EXTEL ENTERPRISES INC.
AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED 2003 AND 2002
The accompanying auditors report and notes are an integral part of these
statements.
EXTEL ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS
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Page
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Report of Independent Registered Public Accounting Firm F-3
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Balance Sheets - December 31, 2003 and 2002 F-4
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Statements of Operations For the Years
Ended December 31, 2003 and 2002 F-5
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Statements of Changes in Stockholders' Equity
(Deficit) - For the Years ended December 31, 2003 and 2002 F-6
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Statements of Cash Flows For the Years
Ended December 31, 2003 and 2002 F-7
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Notes to Financial Statements F-8
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F-2
AJ. ROBBINS, PC
216 SIXTEENTH STREET
SUITE 600
DENVER, COLORADO 80206
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Extel Enterprises, Inc.
Fort Worth, Texas
We have audited the accompanying balance sheets of Extel Enterprises, Inc. as of
December 31, 2003 and 2002, and the related statements of operations, changes in
stockholders' equity (deficit), 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 audit.
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 Extel Enterprises, Inc. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has experienced recurring losses from
operations, negative cash flows from operations and has both a working capital
and a stockholders' deficit at December 31, 2003, that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The financial statements do not
include any adjustments that might results from the outcome of this uncertainty.
AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS
DENVER, COLORADO
May 26, 2005
F-3
EXTEL ENTERPRISES, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
CURRENT ASSETS
Cash $ 78,242 $ 23,649
Trade receivables, net 336,672 208,635
Due from related parties 26,243 3,000
----------- -----------
Total Current Assets 441,157 235,284
Property and equipment, net of accumulated depreciation
of $16,812 and $5,836 57,853 38,709
Deposits 3,202 3,202
----------- -----------
TOTAL ASSETS $ 502,212 $ 277,195
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank note payable $ 45,000 $ 35,000
Accounts payable 1,460,149 539,633
Accrued expenses and other current liabilities 212,148 56,728
Due to related parties 0 32,666
Deferred revenue 292,584 180,114
----------- -----------
Total Current Liabilities 2,009,881 844,141
----------- -----------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; par value $1.00; authorized 1,000,000;
issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 1,000 1,000
Accumulated (deficit) (1,509,669) (568,946)
----------- -----------
Total Stockholders' Equity (Deficit) (1,507,669) (566,946)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 502,212 $ 277,195
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
EXTEL ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
REVENUES
Revenues $ 6,402,372 $ 1,429,631
Cost of goods sold (5,559,097) (1,474,018)
------------ ------------
Gross profit (loss) 843,275 (44,387)
------------ ------------
OPERATING EXPENSES
Depreciation and amortization 10,976 4,909
Sales, general and administrative 1,772,115 533,063
------------ ------------
Total operating expenses 1,783,091 537,972
------------ ------------
(LOSS) FROM OPERATIONS (939,816) (582,359)
OTHER INCOME (EXPENSE)
Interest income 868 509
Interest (expense) (1,775) (4,915)
------------ ------------
Total other (expense) (907) (4,406)
------------ ------------
Net income (loss) before (benefit) for income taxes (940,723) (586,765)
(Benefit) for income tax 0 (1,979)
NET (LOSS) $ (940,723) $ (584,786)
============ ============
NET (LOSS) PER SHARE - BASIC AND DILUTED $ (941) $ (585)
Weighted average number of shares outstanding
- basic and diluted 1,000 1,000
F-5
EXTEL ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Common Common Paid-In Stockholders'
Shares Stock Capital Equity (Deficit) Total
Balance December 31, 2001 1,000 $ 1,000 $ 1,000 $ 15,840 $ 17,840
Net (Loss) (584,786) (584,786)
-------------- -------------- -------------- -------------- --------------
Balance December 31, 2002 1,000 1,000 1,000 (568,946) (566,946)
Net (Loss) (940,723) (940,723)
-------------- -------------- -------------- -------------- --------------
Balance December 31, 2003 1,000 $ 1,000 $ 1,000 $ (1,509,669) $ (1,507,669)
============== ============== ============== ============== ==============
F-6
EXTEL ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED 2003 AND 2002
2003 2002
------------ ------------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net (loss) $ (940,723) $ (584,786)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 10,976 4,909
Changes in Operating Assets and Liabilities:
Trade receivables (128,037) (208,635)
Accounts payable 920,516 535,320
Accrued expenses and other liabilities 155,420 56,728
Deferred revenue 112,470 180,114
Other assets and liabilities 0 (195)
------------ ------------
Net cash provided by (used in) operating activities 130,622 (16,545)
------------ ------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES
Expenditures for property and equipment (30,120) (33,126)
------------ ------------
Net cash (used in) investing activities (30,120) (33,126)
------------ ------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Proceeds from notes payable 45,000 35,000
Payments on notes payable (35,000) 0
Advances from stockholders 0 52,666
Payments to stockholders (55,909) (20,000)
------------ ------------
Net cash provided by (used in) financing activities (45,909) 67,666
------------ ------------
Net increase in cash 54,593 17,995
Cash and cash equivalents, beginning of period 23,649 5,654
------------ ------------
Cash and cash equivalents, end of period $ 78,242 $ 23,649
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,775 $ 4,915
------------ ------------
The accompanying notes are an integral part of these statements
F-7
EXTEL ENTERPRISES, INC.
NOTES TO FINANCINAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
1. BUSINESS AND BACKGROUND
Extel Enterprises, Inc. (the "Company"), was incorporated in the State of Texas
on May 20, 2001. The Company operated as a provider of telecommunications
services including local, long distance and enhanced telephone (voice) services
to residential customers. During 2003 and 2002, the Company continued to
implement and expand its business plan beyond the Dallas/Fort Worth area and
began offering telephone service across the entire state of Texas. The current
business plan involves obtaining, through internal growth, as many customers as
possible by offering various combinations of telecommunications services. In
2004, the Company's assets were sold to Cardinal Communications, Inc. (formerly
USURF America, Inc.), however the business plan has continued. The growth
strategy includes acquisitions of telecommunications-related businesses and/or
properties which would provide an immediate or potential customer base for our
services across multiple states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of 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, 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. Specific estimates include lives of assets, collectability
of receivables and notes, and valuation of allowance on net operating loss
carryforward. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Receivables and Credit Policies
Accounts receivable consist of uncollateralized customer obligations due under
normal trade terms requiring payment within 10 days of the invoice date. In most
cases, trade receivables are applied to a specific identified invoice.
Management reviews trade receivables periodically and reduces the carrying
amount by a valuation allowance that reflects management's best estimate of the
amount that may not be collectible. A valuation allowance of $84,160 and $52,159
was recorded at December 31, 2003 and 2002, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation expense is provided for on the straight-line method over the
estimated useful lives of the assets, generally three to five years.
Depreciation expense was $10,976 and $4,909 for the years ended December 31,
2003 and 2002, respectively. Maintenance and repairs are charged to expense as
incurred and expenditures for major improvements are capitalized. When assets
are retired or otherwise disposed of, the property accounts are relieved of
costs and accumulated depreciation and any resulting gain or loss is credited or
charged to operations.
Revenue Recognition
The Company charges its telephone customers monthly service fees and recognizes
the revenue in the month the services are provided. The Company bills monthly
for voice (telephone) services in advance and bills for long distance services
in arrears. Payment is due by the 10th day after the service begins or the
customer is subject to a suspension of service. When a new customer's service
commences, the customer receives 15 days of service before their first bill is
due. To the extent that revenue is received, but not earned, the Company records
these amounts as deferred revenue.
F-8
EXTEL ENTERPRISES, INC.
NOTES TO FINANCINAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Costs of Goods Sold
Costs of Goods Sold primarily consist of telecommunications expenses inherent in
the network infrastructure.
Advertising Expenses
The Company expenses advertising costs as incurred. During the years ended
December 31, 2003 and 2002 the Company did not have significant advertising
costs.
Income Taxes
Deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is the tax
payable for the current period and the change during the period in deferred tax
assets and liabilities. The deferred tax assets and liabilities have been netted
to reflect the tax impact of temporary differences. At December 31, 2003, a full
valuation allowance has been established for the deferred tax asset as
management believes that it is more likely than not that a tax benefit will not
be realized.
Earnings per Share ("EPS")
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). The
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
loss per share is similar to the basic loss per share computation except the
denominator is increased to include the number of additional shares that would
have been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares. The Company
has no derivative securities and therefore basic and diluted EPS are the same.
Financial Instruments and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash. The Company maintains its cash in
bank deposit accounts, which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash.
Concentrations
The Company relies, in part, on local telephone companies and other companies to
provide certain telecommunications services. Although management believes
alternative telecommunications facilities could be found in a timely manner, any
disruption of these services could have an adverse effect on operating results.
Fair Values of Financial Instruments
The carrying amounts of financial instruments including cash, trade receivables,
accounts payable and accrued expenses approximate fair value because of the
immediate or short-term maturities of these instruments.
Recently Issued Accounting Pronouncements In December 2004 the FASB issued SFAS
No.123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) will
provide investors and other users of financial statements with more complete and
neutral financial information by requiring that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
F-9
EXTEL ENTERPRISES, INC.
NOTES TO FINANCINAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
awards, share appreciation rights, and employee share purchase plans. SFAS
123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to apply the
guidance in Opinion 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used. Public entities (other than those filing as small business
issuers) will be required to apply SFAS 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. The Company has evaluated the
impact of the adoption of SFAS 123(R), and believes that it could have an impact
to the Company's overall results of operations depending on the number of stock
options granted in a given year.
In December 2004 the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
The amendments made by SFAS 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
That exception required that some nonmonetary exchanges, although commercially
substantive, to be recorded on a carryover basis. By focusing the exception on
exchanges that lack commercial substance, the FASB believes SFAS No.153 produces
financial reporting that more faithfully represents the economics of the
transactions. SFAS No.153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date of issuance. The provisions of SFAS No.153 shall be applied
prospectively. The Company has evaluated the impact of the adoption of SFAS 153,
and does not believe the impact will be significant to the Company's overall
results of operations or financial position.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of this standard
did not have a material impact on the Company's financial statements.
In April 2003 FASB issued SFAS No. 149, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. This statement amends and clarifies financial accounting and reporting
for derivative instruments including certain instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of this standard
did not have a material impact on the Company's financial statements.
3. GOING CONCERN
These financial statements are presented on the basis that the Company is a
going concern. Going concern contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business over a reasonable
length of time. The appropriateness of using the going concern basis is
dependent upon obtaining additional financing or equity capital and, ultimately,
to achieve profitable operations. The uncertainty about these conditions raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Management plans to raise capital by obtaining debt and equity financings.
F-10
EXTEL ENTERPRISES, INC.
NOTES TO FINANCINAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Management intends to use the proceeds from any financings to acquire and
develop markets to implement its business plan and sell its telecommunications
services and telecommunications-related equipment. The Company believes that
these actions will enable it to carry out its business plan and ultimately to
achieve profitable operations.
The Company has experienced recurring losses and has negative working capital
and, as a result, there exists substantial doubt about its ability to continue
as a going concern. For the years 2003 and 2002, the Company incurred a net loss
of $ 940,723 and $ 584,786 respectively. As of December 31, 2003, Extel had an
accumulated deficit of $ 1,509,669 . The Company is actively seeking customers
for our services. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in existence. These factors raise substantial doubt
about its ability to continue as a going concern.
The current business plan involves obtaining, through internal growth, as many
customers as possible by offering various combinations of telecommunications
services. In 2004, the Company's assets were sold to Cardinal Communications,
Inc. (formerly USURF America, Inc.), however the business plan has continued.
4. PROPERTY AND EQUIPMENT
Classifications of property and equipment and accumulated depreciation were as
follows at December 31, 2003 and 2002:
Property & Equipment 2003 2002
Furniture & fixtures $ 11,628 $ 11,628
Office equipment 61,675 31,555
Leasehold improvements 1,362 1,362
-------- --------
Total property and equipment 74,665 44,545
Less accumulated depreciation (16,812) (5,836)
-------- --------
Property & Equipment - net $ 57,853 $ 38,709
======== ========
5. NOTE PAYABLE
On September 5, 2002, the Company entered into a financing agreement with the
Bank of America for a credit line in the amount of $50,000. The line of credit
is for a period of three years. After the three-year period the balance will be
converted into a term loan and any remaining balance will be amortized in equal
monthly installments of principal and interest over the remaining life of the
agreement which expires on September 5, 2009. The initial interest rate on the
loan was 8.0% and may be adjusted over the term of the loan with a maximum of
3.25% over the Prime Rate. The line of credit is guaranteed by the three
stockholders and officers of the Company. $5,000 remained unused against this
line of credit at December 31, 2003. This note was paid in 2004.
6. RELATED PARTY TRANSACTIONS
At December 31, 2003, the Company had non-interest bearing loans due from
shareholders and Connect Paging, Inc. (CPI) of $26,243 and $3,000 respectively .
CPI has ownership in common with the Company. As of December 31, 2002 the
Company had non-interest bearing loans payable to shareholders of $32,666. In
2003, the loan to shareholders was paid.
7. INCOME TAXES
The significant components of deferred tax assets and liabilities were as
follows at December 31, 2003 and 2002:
F-11
EXTEL ENTERPRISES, INC.
NOTES TO FINANCINAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
Realized Income taxes (benefits) current $0 $1,979
Deferred tax (assets) based on a federal statutory rate of 34% (319,021) (192,363)
Less - valuation allowance 319,021 192,363
$0 $0
== ==
The Company has net operating loss carry forwards of approximately $1,500,000.
These losses may be available to offset future income for income tax reporting
purposes and will begin to expire in 2017. As a result of the merger with
Cardinal, these losses may be limited.
8. COMMITMENTS AND CONTINGENCIES
A. Litigation
The Company is currently involved in a case, Basicphone, Inc: Diamond Telco,
Inc. d/b/a Diamond Telco-your Home Telephone Store; Extel Enterprises, Inc.; and
Communication Group, Inc. (collectively CLEC) v. Southwestern Bell Telephone,
L.P. (SBC) Docket No. 26581 before the Public Utility Commission of Texas. Each
of the petitioners in this case have generic interconnection agreements with SBC
known in the industry as the T2A. The agreement does not notify the amount that
the CLEC will be charged for electronically connecting resale customers to the
network, nor the amount the CLEC will be charged for electronically suspending
or restoring resale customers.
SBC has been taking the position that it may charge the retail tariff rate for
manual new service orders, less a wholesale discount, for the electronic new
service orders (approximately $14.96) and the full retail rate for the
electronic suspend/ restore orders ($25.00). In contrast, the petitioners claim
that these functions must be offered at the UNE TELRIC rate of no more than
$2.58.
The Company has recorded in its liabilities the full amount owed to SBC which
includes approximately $850,000 in disputed fees which is the difference between
the Company's calculation and the prices alleged by SBC.
B. Leases
The Company leases office space in Fort Worth, Texas under a lease dated
December 1, 2002 through November 30, 2004. The Company has an option to renew
the lease for three additional one-year periods through November 30, 2007. In
addition, the Company leases retail space in Fort Worth, Texas under a lease
dated July 1, 2001 through July 1, 2004. The rent expense for 2003 was $39,723
and for 2002 was $29,011. The future minimum lease payments are $28,368 in 2004.
9. SUBSEQUENT EVENTS
In April 2004, the Company sold its assets to Connect Paging, Inc. a commonly
owned company. Connect Paging, Inc. was simultaneously sold to Cardinal
Communications, Inc.
F-12