UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: June 29, 2006
(Date of Earliest Event Reported)
Thinkpath, Inc.
(Exact name of Registrant as specified in its charter)
Ontario 001-14813 52-209027
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
201 Westcreek Boulevard, Brampton, Ontario, Canada L6T 5S6
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (905) 460-3040
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On June 29, 2006, Thinkpath, Inc. (the "Company") entered into an
Agreement and Plan of Merger with The MultiTech Group, Inc. ("MultiTech"), a New
Jersey corporation, Cecelia Kennedy ("CK"), John Kennedy ("J.K."), James
McLafferty ("J.M."), Scott Nilssen ("S.N.") and Robert Stramara ("R.S.") (C.K.,
J.K., J.M., S.N., and R.S. are collectively referred to as the "Individual
Owners") pursuant to which the Company acquired 100% of the capital stock of
MultiTech. Prior to negotiations between the parties, there was no existing
relationship between Thinkpath and MultiTech or between Thinkpath and the
Individual Owners.
In exchange for all of the capital stock of MultiTech, the Company: (i)
paid an aggregate of $839,625 in cash, (ii) issued promissory notes in the
aggregate principal amount of $559,750, (iii) issued an aggregate of 4,571,196
shares of common stock, and (iv) issued an aggregate of 700 shares of Series C
Preferred Stock. The Series C Preferred Stock is convertible into common stock
one year from issuance (at the option of the holder) by dividing $699,688 by the
market price of the Common Stock prior to conversion.
In connection with the acquisition, the Company entered into employment
agreements with C.K., J.K., J.M. S.N. and R.M.
Item 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On June 29, 2006, Thinkpath, Inc. (the "Company") entered into an
Agreement and Plan of Merger with The MultiTech Group, Inc. ("MultiTech"), a New
Jersey corporation, Cecelia Kennedy ("CK"), John Kennedy ("J.K."), James
McLafferty ("J.M."), Scott Nilssen ("S.N.") and Robert Stramara ("R.S.") (C.K.,
J.K., J.M., S.N., and R.S. are collectively referred to as the "Individual
Owners") pursuant to which the Company acquired 100% of the capital stock of
MultiTech. Prior to negotiations between the parties, there was no existing
relationship between Thinkpath and MultiTech or between Thinkpath and the
Individual Owners.
In exchange for all of the capital stock of MultiTech, the Company: (i)
paid an aggregate of $839,625 in cash, (ii) issued promissory notes in the
aggregate principal amount of $559,750, (iii) issued an aggregate of 4,571,196
shares of common stock, and (iv) issued an aggregate of 700 shares of Series C
Preferred Stock. The Series C Preferred Stock is convertible into common stock
one year from issuance (at the option of the holder) by dividing $699,688 by the
market price of the Common Stock prior to conversion.
In connection with the acquisition, the Company entered into employment
agreements with C.K., J.K., J.M. and R.M.
In connection with the acquisition, the Company agreed to pay certain
fees to Leventis Investments LLC. The Company is currently negotiating the axact
amount of such fee.
(a) Financial Statements of Business Acquired.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
4.1 Form of Agreement and Plan of Merger dated June 29, 2006.
4.2 Form of Promissory Note
4.3 Certificate of Designation of Series C Preferred Stock
4.4 Employment Agreement with Cecelia Kennedy
4.5 Employment Agreement with John Kennedy
4.6 Employment Agreement with James McLafferty
4.7 Employment Agreement with Robert Stramara
4.8 Employment Agreement with Scott Nilssen
4.9 Non-Exclusive Buyer's Fee Arrangement with Leventis Investments LLC
99.1 Press Release
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THINKPATH, INC.
By: /s/ Declan French
- ------------------------------------
Declan French
Chief Executive Officer
Dated: July 11, 2006
Item 9.01 FINANCIAL STATEMENTS
THE MULTITECH GROUP, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
Together with report of
Independent Registered Public Accounting Firm
1
THE MULTITECH GROUP, INC.
DECEMBER 31, 2005 AND 2004
INDEX
PAGE
Financial Statements:
Report of Independent Registered Public Accounting Firm 3
Balance Sheets 4
Statements of income 5
Statements of changes in stockholders' equity (deficiency) 6
Statements of cash flows 7
Notes to financial statements 8-18
2
SCHWARTZ LEVITSKY FELDMAN LLP
CHARTERED ACCOUNTANTS
TORONTO, MONTREAL, OTTAWA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Multitech Group, Inc.
We have audited the accompanying balance sheets of The Multitech Group,
Inc. as at December 31, 2005 and 2004 and the related statements of
income, cash flows and changes in stockholders' equity (deficiency) for
the years ended December 31, 2005 and 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Multitech
Group, Inc. as at December 31, 2005 and 2004 and the results of its
operations and its cash flows for the year ended December 31, 2005 and
2004 in accordance with generally accepted accounting principles in the
United States of America.
Toronto, Ontario, Canada
June 7, 2006 Chartered Accountants
1167 Caledonia Road
Toronto, Ontario M6A 2X1
Tel: 416 785 5353
Fax: 416 785 5663
3
THE MULTITECH GROUP, INC.
BALANCE SHEETS
YEARS ENDING DECEMBER 31,
------------------------
2005 2004
ASSETS
Current assets:
Cash $ 367,078 $ 45,984
Accounts receivable (Note 4) 619,498 1,049,948
Prepaid expenses and
other current assets 19,265 38,625
----------- -----------
Total current assets 1,005,841 1,134,557
Property and equipment (Note 5) 21,562 7,504
----------- -----------
$ 1,027,403 $ 1,142,061
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIENCY)
Current liabilities:
Accounts payable $ 226,787 $ 121,479
Notes payable-current portion (Note 6) 7,417 628,666
Federal & state income taxes payable 110,060 0
Accrued payroll 36,593 26,077
Accrued expenses & other current liabilities 28,359 16,875
Deferred income taxes (Note 3) 107,712 47,852
----------- -----------
Total current liabilities 516,928 840,949
----------- -----------
Long term liabilities:
Officers loans payable (Note 7) 349,624 413,020
Note payable-non-current portion (Note 6) 91,904 82,107
----------- -----------
Total long term liabilities 441,528 495,127
----------- -----------
Total liabilities 958,456 1,336,076
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' Equity (deficiency) :
Capital stock (Note 8) 5,281 5,281
Paid in capital (Note 7) 47,666 25,814
Retained earnings (deficit) 16,000 (225,110)
----------- -----------
Total stockholders' equity (deficiency) 68,947 (194,015)
----------- -----------
$ 1,027,403 $ 1,142,061
=========== ===========
4
THE MULTITECH GROUP, INC.
STATEMENTS OF INCOME
YEARS ENDING DECEMBER 31,
-------------------------
2005 2004
Income - services $ 3,263,876 $ 2,625,946
Direct costs 2,006,104 1,968,069
----------- -----------
Gross margin 1,257,772 657,877
----------- -----------
Selling expenses 62,818 108,912
General and administrative expenses 665,463 725,597
Depreciation 6,610 5,386
----------- -----------
Total selling, general & administrative exp 734,891 839,895
----------- -----------
Income/(loss) before other income and expenses 522,881 (182,018)
----------- -----------
Other income:
Interest 61 37
----------- -----------
522,942 (181,981)
----------- -----------
Other expense:
Bad debt expense 93,763 17,556
Interest 61,196 64,142
----------- -----------
154,959 81,698
----------- -----------
Net income/(loss) for the year before provision for
federal income tax 367,983 (263,679)
Provision for federal income tax (Note 3) 126,873 47,852
----------- -----------
Net income/(loss) for the year 241,110 (311,531)
=========== ===========
5
THE MULTITECH GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDING DECEMBER 31,
-------------------------
2005 2004
---- ----
Retained earnings (deficit) - beginning of year $(225,110) $ 86,421
Net income (loss) for the year 241,110 (311,531)
--------- ---------
Retained earnings (deficit) - end of year $ 16,000 $(225,110)
========= =========
YEARS ENDING DECEMBER 31,
-------------------------
2005 2004
---- ----
Paid in capital, beginning of year $ 25,814 $ --
Interest on officers' loans payable-waived 21,852 25,814
--------- ---------
Paid in capital, end of year $ 47,666 $ 25,814
========= =========
YEARS ENDING DECEMBER 31,
-------------------------
2005 2004
---- ----
# of # of
SHARES $ SHARES $
------ ------ ------ ------
Capital Stock, beginning of year 300 5,281 300 5,281
Changes -- -- -- --
------ ------ ------ ------
Capital Stock, end of year 300 5,281 300 5,281
6
THE MULTITECH GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDING DECEMBER 31,
-------------------------
2005 2004
---- ----
OPERATING ACTIVITIES
Net income/(loss) $ 241,110 $ (311,531)
Adjustments to reconcile net income
To net cash provided by operations:
Depreciation 6,610 5,386
Interest on officers' loans payable 21,852 25,814
Deferred taxes 59,859 47,852
Changes in operating assets and liabilities:
Accounts receivable 430,450 (530,026)
Prepaid expenses and other current assets 19,360 20,569
Accounts payable 105,308 64,623
Federal and state income tax payable 110,060 0
Accrued payroll 10,516 (70,812)
Accrued expenses & other current liabilities 11,484 15,835
----------- -----------
Net cash provided/(used) by operating activities $ 1,016,609 $ (732,290)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (20,667) 0
----------- -----------
Net cash used in investing activities (20,667) 0
----------- -----------
FINANCING ACTIVITIES
Officers loans paid (63,396) 413,020
Proceeds - loan 0 290,000
Net loan paid (611,452) (74,136)
----------- -----------
Net cash provided/(used) in financing activities (674,848) 628,884
----------- -----------
Increase/(decrease) in cash 321,094 (103,406)
Cash, beginning of year 45,984 149,390
----------- -----------
Cash, end of year $ 367,078 $ 45,984
=========== ===========
Supplemental cash items:
Interest paid $ 39,344 $ 38,328
=========== ===========
Income taxes paid 350 5,744
=========== ===========
7
THE MULTITECH GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1- Nature of Business:
The Multitech Group, Inc. is a privately owned engineering services company
which provides engineering, design, technical writing and documentation,
technical training and staffing services to its clients.
Note 2 - Accounting policies:
a. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts from and to banks,
and any other highly liquid investments purchased with a maturity of three
months or less. The carrying amounts approximate fair values because of
the short maturity of those instruments.
b. Property and Equipment
The Company follows the general policy of depreciating the cost of
property and equipment over the useful lives of such assets on the
straight line and modified accelerated cost recovery methods.
c. Revenue
The Company has the following core capabilities and revenue streams;
Engineering and Design, Technical Training and Documentation, and
Staffing. Engineering and Design, as well as Technical Training and
Documentation, primarily recognize revenue on a time-and-materials basis
and/or fixed-price basis. Time and materials efforts are based upon
billable rates times hours delivered, plus expenses incurred. Fixed price
task orders are determined based upon allowable costs incurred plus a
calculation for estimated billable hours utilizing the SOW and fees.
The Company provides its customers with a number of different services
that are generally documented through separate negotiated task orders that
detail the services to be provided and the compensation for these
services. Services rendered under each task order represent an independent
earnings process and are not dependent on any other service or product
sold. The Company records provisions for estimated losses on uncompleted
task orders in the period in which those losses are identified. The
Company considers performance-based fees under any task order to be earned
only when it can demonstrate satisfaction of a specific performance goal
or it receives written notification from a customer that the fee has been
earned.
Staffing revenue consists of two types. In the case of temporary
assignments, clients are billed for services provided by assigned staff.
The billing rate is the actual hourly rate (and overtime rate) of the
individual plus an agreed upon percentage markup. Services are billed
based on an authorized time sheet acting as the approval for time spent.
Staffing placements that are considered to be permanent placements are
billed to clients upon the date of hire for the individual. Revenue is
based on percentage of annual salary of the candidate.
8
d. Leases
The Company's policy is to record leases, which transfer substantially all
benefits and risks incidental to ownership of property, as acquisition of
property and equipment and to record the occurrences of corresponding
obligations as long-term liabilities. Obligations under capital leases are
reduced by rental payments net of imputed interest. Leases are classified
as either capital or operating. Those leases that transfer substantially
all the benefits and risks of ownership of property to the Company are
accounted for as capital leases. All other leases are accounted for as
operating leases. Capital leases are accounted for as assets and are fully
amortized on a straight line basis over the lesser of the period of
expected use of the assets or the lease term. Commitments to repay the
principal amounts arising under capital lease obligations are included in
current liabilities to the extend that the amount is repayable within one
year, otherwise the principal is included in long term debt obligations.
The capitalized lease obligation reflects the present value of future
lease payments. The financing element of the lease payments is charged to
interest expense in the consolidated statement of operations over the term
of the lease. Operating lease costs are charged to administrative expense
in the consolidated statement of operations on a straight line basis.
e. Income Taxes
The Company accounts for income tax under the provision of SFAS Number
109, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in
the financial statement or tax returns.
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of
assets and liabilities.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based
on a judgmental assessment of available evidence, by a valuation allowance
for the amount of any tax benefits which are more likely, based on current
circumstances, not expected to be realized.
9
f. Use of Estimates
The preparation of consolidated financial statement in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
these differences could be material. These estimates are reviewed
periodically and as adjustments become necessary, they are reported in
earnings in the period in which they become known.
g. Impairment of Long-lived Assets
SFAS No 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed", requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Management uses its best estimate of the undiscounted
cash flows to evaluate the carrying amounts and have reflected the
impairment.
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The ruling
did not have a material impact on the Company's results of operations or
financial condition.
h. Comprehensive income
The Company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In addition to items
included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the changes
in unrealized appreciation (depreciation) of securities and foreign
currency translation adjustments. Comprehensive income (loss) is the same
as the Company's reported net income (loss) for both 2005 and 2004.
i. Recent Pronouncements
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The amendments set forth in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS
No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No 149 is effective for contracts entered into or modified after June
30, 2003 with certain exceptions. The Company does not believe that the
adoption of SFAS No 149 will have a material impact, if any, on its
results of operations of financial position.
10
In May 2003, the FASB issued SFAS No 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity". This statement specifies that certain instruments within its
scope embody obligations of the issuer and that, therefore, the issuer
must classify them as liabilities. SFAS No 150 is effective immediately
for all financial instruments entered into or modified after May 31, 2003.
For all other instruments, SFAS No 150 goes into effect at the beginning
of the first interim period beginning after June 15, 2003. For contract
that were created or modified before May 31, 2003 and still exist at the
beginning of the first interim period beginning after June 30, 2003,
entities should record the transition to SFAS No 150 by reporting the
cumulative effect of the change in an accounting principle. SFAS No 150
prohibits entities from restating financial statements for earlier years
presented. The Company does not believe that the adoption of SFAS No 150
will have a material impact, if any, on its results of operations or
financial position.
In December 2003, the FASB issued SFAS No 132 (Revised), "Employers'
Disclosures about Pensions and Other Post Retirement Benefits- an
amendment of FASB Statements No 87, 88 and 106". This statement revises
employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. SFAS No 132 (Revised) will retain and revise the disclosure
requirements contained in the original SFAS No 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. SFAS No 132 (Revised) generally is effective
for fiscal years ending after December 15, 2003. The Company does not
believe that the adoption of SFAS No 132 (Revised) will have a material
impact, if any, on its results of operations of financial position.
In November 2004, the FASB issued SFAS No 151, "Inventory Costs - an
amendment of ARB No 43". This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The
Company does not believe that the adoption of SFAS No 151will have a
material impact, if any, on its results of operations or financial
position as it does not have inventory.
In December 2004, the FASB issued SFAS No 152, "Accounting for Real Estate
Time-Sharing Transactions- an amendment of FASB Statement s No 66 and 67",
which references the financial accounting and reporting guidance for real
estate time-sharing transactions in AICPA Statement of Position (SOP)
04-2, "Accounting for Real Estate Time-Sharing Transactions". SFAS No 152
is effective for years beginning after June 15, 2005, with restatements of
previously issued financial statements prohibited. The Company does not
believe that the adoption of SFAS No 152 will have a material impact, if
any, on its results of operations or financial position.
11
In December 2004, the FASB issued SFAS No 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No 29", effective for non-monetary
asset exchanges occurring in the fiscal year beginning January 1, 2006.
This statement requires that exchanges of productive assets be accounted
for at fair value unless fair value cannot be reasonably determined or the
transaction lacks commercial substance. The Company does not believe that
the adoption of SFAS No 153 will have an impact, if any, on its results of
operations or financial position.
In December 2004, the FASB issued SFAS No 123 (Revised), "Share-based
Payment". This statement requires employers to expense costs related to
share-based payment transactions with employees. With limited exceptions,
SFAS No 123 (Revised) requires that the fair value of share-based payments
to employees be expensed over the period service is received. SFAS No 123
(Revised) becomes effective for annual reporting periods that begin after
December 15, 2005. The Company does not believe that the adoption of SFAS
No 123 (Revised) will have an impact, if any, on its results of operations
or financial position.
In May 2005, the FASB issued Statement No 154, "Accounting Changes and
Error Corrections" applying to all voluntary accounting principle changes
as well as the accounting for and reporting of such changes. SFAS No 154
requires voluntary changes in accounting principle be retrospectively
applied to financial statements from previous periods unless such
application is impracticable. SFAS No 154 requires that changes in
depreciation, amortization, or depletion methods for long-lived,
non-financial assets must be accounted for as a change in accounting
estimate due to a change in accounting principle. By enhancing the
consistency of financial information between periods, the requirements of
SFAS 154 improves financial reporting. SFAS 154 replaces APB Opinion No 20
and FASB 3. SFAS 154 carries forward many provisions of Opinion 20 and
FASB 3 without changes including those provisions related to reporting a
change in accounting estimate, a change in reporting entity, correction of
an error and reporting accounting changes in interim financial statements.
SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.
In February 2006, the FASB issued SFAS No 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 allows any hybrid
financial instrument that contains an embedded derivatives that otherwise
would require bifurcation under SFAS No 133, "Accounting for Derivative
Instruments and Hedging Activities" to be carried at fair value in its
entirety, with changes in fair value recognized in earnings. In addition,
SFAS 155 requires that beneficial interests in securitized financial
assets be analyzed to determine whether they are freestanding derivatives
or contain an embedded derivative. SFAS 155 also eliminates a prior
12
restriction on the types of passive derivatives that a qualifying special
purpose entity is permitted to hold. SFAS 155 is applicable to new or
modified financial instruments in fiscal years beginning after September
15, 2006, through the provisions related to fair value accounting for
hybrid financial instruments can also be applied to existing instruments.
Early adoption, as of the beginning of an entity's fiscal year, is also
permitted, provided interim financial statements have not yet been issued.
The Company does not believe that the adoption of SFAS 155 will have an
impact, if any, on its results of operations or financial position.
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing
Financial Assets-an amendment of FASB Statement No 140". This statement
amends FASB Statement No 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", with respect to the
accounting for separately recognized servicing assets and servicing
liabilities. This statement: (1) requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing
contract in any of the following situations: (a) a transfer of the
servicer's financial assets that meets the requirements for sale
accounting, (b) a transfer of the servicer's financial assets to a
qualifying special purpose entity in a guaranteed mortgage securitization
in which the transferor retains all of the resulting securities and
classifies them as either available-for-sale securities or trading
securities in accordance with FASB statement No 115, "Accounting for
Certain Investments in Debt and Equity Securities", (c) an acquisition or
assumption of an obligation to service a financial asset that does not
relate to financial assets of the servicer or its consolidated affiliates;
(2) requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable; (3)
permits an entity to choose either of the following subsequent measurement
methods for each class of separately recognized servicing assets and
servicing liabilities; (a) Amortization methods-amortize servicing assets
or servicing liabilities in proportion to and over the period of estimated
net servicing income or net servicing loss and assess servicing assets or
servicing liabilities for impairment or increased obligation based on fair
value at each reporting date, or (b) Fair value measurement method-Measure
servicing assets or servicing liabilities at fair value at each reporting
date and report changes in fair value in earnings in the period in which
the changes occur; (3) at its initial adoption, permits a one-time
reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question
the treatment of other available-for-sale securities under Statement 115,
provided that the available-for-sale securities are identified in some
manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to
subsequently measure at fair value; and (5) requires separate presentation
13
of servicing assets and servicing liabilities subsequently measured at
fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing
liabilities. An entity should adopt this statement as of the beginning of
its first fiscal year that begins after September 15, 2006. Earlier
adoption is permitted as of the beginning of an entity's fiscal year,
provided the entity has not yet issued financial statements, including
interim financial statements, for any period of that fiscal year. The
effective date of this statement is the date an entity adopts the
requirements of this statement.
Note 3 - Income taxes and deferred income taxes:
a. Income taxes:
Years ended December 31,
------------------------
2005 2004
---- ----
Income taxes consist of the following:
Current Federal income taxes $ 67,014 $ 0
Deferred income taxes 59,859 47,852
--------- ---------
$ 126,873 $ 47,852
========= =========
b. Current income taxes:
Amount calculated at statutory rates $ 120,497 $(105,841)
--------- ---------
Permanent differences -- --
Temporary differences (53,483) 105,841
Valuation allowance -- --
--------- ---------
(53,483) 105,841
--------- ---------
Current income taxes 67,014 0
========= =========
c. Deferred income taxes:
The components by source of temporary differences that gave rise to the deferred
tax liability are as follows:
Years ended December 31,
------------------------
2005 2004
---- ----
Taxable loss carry forward $ 24,222 $ 307,573
Adjustment cash to accrual method (131,934) (355,425)
--------- ---------
(107,712) ( 47,852)
Less: Valuation allowance -- --
--------- ---------
Deferred income taxes liability $(107,712) $ (47,852)
========= =========
As of December 31, 2005, the Company had Federal non-capital tax losses, in the
amount of $nil ($766,000 in 2004), which were available to reduce future taxable
income. The benefit of these losses has been recognized as a reduction of the
deferred tax liability.
14
Note 4 - Accounts receivable
Years ended December 31,
------------------------
2005 2004
---- ----
Accounts receivable less: $ 619,498 $1,049,948
Allowance for doubtful accounts 0 0
---------- ----------
$ 619,498 $1,049,948
========== ==========
Note 5 - Property and Equipment
2005 2005 2005
----------------------------------------
Cost Accumulated Net
Depreciation
----------------------------------------
Office Equipment $ 39,389 $ 37,763 $ 1,626
Automobiles 61,817 41,881 19,936
-------- -------- --------
$101,206 $ 79,644 $ 21,562
======== ======== ========
2004 2004 2004
----------------------------------------
Cost Accumulated Net
Depreciation
----------------------------------------
Office Equipment $37,113 $37,113 $ 0
Automobiles 43,425 35,921 7,504
------- ------- -------
$80,538 $73,034 $ 7,504
======= ======= =======
Depreciation for the year amounted to $6,610 ($5,386 in 2004).
Note 6 - Notes Payable
2005 2004
---- ----
PNC Bank, NA (A) $ 0 $121,563
SBA (B) 85,929 89,210
Line of Credit (C) 0 500,000
Hyundai (D) 13,392 0
-------- --------
99,321 710,773
Less current portion 7,417 628,666
-------- --------
Non-current portion $ 91,904 $ 82,107
======== ========
15
(A) The company re-financed a commercial loan for $231,443 from PNC Bank, NA for
36 months beginning 5/28/03. This loan was initially converted from SBA to
conventional loan on 3/31/01. The maturity date is 3/30/06. Interest is at the
rate of 7%. Cecelia Kennedy and John Kennedy are personal guarantors, with their
personal residence as collateral on this secured loan. Balance was paid off in
2005.
(B) Loan received from SBA on 5/25/02 because of events of September 11, 2001.
Payments are $592 per month which includes interest at 4%. Cecelia Kennedy and
John Kennedy are personal guarantors, with their personal residence as
collateral on this secured loan. Accounts Receivables are also held as
collateral. Interest for the 2005 calendar year is $3469 ($2695 in 2004). The
maturity date is June 1, 2022.
(C) Line of credit of $500,000 was opened with PNC Bank, NA on 5/30/03. Interest
was at 5.25%. Cecelia Kennedy and John Kennedy are personal guarantors with
their personal residence as collateral on this secured loan. Final payments made
during 2005.
(D) Loan secured by motor vehicle with monthly payments of $372 for 36 months
starting Jan 14, 2006, with an interest rate of 7.5% maturing January 14, 2009.
Interest expense for the year regarding the total loans amounted to $39,344
($38,238 in 2004).
Following are maturities of notes payable for each of the next five years:
Amount
2006 $ 7,417 (Hyundai & SBA)
2007 7,896 (Hyundai & SBA)
2008 4,098 (SBA)
2009 4,265 (SBA)
2010 4,439 (SBA)
Thereafter 71,206
---------
$ 99,321
Note 7 - Officers' Loans
Due to the financial situation caused by The Boeing situation (note 9g) and to
help the Company to continue its daily operations, the officers of the Company
made loans to the Company in the amount of $349,624 with interest payable at
6.25%. $100,000 of the loan was unsecured with an open repayment term. $249,624
was made available to the Company utilizing a personal LOC established by
Cecelia Kennedy and John Kennedy with their personal residence as collateral
with an open repayment term. Interest expense in the amount of $21,852 ($25,814
in 2004) was waived and recorded as paid in capital.
Note 8 - Capital Stock
Years ended December 31,
------------------------
2005 2004
---- ----
Authorized: 1,000 common shares
Issued: 300 common shares $ 5,281 $ 5,281
=========== ===========
16
Note 9 - Commitments and Contingencies
a. The Company entered into an extension of its lease on its premises for three
years beginning January 1, 2004 and ending December 31, 2006. Minimum payments
under this operating lease for the next year is as follows:
2006 $ 61,929
b. The Company entered into an operating lease with Mitsubishi Motor Credit of
America beginning December 9, 2003 for 48 months. Lease commitments are as
follows:
2006 $ 4,804
2007 $ 4,804
c. The Company entered into a capital lease with Summit Quick Lease/DeLage
Landen for the Telephone system on 3/6/01. The term of the lease was 60 months
ending in March 2006. The lease commitments are as follows:
2006 $ 1,134
d. The Company entered into 36 month capital leases with Citicapital Financing
for two copiers. The first copier's lease ran from December 2001 through October
2004. The second copier's lease ran from January 2003 through December 2005.
Both leases were converted for $1.00 each at the end of the lease terms.
e. The Company entered into a five year Covenant not to Compete with the former
owner, Richard Gentile in June 1997. This covenant has been renewed annually
since 2002 and has ended in 2005 with an agreement to payout the covenant
commitment of $25,385 in June 2006.
f. The Company is party to a complaint filed against TMG and others in a
personal injury action captioned James Paterek v Port Authority of New York and
New Jersey, et al. This case concerns bodily injuries the plaintiff suffered
arising out of an electrical fire accident on September 30, 2000. The case has
been dismissed without prejudice as of December 31, 2005 because one of the
defendants was in bankruptcy. TMG has factual defenses to plaintiff's claims but
it is too early in the litigation to determine the likelihood of a successful
defense as the case has been dismissed without prejudice and no expert reports
have yet been provided attributing any to TMG. The General Liability insurance
carrier has instructed their legal representative to contest this case
vigorously. Legal fees have been covered by the GL insurance carrier.
g. The Company entered into a contract in 2002 with The Boeing Company to
provide technical documentation and training on a US Government project. Project
was completed in 2003. A contractual dispute arose with regard to billing rates.
A settlement agreement in the amount of $822,000 was reached between the Company
and The Boeing Company in 2005. Of this settlement amount, $120,965 was applied
to previously entered invoices and the remaining settlement amount of $701,035
was recorded as a receivable on the 12/31/04 financial statement.
17
Note 10- Subsequent events:
On January 3, 2006 the Company entered into a Letter of Intent to be acquired by
an engineering services firm located in Toronto, Canada. The purchase price will
be calculated at five times audited 2005 EBIT of the Company. The acquisition is
subject to due diligence and the audit of the Company's 2005 and 2004 financial
statements.
Note 11- Financial Instruments
a. Credit Risk Management
The Company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce its credit risk, the Company has adopted
credit policies, which include the analysis of the financial position of
its customers and the regular review of their credit limits.
b. Concentration of Credit Risk
The Company's revenue is derived from customers of various industries and
geographic locations reducing its credit risk. Where exposed to credit
risk, the Company mitigates this risk by routinely assessing the financial
strength of its customers, establishing billing arrangements, and
monitoring the collectibility of the account on an ongoing basis.
c. Interest Risk
The long-term debt bears interest rates that approximate the interest
rates of similar loans. Consequently, the long-term debt risk exposure is
minimal.
d. Fair Value of Financial Instruments
The carrying values of the accounts receivable, accounts payable and
federal and state income taxes payable approximates their fair values
because of the short term maturities of these items. The fair value of the
Company's long-term debt is based on the estimated quoted market prices
for the same or similar debt instruments. The fair value of the long-term
debt approximates the carrying value.
18