INDEX TO MICROWAVE SATELLITE TECHNOLOGIES, INC. FINANCIAL STATEMENTS
Item 9.01 (b) Financial Statements of MST for the Years Ended April 30, 2005 and 2004
MICROWAVE SATELLITE TECHNOLOGIES, INC.
YEAR ENDED
APRIL 30, 2005
CONTENTS
| | Page |
| | |
| Independent Auditors’ Report | 1 |
| | |
| Balance Sheet | 2 - 3 |
| | |
| Statement of Income and Retained Earnings | 4 |
| | |
| Statement of Cash Flows | 5 - 6 |
| | |
| Notes to Financial Statements | 7 - 14 |
| | |
| Supplementary Information | |
| | |
| Independent Auditors’ Report on Supplementary Information | 16 |
| | |
| Direct Costs | 17 |
| | |
| Selling and Administrative Expenses | 18 |
| | |
Leaf, Saltzman, Manganelli, Pfeil & Tendler, LLP
Certified Public Accountants
INDEPENDENT AUDITORS’ REPORT
Microwave Satellite Technologies, Inc.
To The Stockholder and Board of Directors
We have audited the accompanying balance sheets of Microwave Satellite Technologies, Inc. as of April 30, 2005 and 2004, and the related statements of income and retained earnings and cash flows for the year ended April 30, 2005. 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 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 financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Microwave Satellite Technologies, Inc. as of April 30, 2005 and 2004, and the results of its operations and its cash flows for the year ended April 30, 2005, in conformity with generally accepted accounting principles in the United States of America.
Leaf, Saltzman, Manganelli, Pfeil & Tendler, LLP
Certified Public Accountants
Fairfield, New Jersey
January 6, 2006
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| BALANCE SHEETS |
| AT |
| | | APRIL 30, | |
| | | 2005 | | 2004 | |
| ASSETS | | | | | | | |
| | | | | | | | |
| Current Assets | | | | | | | |
| Cash | | $ | 765,698 | | $ | 494,489 | |
| Accounts receivable | | | 129,982 | | | 141,440 | |
| Due from officer | | | 13,663 | | | | |
| Interest receivable | | | 15,675 | | | | |
| Escrow receivable | | | | | | 4,778,875 | |
| Security deposits | | | | | | 15,296 | |
| Prepaid income taxes | | | | | | 42,285 | |
| Prepaid expenses and other current assets | | | 174,249 | | | 12,511 | |
| Deferred income taxes asset | | | 44,000 | | | | |
| Total Current Assets | | | 1,143,267 | | | 5,484,896 | |
| | | | | | | | |
| Prepaid expenses | | | | | | 2,061 | |
| Due from related party | | | 5,834 | | | | |
| Property and equipment, net of accumulated depreciation | | | 1,230,225 | | | 1,185,135 | |
| Intangible assets, net of accumulated amortization of | | | | | | | |
| ($17,990 - 2005 and $13,757 - 2004) | | | 45,510 | | | 49,743 | |
| Investment in limited liability company | | | 84,934 | | | 25,000 | |
| Security deposits | | | 12,600 | | | | |
| | | | | | | | |
| | | $ | 2,522,370 | | $ | 6,746,835 | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | | | |
| | | | | | | | |
| Current Liabilities | | | | | | | |
| Note payable - bank | | | | | $ | 26,651 | |
| Current portion of long-term debt | | $ | 6,555 | | | 94,262 | |
| Accounts payable | | | 174,782 | | | 312,121 | |
| Sales taxes payable | | | 13,486 | | | 2,810 | |
| Due to officer | | | | | | 3,112 | |
| Income taxes payable | | | 490,816 | | | | |
| Deferred revenue | | | 85,933 | | | 336,615 | |
| Accrued expenses and other current liabilities | | | 147,289 | | | 3,572,244 | |
| Deferred income taxes | | | | | | 569,000 | |
| Total Current Liabilities | | | 918,861 | | | 4,916,815 | |
| | | | | | | | |
| Long-term debt - less current portion | | | 11,472 | | | 229,985 | |
| Deferred income taxes | | | 120,000 | | | 70,000 | |
| Total Liabilities | | | 1,050,333 | | | 5,216,800 | |
| | | | | | | | |
| Stockholder's Equity | | | | | | | |
| Common stock - no par value | | | | | | | |
| Authorized - 1,000 shares | | | | | | | |
| Issued - 300 shares, outstanding - 125 shares | | | 1,000 | | | 1,000 | |
| Retained earnings | | | 1,546,037 | | | 1,604,035 | |
The accompanying notes are an integral part of these financial statements.
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| BALANCE SHEETS |
| AT |
| | | APRIL 30, | |
| | | 2005 | | 2004 | |
| | | | 1,547,037 | | | 1,605,035 | |
| Less: Treasury stock, 175 shares at cost | | | 75,000 | | | 75,000 | |
| Total Stockholder's Equity | | | 1,472,037 | | | 1,530,035 | |
| | | | | | | | |
| | | $ | 2,522,370 | | $ | 6,746,835 | |
The accompanying notes are an integral part of these financial statements.
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| STATEMENT OF INCOME AND RETAINED EARNINGS |
| FOR THE YEAR ENDED |
| APRIL 30, 2005 |
| | | | |
| Revenues | | $ | 3,528,979 | |
| | | | | |
| Direct costs | | | 2,439,947 | |
| | | | | |
| Gross profit | | | 1,089,032 | |
| | | | | |
| Selling and administrative expenses (including interest expense of $15,525) | | | 1,515,807 | |
| | | | | |
| Loss from operations | | | (426,775 | ) |
| | | | | |
| Other Income | | | | |
| Gain on sale of subscriber base and equipment to Cablevision | | | 311,955 | |
| Interest income | | | 36,288 | |
| Total Other Income | | | 348,243 | |
| | | | | |
| Loss before reduction of income taxes | | | (78,532 | ) |
| | | | | |
| Reduction of income taxes | | | (15,600 | ) |
| | | | | |
| Loss before equity in income of limited liability company | | | (62,932 | ) |
| | | | | |
| Equity in income of limited liability company | | | 4,934 | |
| | | | | |
| Net loss | | | (57,998 | ) |
| | | | | |
| Retained earnings - beginning (restated) | | | 1,604,035 | |
| | | | | |
| Retained earnings - end | | $ | 1,546,037 | |
The accompanying notes are an integral part of these financial statements.
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED |
| APRIL 30, 2005 |
| | | | |
| Cash Flows From Operating Activities | | | | |
| Net loss | | $ | (57,998 | ) |
| | | | | |
| Adjustments To Reconcile Net Loss To Net Cash | | | | |
| Used In Operating Activities | | | | |
| Depreciation and amortization | | | 312,593 | |
| Gain on sale of subscriber base and equipment | | | (311,955 | ) |
| Equity in income of limited liability company | | | (4,934 | ) |
| Reduction of deferred income taxes | | | (563,000 | ) |
| Bad debt expense | | | 13,941 | |
| (Increase) Decrease in: | | | | |
| Accounts receivable, net of deferred revenue | | | (253,165 | ) |
| Security deposits | | | 2,696 | |
| Interest receivable | | | (15,675 | ) |
| Prepaid expenses and other current assets | | | (117,392 | ) |
| Increase (Decrease) in: | | | | |
| Accounts payable | | | (137,339 | ) |
| Sales taxes payable | | | 10,676 | |
| Income taxes payable | | | 490,816 | |
| Accrued expenses and other current liabilities | | | (3,424,955 | ) |
| Total Adjustments | | | (3,997,693 | ) |
| | | | | |
| Net Cash Used In Operating Activities | | | (4,055,691 | ) |
| | | | | |
| Cash Flows From Investing Activities | | | | |
| Investment in limited liability company | | | (55,000 | ) |
| Purchase of equipment | | | (353,450 | ) |
| Proceeds from escrow receivable | | | 4,778,875 | |
| Proceeds from sale of subscriber base and equipment | | | 311,955 | |
| Advances on behalf of related party | | | (5,834 | ) |
| Advances to officer, at net | | | (13,663 | ) |
| Net Cash Provided By Investing Activities | | | 4,662,883 | |
| | | | | |
| Cash Flows From Financing Activities | | | | |
| Repayments of long-term debt | | | (306,220 | ) |
| Repayment of note payable - bank | | | (26,651 | ) |
| Payment of balance due to officer | | | (3,112 | ) |
| Net Cash Used In Financing Activities | | | (335,983 | ) |
| | | | | |
| Net increase in cash | | | 271,209 | |
| | | | | |
| Cash - beginning | | | 494,489 | |
| | | | | |
| Cash - end | | $ | 765,698 | |
The accompanying notes are an integral part of these financial statements.
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED |
| APRIL 30, 2005 |
| Supplemental Information: | | | | |
| | | | | |
| Interest paid during period | | $ | 15,525 | |
| | | | | |
| Income taxes paid during period | | $ | 12,775 | |
The accompanying notes are an integral part of these financial statements.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 1 - Restatement of Retained Earnings at May 1, 2004
During the period under audit, it was determined that certain balances had been incorrectly stated at April 30, 2004 that are itemized as follows:
| Accrued expenses and other current liabilities had been understated | | $ | (2,098,039 | ) |
| Inventory had been overstated | | | (180,557 | ) |
| Accounts receivable had been overstated | | | (11,072 | ) |
| Prepaid expenses and other current assets had been overstated | | | (10,848 | ) |
| | | | | |
| Total Adjustments Before Income Tax Effect | | | (2,300,516 | ) |
| | | | | |
| Reduction of deferred income taxes | | | 866,000 | |
| Reduction of current income taxes | | | 8,000 | |
| | | | | |
| Total Reduction of Income Taxes | | | 874,000 | |
| | | | | |
| Adjustments, Net of Income Taxes | | | (1,426,516 | ) |
| Retained earnings at April 30, 2004, prior to restatement | | | 3,030,551 | |
| | | | | |
| Retained earnings at May 1, 2004, restated | | $ | 1,604,035 | |
Note 2 - Summary of Significant Accounting Policies
Nature of Operations
The Company is engaged in satellite communications, specializing in constructing, maintaining and managing private business television networks, as well as constructing and operating private cable television systems. In addition, the Company provides high-speed cable modem service to its private cable television system operations. The Company also provides national dial-up service, web hosting and design, and co-location services. The primary areas of operation are New York, New Jersey and Pennsylvania.
In March 2004, the Company sold a substantial portion of its cable subscriber base which represented 80% of the Company’s total subscriber base (See Notes 19 and 20).
Inventory of Materials and Supplies
Materials and supplies with unit costs of $500 and less are expensed upon acquisition. Materials and supplies in inventory are stated at cost, based on the first-in, first-out (FIFO) method, net of a reserve for obsolescence.
Prepaid Expenses
Included in prepaid expenses are expenses incurred by the balance sheet date to prepare and place operational equipment into service prior to the equipment’s actual use in the Company’s operations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by straight-line and accelerated methods over the estimated useful lives of the assets.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 2 - Summary of Significant Accounting Policies (Continued)
Intangible Assets and Amortization
The Company acquired a subscriber base during the year ended April 30, 2001 that is being amortized over its estimated useful life of fifteen years using the straight-line method.
Investment in Limited Liability Company
The Company accounts for its 50% investment in Interactivewifi.com, LLC by the equity method of accounting.
Deferred Revenue
Deferred revenue represents advance billings that are included in accounts receivable. Advance billings at the balance sheet date are not included in revenues for the period then ended, and cash payments received for advanced billings are credited towards accounts receivable.
Income Taxes
Deferred income taxes are created by temporary differences between financial and tax bases for the following accounts: inventory, investment in the limited liability company, accumulated depreciation, and in accounting for the gain on the sale of the Company’s subscriber base and equipment to Cablevision. For income tax purposes, inventory includes materials and supplies with unit costs of less than $500, the equity interest in the income of the limited liability company is accounted for by the cash basis method, depreciation is accelerated, and the gain on the sale of subscriber base is reported on the installment method. In addition, the Company had available a contribution carryover which created a deferred income tax asset.
Use of Estimates
The preparation of financial statements in accordance 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 2 - Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Management periodically reviews the accounts receivable for uncollectible accounts and uses the direct write-off method to specifically identify and write-off any accounts determined to be uncollectible when a realistic probability of collection does not exist. Generally accepted accounting principles require the Company to provide for an allowance for doubtful accounts, which entails estimating a reserve for uncollectible accounts based on a history of past write-offs and collections and current credit conditions. However, it is the Company’s experience that the direct write-off method has not differed materially from results that would have been obtained had the allowance method been used. In addition, the Company does not generally charge interest on past due accounts.
Note 3 - Escrow Receivable
The entire balance of escrow receivable at April 30, 2004, $4,778,875, was received during the year ended April 30, 2005.
Note 4 - Significant Concentrations of Credit Risk
Cash balances are maintained by the Company in two commercial banks. Such balances are insured up to $100,000 in total at each bank by the Federal Deposit Insurance Corporation (FDIC). At April 30, 2005 and 2004, cash balances exceeding federally insured limits amounted to $683,391 and $438,507, respectively.
Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within the same geographic region. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral.
Note 5 - Major Customers
At April 30, 2005, balances due from three customers approximated 57% of the total accounts receivable balance. At April 30, 2004, balances due from three customers approximated 56% of the total accounts receivable balance.
Note 6 - Due From Officer
The balance due from officer, amounting to $13,663 at April 30, 2005, is due on demand and no interest has been charged. The balance is expected to be repaid within the near-term and has therefore been classified as a current asset.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 7 - Due From Related Party
The Company has made an advance for certain expenses on behalf of a related party as of April 30, 2005 that amounts to $5,834. The related party is owned in part by the Company’s sole stockholder and the advance is neither subject to interest nor expected to be repaid within the near-term.
Note 8 - Property and Equipment (See Note 10)
Property and equipment consist of the following at April 30:
| | | | | | | Estimated | |
| | | 2005 | | 2004 | | Useful Lives | |
| | | | | | | | |
| Leasehold improvements | | $ | 198,733 | | $ | 198,733 | | | 39 years | |
| Operating equipment | | | 1,959,203 | | | 1,672,240 | | | 5 - 10 years | |
| Transportation equipment | | | 202,489 | | | 185,219 | | | 3 - 5 years | |
| Furniture and office equipment | | | 466,861 | | | 417,644 | | | 5 - 7 years | |
| | | | 2,827,286 | | | 2,473,836 | | | | |
| Less: accumulated depreciation | | | 1,597,061 | | | 1,288,701 | | | | |
| | | | | | | | | | | |
| | | $ | 1,230,225 | | $ | 1,185,135 | | | | |
Depreciation expense for the year ended April 30, 2005 amounted to $308,360.
Note 9 - Investment in Limited Liability Company
Summarized financial information concerning Interactivewifi.com, LLC, an entity in which the Company owns 50%, and accounts for on the equity method, is as follows at April 30, 2005 and for the year then ended:
| Total assets | | $ | 180,297 | |
| Total liabilities | | | (10,429 | ) |
| | | | | |
| Members’ Equity | | | 169,868 | |
| | | | x 50% | |
| | | | | |
| Investment in Limited Liability Company | | $ | 84,934 | |
| | | | | |
| Total income of Limited Liability Company | | | | |
| during the period | | $ | 9,868 | |
| | | | x 50% | |
| 50% equity in income of Limited Liability Company | | | | |
| during the period | | $ | 4,934 | |
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 10 - Long-Term Debt (See Note 8)
| | | 2005 | | 2004 | | Maturity Date | |
| | | | | | | | |
| Washington Mutual Bank - note payable had been subject to interest at the bank’s prime lending rate plus 1/2%. The note was paid in full September 2004. | | | | | $ | 299,664 | | | N/A | |
| | | | | | | | | | | |
| Ford Motor Credit - note payable in monthly installments of $546 with no interest. The note is collateralized by transportation equipment. | | $ | 18,027 | | | 24,583 | | | January 2008 | |
| | | | 18,027 | | | 324,247 | | | | |
| Less: current portion | | | 6,555 | | | 94,262 | | | | |
| | | | | | | | | | | |
| Amount Due After One Year | | $ | 11,472 | | $ | 229,985 | | | | |
Following are the maturities of long-term debt for each of the next three years and in the aggregate:
| April 30, 2006 | | $ | 6,555 | |
| 2007 | | | 6,555 | |
| 2008 | | | 4,917 | |
| | | | | |
| | | $ | 18,027 | |
Note 11 - Due To Officer
The balance due to officer, amounting to $3,112 at April 30, 2004, was repaid during the year ended April 30, 2005 and was not subject to interest.
Note 12 - Deferred Income Taxes
At April 30, 2005, the current deferred income tax asset and non-current deferred income tax liability consisted of the following components:
| | | Current Asset | |
| | | | | |
| Deferred income tax asset created by deductible temporary differences between financial and tax bases | | $ | 44,000 | |
| | | | | |
| | | Non-Current Liability | |
| Deferred income tax liability resulting from taxable temporary differences in the reporting of accumulated depreciation for financial and income tax purposes | | $ | 103,000 | |
| | | | | |
| Deferred income tax liability resulting from taxable temporary differences between financial and tax bases in accounting for the investment in the limited liability company | | | 17,000 | |
| | | | | |
| | | $ | 120,000 | |
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 12 - Deferred Income Taxes (Continued)
At April 30, 2004, the net deferred income tax liability consisted of the following components:
| | | Current | |
| | | | |
| Deferred income tax liability resulting from taxable temporary differences between financial and tax bases in accounting for the gain on the sale to Cablevision | | $ | 648,000 | |
| | | | | |
| Deferred income tax asset created by deductible temporary differences between financial and tax bases | | | (72,000 | ) |
| | | | | |
| Deferred income tax asset created by contribution carryover available for future periods | | | (7,000 | ) |
| | | | | |
| | | $ | 569,000 | |
| | | Non-Current | |
| | | | | |
| Deferred income tax liability resulting from taxable temporary differences in the reporting of accumulated depreciation for financial and income tax purposes | | $ | 70,000 | |
Estimates concerning the amounts and rate of realization of deferred taxes are inherently subject to change and it is at least reasonably possible that these estimates may change materially within the near-term.
Note 13 - Rent Expense
The Company rents office and warehouse space in New Jersey under a lease that has been extended to April 30, 2010. Monthly payments have been $6,300 under the old lease terms; however, effective May 1, 2005, monthly rent has been increased to $6,508 and is scheduled to increase annually thereafter, based on the increase in the Consumer Price Index. In addition, the Company had sublet its warehouse space at $2,000 per month on a month-to-month basis through September 30, 2004. Rent expense for the year ended April 30, 2005 is as follows:
| Base rent | | $ | 75,600 | |
| | | | | |
Contingent rent (charge for insurance, real estate taxes, maintenance and utilities) | | | 22,587 | |
| | | | | |
| Total rent expense | | | 98,187 | |
| | | | | |
| Less: sublet rental income | | | 10,000 | |
| | | | | |
| Net Rent Expense | | $ | 88,187 | |
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 14 - Commitments and Contingencies
The Company leases a vehicle under a non-cancelable operating lease, in addition to the lease for office and warehouse space described in Note 13. The minimum future rental payments under non-cancelable operating leases (including the lease described in Note 13) for each of the next five years and in the aggregate are as follows:
| April 30, 2006 | | $ | 84,614 | |
| 7 | | | 84,614 | |
| 8 | | | 80,269 | |
| 9 | | | 78,096 | |
| 2010 | | | 78,096 | |
| | | | | |
| Total Minimum Future Lease Payments | | $ | 405,689 | |
Note 15 - Retirement Plan
The Company provides a profit-sharing plan with a 401(k) deferred compensation feature for all eligible employees. The Company matches the employees’ contribution in an amount equal to 100% of the first 1% of compensation, plus 10% of the next 5% of compensation. The Company must also make a non-elective contribution equal to 3% of compensation for all eligible employees. The Company can also make a discretionary non-elective profit-sharing contribution in an amount necessary to satisfy the minimum allocation requirement. Total employee and employer contributions for each participant may not exceed the lesser of 100% of compensation, or $42,000 plus any employee catch-up contributions. Company contributions to the plan amounted to $44,433 for the year ended April 30, 2005.
Note 16 - Related Party Transactions
Included in the Company’s revenue during the year ended April 30, 2005 is revenue earned from services provided to Interactivewifi.com, LLC, in which the Company has a 50% equity investment, that amounted to $6,137.
Note 17 - Amortization Expense
Amortization expense amounted to $4,233 for the year ended April 30, 2005. Amortization expense for each of the next five years is presently scheduled to be $4,233.
Note 18 - Advertising Expense
Advertising costs are expensed as incurred and amounted to $17,783 for the year ended April 30, 2005.
Note 19 - Gain on Sale of Equipment and Portion of Subscriber Base to Cablevision
In March 2004 the Company sold certain equipment and the portion of its subscriber base located in Brooklyn, New York to Cablevision for a total of $7,638,550. Residuals from the sale of the subscriber base were received during the year ended April 30, 2005 that amounted to $311,955.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2005 AND 2004
Note 20 - Revenues and Direct Costs Related to Disposed Cable Subscriber Base
Revenues and direct costs recognized during the year ended April 30, 2005 include activity arising from the portion of its cable subscriber base that has been sold and will not be recurring in subsequent periods that approximates the following:
| Revenues | | $ | 1,573,000 | |
| Direct costs | | | 975,000 | |
| | | | | |
| Gross profit | | $ | 598,000 | |
Note 21 - Provision For (Reduction Of) Income Taxes
The provision for (reduction of) income taxes consists of the following components for the year ended April 30, 2005:
| Current | | $ | 547,400 | |
| Deferred | | | (563,000 | ) |
| | | | | |
| Net Reduction of Income Taxes | | $ | (15,600 | ) |
The components of the reduction of deferred income taxes for the year ended April 30, 2005 are as follows:
| | | | |
| Reduction of deferred income taxes created by change in temporary differences between financial and income tax bases in accounting for the gain on sale to Cablevision | | $ | (648,000 | ) |
| | | | | |
| Provision for deferred income taxes created by change in temporary differences in the balance of inventory between financial and income tax bases | | | 28,000 | |
| | | | | |
Provision for deferred income taxes created by change in temporary differences in the balance of accumulated depreciation between financial and income tax bases | | | 33,000 | |
| | | | | |
| Provision for deferred income taxes created by the use of contribution carryovers | | | 7,000 | |
| | | | | |
| Provision for deferred income taxes created by change in temporary differences between financial and income tax bases in accounting for the investment in the limited liability company | | | 17,000 | |
| | | | | |
| Net Reduction Of Deferred Income Taxes | | $ | (563,000 | ) |
SUPPLEMENTARY INFORMATION
Leaf, Saltzman, Manganelli, Pfeil & Tendler, LLP
INDEPENDENT AUDITORS’ REPORT ON
SUPPLEMENTARY INFORMATION
Microwave Satellite Technologies, Inc.
To the Stockholder and Board of Directors
Our report on our audits of the basic financial statements of Microwave Satellite Technologies, Inc. at April 30, 2005 and 2004 and for the year ended April 30, 2005 appears on page 1. Those audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information, listed in the contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Certified Public Accountants
Fairfield, New Jersey
January 6, 2006
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| SUPPORTING SCHEDULE |
| FOR THE YEAR ENDED |
| APRIL 30, 2005 |
| DIRECT COSTS | | | | |
| | | | | |
| Purchases - materials and supplies | | $ | 229,750 | |
| Direct labor | | | 123,927 | |
| Subcontractor labor | | | 100,498 | |
| Professional services | | | 6,319 | |
| Payroll taxes | | | 12,793 | |
| Employee benefits | | | 15,937 | |
| Commissions | | | 191,912 | |
| Outside programming costs | | | 959,011 | |
| Internet modem and service | | | 12,730 | |
| Equipment rentals and repairs | | | 18,577 | |
| Satellite time rental | | | 43,245 | |
| Program guides | | | 2,107 | |
| Truck and auto expense | | | 45,485 | |
| Road expenses | | | 14,225 | |
| Rent and utilities | | | 51,476 | |
| Insurance | | | 117,327 | |
| Telephone | | | 232,519 | |
| Other operating supplies and expenses | | | 798 | |
| Depreciation | | | 261,311 | |
| | | | | |
| Total Direct Costs | | $ | 2,439,947 | |
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| SUPPORTING SCHEDULE |
| FOR THE YEAR ENDED |
| APRIL 30, 2005 |
| SELLING AND ADMINISTRATIVE EXPENSES | | | | |
| | | | | |
| Salary - officer | | $ | 715,466 | |
| Salaries - office | | | 308,114 | |
| Payroll taxes | | | 68,624 | |
| Truck and auto expense | | | 5,054 | |
| Advertising | | | 17,783 | |
| Sales promotions and entertainment | | | 6,872 | |
| Travel, meals and lodging | | | 3,381 | |
| Office supplies and expenses | | | 32,674 | |
| Dues and subscriptions | | | 17,307 | |
| Insurance | | | 15,999 | |
| Employee benefits | | | 39,033 | |
| Officer's life insurance | | | 2,041 | |
| Telephone | | | 22,120 | |
| Repairs and maintenance | | | 9,663 | |
| Professional fees | | | 41,109 | |
| Other taxes | | | 377 | |
| Contributions | | | 1,050 | |
| Bank charges | | | 32,483 | |
| Rent and utilities | | | 51,476 | |
| Retirement plan contribution | | | 44,433 | |
| Bad debt expense | | | 13,941 | |
| Depreciation and amortization | | | 51,282 | |
| Interest expense | | | 15,525 | |
| | | | | |
| Total Selling and Administrative Expenses | | $ | 1,515,807 | |
MICROWAVE SATELLITE TECHNOLOGIES, INC.
YEAR ENDED
APRIL 30, 2004
CONTENTS
| | |
| | Page |
| | |
| Independent Auditors’ Report | 1 |
| | |
| Balance Sheets | 2 - 3 |
| | |
| Statement of Income and Retained Earnings | 4 |
| | |
| Statement of Cash Flows | 5 - 6 |
| | |
| Notes to Financial Statements | 7 - 14 |
| | |
| Supplementary Information | |
| | |
| Independent Auditors’ Report on Supplementary Information | 16 |
| | |
| Direct Costs | 17 |
| | |
| Selling and Administrative Expenses | 18 |
INDEPENDENT AUDITORS’ REPORT
Microwave Satellite Technologies, Inc.
To The Stockholder and Board of Directors
We have audited the accompanying balance sheets of Microwave Satellite Technologies, Inc. as of April 30, 2004 and 2003, and the related statements of income and retained earnings and cash flows for the year ended April 30, 2004. 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 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 financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Microwave Satellite Technologies, Inc. as of April 30, 2004 and 2003, and the results of its operations and its cash flows for the year ended April 30, 2004, in conformity with generally accepted accounting principles in the United States of America.
Leaf, Saltzman, Manganelli, Pfeil & Tendler, LLP
Certified Public Accountants
Fairfield, New Jersey
February 9, 2006
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| BALANCE SHEETS |
| AT |
| | | APRIL 30, | |
| | | 2004 | | 2003 | |
| ASSETS | | | | | | | |
| | | | | | | | |
| Current Assets | | | | | | | |
| Cash | | $ | 494,489 | | $ | 132,302 | |
| Accounts receivable | | | 141,440 | | | 196,461 | |
| Due from officer | | | | | | 57,428 | |
| Escrow receivable | | | 4,778,875 | | | | |
| Security deposits | | | 15,296 | | | 1,427 | |
| Prepaid income taxes | | | 42,285 | | | 57,266 | |
| Prepaid expenses and other current assets | | | 12,511 | | | 285,602 | |
| Deferred income taxes asset | | | | | | 122,000 | |
| Total Current Assets | | | 5,484,896 | | | 852,486 | |
| | | | | | | | |
| Prepaid expenses | | | 2,061 | | | | |
| Property and equipment, net of accumulated depreciation | | | 1,185,135 | | | 1,495,773 | |
| Intangible assets, net of accumulated amortization of | | | | | | | |
| ($13,757 - 2004 and $9,524 - 2003) | | | 49,743 | | | 53,976 | |
| Investment in limited liability company | | | 25,000 | | | | |
| Security deposits | | | | | | 64,979 | |
| | | | | | | | |
| | | $ | 6,746,835 | | $ | 2,467,214 | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | | | |
| | | | | | | | |
| Current Liabilities | | | | | | | |
| Note payable - bank | | $ | 26,651 | | | | |
| Current portion of long-term debt | | | 94,262 | | $ | 281,208 | |
| Accounts payable | | | 312,121 | | | 554,951 | |
| Sales taxes payable | | | 2,810 | | | 3,327 | |
| Due to officer | | | 3,112 | | | | |
| Deferred revenue | | | 336,615 | | | 286,711 | |
| Accrued expenses and other current liabilities | | | 3,572,244 | | | 33,150 | |
| Deferred income taxes | | | 569,000 | | | | |
| Total Current Liabilities | | | 4,916,815 | | | 1,159,347 | |
| | | | | | | | |
| Long-term debt - less current portion | | | 229,985 | | | 876,015 | |
| Deferred revenue | | | | | | 6,276 | |
| Deferred income taxes | | | 70,000 | | | 15,000 | |
| Total Liabilities | | | 5,216,800 | | | 2,056,638 | |
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| BALANCE SHEETS |
| AT |
| | | APRIL 30, |
| | | | 2004 | | | 2003 | |
| Stockholder's Equity | | | | | | | |
| Common stock - no par value | | | | | | | |
| Authorized - 1,000 shares | | | | | | | |
| Issued - 300 shares, outstanding - 125 shares | | | 1,000 | | | 1,000 | |
| Retained earnings | | | 1,604,035 | | | 484,576 | |
| | | | 1,605,035 | | | 485,576 | |
| Less: Treasury stock, 175 shares at cost | | | 75,000 | | | 75,000 | |
| Total Stockholder's Equity | | | 1,530,035 | | | 410,576 | |
| | | | | | | | |
| | | $ | 6,746,835 | | $ | 2,467,214 | |
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| STATEMENT OF INCOME AND RETAINED EARNINGS |
| FOR THE YEAR ENDED |
| APRIL 30, 2004 |
| Revenues | | $ | 4,835,290 | |
| | | | | |
| Direct costs | | | 3,674,844 | |
| | | | | |
| Gross profit | | | 1,160,446 | |
| | | | | |
| Selling and administrative expenses (including interest expense of $53,265) | | | 846,925 | |
| | | | | |
| Income from operations | | | 313,521 | |
| | | | | |
| Other Income | | | | |
| Gain on sale of subscriber base and equipment to Cablevision, net of | | | | |
| commissions and other expenses regarding sale amounting to $3,729,889 | | | 1,576,735 | |
| Interest income | | | 5,344 | |
| Total Other Income | | | 1,582,079 | |
| | | | | |
| Income before provision for income taxes | | | 1,895,600 | |
| | | | | |
| Provision for income taxes | | | 776,141 | |
| | | | | |
| Net income | | | 1,119,459 | |
| | | | | |
| Retained earnings - beginning (restated) | | | 484,576 | |
| | | | | |
| Retained earnings - end | | $ | 1,604,035 | |
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED |
| APRIL 30, 2004 |
| Cash Flows From Operating Activities | | | | |
| Net income | | $ | 1,119,459 | |
| | | | | |
| Adjustments To Reconcile Net Income To Net Cash | | | | |
| Used In Operating Activities | | | | |
| Depreciation and amortization | | | 319,133 | |
| Gain on sale of subscriber base and equipment to Cablevision, | | | | |
| before related expenses | | | (5,306,624 | ) |
| Provision for deferred income taxes | | | 746,000 | |
| Provision for bad debts | | | 22,977 | |
| Interest expense and bank charges on payoff of notes | | | 30,419 | |
| Interest income - officer | | | (2,070 | ) |
| (Increase) Decrease in: | | | | |
| Accounts receivable, net of deferred revenue | | | 75,672 | |
| Security deposits | | | (3,958 | ) |
| Prepaid income taxes | | | 14,981 | |
| Prepaid expenses and other current assets | | | 107,148 | |
| Increase (Decrease) in: | | | | |
| Accounts payable | | | (277,971 | ) |
| Sales taxes payable | | | (517 | ) |
| Accrued expenses and other current liabilities | | | 2,086,367 | |
| Total Adjustments | | | (2,188,443 | ) |
| | | | | |
| Net Cash Used In Operating Activities | | | (1,068,984 | ) |
| | | | | |
| Cash Flows From Investing Activities | | | | |
| Investment in limited liability company | | | (25,000 | ) |
| Purchase of equipment | | | (347,838 | ) |
| Proceeds from sale of subscriber base and equipment, | | | | |
| net of related cash paid of $281,532 | | | 1,938,669 | |
| Net proceeds received on balance due from officer | | | 59,498 | |
| Net Cash Provided By Investing Activities | | | 1,625,329 | |
| | | | | |
| Cash Flows From Financing Activities | | | | |
| Proceeds of note payable - bank | | | 23,000 | |
| Repayment of note payable - bank | | | (23,000 | ) |
| Repayment of long-term debt | | | (197,270 | ) |
| Advances on balance due to officer | | | 3,112 | |
| Net Cash Used In Financing Activities | | | (194,158 | ) |
| | | | | |
| Net increase in cash | | | 362,187 | |
| | | | | |
| Cash - beginning | | | 132,302 | |
| | | | | |
| Cash - end | | $ | 494,489 | |
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED |
| APRIL 30, 2004 |
| Supplemental Information: | | | | |
| | | | | |
| Interest paid during period | | $ | 54,903 | |
| | | | | |
| Income taxes paid during period | | $ | 13,366 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Supplementary Schedule of Non-Cash Investing and Financing Activities: | | | | |
| | | | | |
| Long-term debt directly refinanced | | $ | 1,038,628 | |
| | | | | |
| Increase in escrow receivable related to sale of subscriber base | | | | |
| and equipment | | $ | 4,778,875 | |
| | | | | |
| Long-term debt paid to creditor directly from proceeds of sale of | | | | |
| subscriber base and equipment | | $ | 638,596 | |
| | | | | |
| Long-term debt directly refinanced with short-term debt | | $ | 22,160 | |
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 1 - Restatement of Retained Earnings at May 1, 2003
During the period under audit, it was determined that certain balances had been incorrectly stated at April 30, 2003 that are itemized as follows:
| | | | |
| Accounts payable had been understated | | $ | (196,220 | ) |
| Inventory had been overstated | | | (185,667 | ) |
| Accounts receivable had been overstated | | | (23,386 | ) |
| Prepaid expenses and other current assets had been overstated | | | (21,671 | ) |
| | | | | |
| Total Adjustments Before Income Tax Effect | | $ | (426,944 | ) |
| | | | | |
| Reduction of deferred income taxes | | $ | 114,600 | |
| Reduction of current income taxes | | | 20,000 | |
| | | | | |
| Total Reduction of Income Taxes | | $ | 134,600 | |
| | | | | |
| Adjustments, net of income taxes | | $ | (292,344 | ) |
| Retained earnings at April 30, 2003, prior to restatement | | | 776,920 | |
| | | | | |
| Retained earnings at May 1, 2003, restated | | $ | 484,576 | |
Note 2 - Summary of Significant Accounting Policies
Nature of Operations
The Company is engaged in satellite communications, specializing in constructing, maintaining and managing private business television networks, as well as constructing and operating private cable television systems. In addition, the Company provides high-speed cable modem service to its private cable television system operations. The Company also provides national dial-up service, web hosting and design, and co-location services. The primary areas of operation are New York, New Jersey and Pennsylvania.
In March 2004, the Company sold a substantial portion of its cable subscriber base which represented 80% of the Company’s total subscriber base (see Note 18). During the year ended April 30, 2004, revenues earned from the sold cable subscriber base approximated $2,765,000.
Inventory of Materials and Supplies
Materials and supplies with unit costs of $500 and less are expensed upon acquisition. Materials and supplies in inventory are stated at cost, based on the first-in, first-out (FIFO) method, net of a reserve for obsolescence. At April 30, 2004 and 2003, no inventory has been recognized based on this policy.
Prepaid Expenses
Included in prepaid expenses are costs incurred by the balance sheet date to acquire, prepare and place operational equipment into service prior to the equipment’s actual use in the Company’s operations.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 2 - Summary of Significant Accounting Policies (Continued)
Property and Equipment and Depreciation
Property and equipment are recorded at cost. Depreciation is provided by straight-line and accelerated methods over the estimated useful lives of the assets.
Intangible Assets and Amortization
The Company acquired a subscriber base during the year ended April 30, 2001 that is being amortized over its estimated useful life of fifteen years using the straight-line method.
Investment in Limited Liability Company
At April 30, 2004, the Company accounted for its 50% investment in Interactivewifi.com, LLC at cost. Generally accepted accounting principles generally require that such an investment be accounted for by the equity method; however, the balance at April 30, 2004 determined by using the cost method does not differ materially from the balance determined by using the equity method (see Note 8).
Deferred Revenue
Deferred revenue represents advanced cable subscription billings for the month following the balance sheet date. Advanced billings at the balance sheet date are not included in revenues for the period then ended but, rather, are reported as a liability in the balance sheet, and cash payments received for advanced billings are credited towards accounts receivable.
Income Taxes
Deferred income taxes are created by temporary differences between financial and tax bases for the following accounts: inventory, investment in the limited liability company, accumulated depreciation, and in accounting for the gain on the sale of the Company’s subscriber base and equipment to Cablevision. For income tax purposes, inventory includes materials and supplies with unit costs of less than $500, the equity interest in the income of the limited liability company is accounted for by the cash basis method, depreciation is accelerated, and the gain on the sale of the subscriber base and equipment is reported on the installment method. In addition, the Company had available net operating loss and contribution carryovers which has created a deferred income tax asset (see Note 12).
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 2 - Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in accordance 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Management periodically reviews the accounts receivable for uncollectible accounts and uses the direct write-off method to specifically identify and write-off any accounts determined to be uncollectible when a realistic probability of collection does not exist. Generally accepted accounting principles require the Company to provide for an allowance for doubtful accounts, which entails estimating a reserve for uncollectible accounts based on a history of past write-offs and collections and current credit conditions. However, it is the Company’s experience that the direct write-off method has not differed materially from results that would have been obtained had the allowance method been used. In addition, the Company does not generally charge interest on past due accounts.
Note 3 - Escrow Receivable
The entire balance of escrow receivable at April 30, 2004, $4,778,875, was received during the year ended April 30, 2005.
Note 4 - Significant Concentrations of Credit Risk
Cash balances are maintained by the Company in two commercial banks. Such balances are insured up to $100,000 in total at each bank by the Federal Deposit Insurance Corporation (FDIC). At April 30, 2004 and 2003, cash balances exceeding federally insured limits amounted to $438,507 and $77,216, respectively.
Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within the same geographic region. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral.
Note 5 - Major Customers
At April 30, 2004, balances due from three customers approximated 56% of the total accounts receivable balance. At April 30, 2003, balances due from three customers approximated 50% of the total accounts receivable balance.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 6 - Due From Officer
The remaining balance of the account due from officer was paid in full on April 30, 2004. Interest had been charged at the federal semi-annual mid-term (for demand loans) rate as published under IRC Section 1274(d). The rate used for the year ended April 30, 2004 was 3.13% on an average balance of $66,139. Interest income of $2,070 was earned on this balance during the year ended April 30, 2004.
Note 7 - Property and Equipment (See Note 10)
Property and equipment consist of the following at April 30:
| | | | | | | Estimated | |
| | | 2004 | | 2003 | | Useful Lives | |
| | | | | | | | |
| Leasehold improvements | | $ | 198,733 | | $ | 198,733 | | | 39 years | |
| Operating equipment | | | 1,672,240 | | | 3,273,352 | | | 5 - 10 years | |
| Transportation equipment | | | 185,219 | | | 185,219 | | | 3 - 5 years | |
| Furniture and office equipment | | | 417,644 | | | 407,296 | | | 5 - 7 years | |
| | | | 2,473,836 | | | 4,064,600 | | | | |
| Less: accumulated depreciation | | | 1,288,701 | | | 2,568,827 | | | | |
| | | | | | | | | | | |
| | | $ | 1,185,135 | | $ | 1,495,773 | | | | |
Depreciation expense for the year ended April 30, 2004 amounted to $314,900.
Note 8 - Investment in Limited Liability Company
The Company owns 50% of Interactivewifi.com, LLC (the “LLC”), an entity that provides internet wireless zones for its customers.
At April 30, 2004, LLC had just begun operations, and had incurred expenses of $1,500 and had not earned any revenues from its inception. LLC had total assets and members’ equity of $48,500 at April 30, 2004, with no liabilities. Under the equity method of accounting, the Company’s equity in the loss of LLC amounted to $750 during the year ended April 30, 2004, which was not recognized in these financial statements because of its immateriality.
Note 9 - Lines-Of-Credit Available
At April 30, 2004, the Company had a line-of-credit with Washington Mutual Bank in the amount of $100,000 to be used for working capital that was terminated September 30, 2004 after payment of all outstanding balances. Advances against this line have been payable with interest at the bank’s prime lending rate plus 1/2%. The line has been collateralized by all the business assets of the Company and also personally guaranteed by the Company’s stockholder. Drawings against this line at April 30, 2004 totaled $26,651, leaving a remaining available line of $73,349 at that date.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 9 - Lines-Of-Credit Available (Continued)
In addition, at April 30, 2004, the Company had another line-of-credit with Washington Mutual Bank in the amount of $100,000 to be used for equipment purchases that also expired on September 30, 2004. Drawings against this line would have been subject to interest at the bank’s prime lending rate plus 1/2%. This line has also been collateralized by all the business assets of the Company and personally guaranteed by the Company’s stockholder. There were no drawings against this line at April 30, 2004.
Note 10 - Long-Term Debt (See Note 7)
| | | 2004 | | 2003 | | Maturity Date | |
| | | | | | | | |
| Washington Mutual Bank - note payable in monthly installments of $7,309 plus interest at the bank’s prime lending rate plus 1/2%. The note is collateralized by all of the business assets of the Company (that are not otherwise collateralized) and is also personally guaranteed by the Company’s stockholder. | | $ | 299,664 | | | | | | September 2007 | |
| | | | | | | | | | | |
| Ford Motor Credit - note payable in monthly installments of $546 with no interest. The note is collateralized by transportation equipment. | | | 24,583 | | $ | 31,137 | | | January 2008 | |
| | | | | | | | | | | |
| PNC Bank - note payable had been subject to interest at 7.125%. The note was paid in full October 2003. | | | -0- | | | 752,191 | | | N/A | |
| | | | | | | | | | | |
| PNC Bank - note payable had been subject to interest at the bank’s prime rate plus 1%. The note was paid in full October 2003. | | | -0- | | | 270,000 | | | N/A | |
| | | | | | | | | | | |
| PNC Bank - note payable was paid in full October 2003. | | | -0- | | | 100,000 | | | N/A | |
| | | | | | | | | | | |
| Ford Motor Credit Corp. - note payable was paid in full November 2003. | | | -0- | | | 3,895 | | | N/A | |
| | | | 324,247 | | | 1,157,223 | | | | |
| Less: current portion | | | 94,262 | | | 281,208 | | | | |
| | | | | | | | | | | |
| Amount Due After One Year | | $ | 229,985 | | $ | 876,015 | | | | |
Following are the maturities of long-term debt for each of the next four years and in the aggregate:
| April 30, 2005 | | $ | 94,262 | |
| 2006 | | | 94,262 | |
| 2007 | | | 94,262 | |
| 2008 | | | 41,461 | |
| | | | | |
| | | $ | 324,247 | |
The note payable to Washington Mutual Bank for $299,664 at April 30, 2004 was paid in full September 2004.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 11 - Due To Officer
The balance due to officer, amounting to $3,112 at April 30, 2004, was repaid during the year ended April 30, 2005 and was not subject to interest.
Note 12 - Deferred Income Taxes
At April 30, 2004, the net deferred income tax liabilities consisted of the following components:
| | | Current Liability | |
| Deferred income tax liability resulting from taxable temporary differences between financial and tax bases in accounting for the gain on the sale to Cablevision | | $ | 648,000 | |
| | | | | |
| Deferred income tax asset created by deductible temporary differences between financial and tax bases | | | (72,000 | ) |
| | | | | |
| Deferred income tax asset created by contribution carryover available for future periods | | | (7,000 | ) |
| | | | | |
| Total Deferred Income Tax Liability | | $ | 569,000 | |
| | | Non-Current | |
| | | | |
| Deferred income tax liability resulting from taxable temporary differences in the reporting of accumulated depreciation for financial and income tax purposes | | $ | 70,000 | |
At April 30, 2003, the deferred income tax asset and liability consisted of the following components:
| | | Current Asset | |
| Deferred income tax asset created by net operating losses available for future periods: | | | | |
| Federal | | $ | 29,000 | |
| State | | | 12,000 | |
| | | | | |
| Total | | | 41,000 | |
| | | | | |
| Deferred income tax asset created by deductible temporary differences between financial and tax bases | | | 74,000 | |
| | | | | |
| Deferred income tax asset created by contribution carryover available for future periods | | | 7,000 | |
| | | | | |
| Total Deferred Income Tax Asset | | $ | 122,000 | |
| | | Non-Current | |
| | | | |
| Deferred income tax liability resulting from taxable temporary differences in the reporting of accumulated depreciation for financial and income tax purposes | | $ | 15,000 | |
Estimates concerning the amounts and rate of realization of deferred taxes are inherently subject to change and it is at least reasonably possible that these estimates may change materially within the near-term.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 13 - Rent Expense
The Company rents office and warehouse space in New Jersey under a lease that was originally in effect until April 30, 2005. Subsequent to the balance sheet date, the lease was renewed to April 30, 2010. Monthly payments under the lease during the year ended April 30, 2004 amounted to $6,300. In addition, the Company sublet its warehouse space at $2,000 per month on a month-to-month basis through September 30, 2004. Rent expense for the year ended April 30, 2004 is as follows:
| Base rent | | $ | 75,600 | |
| Contingent rent (charge for insurance, real | | | | |
| estate taxes, maintenance and utilities) | | | 21,743 | |
| Total rent expense | | | 97,343 | |
| Less: sublet rental income | | | 22,000 | |
| | | | | |
| Net Rent Expense | | $ | 75,343 | |
Note 14 - Commitments and Contingencies
The Company leases a vehicle under a non-cancelable operating lease, in addition to the lease for office and warehouse space described above in Note 13. The minimum future rental payments under non-cancelable operating leases effective at April 30, 2004 (including the lease described in Note 13) for each of the next five years and in the aggregate are as follows:
| April 30, 2005 | | $ | 98,751 | |
| 2006 | | | 458 | |
| 2007 | | | - 0 - | |
| 2008 | | | - 0 - | |
| 2009 | | | - 0 - | |
| | | | | |
| Total Minimum Future Lease Payments | | $ | 99,209 | |
Note 15 - Retirement Plan
The Company provides a profit sharing plan with a 401(k) deferred compensation feature for all eligible employees. The Company matches the employees’ contribution in an amount equal to 100% of the first 1% of compensation plus 10% of the next 5% of compensation. Total employee and employer contributions may not exceed 25% of total eligible compensation. Contributions for the year ended April 30, 2004 amounted to $5,738.
For plan years beginning January 1, 2005, the plan was amended to allow for employee and employer contributions for each participant of up to the lesser of 100% of compensation or the statutory maximum ($42,000 per participant in 2005). In addition, the plan amendment provides for employer non-elective contributions equal to 3% of compensation for all eligible employees.
Note 16 - Amortization Expense
Amortization expense amounted to $4,233 for the year ended April 30, 2004. Amortization expense for each of the next five years is presently scheduled to be $4,233.
MICROWAVE SATELLITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT
APRIL 30, 2004 AND 2003
Note 17 - Advertising Expense
Advertising costs are expensed as incurred and amounted to $14,742 for the year ended April 30, 2004.
Note 18 - Gain on Sale of Equipment and Portion of Subscriber Base to Cablevision
In March 2004 the Company sold certain equipment and the portion of its subscriber base located in Brooklyn, New York to Cablevision for a total of $7,638,550. The total net gain on the sale amounted to $1,576,735 and consisted of the following components:
| Gain on sale of subscriber base | | $ | 5,417,513 | |
| Loss on sale of equipment | | | (110,889 | ) |
| Net gain on sale before commissions and other expenses regarding sale | | | 5,306,624 | |
| Selling expenses, including commissions | | | 3,729,889 | |
| | | | | |
| Net Gain on Sale | | $ | 1,576,735 | |
Note 19 - Provision For Income Taxes
The provision for income taxes consists of the following components for the year ended April 30, 2004:
| Current | | $ | 30,141 | |
| Deferred | | | 746,000 | |
| | | | | |
| Total Provision For Income Taxes | | $ | 776,141 | |
The components of the provision for deferred income taxes for the year ended April 30, 2004 are as follows:
| | | | |
| Provision for deferred income taxes arising from taxable temporary differences between financial and income tax bases in accounting for the gain on sale to Cablevision during the year | | $ | 648,000 | |
| | | | | |
| Provision for deferred income taxes created by reduction of deductible temporary differences in the balance of inventory between financial and income tax bases | | | 2,000 | |
| | | | | |
Provision for deferred income taxes created by change in temporary differences in the balance of accumulated depreciation between financial and income tax bases | | | 55,000 | |
| | | | | |
| Provision for deferred income taxes arising from the use of available net operating losses | | | 41,000 | |
| | | | | |
| Total Provision For Deferred Income Taxes | | $ | 746,000 | |
SUPPLEMENTARY INFORMATION
INDEPENDENT AUDITORS’ REPORT ON
SUPPLEMENTARY INFORMATION
Microwave Satellite Technologies, Inc.
To the Stockholder and Board of Directors
Our report on our audits of the basic financial statements of Microwave Satellite Technologies, Inc. at April 30, 2004 and 2003 and for the year ended April 30, 2004 appears on page 1. Those audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information, listed in the contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Leaf, Saltzman, Manganelli, Pfeil & Tendler, LLP
Certified Public Accountants
Fairfield, New Jersey
February 9, 2006
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| SUPPORTING SCHEDULE |
| FOR THE YEAR ENDED |
| APRIL 30, 2004 |
| DIRECT COSTS | | | |
| | | | |
| Purchases - materials and supplies | | $ | 229,564 | |
| Direct labor | | | 186,791 | |
| Subcontractor labor | | | 49,888 | |
| Professional services | | | 3,500 | |
| Payroll taxes | | | 17,514 | |
| Employee benefits | | | 25,853 | |
| Commissions | | | 207,819 | |
| Outside programming costs | | | 1,515,157 | |
| Internet modem and service | | | 18,169 | |
| Equipment rentals and repairs | | | 636,942 | |
| Satellite time rental | | | 57,331 | |
| Program guides | | | 5,328 | |
| Truck and auto expense | | | 39,825 | |
| Road expenses | | | 13,277 | |
| Rent and utilities | | | 44,378 | |
| Insurance | | | 118,168 | |
| Telephone | | | 233,462 | |
| Other operating supplies and expenses | | | 292 | |
| Depreciation | | | 271,586 | |
| | | | | |
| Total Direct Costs | | $ | 3,674,844 | |
| MICROWAVE SATELLITE TECHNOLOGIES, INC. |
| SUPPORTING SCHEDULE |
| FOR THE YEAR ENDED |
| APRIL 30, 2004 |
| SELLING AND ADMINISTRATIVE EXPENSES | | | |
| | | | |
| Salary - officer | | $ | 137,230 | |
| Salaries - office | | | 256,231 | |
| Payroll taxes | | | 30,302 | |
| Truck and auto expense | | | 4,425 | |
| Advertising | | | 14,742 | |
| Sales promotions and entertainment | | | 15,766 | |
| Travel, meals and lodging | | | 1,063 | |
| Office supplies and expenses | | | 31,887 | |
| Dues and subscriptions | | | 13,209 | |
| Insurance | | | 16,113 | |
| Employee benefits | | | 31,104 | |
| Officer's life insurance | | | 2,041 | |
| Telephone | | | 22,127 | |
| Repairs and maintenance | | | 11,475 | |
| Professional fees | | | 36,914 | |
| Other taxes | | | 250 | |
| Contributions | | | 449 | |
| Bank charges | | | 47,692 | |
| Rent and utilities | | | 44,378 | |
| Retirement plan contribution | | | 5,738 | |
| Bad debt expense | | | 22,977 | |
| Depreciation and amortization | | | 47,547 | |
| Interest expense | | | 53,265 | |
| | | | | |
| Total Selling and Administrative Expenses | | $ | 846,925 | |
18
