EXHIBIT 99.1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Berliner Communications, Inc.
We have audited the accompanying consolidated balance sheet of Berliner Communications, Inc. as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for purposes of expressing an opinion on the effectiveness of the Company’s internal control over 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 audit provides 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 Berliner Communications, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
BDO Seidman, LLP
Woodbridge, New Jersey
May 6, 2005
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Berliner Communications, Inc.
We have audited the accompanying consolidated balance sheets of Berliner Communications, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two 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 the standards of the Public Company Accounting Oversight Board (United States). 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Berliner Communications, Inc. and subsidiaries as of December 31, 2003, and the consolidated results of their operations and their consolidated cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.
Grant Thornton, LLP
Philadelphia, Pennsylvania
July 1, 2004
BERLINER COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2004 | 2003 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 453,818 | $ | 137,870 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $106,061 in 2004 and $147,724 in 2003 | 3,384,904 | 5,495,679 | ||||||
| Inventories | 515,565 | 611,974 | ||||||
| Prepaid expenses and other current assets | 212,943 | 159,349 | ||||||
| 4,567,230 | 6,404,872 | |||||||
| LONG-TERM ASSETS | ||||||||
| Fixed assets, net | 557,317 | 780,032 | ||||||
| Other assets | 68,032 | 59,302 | ||||||
| $ | 5,192,579 | $ | 7,244,206 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABLILITIES | ||||||||
| Line of credit | $ | 344,588 | $ | 435,995 | ||||
| Current portion of long-term debt | 434,372 | 339,513 | ||||||
| Current portion of capital lease obligations | 56,573 | 114,704 | ||||||
| Loan from shareholder | 101,640 | — | ||||||
| Accounts payable | 1,704,187 | 1,989,142 | ||||||
| Accrued liabilities | 1,223,965 | 1,936,539 | ||||||
| Deferred revenue | 9,435 | — | ||||||
| Income taxes payable | 12,581 | 34,371 | ||||||
| 3,887,341 | 4,850,264 | |||||||
| LONG-TERM LIABILITIES | ||||||||
| Long-term debt, net of current portion | 404,484 | 624,765 | ||||||
| Long-term capital lease obligations, net of current portion | 26,977 | 58,568 | ||||||
| 431,461 | 683,333 | |||||||
| COMMITMENTS | — | — | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock - $0.01 par value, authorized 3,000,000 shares, none issued and outstanding | — | — | ||||||
| Common stock - - $.01 par value, authorized 30,000,000 shares, 20,224,320 shares issued and outstanding | 202,243 | 202,243 | ||||||
| Additional paid -in capital | 10,531,131 | 10,531,131 | ||||||
| Accumulated deficit | (9,859,597 | ) | (9,022,765 | ) | ||||
| 873,777 | 1,710,609 | |||||||
| $ | 5,192,579 | $ | 7,244,206 | |||||
The accompanying notes are an integral part of these statements.
BERLINER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the year ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Revenues | $ | 15,285,904 | $ | 17,955,834 | $ | 22,939,479 | ||||||
| Costs of revenues | 9,604,839 | 13,098,669 | 18,435,786 | |||||||||
| Gross margin | 5,681,065 | 4,857,165 | 4,503,693 | |||||||||
| Selling, general and administrative expenses | 6,123,328 | 5,898,143 | 8,132,762 | |||||||||
| Depreciation and amortization | 342,934 | 580,207 | 703,519 | |||||||||
| Impairment of goodwill | — | — | 413,801 | |||||||||
| Impairment of deferred financing costs | — | — | 81,741 | |||||||||
| Loss from operations | (785,197 | ) | (1,621,185 | ) | (4,828,130 | ) | ||||||
| Other income (expense) | ||||||||||||
| Interest expense | (46,813 | ) | (34,112 | ) | (61,215 | ) | ||||||
| Interest income | 1,639 | 12,763 | 43,542 | |||||||||
| Gain on extinguishment of debt | — | 7,171,119 | — | |||||||||
| Gain (loss) on sale of fixed assets | 9,699 | (45,445 | ) | (7,003 | ) | |||||||
| Income (loss) before income taxes | (820,672 | ) | 5,483,140 | (4,852,806 | ) | |||||||
| Income tax expense | 16,160 | 44,250 | 253,987 | |||||||||
| Net income (loss) | (836,832 | ) | 5,438,890 | (5,106,793 | ) | |||||||
| Preferred stock dividends and accretion | — | 378,355 | 1,623,420 | |||||||||
| Net income (loss) applicable to common shareholders | $ | (836,832 | ) | $ | 5,060,535 | $ | (6,730,213 | ) | ||||
The accompanying notes are an integral part of these statements.
BERLINER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Common Stock | Additional | |||||||||||
| Shares | Amount | Paid -in Capital | ||||||||||
| Balance at December 31, 2001 | 12,134,591 | $ | 121,345 | $ | 8,573,480 | |||||||
| Deferred compensation | — | — | (19,666 | ) | ||||||||
| Preferred stock dividends and accretion | — | — | — | |||||||||
| Net loss | — | — | — | |||||||||
| Balance at December 31, 2002 | 12,134,591 | 121,345 | 8,553,814 | |||||||||
| Stock issued under standstill voting and termination agreement (see Note 7) | 8,089,729 | 80,898 | 1,977,317 | |||||||||
| Preferred stock dividends and accretion | — | — | — | |||||||||
| Net loss | — | — | — | |||||||||
| Balance at December 31, 2003 | 20,224,320 | 202,243 | 10,531,131 | |||||||||
| Net loss | — | — | — | |||||||||
| Balance at December 31, 2004 | 20,224,320 | $ | 202,243 | $ | 10,531,131 | |||||||
The accompanying notes are an integral part of these statements.
| Total | ||||||||||||
| Deferred | Accumulated | Stockholders’ | ||||||||||
| Compensation | Deficit | Equity (Deficit) | ||||||||||
| $ | (29,000 | ) | $ | (7,353,087 | ) | $ | 1,312,738 | |||||
| 29,000 | — | $ | 9,334 | |||||||||
| — | (1,623,420 | ) | $ | (1,623,420 | ) | |||||||
| — | (5,106,793 | ) | $ | (5,106,793 | ) | |||||||
| — | (14,083,300 | ) | (5,408,141 | ) | ||||||||
| — | — | 2,058,215 | ||||||||||
| — | (378,355 | ) | (378,355 | ) | ||||||||
| — | 5,438,890 | 5,438,890 | ||||||||||
| — | (9,022,765 | ) | 1,710,609 | |||||||||
| — | (836,832 | ) | (836,832 | ) | ||||||||
| $ | — | $ | (9,859,597 | ) | $ | 873,777 | ||||||
BERLINER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the year ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) | $ | (836,832 | ) | $ | 5,438,890 | $ | (5,106,793 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operations | ||||||||||||
| Depreciation | 342,934 | 580,207 | 703,519 | |||||||||
| Impairment of deferred financing costs | — | — | 81,741 | |||||||||
| Gain on extinguishment of debt | — | (7,171,119 | ) | — | ||||||||
| Impairment of goodwill | — | — | 413,801 | |||||||||
| (Gain) loss on sale of fixed assets | (9,699 | ) | 45,445 | 7,003 | ||||||||
| Changes in operating assets and liabilities | ||||||||||||
| Accounts receivable | 2,110,775 | (157,860 | ) | 5,330,711 | ||||||||
| Inventories | 96,409 | 92,449 | 452,995 | |||||||||
| Prepaid expenses and other current assets | (53,594 | ) | 106,703 | (71,766 | ) | |||||||
| Other assets | (8,730 | ) | 4,561 | 896 | ||||||||
| Accounts payable | (284,955 | ) | 249,702 | (2,664,680 | ) | |||||||
| Accrued liabilities | (712,574 | ) | (518,118 | ) | 517,508 | |||||||
| Income taxes receivable and payable | (21,790 | ) | 34,371 | 462,974 | ||||||||
| Deferred revenues | 9,435 | (200,000 | ) | 200,000 | ||||||||
| Other liabilities | — | — | 10,374 | |||||||||
| Net cash (used in) provided by operating activities | 631,379 | (1,494,769 | ) | 338,283 | ||||||||
| Cash flow from investing activities | ||||||||||||
| Purchase of fixed assets | (80,358 | ) | (219,765 | ) | (330,699 | ) | ||||||
| Proceeds from the sale of fixed assets | 25,053 | 28,849 | 118,401 | |||||||||
| Net cash used in investing activities | (55,305 | ) | (190,916 | ) | (212,298 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Payment of preferred stock dividends | — | (137,500 | ) | (660,000 | ) | |||||||
| Proceeds from line of credit | 1,887,663 | 435,995 | — | |||||||||
| Proceeds from long-term debt | 101,640 | 87,566 | — | |||||||||
| Repayment of line of credit | (1,979,070 | ) | — | — | ||||||||
| Repayment of long-term debt | (180,637 | ) | (89,288 | ) | — | |||||||
| Repayment of capital leases | (89,722 | ) | (97,154 | ) | (66,218 | ) | ||||||
| Cash paid on debt extinguishment | — | (800,000 | ) | — | ||||||||
| Net cash used in financing activities | (260,126 | ) | (600,381 | ) | (726,218 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents...... | 315,948 | (2,286,066 | ) | (600,233 | ) | |||||||
| Cash and cash equivalents at beginning of year | 137,870 | 2,423,936 | 3,024,169 | |||||||||
| Cash and cash equivalents at end of year | $ | 453,818 | $ | 137,870 | $ | 2,423,936 | ||||||
| Supplemental disclosure of cash flow information Interest paid | $ | 46,813 | $ | 35,776 | $ | 61,215 | ||||||
| Income taxes paid | $ | 9,789 | $ | — | $ | 167,631 | ||||||
| Non-cash investing and financing activities Preferred stock accretion | $ | — | $ | 240,855 | $ | 963,420 | ||||||
| Capital leases entered into | $ | 55,215 | $ | 19,415 | $ | 342,018 | ||||||
The accompanying notes are an integral part of these statements.
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Berliner Communications Inc. (“BCI”, “we”, “us” and “our”), a Delaware corporation, headquartered in Elmwood Park, New Jersey, was formed in January 1995 and has two wholly owned subsidiaries: Wireless Systems Consulting, Inc. and Berliner Services, Inc. We operate in one business segment providing real estate acquisition and zoning services, radio frequency and network design and engineering, infrastructure equipment construction and installation, radio transmission base station modifications and project management services to wireless communications carriers.
BCI Southeast, Inc. (“BCISE”) provided consulting and construction services to wireless communications carriers and was dissolved in 2002. Vertical Wireless, Inc. began operations in late 2002 to sell and activate new cell telephones subscribers and discontinued operations in 2003.
2. Summary of Significant Accounting Policies
Basis of Presentation
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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the more significant estimates being made include the allowance for doubtful accounts and percentage of completion of construction projects.
Principals of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2004, cash and cash equivalents totaled $453,818 and consisted of bank balances and a money market account. We maintain our cash and cash equivalents with two financial institutions. A significant amount of the cash balance is in excess of the FDIC insurance limit. Cash equivalents are stated at cost, which approximates fair value.
Inventories
Inventories, which consist mainly of raw materials, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Prepaid Expenses and Other Assets
Prepaid expenses are recorded as assets and expensed in the period in which the related services are received. At December 31, 2004, current prepaid expenses and other assets classified as current totaled $212,943 and consisted mainly of insurance and rents. Non-current other assets of $68,032 are mainly deposits for our office and warehouse locations.
Risks and Uncertainties
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. We routinely assess the financial strength of our customers and do not require collateral or other security to support customer receivables. Credit losses are provided for in our consolidated financial statements in the form of an allowance for doubtful accounts. Our allowance for doubtful accounts is based upon the expected collectibility of all our accounts receivable. We determine our allowance by considering a number of factors, including the length of time it is past due, our previous loss history and the customer’s current ability to pay its obligation. Accounts receivable are written off when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Property and Equipment
Property and equipment consist of automobiles and trucks, computer equipment, equipment, furniture and fixtures and leasehold improvements. Each class of assets is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the estimated useful life, whichever is shorter. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. As of the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.
Long-lived Assets
Our long-lived assets consist of property and equipment. SFAS No. 144,Accounting for the Impairment or Disposal of Long Lived Assets, establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions.
We assess the recoverability of long-lived assets by determining whether the net book value of the assets can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and is charged to operations in the period in which the impairment occurs.
Goodwill
Goodwill represents acquisition costs in excess of the fair value of the net assets of businesses purchased. Effective January 1, 2002, we adopted SFAS No. 142,Goodwill and Intangible Assets.In accordance with SFAS No. 142, the Company evaluates impairment annually for impairment, or earlier if indicators of potential impairment exist. The determination of whether Goodwill is impaired requires a significant level of judgment. An impairment loss would generally be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of the reporting unit is determined using a discounted cash flow approach. If we determine that goodwill has been impaired, an impairment charge is recorded in the statement of operations. During 2002, due to the discontinuance of the BCISE operations, we wrote off the remaining $413,801 of goodwill associated with the purchase of that business.
Revenue Recognition
Revenue from radio frequency and network design and engineering, infrastructure equipment construction and installation, radio transmission base station modifications and project management services are recognized as work is performed. Revenue from real estate acquisition and zoning services is recognized upon the identification of an acceptable site and when the lease is signed between the landlord and customer. Revenue associated with multiple element contracts is allocated based on the relative fair value of the services included in the contract. Revenue from infrastructure equipment construction and installation contracts, which are generally completed within 90 days, is recorded under the percentage-of-completion method based on the percentage that total direct costs incurred to date bear to estimated total costs at completion. Losses on infrastructure equipment construction and installation contracts are recognized when such losses become known.
Unbilled receivables represent direct costs incurred and estimated gross profit on uncompleted infrastructure equipment construction and installation contracts that are not yet billed or billable, pursuant to contractual terms.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax basis. Deferred tax assets and liabilities are measured using applicable tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered.
Stock Based Compensation
We apply the intrinsic value-based method of accounting prescribed by Accounting Principal Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, in accounting for our employee-based stock options plan. As such, compensation expense would be recorded on the date of grant only if the current market price of underlying stock exceeded the exercise price. SFAS No. 123,Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based compensation. As permitted by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting for our employee-based stock option grants and have adopted the disclosure requirements of SFAS No. 123.
During 2004, we did not grant any stock options under the Plans. During 2003, there were 60,000 stock options granted under the Plans. The per share weighted-average fair value of stock options granted during 2003 was $0.00, on the date of grant using a Black Scholes option-pricing model (excluding a volatility assumption) with the following weighted-average assumptions: expected dividend yield of 0%, risk-free interest rate of 3.07% and an expected life of five years. The fair value of the options granted is immaterial; therefore, the proforma net income (loss) would have equalled the amount reported for all periods.
We have adopted the disclosure-only provision of SFAS 123, “Accounting for Stock Based Compensation.” SFAS 123 requires pro forma information to be presented as if we had accounted for the stock options granted during the fiscal periods presented using the fair value method. We will be required to comply with SFAS 123(R) that was issued in December of 2004, which will require us to record compensation expense in our results of operations for our fiscal year beginning after June 15, 2005.
Stock options and warrants granted to non-employees are recorded at fair value.
3. Accounts Receivable
Accounts receivable at December 31, 2004, and 2003, consist of the following:
| 2004 | 2003 | |||||||
| Accounts receivable | $ | 2,788,188 | $ | 4,492,837 | ||||
| Unbilled receivables | 702,777 | 1,150,566 | ||||||
| 3,490,965 | 5,643,403 | |||||||
| Allowance for doubtful accounts | (106,061 | ) | (147,724 | ) | ||||
| Total | $ | 3,384,904 | $ | 5,495,679 | ||||
Unbilled receivables represents the value of services rendered to customers not billed as of the balance sheet date. Unbilled receivables are generally billed within three months subsequent to the provisions of services.
4. Fixed Assets
Fixed assets at December 31, 2004, and 2003, consist of the following:
| 2004 | 2003 | |||||||
| Automobiles and trucks | $ | 239,464 | $ | 813,713 | ||||
| Furniture and fixtures | 500,322 | 276,047 | ||||||
| Equipment | 1,766,906 | 1,395,771 | ||||||
| Computer equipment and software | 81,490 | 110,132 | ||||||
| Leasehold improvements | 110,131 | 71,506 | ||||||
| 2,698,313 | 2,667,169 | |||||||
| Less accumulated for depreciation and amortization | (2,140,996 | ) | (1,887,137 | ) | ||||
| Total | $ | 557,317 | $ | 780,032 | ||||
Depreciation and amortization expense on fixed assets for the years ended December 31, 2004, and 2003, was $342,934 and $580,207, respectively.
5. Accrued Liabilities
Accrued liabilities at December 31, 2004, and 2003, consist of the following:
| 2004 | 2003 | |||||||
| Employee compensation | $ | 141,838 | $ | 41,171 | ||||
| Constructions costs | 975,969 | 1,862,469 | ||||||
| Other | 106,158 | 32,899 | ||||||
| $ | 1,223,965 | $ | 1,936,539 | |||||
6. Income Taxes
Income tax (benefit) expense differed from amounts computed by applying the U.S. federal tax rate of 34% to pre-tax loss as a result of the following:
| 2004 | 2003 | |||||||
| Tax expense (benefit) of statutory rate of 34% | $ | (279,028 | ) | $ | 1,864,268 | |||
| Increase in valuation allowance against deferred tax assets | 305,009 | 899,512 | ||||||
| State income tax expense (benefit), net of federal income tax benefit | (73,860 | ) | (159,333 | ) | ||||
| Gain on extinguishment of debt | — | (2,438,180 | ) | |||||
| Other, net | 64,039 | (122,017 | ) | |||||
| Income tax expense | $ | 16,160 | $ | 44,250 | ||||
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 2004, and 2003, are as follows:
| 2004 | 2003 | |||||||
| Deferred tax assets | ||||||||
| Allowance for doubtful accounts | $ | 42,424 | $ | 59,090 | ||||
| Reserve for obsolete and slow moving inventory | 6,084 | 15,102 | ||||||
| Net operating loss carryforwards | 3,402,205 | 3,062,334 | ||||||
| Excess of financial statement depreciation over tax depreciation | — | 9,178 | ||||||
| Total gross deferred tax assets | 3,450,713 | 3,145,704 | ||||||
| Less valuation allowance | 3,450,713 | 3,145,704 | ||||||
| Net deferred tax assets | $ | — | $ | — | ||||
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
We have net operating loss carryforwards for federal and state income tax purposes of approximately $7,952,000 and $7,100,000, respectively, expiring in 2023 for federal income tax purposes and in 2010 for state income tax purposes, which may be applied against future taxable income.
7. Stockholders’ Equity
Preferred Stock
Our authorized shares include 3,000,000 shares of $0.01 par value preferred stock, of which none were issued and outstanding at December 31, 2004, and 2003, respectively.
In March of 2000, we completed the sale of 110,000 shares of Series A Senior Cumulative Participating Convertible Preferred Stock (“Series A Preferred Stock”) for aggregate proceeds of $11,000,000. In connection with sale of the Series A Preferred Stock, we granted warrants to purchase 1,100,000 shares of our common stock, subject to an adjustment, at an exercise price of $3.00 per share, by cash or through a cashless exercise, at the option of the warrant holder. The warrants were exercisable at any time, in whole or in part, and expired in five years.
On June 11, 2003, we signed a standstill voting and termination agreement whereby we and the Series A Preferred Stock holders agreed to exchange the existing securities for cash, promissory notes and shares of common stock. The holders of the Series A Preferred Stock received in exchange for 110,000 shares of Series A Preferred Stock and warrants to purchase 1,100,000 shares of our common stock the following: cash of $800,000, promissory notes of $966,000 and 8,089,729 shares of our common stock. We recorded a gain on extinguishment of debt in 2003 in the amount of $7,171,119. The gain was determined by valuing the cash, promissory notes and common stock issued in relation to the recorded value of the securities cancelled.
In 2003 and 2002, we declared and paid $137,500 and $660,000, respectively, in dividends.
Common Stock
As of December 31, 2004, and 2003, 1,913,950 and 2,160,694 shares of our common stock, respectively, have been reserved for issuance in connection with our outstanding warrants and stock options.
Warrants
At December 31, 2004, we had the following warrants outstanding and exercisable:
| Year of Issuance | Shares | Exercise Price | Expiration | |||||||||
| 1999 | 5,000 | $ | 2.50 | January 5, 2005 | ||||||||
| 1999 | 900,000 | $ | 1.50 | January 28, 2006 | ||||||||
| 2000 | 200,000 | $ | 3.00 | March 23, 2005 | ||||||||
| 2000 | 300,000 | $ | 1.50 | March 31, 2005 | ||||||||
| 1,405,000 | ||||||||||||
Warrants to purchase 1,100,000 shares of common stock were granted in connection with the placement of the Series A Preferred Stock in 2000 (see Note 7). The aggregate fair value of the 1,100,000 warrants was determined by management to be $1,896,000 on the date of issuance and was recorded as additional paid-in capital with a corresponding reduction in the carrying amount of the Series A Preferred Stock. In addition, warrants to purchase 200,000 shares of common stock were granted as a finder’s fee in connection with the transaction. The fair value of the warrants was determined by management to be $346,900 and was recorded as additional paid-in capital with corresponding reduction in the carrying amount of the Series A Preferred Stock in the 2000 consolidated financial statements.
Stock Options Plans
We have adopted the 1997, 1998 and 2000 stock option plans (“Plans”) pursuant to which our Board may grant stock options to officers and key employees. The Plans authorize grants of stock options to purchase up to 100,000, 850,000 and 2,500,000 shares of authorized but unissued common stock, respectively. Stock options are granted with an exercise price equal to the fair value of the common stock at the date of grant and expire over various periods up to ten years from the date of issue and vest and become fully exercisable as specified by the Board. Fair value at the date of grant is derived by an analysis of the financial results of companies that we consider to have similar characteristics. In April 2000, we adopted the policy of vesting stock options granted over two years: one-third immediately, one-third at the end of the first year and one-third at the end of the second year.
Stock options activity during the periods indicated is as follows:
| 2000 Plan | 1998 Plan | 1997 Plan | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Number | Exercise | Number | Exercise | Number | Exercise | |||||||||||||||||||
| of Shares | Price | of Shares | Price | of Shares | Price | |||||||||||||||||||
| Outstanding at December 31, 2001 | 2,099,673 | $ | 2.95 | 18,744 | $ | 2.50 | 12,500 | $ | 1.50 | |||||||||||||||
| Options granted at fair value value | 80,000 | $ | 3.00 | — | — | |||||||||||||||||||
| Options exercised | — | — | — | |||||||||||||||||||||
| Options cancelled | (1,219,673 | ) | (11,248 | ) | — | |||||||||||||||||||
| Outstanding at December 31, 2002 | 960,000 | $ | 3.05 | 7,496 | 2.50 | 12,500 | 1.50 | |||||||||||||||||
| Options granted at fair value value | 60,000 | $ | 3.00 | — | — | |||||||||||||||||||
| Options exercised | — | — | — | |||||||||||||||||||||
| Options cancelled | (392,550 | ) | — | — | ||||||||||||||||||||
| Outstanding at December 31, 2003 | 627,450 | $ | 3.07 | 7,496 | 2.50 | 12,500 | 1.50 | |||||||||||||||||
| Exercisable at December 31, 2003 | 627,450 | $ | 3.07 | 7,496 | 2.50 | 12,500 | 1.50 | |||||||||||||||||
| Options granted at fair value value | — | — | — | |||||||||||||||||||||
| Options exercised | — | — | — | |||||||||||||||||||||
| Options cancelled | (118,500 | ) | (7,496 | ) | (12,500 | ) | ||||||||||||||||||
| Outstanding at December 31, 2004 | 508,950 | $ | 3.06 | — | — | — | — | |||||||||||||||||
| Exercisable at December 31, 2004 | 508,950 | $ | 3.06 | — | — | — | — | |||||||||||||||||
Stock options and warrants granted to non-employees are recorded at fair value.
8. Revolving Credit Facility
In January of 2004, we entered into a revolving credit facility, which provides for borrowings up to $1,250,000. The credit facility is available for working capital, capital expenditures and general corporate purposes. The credit facility interest rate is prime plus two percent (2%) (as of December 31, 2004, the prime rate was 5.25%.)
The credit facility is secured by substantially all our assets and the balance outstanding at December 31, 2004, and 2003, was $344,588 and $435,995, respectively. The revolving credit facility was for a period of one year with the ability to renew for an additional one year term.
9. Long-Term Debt
Long-term debt consists of the following at December 31:
| 2004 | 2003 | |||||||
| Loans payable to financing companies, payable in monthly installments of $2,656, interest at -0 -% and 7.99% annually, due May of 2008 through November of 2011, secured by automobilies | $ | 114,354 | $ | 78,778 | ||||
| Notes payable to Greenhill Capital Partners LP and PWIBD Partners LP issued in 2003, payable in quarterly installments $80,500, not bearing interest, maturing in September of 2006 | 724,502 | 885,500 | ||||||
| 838,856 | 964,278 | |||||||
| Less current maturities | (434,372 | ) | (339,513 | ) | ||||
| $ | 404,484 | $ | 624,765 | |||||
Aggregate maturities of long-term debt are as follows:
| December 31, | ||||
| 2005 | $ | 434,372 | ||
| 2006 | 353,874 | |||
| 2007 | 31,872 | |||
| 2008 | 17,601 | |||
| 1,137 | ||||
| $ | 838,856 | |||
10. Capitalized Leases
We have entered into capital leases for certain automobiles and trucks that we previously owned. As of December 31, 2004, the total cost of the vehicles leased was $329,309 and the accumulated depreciation was $194,527.
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2004:
| 2005 | $ | 66,663 | ||
| 2006 | 27,832 | |||
| 2007 | 3,957 | |||
| Future minumum lease payments | 98,452 | |||
| Amounts representing interest | 14,902 | |||
| Present value of net minimum lease payments | $ | 83,550 | ||
11. Loan from Shareholder
In November of 2004, we borrowed $100,00 from one of our shareholders. The loan was an on-demand unsecured note with interest at 12% annually. The loan was paid off in February of 2005.
12. Commitments
We lease office and warehouse space under operating leases. Rent expense for the years ended December 31 2004, 2003, and 2002, was $440,686, $483,500 and $578,000, respectively.
Minimum amounts due under operating leases are as follows:
| December 31, | ||||
| 2005 | $ | 348,161 | ||
| 2006 | 244,309 | |||
| 2007 | 173,076 | |||
| 2008 | 138,361 | |||
| $ | 903,907 | |||
13. Employee Benefit Plan
We maintain a defined contribution plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may elect to defer a percentage of their salary, subject to defined limitations. We retain the right to provide for a discretionary matching contribution in addition to discretionary contributions based upon participants’ salaries. We have not made any contribution to the plan in 2004, 2003 or 2002.
14. Concentration of Credit Risk
As of and for the year ended December 31,2004, nine customers accounted for approximately 94% of revenues and 90% of accounts receivable. Of those customers, six of them individually represented greater than 5% of revenues, and four of them represented greater than 10% of revenues. During the year ended December 31, 2004, T-Mobile USA, Inc. (“T-Mobile”) represented approximately 32%, Nextel Communications, Inc. (“Nextel”) represented approximately 18%, Sprint Corp. (“Sprint”) represented approximately 13% and General Dynamics Corp. represented approximately 12% of revenues. As of and for the year ended December 31, 2003, four customers accounted for approximately 84% of revenues, each of which individually represented greater than 10% of such total of such total, and 82% of accounts receivable. In 2003, Bechtel Corp. represented approximately 32%, Sprint represented approximately 22%, T-Mobile represented approximately 14% and Nextel represented approximately 12% of revenues. As of and for the year ended December 31, 2002, five customers accounted for approximately 90% of revenues, of which four individually represented greater than 10% and one represented greater than 5% of such total of such total, and 58% of accounts receivable. The loss of these customers could have a material adverse effect on our operations.
15. Related Party Transactions
We contract with RBI Real Estate, LLC (“RBI”) for the lease of certain vehicles used in our operations. This contract resulted in payment to RBI in an amount equal to $86,000 and $38,600 during 2004 and 2003, respectively. No such payment was received in 2002. RBI is owned equally by a current and a former senior executive officer of us.
16. Subsequent Event
On February 18, 2005, we entered into an asset purchase agreement with Novo Networks, Inc. (“Novo”) and BCI Communications, Inc. (“BCIC”), a Delaware corporation and a wholly-owned subsidiary of Novo, whereby we transferred our operations, substantially all of our assets and our liabilities to BCIC in exchange for common and preferred stock of Novo. Subsequent to the transaction, we have a controlling interest in Novo.