Paragraphs (a) and (b) of Item 9.01, “Financial Statements and Exhibits” are hereby amended to include the following:
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of
E & M Advertising, Inc. and Affiliates:
We have audited the accompanying consolidated balance sheets of E & M Advertising, Inc. and Affiliates (the Company) as of December 31, 2005 and 2004 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of E & M Advertising, Inc. and Affiliates 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.
On February 28, 2006, the Company sold substantially all of its assets to Impart Media Advertising, Inc. See Note 8 for further information.
| April 26, 2006 | /s/ Kahn, Litwin, Renza & Co., Ltd. |
E & M ADVERTISING, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
| | | 2005 | | 2004 | |
ASSETS | | | | | |
| | | | | | |
| CURRENT ASSETS: | | | | | |
| Cash and cash equivalents | | $ | 1,745,272 | | $ | 1,099,303 | |
| Accounts receivable, net of allowance of $208,500 and $123,000 at December 31, 2005 and 2004, respectively | | | 3,575,356 | | | 3,864,793 | |
| Prepaid expenses | | | 54,187 | | | 377,105 | |
| Total current assets | | | 5,374,815 | | | 5,341,201 | |
| | | | | | | | |
| NONCURRENT ASSETS: | | | | | | | |
| Property and equipment, net | | | 61,799 | | | 71,012 | |
| Receivable - related party | | | 24,277 | | | 14,789 | |
| Deposits | | | 40,250 | | | 40,550 | |
| Total noncurrent assets | | | 126,326 | | | 126,351 | |
| | | | | | | | |
| Total assets | | $ | 5,501,141 | | $ | 5,467,552 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | |
| | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | |
| Accounts payable | | $ | 4,746,295 | | $ | 4,506,538 | |
| Advance billings | | | 576,180 | | | 716,198 | |
| Accrued expenses | | | 247,226 | | | 402,068 | |
| Total current liabilities | | | 5,569,701 | | | 5,624,804 | |
| | | | | | | | |
| STOCKHOLDERS' DEFICIT: | | | | | | | |
| Common stock, no par value; 200 shares authorized, 125 shares issued and outstanding at December 31, 2005 and 2004 | | | 49,049 | | | 49,049 | |
| Additional paid-in capital | | | 773,955 | | | 569,505 | |
| Minority interest in VIE | | | (427,224 | ) | | (119,990 | ) |
| Accumulated deficit | | | (464,340 | ) | | (655,816 | ) |
| Total stockholders' deficit | | | (68,560 | ) | | (157,252 | ) |
| | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (notes 3 and 4) | | | - | | | - | |
| | | | | | | | |
| Total liabilities and stockholders' deficit | | $ | 5,501,141 | | $ | 5,467,552 | |
E & M ADVERTISING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005 and 2004
| | | 2005 | | 2004 | |
| | | | | | |
| OPERATING REVENUES | | $ | 4,532,737 | | $ | 3,522,267 | |
| | | | | | | | |
| OPERATING EXPENSES | | | 3,857,362 | | | 3,440,923 | |
| | | | | | | | |
| Total operating income | | | 675,375 | | | 81,344 | |
| | | | | | | | |
| OTHER INCOME | | | 22,350 | | | 3,213 | |
| | | | | | | | |
| Total earnings | | | 697,725 | | | 84,557 | |
| | | | | | | | |
| Income attributable to minority interest | | | 59,766 | | | 306,910 | |
| | | | | | | | |
| Net income (loss) | | $ | 637,959 | | $ | (222,353 | ) |
E & M ADVERTISING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 2005 and 2004
| | | Common Stock | | Additional | | Minority | | | | Total | |
| | | Shares | | | | Paid-In | | Interest | | Accumulated | | Stockholders' | |
| | | Outstanding | | Amount | | Capital | | in VIE | | Deficit | | Equity (Deficit) | |
| | | | | | | | | | | | | | |
| Balances, December 31, 2003 | | | 125 | | $ | 49,049 | | $ | 249,370 | | $ | 70,100 | | $ | (279,817 | ) | $ | 88,702 | |
| | | | | | | | | | | | | | | | | | | | |
| Capital contributions | | | | | | | | | 320,135 | | | | | | | | | 320,135 | |
| Distributions | | | | | | | | | | | | (497,000 | ) | | (153,646 | ) | | (650,646 | ) |
| Net income (loss) | | | | | | | | | | | | 306,910 | | | (222,353 | ) | | 84,557 | |
| | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2004 | | | 125 | | | 49,049 | | | 569,505 | | | (119,990 | ) | | (655,816 | ) | | (157,252 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Capital contributions | | | | | | | | | 204,450 | | | | | | | | | 204,450 | |
| Distributions | | | | | | | | | | | | (367,000 | ) | | (446,483 | ) | | (813,483 | ) |
| Net income | | | | | | | | | | | | 59,766 | | | 637,959 | | | 697,725 | |
| | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2005 | | | 125 | | $ | 49,049 | | $ | 773,955 | | $ | (427,224 | ) | $ | (464,340 | ) | $ | (68,560 | ) |
E & M ADVERTISING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 and 2004
| | | 2005 | | 2004 | |
| | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Total earnings | | $ | 697,725 | | $ | 84,557 | |
| Adjustments to reconcile total earnings to net cash provided by operating activities: | | | | | | | |
| Bad debt provision | | | 85,500 | | | 84,400 | |
| Depreciation | | | 30,031 | | | 42,501 | |
| Changes in assets and liabilities: | | | | | | | |
| Accounts receivable | | | 203,937 | | | 227,678 | |
| Prepaid expenses | | | 322,918 | | | (859,102 | ) |
| Deposits | | | 300 | | | (800 | ) |
| Accounts payable | | | 239,757 | | | 427,044 | |
| Advance billings | | | (140,018 | ) | | 189,209 | |
| Accrued expenses | | | (154,842 | ) | | (227,005 | ) |
| Payables - related party | | | - | | | 102,234 | |
| Total adjustments | | | 587,583 | | | (13,841 | ) |
| Net cash provided by operating activities | | | 1,285,308 | | | 70,716 | |
| | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | |
| Capital expenditures | | | (20,818 | ) | | (14,734 | ) |
| Decrease (increase) in receivable - related party | | | (9,488 | ) | | 30,132 | |
| Net cash provided (used) by investing activities | | | (30,306 | ) | | 15,398 | |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Principal payments on capital lease obligations | | | - | | | (3,592 | ) |
| Capital contributions | | | 204,450 | | | 320,135 | |
| Stockholder distributions | | | (813,483 | ) | | (650,646 | ) |
| Net cash used by financing activities | | | (609,033 | ) | | (334,103 | ) |
| | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 645,969 | | | (247,989 | ) |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | | 1,099,303 | | | 1,347,292 | |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 1,745,272 | | $ | 1,099,303 | |
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
This summary of significant accounting policies of E & M Advertising, Inc. and Affiliates (the Company) is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, who is responsible for the integrity and objectivity of the consolidated financial statements. 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 consolidated financial statements.
Nature of Operations
The Company is headquartered in New York City and also has locations in Los Angeles and Las Vegas. The Company offers a range of media services to clients looking to build their customer base through direct response electronic media marketing. These services include strategic planning, creative, production, telemarketing, fulfillment, and on-line marketing. The Company’s clients include traditional product marketers, financial, insurance, music, entertainment, and healthcare service corporations, as well as, catalog companies.
On February 28, 2006, the Company sold substantially all of its assets to Impart Media Advertising, Inc. See Note 8 for further information.
Principles of Consolidation
The consolidated financial statements of E & M Advertising Inc. include E & M Advertising West/Camelot Media, Inc. (Camelot) and NextReflex, Inc. (NextReflex), (collectively the Affiliates). These Affiliates are considered variable interest entities of which E & M Advertising, Inc. is the primary beneficiary as further described in Note 7. Camelot is a sales division of E & M Advertising, Inc. that provides a sales presence on the West Coast. NextReflex provides the Company with internet and website capabilities. The affiliates share common ownership and engage in business transactions with E & M Advertising, Inc. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued) |
Revenue Recognition
Substantially all revenue is derived from fees for services. Additionally, commissions are earned based upon the placement of advertisements in various media. Revenue is realized when the service is performed in accordance with the terms of each client arrangement and upon completion of the earnings process.
Revenue recognition policies are in compliance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) 101, Revenue and Recognition in Financial Statements as updated by SAB 104, Revenue Recognition (SAB 104) which summarizes certain views of the SEC staff in applying generally accepted accounting principles to revenue recognition in the financial statements. In July 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) released Issue 99-19 (EITF 99-19). This Issue summarized the EITF’s views on when revenue should be recorded at the gross amount billed because revenue has been earned from the sale of goods or services, or the net amount retained because revenue has been earned from a fee or commission.
The Company recognizes revenue in compliance with SAB 101, SAB 104, and EITF 99-19. The determination whether revenue in a particular line of business should be recognized net or gross involves difficult judgments. If the Company makes these judgments differently, it could significantly affect the financial presentation. If it were determined that the Company must recognize a significant portion of revenues on a gross basis rather than a net basis, it would positively impact revenues, but have no impact on operating income.
The Company typically acts as an agent on behalf of their clients in their primary lines of business. Accordingly, most revenues are recorded based upon the net commissions earned. The Company records non-media and internet services at a gross billings amount, due to the actual services it performs or provides. The gross billing amounts included in the operating revenues for the years ended December 31, 2005 and 2004 were approximately $534,000 and $714,000, respectively.
Although most revenues are presented on a net commissions earned basis, the related accounts receivable and accounts payable are recorded on a gross basis in order to match the actual cash due from the applicable client or due to the applicable vendor, as committed in these arrangements. The accounts receivable balance of approximately $3,575,000 and $3,865,000 and the corresponding accounts payable balance of approximately $4,746,000 and $4,507,000 at December 31, 2005 and 2004, respectively, represents remaining unremitted funds from gross bookings of approximately $39,917,000 and $34,085,000 for 2005 and 2004, respectively.
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued) |
Operating Expenses
Operating expenses include salaries and related payroll costs associated with client service professional and administrative staff. These costs also include office and general expenses attributable to the support of client service professional staff, depreciation, rent expenses, professional fees, and bad debt expense relating to accounts receivable.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
The majority of client agreements permit the Company to bill for the cost the Company incurs for media advertisement on the client’s behalf plus a commission. The Company carries its accounts receivable at net realizable value. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past bad debt expense and collections and current credit conditions.
The Company does not accrue interest on receivables. A receivable is considered past due if payments have not been received by the Company within stated terms. Accounts are written off as uncollectible if no payments are received after a reasonable amount of time, and it is evident after exhausting all reasonable means that the client will not be remitting payment. In most circumstances, the Company has been absolved of amounts owed to a media outlet in connection with the underlying client payment default and, accordingly, the Company will offset the related payable against the uncollectible receivable.
Depreciation
Depreciation is provided using the straight-line and accelerated methods over the estimated useful lives of the assets. The majority of the Company’s assets are furniture and fixtures and office equipment which has useful lives between 3 to 7 years.
Advance billings
Advance billings represent cash received from clients in advance of their media placement.
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued) |
Income Taxes
The Company, with the consent of its stockholders, elected to have its income taxed under the provisions of Subchapter S of the Internal Revenue Code. Subchapter S provides that the individual stockholders be taxed on the Company’s taxable income in lieu of the Company paying income taxes. Therefore, no provision or liability for income taxes is reflected in these consolidated financial statements.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ended December 31, 2005 and 2004 was approximately $73,100 and $6,200, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable, and related party receivables. The Company performs ongoing credit evaluations of its customers’ financial conditions and generally requires no collateral.
The Company maintains its operating bank accounts in a financial institution located in New York City. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. The aggregate amount of all balances exceeded insured limits by approximately $2,001,000 and $1,803,000 at December 31, 2005 and 2004, respectively.
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company’s financial instruments approximate fair value due to the short-term nature.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain accounts in the 2004 financial statements have been reclassified for comparative purposes to conform with the 2005 consolidated financial statement presentation.
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
A summary of the property and equipment is as follows:
| | | 2005 | | 2004 | |
| | | | | | |
| Furniture and fixtures | | $ | 233,351 | | $ | 233,351 | |
| Leasehold improvements | | | 3,264 | | | 3,264 | |
| Office equipment | | | 620,996 | | | 600,178 | |
| Total property and equipment | | | 857,611 | | | 836,793 | |
| Less accumulated depreciation | | | 795,812 | | | 765,781 | |
| | | | | | | | |
| Property and equipment, net | | $ | 61,799 | | $ | 71,012 | |
The Company leases its office facilities under an operating lease, which expires April, 2006. Subsequent to year-end, the Company extended the lease agreement through June, 2011. Total rental expense under the facilities lease was approximately $210,600 and $207,200 for the years ended December 31, 2005 and 2004, respectively. The Company also has various non-cancelable operating leases for automobiles and equipment that expire at various dates through 2008.
Approximate future minimum lease payments are as follows:
Year Ending | | | |
| | | | |
| December 31, 2006 | | $ | 206,800 | |
| December 31, 2007 | | | 232,200 | |
| December 31, 2008 | | | 235,300 | |
| December 31, 2009 | | | 235,400 | |
| December 31, 2010 | | | 240,100 | |
| December 31, 2011 | | | 121,200 | |
| | | | | |
| | | $ | 1,271,000 | |
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
The Company has a profit sharing plan that qualifies under Section 401(k) of the Internal Revenue Code. The profit sharing plan covers employees who have completed six months of service and have attained age twenty-one. The Company allows eligible employees to contribute up to 15% of their compensation with the Company matching 100% of the employees’ contribution of the first $1,000 and 50% of the next $1,500.
The Company contributed approximately $31,100 and $22,900 to its profit sharing plan for the years ended December 31, 2005 and 2004, respectively.
| 5. | RELATED PARTY TRANSACTIONS |
Revenue
The Company performs services and pays expenses for a company affiliated through common ownership, for which it is reimbursed. Revenue from this related party was approximately $24,000 for the years ended December 31, 2005 and 2004.
Receivable - Related Party
Receivable - related party includes various unsecured loans due from a company affiliated through common ownership. The loans are non-interest bearing and are payable upon demand. Outstanding balances on the loans at December 31, 2005 and 2004 are approximately $24,300 and $14,800, respectively.
The Company had one major client that accounted for approximately $1,318,300 (29%) of net revenues for 2005. The Company had one major client that accounted for approximately $1,254,500 (36%) of net revenues for 2004.
The Company had one major vendor that accounted for approximately $1,732,300 (6%) of gross billed broadcast time purchased on behalf of their clients during 2004. There were no major vendors in 2005.
E & M ADVERTISING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
| 7. | VARIABLE INTEREST ENTITIES |
During 2003, the Financial Accounting Standards Board issued an then revised Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”) which requires the primary beneficiary of a variable interest entity (VIE) to consolidate that entity. The primary beneficiary of a VIE is the party that absorbs a majority of that entity’s expected losses, receives a majority of that entity’s expected returns, or both, as a result of ownership, contractual or other financial interests in the entity.
Application of FIN 46R was required in the Company’s consolidated financial statements for the year ended December 31, 2005. This resulted in the consolidation of Camelot and NextReflex of which the Company is considered the primary beneficiary as a result of common ownership and management. As permitted by FIN 46R, the 2004 balances have been restated to reflect the consolidation of these VIEs.
On February 28, 2006, the Company entered into an Asset Purchase Agreement (the Agreement) with Impart Media Advertising, Inc. (Impart), a wholly-owned subsidiary of Impart Media Group, Inc. (the Group). Under the terms of the Agreement, the Company will receive an aggregate amount of $800,000 and 1,608,392 restricted shares of the Group’s common stock in exchange for substantially all of the Company’s assets. See the Group’s Form 8-K filed with the Securities and Exchange Commission on March 6, 2006 for additional information.
Concurrently with the acquisition, the Group entered into a three year employment agreement with Michael Medico, the Company’s founder and principal stockholder, pursuant to which Mr. Medico will serve as Executive Vice President of the Group and President of Impart.
