Exhibit 99.1
STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
FINANCIAL REPORT
MAY 30, 2006 AND MAY 31, 2005
STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
TABLE OF CONTENTS
MAY 30, 2006 AND MAY 31, 2005
FINANCIAL STATEMENTS | ||
Consolidated Balance Sheets | 1-2 | |
Consolidated Statements of Income | 3 | |
Consolidated Statements of Changes In Shareholders’ And Members’ Equity | 4 | |
Consolidated Statements of Cash Flows | 5 | |
Notes to Consolidated Financial Statements | 6 |
STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
MAY 30, 2006 AND MAY 31, 2005
2006 | 2005 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and Cash Equivalents | $ | 2 | $ | 1,249,712 | ||||
Accounts Receivable, Trade, Net | 1,067,369 | 1,024,047 | ||||||
Accounts Receivable, Other, Net | 55,537 | 87,063 | ||||||
Inventory | 318,643 | 160,504 | ||||||
Prepaid Expenses and Other Current Assets | — | 29,265 | ||||||
TOTAL CURRENT ASSETS | 1,441,551 | 2,550,591 | ||||||
PROPERTY & EQUIPMENT | ||||||||
Computer Equipment | 94,803 | 71,964 | ||||||
Furniture, Fixtures & Other | 379,663 | 381,882 | ||||||
Vehicles | 141,843 | 141,843 | ||||||
616309 | 595,689 | |||||||
Less Accumulated Depreciation | (415,852 | ) | (316,481 | ) | ||||
TOTAL PROPERTY & EQUIPMENT, NET | 200,457 | 279,208 | ||||||
OTHER ASSETS | ||||||||
Goodwill | 73,997 | 73,997 | ||||||
Covenant Not To Compete, Net | 9,875 | 11,375 | ||||||
TOTAL OTHER ASSETS | 83,872 | 85,372 | ||||||
TOTAL ASSETS | $ | 1,725,880 | $ | 2,915,171 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
MAY 30, 2006 AND MAY 31, 2005
2006 | 2005 | |||||
LIABILITIES AND SHAREHOLDERS’ AND MEMBERS’ EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts Payable and Accrued Expenses | $ | 696,267 | $ | 252,599 | ||
Accrued Compensation Expenses | 190,840 | 444,008 | ||||
Distributions Payable | — | 82,515 | ||||
Deferred Revenue | 226,207 | 150,569 | ||||
TOTAL CURRENT LIABILITIES | 1,113,314 | 929,691 | ||||
LONG-TERM LIABILITIES | ||||||
Long-Tenn Debt | 20,544 | 48,248 | ||||
TOTAL LONG-TERM LIABILITIES | 20,544 | 48,248 | ||||
TOTAL LIABILITIES | 1,133,858 | 977,939 | ||||
SHAREHOLDERS’ AND MEMBERS’ EQUITY | ||||||
Common Stock | 16,000 | 16,000 | ||||
Retained Earnings | 576,022 | 1,921,232 | ||||
TOTAL SHAREHOLDERS’ AND MEMBERS’ EQUITY | 592,022 | 1,937,232 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ | ||||||
AND MEMBERS’ EQUITY | $ | 1,725,880 | $ | 2,915,171 | ||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF INCOME
FIVE MONTHS ENDED MAY 30, 2006 AND MAY 31, 2005
2006 | 2005 | |||||||
REVENUE | ||||||||
Product Sales | $ | 2,967,286 | $ | 2,753,826 | ||||
Service Revenue | 492,744 | 537,633 | ||||||
Commission Revenue | 1,018,427 | 761,451 | ||||||
TOTAL REVENUE | 4,478,457 | 4,052,910 | ||||||
COST OF REVENUE | ||||||||
Cost of Product Sales | 1,894,289 | 1,793,764 | ||||||
Cost of Service Revenue | 859,725 | 604,980 | ||||||
TOTAL COST OF REVENUE | 2,754,014 | 2,398,744 | ||||||
GROSS MARGIN | 1,724,443 | 1,654,165 | ||||||
OPERATING EXPENSES | ||||||||
Selling, General and Administrative | 1,132,014 | 861,378 | ||||||
Depreciation and Amortization | 40,896 | 44,267 | ||||||
TOTAL OPERATING EXPENSES | 1,172,910 | 905,645 | ||||||
OPERATING INCOME | 551,533 | 748,520 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
Loss on Sale of Assets | — | (19,860 | ) | |||||
Interest Expense | (4,016 | ) | (9,348 | ) | ||||
Interest Income | 25,990 | 15,656 | ||||||
Miscellaneous Income | 32,929 | 29,086 | ||||||
INCOME BEFORE INCOME TAX EXPENSE | 606,436 | 764,054 | ||||||
INCOME TAX BENEFIT | — | 51,260 | ||||||
NET INCOME | $ | 606,436 | $ | 815,314 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ AND MEMBERS’ EQUITY
FIVE MONTHS ENDED MAY 30, 2006 AND MAY 31, 2005
2006 | 2005 | |||||||
SHAREHOLDERS’ AND MEMBERS’ EQUITY, JANUARY 1 | $ | 2,430,362 | $ | 1,128,138 | ||||
DISTRIBUTIONS | (2,444,776 | ) | (6,220 | ) | ||||
NET INCOME FOR THE PERIOD ENDED | 606,436 | 815,314 | ||||||
SHAREHOLDERS’ AND MEMBERS’ | ||||||||
EQUITY, MAY 30, 2006 AND MAY 31, 2005 | $ | 592,022 | $ | 1,937,232 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIVE MONTHS ENDED MAY 30, 2006 AND MAY 31, 2005
2006 | 2005 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Income | $ | 606,436 | $ | 815,314 | ||||
Adjustments to Reconcile Net Income to | ||||||||
Net Cash Provided by Operating Activities | ||||||||
Depreciation | 40,271 | 43,642 | ||||||
Amortization | 625 | 625 | ||||||
Loss on Disposal of Fixed Assets | — | 19,860 | ||||||
Changes in Operating Assets and Liabilities | ||||||||
Accounts Receivable, Trade, Net | (101,946 | ) | (211,581 | ) | ||||
Accounts Receivable, Other, Net | 125,630 | 74,394 | ||||||
Inventory | (256,299 | ) | (67,032 | ) | ||||
Prepaid Expenses and Other Current Assets | 10,204 | (12,462 | ) | |||||
Accounts Payable and Accrued Expenses | 426,717 | (752,333 | ) | |||||
Income Taxes Payable | — | (160,174 | ) | |||||
Accrued Compensation Expenses | (8,682 | ) | 262,536 | |||||
Deferred Tax Asset | — | 940 | ||||||
Deferred Tax Liability | — | (52,200 | ) | |||||
Deferred Revenue | 29,054 | 25,157 | ||||||
Total Adjustments | 265,574 | (828,628 | ) | |||||
Net Cash Provided (Used) by Operating Activities | 872,010 | (13,313 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Computer Equipment | (4,468 | ) | (4,925 | ) | ||||
Furniture, Fixtures & Other | 2,220 | (19,381 | ) | |||||
Net Cash Used by Investing Activities | (2,248 | ) | (24,306 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Distributions to Partners | (2,444,776 | ) | (6,220 | ) | ||||
Distribution Payable | — | 2,515 | ||||||
Principal Payments on Long-Term Debt | (17,461 | ) | (8,967 | ) | ||||
Net Cash Used by Financing Activities | (2,462,237 | ) | (12,672 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (1,592,475 | ) | (50,291 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING | 1,592,477 | 1,300,003 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 2 | $ | 1,249,712 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE MONTHS ENDED MAY 30, 2006 AND MAY 31, 2005
Note 1 - Organization and Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
Sterling Systems & Consulting, Inc. and Affiliates (the Companies) is composed of three organizations collectively referred to as Sterling Systems. The results of the Companies are presented on consolidated financial statements as a result of common ownership of the three companies. All intercompany transactions and accounts have been eliminated.
The Companies provide design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals), which are, in management’s opinion, necessary to present a fair statement of results of the interim periods presented. Operating results for the five months ended May 30, 2006 and May 31,2005 are not necessarily indicative of results for any future period.
Note 2 - Subsequent Event
On May 30, 2006 the Companies were purchased by Avatech Solutions, Inc.
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
FINANCIAL REPORT
DECEMBER 31, 2005 AND 2004
STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
TABLE OF CONTENTS
DECEMBER 31, 2005 AND 2004
FINANCIAL STATEMENTS | ||
Independent Auditors’ Report | 1 | |
Consolidated Balance Sheets | 2-3 | |
Consolidated Statements of Income | 4 | |
Consolidated Statements of Changes In Shareholders’ and Members’ Equity | 5 | |
Consolidated Statements of Cash Flows | 6-7 | |
Notes to Consolidated Financial Statements | 8-12 |
INDEPENDENT AUDITORS’ REPORT
August 31, 2006
Board of Directors
Sterling Systems & Consulting, Inc. and Affiliates
Madison Heights, Michigan
We have audited the accompanying consolidated balance sheets of Sterling Systems & Consulting, Inc. and Affiliates as of December 31, 2005 and 2004, and the related consolidated statements of income and changes in shareholders’ and members’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sterling Systems & Consulting, 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.
WRIGHT GRIFFIN DAVIS AND CO, PLLC
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and Cash Equivalents | $ | 1,592,477 | $ | 1,300,003 | ||||
Accounts Receivable, Trade, Net | 965,423 | 812,466 | ||||||
Accounts Receivable, Other, Net | 181,167 | 161,457 | ||||||
Inventory | 62,344 | 93,473 | ||||||
Prepaid Expenses and Other Current Assets | 10,204 | 16,803 | ||||||
Deferred Tax Asset | — | 940 | ||||||
TOTAL CURRENT ASSETS | 2,811,615 | 2,385,142 | ||||||
PROPERTY & EQUIPMENT | ||||||||
Computer Equipment | 90,335 | 70,357 | ||||||
Furniture, Fixtures & Other | 381,883 | 397,765 | ||||||
Vehicles | 141,843 | 141,843 | ||||||
614,061 | 609,965 | |||||||
Less Accumulated Depreciation | (375,581 | ) | (291,561 | ) | ||||
TOTAL PROPERTY & EQUIPMENT, NET | 238,480 | 318,404 | ||||||
OTHER ASSETS | ||||||||
Goodwill | 73,997 | 73,997 | ||||||
Covenant Not To Compete, Net | 10,500 | 12,000 | ||||||
TOTAL OTHER ASSETS | 84,497 | 85,997 | ||||||
TOTAL ASSETS | $ | 3,134,592 | $ | 2,789,543 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||
LIABILITIES AND SHAREHOLDERS’ AND MEMBERS’ EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts Payable and Accrued Expenses | $ | 269,550 | $ | 1,004,932 | ||
Income Taxes Payable | — | 160,174 | ||||
Accrued Compensation Expenses | 199,522 | 181,472 | ||||
Current Portion of Long-Term Debt | 16,137 | 19,210 | ||||
Distributions Payable | — | 80,000 | ||||
Deferred Revenue | 197,153 | 125,412 | ||||
TOTAL CURRENT LIABILITIES | 682,362 | 1,571,200 | ||||
LONG-TERM LIABILITIES | ||||||
Long-Term Debt, Net of Current Portion | 21,868 | 38,005 | ||||
Deferred Tax Liability | — | 52,200 | ||||
TOTAL LONG-TERM LIABILITIES | 21,868 | 90,205 | ||||
TOTAL LIABILITIES | 704,230 | 1,661,405 | ||||
SHAREHOLDERS’ AND MEMBERS’ EQUITY | ||||||
Common Stock, $1 Par Value, 16,000 Shares Authorized, 16,000 Shares Issued and Outstanding in 2005 and 2004 | 16,000 | 16,000 | ||||
Retained Earnings | 2,414,362 | 1,112,138 | ||||
TOTAL SHAREHOLDERS’ AND MEMBERS’ EQUITY | 2,430,362 | 1,128,138 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ AND MEMBERS’ EQUITY | $ | 3,134,592 | $ | 2,789,543 | ||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
REVENUE | ||||||||
Product Sales | $ | 6,813,312 | $ | 6,959,690 | ||||
Service Revenue | 1,172,789 | 1,044,005 | ||||||
Commission Revenue | 1,645,718 | 1,163,466 | ||||||
TOTAL REVENUE | 9,631,819 | 9,167,161 | ||||||
COST OF REVENUE | ||||||||
Cost of Product Sales | 4,257,482 | 4,869,830 | ||||||
Cost of Service Revenue | 680,276 | 620,112 | ||||||
TOTAL COST OF REVENUE | 4,937,758 | 5,489,942 | ||||||
GROSS MARGIN | 4,694,061 | 3,677,219 | ||||||
OPERATING EXPENSES | ||||||||
Selling, General and Administrative | 2,930,023 | 2,694,880 | ||||||
Depreciation and Amortization | 104,242 | 84,862 | ||||||
TOTAL OPERATING EXPENSES | 3,034,265 | 2,779,742 | ||||||
OPERATING INCOME | 1,659,796 | 897,477 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
Loss on Sale of Assets | (19,860 | ) | (687 | ) | ||||
Interest Expense | (5,504 | ) | (10,242 | ) | ||||
Interest Income | 30,040 | 18,798 | ||||||
Miscellaneous Income | 56,046 | 27,229 | ||||||
INCOME BEFORE INCOME TAX EXPENSE | 1,720,518 | 932,575 | ||||||
INCOME TAX BENEFIT (EXPENSE) | 51,260 | (232,207 | ) | |||||
NET INCOME | $ | 1,771,778 | $ | 700,368 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ AND MEMBERS’ EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
SHAREHOLDERS’ AND MEMBERS’ EQUITY, JANUARY 1 | ||||||||
Shareholders’ Equity | $ | 845,767 | $ | 908,375 | ||||
Members’ Equity | 282,371 | 106,211 | ||||||
1,128,138 | 1,014,586 | |||||||
DISTRIBUTIONS | (469,554 | ) | (586,816 | ) | ||||
NET INCOME FOR THE YEAR ENDED | 1,771,778 | 700,368 | ||||||
SHAREHOLDERS’ AND MEMBERS’ EQUITY, DECEMBER 31 | ||||||||
Shareholders’ Equity | 1,511,786 | 845,767 | ||||||
Members’ Equity | 918,576 | 282,371 | ||||||
$ | 2,430,362 | $ | 1,128,138 | |||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Income | $ | 1,771,778 | $ | 700,368 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | ||||||||
Depreciation | 102,742 | 83,362 | ||||||
Amortization | 1,500 | 1,500 | ||||||
Loss on Disposal of Fixed Assets | 19,860 | 687 | ||||||
Changes in Operating Assets and Liabilities | ||||||||
Accounts Receivable, Trade, Net | (152,957 | ) | (282,515 | ) | ||||
Accounts Receivable, Other, Net | (19,710 | ) | 84,647 | |||||
Inventory | 31,129 | 59,869 | ||||||
Prepaid Expenses and Other Current Assets | 6,599 | 164 | ||||||
Accounts Payable and Accrued Expenses | (735,382 | ) | 737,653 | |||||
Income Taxes Payable | (160,174 | ) | 150,536 | |||||
Accrued Compensation Expenses | 18,050 | 58,634 | ||||||
Deferred Tax Asset | 940 | (940 | ) | |||||
Deferred Tax Liability | (52,200 | ) | 48,700 | |||||
Deferred Revenue | 71,741 | 56,693 | ||||||
Total Adjustments | (867,862 | ) | 998,990 | |||||
Net Cash Provided by Operating Activities | 903,916 | 1,699,358 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Computer Equipment | (34,617 | ) | (49,912 | ) | ||||
Furniture, Fixtures & Other | (8,061 | ) | (171,879 | ) | ||||
Vehicles | — | (26,314 | ) | |||||
Net Cash Used by Investing Activities | (42,678 | ) | (248,105 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Distributions to Partners | (549,554 | ) | (506,816 | ) | ||||
Principal Payments on Long-Term Debt | (19,210 | ) | (18,941 | ) | ||||
Net Cash Used by Financing Activities | (568,764 | ) | (525,757 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 292,474 | 925,496 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING | 1,300,003 | 374,507 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 1,592,477 | $ | 1,300,003 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||
Cash Paid During the Year For Interest | $ | 5,504 | $ | 10,242 | ||
Income Taxes | $ | 160,174 | $ | 34,142 | ||
The accompanying notes are an integral part of these consolidated financial statements
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 1 - | Organization and Summary of Significant Accounting Policies | |
Nature of Business and Basis of Presentation | ||
Sterling Systems & Consulting, Inc. and Affiliates (the Companies) is composed of three organizations collectively referred to as Sterling Systems. All intercompany transactions and accounts have been eliminated. | ||
The Companies provide design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States. | ||
. | Sterling Systems & Consulting, Inc. (Sterling Systems) was incorporated in Michigan effective May 20, 1993. Sterling Systems was incorporated to provide computer programming, consulting, and sales services to clients. | |
Sterling Systems - Ohio, LLC (Ohio, LLC) was created in Michigan effective June 16, 2003. Ohio, LLC was organized to provide sales services and consulting to clients. | ||
Sterling Systems - Indiana, LLC (Indiana, LLC) was created in Michigan effective November 6, 1998 Indiana, LLC was organized to provide sales services and consulting to clients. | ||
On January 1, 2005, The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No 46, “Consolidation of Variable Interest Entities” (“FIN 46”) and its amendment FIN 46R. This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do not have the characteristics of a controlling interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support FIN 46R requires a company to evaluate all existing arrangements to identify situations where a company has a variable interest in a variable interest entity (“VIE”) and further determine whether it is the primary beneficiary of the VIE, which results in a company being required to consolidate the VIE’s financial statements with its own Upon adoption of FIN 46, there was no affect on the assets, liabilities, equity and net income of the consolidated entity as the companies were previously presented on a combined basis. | ||
The accompanying consolidated financial statements represent the consolidation of Sterling Systems & Consulting, Inc. and the VIE’s in which Sterling Systems & Consulting, Inc. is deemed the primary beneficiary. All material related party balances and transactions have been eliminated in consolidation. | ||
Use of Estimates | ||
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses durmg the reporting period. Actual results could differ from those estimates |
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 1 - | Cash and Cash Equivalents | |
(Cont) |
The Companies consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Periodically during the year, the balances may have exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limitation of $100,000 per institution. | |
Inventory | ||
Inventory, consisting of computer software and hardware, is stated at the lower of first-in, first-out cost, or market. | ||
Allowance for Doubtful Accounts | ||
The Companies use estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its expected net realizable value. The Companies estimate the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience, and a lack of concentration of accounts receivable. The Companies charge-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are not collateralized. The Companies have established an allowance for doubtful accounts of $2,342 as of December 31, 2005 and 2004. | ||
Property and Equipment | ||
Property and equipment is stated at cost. Depreciation for vehicles, computer software and equipment and office furniture and equipment is provided for by the straight-line method over estimated useful lives ranging from 3 to 7 years. | ||
Depreciation expense for the year ended December 31, 2005 and 2004, is $102,742 and $83,362, respectively. | ||
Goodwill and Other Intangible Assets | ||
The Companies account for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No 142, “Goodwill and Other Intangible Assets “ SFAS No 142 requires that goodwill be tested for impairment at least annually. Based on the impairment test performed as of December 31, 2005 and 2004, no impairment existed in the value of goodwill SFAS No 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives. |
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 1 - (Cont) | Revenue Recognition and Accounts Receivable | |
Software products are sometimes sold in an arrangement that includes implementation services or maintenance services Maintenance services are limited to help desk support and training. The Companies allocate the total arrangement fee among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. The Companies limit its assessment of fair value of each element to the price charged when the same element is sold separately. If the fair value of each element in a multiple element arrangement cannot be reliably determined, and if the fair value of any undelivered element cannot also be reliably determined, all revenue under the arrangement is deferred until such time as the only remaining undelivered element is maintenance, or in the absence of maintenance, implementation services, upon which time revenue is recognized over the remaining maintenance or service period Revenue that is deferred and recognized over a maintenance or service period is recognized in proportion to the services delivered, or ratably if no better measure of performance can be determined. | ||
Revenues for software product sales are recognized as revenue when four criteria are met. These four criteria are (i) a signed purchase order has been obtained (ii) delivery of the software has occurred (iii) the fee is fixed or determinable and (iv) the fee is probable of collection Software product sales billed and not recognized as revenue are included in deferred revenue. The Companies generally do not require collateral for accounts receivable. The Companies provide a 30-day return policy to its customers. The Companies have historically not experienced significant returns, and accordingly, allowances for returned products are not recorded. | ||
Maintenance services are sold for stated periods or for stated numbers of hours Revenues are recognized ratably over the service period for arrangements to provide maintenance over a stated period. Revenues for maintenance delivered on an hourly basis are recognized as the services are delivered. Revenues from implementation and training services are recognized as the services are provided Advance payments for these services are deferred and recognized in the periods when the services are performed. | ||
The Companies also receive commissions from vendors for transactions in which the Companies essentially act as an agent for the vendor. In these transactions, the Companies do not take title to the product, have responsibility for the delivery of any services, or have risk of loss for collection. These commissions are recorded as revenue when earned. | ||
Additional Owners’ Compensation | ||
Included in the accompanying consolidated statements of income are year end bonus payments paid to a majority shareholder that totaled $585,588 and $450,000 for the years ended December 31, 2005 and 2004, respectively. | ||
Income Taxes | ||
Ohio, LLC and Indiana, LLC, as limited liability companies, are not subject to income taxes. The members are required to report their respective shares of company income (loss) and other tax items on their individual income tax returns. | ||
As of December 31, 2004, Sterling Systems used the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. |
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 1 - (Cont) | Effective January 1, 2005, the stockholders of Sterling Systems elected to be taxed under the provisions of the S Corporation section of the Internal Revenue Code (IRC). Under those provisions, the Companies are not subject to corporate income taxes. Instead, the tax results of operations of the Companies are included in the individual income tax returns of its stockholders. | |
Cost of Product Sales | ||
Cost of product sales includes the costs of purchasing software and hardware from suppliers and the associated shipping and handling costs. | ||
Cost of Service Revenue | ||
Cost of service revenue consists primarily of direct employee compensation and related benefits, the cost of subcontracted services and direct expenses billable to customers. Cost of service revenue does not include an allocation of overhead costs. | ||
Note 2 - | Goodwill and Other Intangible Assets | |
On June 24, 2003, Ohio, LLC purchased 100% of the assets of Automated Tech Tools, Inc. As a result of the acquisition, approximately $74,000 in goodwill was recorded in connection with the purchase price. In connection with this purchase, a covenant not to compete originated in the amount of $15,000 which is being amortized on a straight-line basis over its term life of 5 years. Accumulated amortization on the covenant not to compete was $4,500 and $3,000, respectively, as of December 31, 2005 and 2004 | ||
Note 3 - | Line of Credit and Notes Payable | |
The line of credit from the lender allows the Companies to borrow up to $400,000. As of December 31, 2005 and 2004 the companies had no balance outstanding on the line of credit. The interest rate as of December 31, 2005 and 2004 on the line of credit was 7 75% and 5 75%, respectively. The Lane of Credit expires on February 18, 2006. | ||
The Companies entered into various automobile financing agreements that will be maturing between October 2007 and September 2008. The outstanding balances on these notes at December 31, 2005 and 2004, were $38,005 and $57,215, respectively. Payments are required monthly including interest at various rates between 0% and 4 95%. Future principal payments required on the notes payable are as follows |
Year Ending December 31, 2006 | $ | 16,137 | |
2007 | 18,034 | ||
2008 | 3,834 | ||
$ | 38,005 | ||
Note 4 - | Income Taxes | |
As described in Note 1, Sterling Systems elected to be taxed under the provisions of the S Corporation section of the IRC effective January 1, 2005. As a result of this change in taxing status, the Companies wrote-off their net deferred tax assets and liabilities during the year ended December 31, 2005, resulting in a tax benefit of $51,260. Included in retained earnings as of December 31, 2005 is $984,108 of C Corporation earnings and profits. |
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STERLING SYSTEMS & CONSULTING, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 5 - | Commitments & Contingencies | |
The Companies lease certain office space under noncancellable operating lease agreements that expire in various years through 2010, and generally do not contain significant renewal options. Future minimum payments under all noncancellable operating leases with initial terms of one year or more consisted of the following at December 31, 2005. |
Year Ending December 31, 2006 | $ | 161,007 | |
2007 | 161,007 | ||
2008 | 71,295 | ||
2009 | 42,975 | ||
2010 | 39,394 | ||
$ | 475,678 | ||
Rent expense for the years ended December 31, 2005 and 2004, was $174,252 and $164,134, respectively. | ||
Note 6 - | Shareholders’ and Members’ Equity | |
Sterling Systems makes distributions from time to tune to its stockholders. As of December 31, 2005 and 2004, the stockholders approved distributions in the amounts of $469,554 and $586,816, respectively, of which, for the year ended December 31, 2004, $80,000 was paid in two installments in June and December of 2005. | ||
Note 7 - | Employee Benefit and Incentive Compensation Plans | |
Effective January 1, 1998, the Companies adopted the Sterling Systems 401(k) Plan (the “Plan”). The Plan is a defined contribution plan, which covers substantially all employees of the Companies, who have attained age 21 and have completed six months of service Participants may elect a pre-tax payroll deduction up to $14,000 (if under age 50), or $18,000 (if age 50 or older by December 31, 2005). Annually, the Companies determine the percentage of contributio.n For the years ended December 31, 2005 and 2004, the Companies contributed the lesser of 50% of participant’s deferrals or 3% of the employee’s salary The Companies’ matching contributions were approximately $49,788 and $40,152 for the years ended December 31, 2005 and 2004, respectively. | ||
The Companies have established a profit sharing plan in conjunction with its 401(k) plan. On an annual basis, the Companies can authorize a discretionary distribution of profits to eligible employees through additional contributions to employee 401(k) accounts. There were no additional contributions made during the years ended December 31, 2005 and 2004. | ||
Note 8 - | Significant Supplier | |
Approximately 67% and 64% of the Companies’ inventory purchases for the years ended December 31, 2005 and 2004, respectively, were from one vendor. Accounts payable at December 31, 2005 and 2004 were due to this vendor in the amounts of approximately $50,000 and $743,900, respectively. Approximately 84% and 83% of the Companies’ total product revenues are related to this supplier’s products as of the years ended December 31, 2005 and 2004, respectively. | ||
Note 9 - | Subsequent Event | |
On May 30, 2006 the Companies were purchased by Avatech Solutions, Inc. |
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