EXHIBIT 99.1
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TELENATIONAL COMMUNICATIONS, INC.
December 31, 2005 and 2004
TELENATIONAL COMMUNICATIONS, INC.
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants.............. 3
Financial Statements
Balance Sheets. ............................................... 4
Statements of Income .......................................... 5
Statements of Changes in Stockholders' Equity ................. 6
Statements of Cash Flows ...................................... 7
Notes to Financial Statements ................................. 8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Shareholders of
Telenational Communications, Inc.
We have audited the accompanying balance sheets of Telenational
Communications, Inc. (the "Company") as of December 31, 2005 and 2004 and
the related statements of income, changes in stockholders' 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 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 Telenational
Communications, Inc. 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.
/s/ KBA GROUP LLP
KBA Group LLP
Dallas, Texas
April 11, 2006
TELENATIONAL COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
------
March 31, December 31,
--------- ----------------------
2006 2005 2004
--------- --------- ---------
(unaudited)
Current assets
Cash and cash equivalents $ 563,074 $ 553,500 $1,184,639
Accounts receivable, net of allowance
for doubtful accounts of $25,000
(unaudited), $22,509 and $2,397,
respectively 820,252 877,411 547,769
Prepaid expenses and other
current assets 56,592 42,078 45,679
--------- --------- ---------
Total current assets 1,439,918 1,472,989 1,778,087
Property and equipment, net 202,951 219,247 166,661
Non-current accounts receivable 12,712 21,454 118,098
Other assets 18,665 26,297 86,447
--------- --------- ---------
Total assets $1,674,246 $1,739,987 $2,149,293
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued
liabilities $ 745,628 $ 739,426 $1,362,656
Customer deposits 16,183 16,183 16,664
--------- --------- ---------
Total current liabilities 761,811 755,609 1,379,320
Commitments and contingencies
Stockholders' equity
Common stock - par value $.0001
per share; 1,000 shares authorized,
issued and outstanding 1 1 1
Additional paid-in capital 999 999 999
Retained earnings 911,435 983,378 768,973
--------- --------- ---------
Total stockholders' equity 912,435 984,378 769,973
--------- --------- ---------
Total liabilities and
stockholders' equity $1,674,246 $1,739,987 $2,149,293
========= ========= =========
The accompanying notes are an integral part of this financial statement.
TELENATIONAL COMMUNICATIONS, INC.
STATEMENT OF INCOME
Three Months Ended Year Ended
March 31, December 31,
---------------------- ----------------------
2006 2005 2005 2004
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Revenues $ 2,722,025 $ 2,689,260 $10,907,141 $10,273,619
Cost and expenses
Cost of services 1,870,491 1,754,758 7,159,393 6,672,310
Sales and marketing expenses 296,549 338,492 1,235,777 1,072,040
General and administrative
expenses 450,817 421,936 1,980,911 2,121,592
Depreciation and amortization 16,766 11,987 56,616 48,463
---------- ---------- ---------- ----------
Total costs and expenses 2,634,623 2,527,173 10,432,697 9,914,405
---------- ---------- ---------- ----------
Operating income 87,402 162,087 474,444 359,214
Other income - - 9,095 15,250
---------- ---------- ---------- ----------
Net income $ 87,402 $ 162,087 $ 483,539 $ 374,464
========== ========== ========== ==========
The accompanying notes are an integral part of this financial statement.
TELENATIONAL COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2005 and 2004
Common Stock Additional
---------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- --------- ---------
Balances at December 31, 2003 1,000 $ 1 $ 999 $ 539,251 $ 540,251
Distributions to stockholders - - - (144,742) (144,742)
Net income - - - 374,464 374,464
------ ------ ------- --------- ---------
Balances at December 31, 2004 1,000 1 999 768,973 769,973
Distributions to stockholders - - - (269,134) (269,134)
Net income - - - 483,539 483,539
------ ------ ------- --------- ---------
Balances at December 31, 2005 1,000 $ 1 $ 999 $ 983,378 $ 984,378
====== ====== ======= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
TELENATIONAL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended
March 31, December 31,
---------------------- ----------------------
2006 2005 2005 2004
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $ 87,402 $ 162,087 $ 483,539 $ 374,464
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation and amortization 16,766 11,987 56,616 48,463
Provision for doubtful accounts 2,491 9,512 20,112 (58,831)
Changes in assets and liabilities:
Accounts receivable 63,410 (229,415) (283,110) (128,962)
Prepaid expenses and other
current assets (14,514) 9,370 3,601 11,289
Other assets 7,632 44,156 60,150 11,511
Accounts payable and accrued
liabilities 6,202 (666,700) (623,230) 179,409
Customer deposits - - (481) -
---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities 169,389 659,003 (252,803) 437,343
Cash flows from investing activities
Purchases of property and equipment (470) (10,110) (109,202) (51,230)
Cash flows from financing activities
Distributions to stockholders (159,345) (30,325) (269,134) (144,742)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 9,574 699,438 (631,139) 241,371
Cash and cash equivalents at
beginning of period 553,500 943,268 1,184,639 943,268
---------- ---------- ---------- ----------
Cash and cash equivalents at
end of period $ 563,074 $ 243,830 $ 553,500 $ 1,184,639
========== ========== ========== ==========
Supplemental disclosure of cash
flow information
Cash paid for interest $ - $ - $ - $ -
========== ========== ========== ==========
Cash paid for income taxes $ - $ - $ - $ -
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
TELENATIONAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
--------------------------
Telenational Communications, Inc. (the "Company") was founded in May 1997 as
a Delaware S corporation. The Company is a wholly owned subsidiary of Apex,
Inc. ("Apex") The Company provides a variety of telecommunications services
to corporations, consumers, communication carriers and internet service
providers primarily for the transmission of voice and data traffic and other
communications services. The Company also sells telecommunications services
for both the foreign and domestic termination of international long distance
traffic to wholesalers. The Company is located in Omaha, Nebraska.
Unaudited Interim Information
-----------------------------
The interim financial statements of the Company included in these audited
financial statements are unaudited and do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
consisting of normal recurring adjustments considered necessary for a fair
presentation of the financial position and operating results for the three
month periods ended March 31, 2006 and 2005 have been included. Operating
results for the three month period ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2006.
Management Estimates
--------------------
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 results of operations. These
estimates are based on historical experience and information that is
available to management about current events and actions the Company may
take in the future. Significant items subject to estimates and assumptions
include the allowance for doubtful accounts. Actual results could differ
from these estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Accounts Receivable
-------------------
Accounts receivable represent amounts due from customers and are stated at
the amount the Company expects to collect. The Company generally does not
require collateral from its customers. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. Management considers the following
factors when determining the probability of collecting specific customer
accounts: customer credit-worthiness, past transaction history with the
customer, current economic industry trends, and changes in customer payment
terms. If the financial condition of the Company's customers were to
deteriorate, adversely affecting their ability to make payments, additional
allowances would be required.
Based on management's assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to a
valuation allowance. Balances that remain outstanding after the Company has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to accounts receivable.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of
the assets ranging from 3 to 15 years. Leasehold improvements are amortized
over the shorter of the estimated useful life of the asset or the remaining
term of the related lease.
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
Long-Lived Assets
-----------------
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The Company does not perform a periodic assessment of assets
for impairment in the absence of such information or indicators. Conditions
that would necessitate an impairment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if an impairment is indicated by its
carrying value not being recoverable through undiscounted cash flows. The
impairment loss is the difference between the carrying amount and the fair
value of the asset estimated using discounted cash flows.
Revenue Recognition
-------------------
The Company's revenues result from monthly recurring billings for
telecommunications services including long distance, international re-
origination, calling card, and other services. These revenues are recognized
as the services are delivered. The Company records payments received in
advance as deferred revenue until such services are provided.
Sales and Marketing Costs
-------------------------
Sales and marketing costs consist primarily of agent commissions and are
expensed in the period incurred.
Income Taxes
------------
The Company has elected to be an "S" Corporation for Federal tax purposes.
Accordingly, the Company is generally not subject to federal income taxes.
Taxable income or loss is included in the shareholders federal tax return.
The Company is subject to various state income taxes. Current and deferred
state taxes are not significant to the Company's financial statements.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and 2004 consists of the
following:
2005 2004
-------- --------
Switch and peripheral equipment $ 165,894 $ 142,579
Leasehold improvements 12,447 12,447
Office Equipment 9,789 9,789
Furniture and fixtures 89,216 45,457
Computer equipment 117,152 75,024
-------- --------
394,498 285,296
Less accumulated depreciation
and amortization (175,251) (118,635)
-------- --------
$ 219,247 $ 166,661
======== ========
NOTE 3. LEASE COMMITMENT
The Company leases office space for its corporate headquarters and
operations under a noncancelable operating lease which expires in September
2006. Future minimum lease payments required under the operating lease for
the year ended December 31, 2006 total $74,355.
Rent expense for the years ended December 31, 2005 and 2004 totaled $98,932
and $96,662, respectively.
NOTE 4. RETIREMENT PLAN
The Company offers a 401(k) retirement plan ("the Plan") to its employees
who are at least 21 years of age and have completed 90 days of service with
the Company. The Company makes matching contributions equal to 50% of
employee contributions up to a maximum of 6% of annual compensation. During
the years ended December 31, 2005 and 2004, the Company contributed
approximately $7,522 and $24,205 respectively, to the Plan.
NOTE 5. CONCENTRATIONS AND CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells its products primarily to customers geographically dispersed
throughout the United States and has some international customers. At March
31, 2006 and December 31, 2005 and 2004, three customers accounted for
approximately 32%, 31% and 26% of the Company's total accounts receivable,
respectively. No single customer accounted for more than 10% of the
Company's revenues for the periods ended March 31, 2006 and 2005 or the
years ended December 31, 2005 or 2004. The Company extends credit to its
customers without collateral. The Company from time to time will require
prepayment from customers. Management has evaluated accounts receivable at
December 31, 2005 and 2004 and has provided an allowance for the estimated
uncollectible accounts. In the event of complete non-performance of
accounts receivable, the maximum exposure to the Company is the recorded
amount on the balance sheets.
The Company maintains funds in bank accounts which, from time to time,
exceed federally insured limits. To minimize risk, the Company places it's
cash with high credit quality institutions.
NOTE 6. SUBSEQUENT EVENT
On May 5, 2006, the Company finalized a Purchase Agreement (the "Agreement")
to sell all of its issued and outstanding shares of common stock to Rapid
Link Incorporated, ("Rapid Link") a public telecommunications entity.
Under the terms of the Agreement, the Company will receive the initial
consideration from Rapid Link of $1.0 million in notes payable and 9,587,500
shares of Rapid Link common stock and contingent consideration of $500,000
in cash, payable within 90 days of closing, provided that the actual gross
margin during this 90-day period is greater than the Average Gross Margin,
as defined in the Agreement. If the actual gross margin is less than the
Average Gross Margin, this cash payment will be reduced proportionately. In
addition, the agreement included a contingent stock payment of 9,587,500
shares provided the aggregate gross margin for the 12-month period is not
less than $3.6 million, subject to adjustment based on any shortfall. On
June 5, 2006, the board of Rapid Link resolved to waive the contingent stock
payment of 9,587,500 commons shares and issue them immediately.
Additionally, upon closing the shareholders of Apex provided a working
capital loan to Rapid Link in the amount of $400,000. This loan will be
payable in 12 equal monthly installments of principal and interest. The
loan will accrue interest at the rate of 8% percent per annum.