Exhibit 99.1
BLONDER TONGUE TELEPHONE, LLC
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS’ REPORT
December 31, 2005 and 2004
C O N T E N T S
INDEPENDENT AUDITORS’ REPORT | 3 |
FINANCIAL STATEMENTS | |
BALANCE SHEETS | 4 |
STATEMENTS OF OPERATIONS | 5 |
STATEMENTS OF MEMBERS' EQUITY AND | |
OTHER COMPREHENSIVE INCOME (LOSS) | 6 |
STATEMENTS OF CASH FLOWS | 7 |
NOTES TO FINANCIAL STATEMENTS | 8 |
INDEPENDENT AUDITORS’ REPORT
To the Members of
Blonder Tongue Telephone, LLC
Williamstown, New Jersey
We have audited the accompanying balance sheets of Blonder Tongue Telephone, LLC as of December 31, 2005 and 2004 and the related statements of operations, members' equity and other comprehensive income (loss) and cash flows for the years then ended. These financial statements are the responsibility of Blonder Tongue Telephone, LLC'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 of the Public Company Accounting Oversight Board 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over the financial reporting. Accordingly, we express no such opinion. 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 Blonder Tongue Telephone, LLC as of December 31, 2005 and 2004 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.
/s/ Wheeler, Wolfenden & Dwares, P.A.
February 15, 2006
Wilmington, Delaware
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BLONDER TONGUE TELEPHONE, LLC | |||||||
BALANCE SHEETS | |||||||
December 31, 2005 and 2004 | |||||||
ASSETS | |||||||
2005 | 2004 | ||||||
CURRENT ASSETS | |||||||
Cash | $ | 684 | $ | 42 | |||
Customer accounts receivable | 20,493 | 22,513 | |||||
Due from affiliates | 32,521 | - | |||||
Due from member | 29,333 | 14,041 | |||||
Other assets | 2,088 | 6,459 | |||||
Total current assets | 85,119 | 43,055 | |||||
OTHER ASSETS | |||||||
Equipment - net | 919 | 2,034 | |||||
Due from member | - | 326,887 | |||||
Due from related party | - | 112,564 | |||||
Deferred costs | 29,869 | 54,504 | |||||
Marketable equity securities | 975,000 | 2,155,000 | |||||
Total other assets | 1,005,788 | 2,650,989 | |||||
TOTAL ASSETS | $ | 1,090,907 | $ | 2,694,044 | |||
LIABILITIES AND MEMBERS' EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 8,727 | $ | 18,228 | |||
Due to member | 103,427 | 56,631 | |||||
Due to affiliate | - | 18,019 | |||||
Refundable deposit | - | 3,000 | |||||
Accrued expenses | 10,063 | 13,690 | |||||
Total current liabilities | 122,217 | 109,568 | |||||
COMMITMENTS AND CONTINGENCIES | - | - | |||||
MEMBERS' EQUITY | |||||||
Members' capital | 2,226,667 | 2,226,667 | |||||
Accumulated deficit | (1,202,977 | ) | (767,191 | ) | |||
Accumulated other comprehensive (loss) income | (55,000 | ) | 1,125,000 | ||||
Total members' equity | 968,690 | 2,584,476 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 1,090,907 | $ | 2,694,044 | |||
The accompanying notes are an integral part of these financial statements. | |||||||
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BLONDER TONGUE TELEPHONE, LLC | |||||||
STATEMENTS OF OPERATIONS | |||||||
For the Years Ended December 31, 2005 and 2004 | |||||||
2005 | 2004 | ||||||
Revenue | |||||||
Subscriber | $ | 168,109 | $ | 52,944 | |||
Due from affiliate | - | - | |||||
Royalties | 29,333 | 35,964 | |||||
Total revenue | 197,442 | 88,908 | |||||
Cost of services | 193,789 | 88,022 | |||||
Gross profit | 3,653 | 886 | |||||
Due from related party | - | - | |||||
Operating expenses | |||||||
Selling and marketing | 166 | 1,361 | |||||
General and administrative | 446,487 | 323,949 | |||||
Amortization of intangibles | - | 19,285 | |||||
Asset impairment | - | 143,572 | |||||
Total operating expenses | 446,653 | 488,167 | |||||
Loss from operations | (443,000 | ) | (487,281 | ) | |||
Interest income | 7,214 | 28,278 | |||||
NET LOSS | (435,786 | ) | (459,003 | ) | |||
Other comprehensive income | |||||||
Unrealized holding (loss) gain | (1,180,000 | ) | 550,000 | ||||
Comprehensive (loss) income | $ | (1,615,786 | ) | $ | 90,997 | ||
The accompanying notes are an integral part of these financial statements. | |||||||
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BLONDER TONGUE TELEPHONE, LLC | |||||||||||||
STATEMENTS OF MEMBERS' EQUITY AND | |||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||
For the Years Ended December 31, 2005 and 2004 | |||||||||||||
Accumulated Other | |||||||||||||
Members' | Accumulated | Comprehensive | |||||||||||
Capital | Deficit | Income (Loss) | Total | ||||||||||
Balance, December 31, 2003* | $ | 2,226,667 | $ | (308,188 | ) | $ | 575,000 | $ | 2,493,479 | ||||
Comprehensive income | |||||||||||||
Net loss | - | (459,003 | ) | - | (459,003 | ) | |||||||
Other comprehensive income | - | - | 550,000 | 550,000 | |||||||||
Due from related party | - | (459,003 | ) | 550,000 | 90,997 | ||||||||
Capital contributions | - | - | - | - | |||||||||
Balance, December 31, 2004 | 2,226,667 | (767,191 | ) | 1,125,000 | 2,584,476 | ||||||||
Comprehensive loss | |||||||||||||
Net loss | - | (435,786 | ) | - | (435,786 | ) | |||||||
Other comprehensive loss | - | - | (1,180,000 | ) | (1,180,000 | ) | |||||||
Total comprehensive loss | - | (435,786 | ) | (1,180,000 | ) | (1,615,786 | ) | ||||||
Capital contributions | - | - | - | - | |||||||||
Balance, December 31, 2005 | $ | 2,226,667 | $ | (1,202,977 | ) | $ | (55,000 | ) | $ | 968,690 | |||
* Restated | |||||||||||||
The accompanying notes are an integral part of these financial statements. | |||||||||||||
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BLONDER TONGUE TELEPHONE, LLC | |||||||
STATEMENTS OF CASH FLOWS | |||||||
For the Years Ended December 31, 2005 and 2004 | |||||||
2005 | 2004 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net loss | $ | (435,786 | ) | $ | (459,003 | ) | |
Adjustments to reconcile net loss to net cash utilized by | |||||||
operating activities | |||||||
Amortization | - | 19,285 | |||||
Depreciation | 1,115 | 196 | |||||
Asset impairment | - | 143,572 | |||||
(Increase) decrease in assets | |||||||
Customer accounts receivable | 2,020 | (22,513 | ) | ||||
Other assets | 4,371 | 5,137 | |||||
Accounts payable | (9,501 | ) | 3,810 | ||||
Refundable deposit | (3,000 | ) | 3,000 | ||||
Accrued expenses | (3,627 | ) | (921 | ) | |||
Net cash utilized by operating activities | (444,408 | ) | (307,437 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of equipment | - | (2,230 | ) | ||||
Deferred costs | 24,635 | (54,504 | ) | ||||
Net cash provided (utilized) by investing activities | 24,635 | (56,734 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Due to member - net | 358,391 | 327,148 | |||||
Due to affiliate - net | (50,540 | ) | 31,488 | ||||
Due to related party - net | 112,564 | - | |||||
Net cash provided by financing activities | 420,415 | 358,636 | |||||
Net increase (decrease) in cash | 642 | (5,535 | ) | ||||
Cash - beginning of year | 42 | 5,577 | |||||
Cash - end of year | $ | 684 | $ | 42 | |||
The accompanying notes are an integral part of these financial statements. |
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BLONDER TONGUE TELEPHONE, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Business
Blonder Tongue Telephone, LLC (the Company) was formed on December 26, 2002. The operations of the Company in 2002 were limited to the filing of a certificate of formation. The Company is a provider of primary telephone service for multiple-dwelling-unit communities in the United States. During 2004, the Company began providing service to communities in Dallas, Texas, Great Mills, Maryland, Ft. Lauderdale, Florida, Long Branch, New Jersey, and Lafayette, Indiana. The Company also sells telephone equipment, provides billing, collection and customer service and provides training and technical support to complement the telephone service.
The Company operates under the terms of the Amended and Restated Operating Agreement (the Agreement) dated September 11, 2003. The members of the Company (the Members) are Resource Marketable Equity Securities Group, LLC (RIG) and Blonder Tongue Laboratories, Inc. (BT). RIG and BT contributed cash of $30,000 and $1,166,667, respectively. BT also issued 500,000 shares of its publicly-traded common stock (AMEX:BDR) with a value of $1,030,000 to the Company. BT will receive preferred distributions of $1,166,667 from the cash flows (as defined in the Agreement) of the Company. RIG and BT have 51 and 49 membership shares, respectively. Each Member has a percentage interest of 50%. As defined in the Agreement, profits and losses are allocated based on the percentage of interest.
The Agreement provides that the Company will continue in perpetual existence, unless terminated sooner by unanimous written consent of all Members or a Voluntary or Involuntary Withdrawal as defined in the Agreement.
2. Revenue Recognition
The Company generally recognizes revenue as services are provided. Local service revenue is billed in advance monthly, with revenue being recognized when earned.
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NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
3. Liquidity and Capital Resources
Since inception, the Company has financed its operations through capital contributions from the Members. The Company has incurred substantial net losses and negative cash flow from operations since inception. Expenses are expected to exceed revenues until the Company establishes a sufficient subscriber base. Management expects operating losses to decrease as the Company obtains more subscribers.
4. 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 at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
5. Income Taxes
In conformity with the Internal Revenue Code and applicable state and local tax statutes, taxable income or loss of the Company is required to be reported on the tax returns of the Members in accordance with the terms of the Agreement and, accordingly, no provision has been made in the accompanying financial statements for any federal, state or local taxes.
6. Intangible Assets
The Company reviews the carrying value of intangibles when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the estimated future undiscounted cash flows expected to result from the use of an asset and its eventual disposition is less than its carrying amount. An impairment loss is measured as the amount by which the carrying value of an asset exceeds its fair value.
7. Statement of Cash Flows
For the purposes of the statement of cash flows, the Company considers all highly liquid debt investments with maturities of less then three months to be cash equivalents. The Company did not have any cash equivalents at December 31, 2005 and 2004.
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NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. Accounts Receivable and Allowance for Doubtful Accounts
The Company operates in the mid-Atlantic area, Dallas, Texas, Ft. Lauderdale, Florida and Lafayette, Indiana, and grants credit to customers, substantially all of whom are within the local sector. Management believes that its contract acceptance, billings and collection policies are adequate to minimize potential credit risk.
Customer accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment on the 25th of each month, unless specified otherwise in a signed contract relating to a specific job. The Company does not charge interest or delinquency fees for receivables not paid on a timely basis.
Accounts receivable are stated at the amount billed to the customer less amounts determined to be uncollectible by management. Customer account balances with invoices dated over 30 days old are considered delinquent and services cease until payment is made.
Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
Customer accounts receivable are stated at their estimated realizable amounts. Bad debts are charged to expense when determined to be uncollectible by management. It is the belief of management that all amounts due at December 31, 2005 and 2004 are collectible.
It is the opinion of management that the bad debt expense computed under this method is not materially different than what it would have been if the allowance method were used. Bad debt expense for the years ended December 31, 2005 and 2004 amounted to $137,768 and $0, respectively. The bad debt expense for fiscal year 2005 included $20,139 of customer accounts written off and $117,629 of a related party loan.
9. Equipment
Equipment is carried at cost. Depreciation is computed by use of straight-line methods over the estimated useful lives of the assets. Estimated useful lives are 3 years for computer equipment. Equipment consisted of the following as of December 31:
2005 | 2004 | ||||||
Equipment | $ | 2,230 | $ | 2,230 | |||
Less: accumulated depreciation | (1,311 | ) | (196 | ) | |||
Equipment - net | $ | 919 | $ | 2,034 |
Depreciation expense was $1,115 and $196 for the years ended December 31, 2005 and 2004, respectively.
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NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
10. Advertising
Advertising costs are expensed as incurred. Advertising expense was $166 and $1,360 for the years ended December 31, 2005 and 2004, respectively.
11. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables and trade payables. The carrying value of these financial instruments approximates their respective fair values.
12. Deferred Costs
Deferred costs consist of customer acquisition costs. These costs were incurred with the connection and activation of customers.
NOTE B - INTANGIBLE ASSETS
Intangible assets consist of acquired intellectual property. These intangible assets were amortized on a straight-line basis over their estimated useful lives of seven years. Accumulative amortization was $19,285 through the fourth quarter of 2004.
The Company follows Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets" (FAS 144). FAS 144 standardized the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets based on non-discounted cash flows. During the fourth quarter of 2004, the Company performed an impairment assessment of its intellectual property as a result of the strategic alternatives being explored. Based on this assessment, it was determined that the intellectual property assets were impaired, and the Company recorded a $143,572 non-cash impairment charge to reduce the carrying value of these assets to zero at December 31, 2004.
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NOTE C - MARKETABLE EQUITY SECURITIES
On September 16, 2003, 500,000 shares of common stock of BT valued at $1,030,000 were registered in the Company’s name as part of BT’s initial capital contribution. The market value as of December 31, 2005 and 2004 was $975,000 and $2,155,000, respectively. The Company requested the stock certificates; however, as of December 31, 2005, they were still held by BT. In accordance with the Stock Pledge Agreement dated September 11, 2003, 250,000 shares were pledged as security for the payment of BT’s cash priority return in accordance with the provisions of the Agreement and all of the Company’s obligations under the Stock Pledge Agreement.
This investment represents 92% and 80% of total assets and 101% and 83% of members’ equity as of December 31, 2005 and 2004, respectively. Any significant decline in the market price of this stock could have a significant impact on financial condition, results of operations and/or cash flows.
NOTE D - RELATED PARTY TRANSACTIONS
The Company had numerous transactions with related parties. As of December 31, 2005, the Company was indebted to Resource Investment Group, LLC, a related party, in the amount of $103,427. As of December 31, 2004, Resource Investment Group, LLC, was indebted to the Company in the amount of $326,887. These transactions arose from a series of member cash advances and repayments.
Interest is accrued monthly at the applicable federal rate. Amounts due become payable on demand after ten years. The interest rate, adjusted monthly, ranged from 3.70% to 4.43% in 2005 and 4.56% to 5.21% in 2004, respectively. Interest earned on such loans amounted to $7,214 and $28,278 in 2005 and 2004, respectively.
On September 11, 2003, the Company entered into a Royalty Agreement with a Member. In consideration of the Company facilitating a Member’s sales of certain telephone products (as defined in the Royalty Agreement), the Company earned royalties of $29,333 and $35,964 for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, $29,333 and $14,041 of these royalties were due from a Member, respectively. At December 31, 2004, there was $56,631 due to a Member for equipment purchased by the Company.
As of December 31, 2004 Netlinc Communications, LLC, a related party, was indebted to the Company in the amount of $112,564. This amount was written off during the current year as an uncollectible account. The transactions result from the use of a centralized disbursement system for certain transactions. These amounts are within parameters as agreed upon in the Agreement; however, management felt the amount was uncollectible.
As of December 31, 2005, an affiliate was indebted to the Company in the amount of $32,521. On December 31, 2004, the Company was indebted to an affiliate in the amount of $18,019. These transactions resulted from the use of a centralized disbursement system for certain transactions.
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NOTE D - RELATED PARTY TRANSACTIONS (CONTINUED)
Included in general and administrative expenses are $93,200 and $107,200 of salaries paid to affiliates in 2005 and 2004, respectively. These amounts are within the parameters agreed upon in the Agreement.
NOTE E - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments and contingencies outstanding which are not reflected in these financial statements. In the opinion of management, the outcome of such events, if any, will not have a material effect on the Company’s financial position or results of operations.
NOTE F - CONCENTRATION OF CREDIT RISK
The Company maintains operating cash balances in financial institutions located in Williamstown, New Jersey. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000. There were no uninsured amounts at December 31, 2005 and 2004.
NOTE G - VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities" and in December 2003, a revised interpretation was issued (FIN No. 46, as revised). In general, a variable interest entity (VIE) is a corporation, partnership, trust or any other legal structure used for the business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46, as revised, requires a VIE to be consolidated by a company if that company is designated as the primary beneficiary. The adoption of FIN No. 46, as revised, did not have a material effect on the Company's financial position or results of operations.