsecured loans with members of the Company bearing interest at
a rate of 10%. The balance of the loan payable to members was $212,092,
$374,778, $491,887 and $357,058 at September 30, 2007 and at December 31, 2006,
2005 and 2004, respectively. There are no defined repayment terms within the
loan. Management does not anticipate repayment of the advances currently,
therefore they are being reflected as long-term on the Balance Sheets.
NOTE 7--OPERATING LEASES
The Company currently leases four automobiles for approximately $963 per month
under noncancellable operating leases which expire from December 2007 to
September 2008. Total expense under these operating leases for the period and
years ended September 30, 2007, and December 31, 2006, 2005, and 2004 was
$8,668, $11,557, $11,557, and $7,763, respectively.
At September 30, 2007, the future minimum lease obligations under the above
operating leases can be summarized as follows:
2008 $6,932
NOTE 8--LEASED PREMISES
The Company leases its Louisville office space from an unrelated party under an
operating lease that began December 2005. The lease is over a five-year term
with monthly rental payments of $5,222. Previously, the office space in
Louisville, Kentucky was rented from a related party under a three year lease
that ended November 2005 for $3,500 per month. In addition, the Company leased
various office space from unrelated parties under operating leases which expired
March 2005 and May 2006 located respectively in Lexington and Florence,
Kentucky. Total rent expenses under these leases are as follows:
September 30,
2007 2006 2005 2004
------------- ------- ------- -------
Rent expense $50,188 $73,705 $82,567 $76,936
======= ======= ======= =======
Future rental payments under the lease are:
September 30:
2008 $ 62,664
2009 62,664
2010 62,664
2011 10,444
--------
$198,436
========
9
STRATEGIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 9--INCOME TAXES
The Company has elected to be treated as a partnership for federal income tax
purposes under the provisions of the Internal Revenue Code. Under those
provisions, all tax effects of the Company's income or loss are passed through
to the members individually. Accordingly, no provision has been made for federal
or state income taxes in the accompanying financial statements.
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 one major customer during the period ended September 30, 2007 totaled
approximately 17% of the total sales income. Sales to the major customers, for
the years ended December 31, 2006, 2005 and 2004 were approximately 32%, 37% and
22% of the total sales income, respectively. The nature of the Company's
business is such that major customers will vary due to technology needs.
Major Suppliers
- ---------------
Purchases from two major suppliers during the period ended September 30, 2007
and years ended December 31, 2006, 2005 and 2004 totaled approximately 52%, 34%,
37%, and 53% of the total purchases, respectively.
NOTE 11--ACQUISITION
On March 1, 2006, the Company purchased certain assets to include inventory,
equipment and customer list totaling $196,541 and assumed certain liabilities of
Uplink Technology, Inc. The Company paid cash to the seller (or third parties on
their behalf) at closing, and seller financing through the issuance of a note
for $140,000 and assumption of a capital lease obligations totaling $54,041. See
Note 4 for discussion regarding breach of covenant for payment under the
financing arrangement.
The purchase of part of the assets of Uplink Technology, Inc. was accounted for
by the purchase method, whereby the underlying assets acquired and liabilities
assumed are recorded by the Company at their estimated fair value. The
supplemental disclosures reported in the Statements of Cash Flows present
additional information about the assets acquired and liabilities assumed as a
result of the asset acquisition of Uplink Technology, Inc.
10
STRATEGIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS--Continued
NOTE 11--ACQUISITIONS--Continued
In connection with the acquisition of Uplink Technology, Inc., the purchase
price could be increased by a maximum of $120,000 if the Company or a majority
of its assets are sold prior to February 28, 2008. Based on the letter of intent
as discussed in Note 14, this amount in the Statement of Operations and Members'
Deficit was recognized as a commission expense during the year ended December
31, 2006 and has been included in accounts payable as of September 30, 2007 and
December 31, 2006.
NOTE 12--WORKING CAPITAL
The Company has a working capital deficit at September 30, 2007 of $903,909
(current assets of $754,653 less current liabilities of $1,658,562). Management
recognizes the impact the operating losses have had and their effect on the
working capital deficit, but anticipates with the future sale of substantially
all business assets, as discussed further in Note 13, it should allow the
Company to meet its working capital needs. The Company had net cash provided by
operating activities of $182,107 during the year ended September 30, 2007.
NOTE 13--SALE OF OPERATING ASSETS UNDER AN OPERATING LETTER OF INTENT
The Company has entered into a letter of intent to sell 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 approximately $2,250,000. 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