Exhibit 99.5
ANNUAL REPORT OF
Trinity IMS, Inc
YEARS ENDED DECEMBER 31, 2006 AND 2005
C O N T E N T S
Page
REPORT OF INDEPENDENT AUDITORS 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Income 3
Statements of Changes in Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 10
Report of Independent Auditors
Board of Directors
Trinity Information Management Services, Inc.
We have audited the accompanying balance sheets of Trinity Information
Management Services, Inc. as of December 31, 2006 and 2005, and the related
statements of income, changes in equity and cash flows for the years then ended.
These financial statements are the responsibility of the management of Trinity
Information Management Services, Inc. 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 Trinity Information
Management Services, Inc. as of December 31, 2006 and 2005, 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/ Goodman & Company, L.L.P.
McLean, Virginia
June 15, 2007
-1-
Trinity Information Management Services, Inc.
BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
2006 2005
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 121,654 $ 4,464
Accounts receivable - less allowance for
doubtful accounts of $10,000 for 2006
and $0 for 2005 623,810 952,662
Current portion of settlement receivable 37,500 34,375
Prepaid expenses 5,150 1,400
Employee receivables 2,769 --
Related party receivable -- 2,111
----------- -----------
TOTAL CURRENT ASSETS 790,883 995,012
----------- -----------
PROPERTY AND EQUIPMENT, NET 94,633 85,877
OTHER ASSETS
Settlement receivable - less current portion 46,875 84,375
Deposit 25,592 25,592
----------- -----------
TOTAL ASSETS $ 957,983 $ 1,190,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 307,015 $ 206,701
Credit card liabilities 49,470 38,109
Line of credit -- 470,759
Advances from stockholder -- 8,940
Current portion of automobile financing -- 7,658
Current portion of deferred rent 6,448 11,948
Stock repurchase 40,000 --
Deferred taxes 209,409 211,996
----------- -----------
TOTAL CURRENT LIABILITIES 612,342 956,111
----------- -----------
LONG-TERM LIABILITIES
Deferred rent - less current portion 20,097 15,010
----------- -----------
TOTAL LIABILITIES 632,439 971,121
----------- -----------
STOCKHOLDERS' EQUITY 325,544 219,735
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 957,983 $ 1,190,856
=========== ===========
The accompanying notes are an integral part of these financial statements.
-2-
Trinity Information Management Services, Inc.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
---------- ----------
Contract revenue $4,216,934 $3,660,482
Cost of contract revenue 3,317,133 3,074,722
Selling, general and administrative expenses 612,748 669,852
---------- ----------
Operating income (loss) 287,053 (84,092)
---------- ----------
Other Income
Settlement income -- 150,000
Interest income 556 945
Interest expense (22,086) (17,347)
---------- ----------
Total other income (expense) (21,530) 133,598
---------- ----------
Net income before taxes 265,523 49,506
Income tax expense 109,714 27,574
---------- ----------
Net income $ 155,809 $ 21,932
========== ==========
The accompanying notes are an integral part of these financial statements.
-3-
Trinity Information Management Services, Inc.
STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2006 AND 2005
Common Retained
Stock Earnings Total
--------- ---------- ----------
Balance - December 31, 2004 $ 825 $ 196,978 $ 197,803
Net income -- 21,932 21,932
--------- ---------- ----------
Balance - December 31, 2005 825 218,910 219,735
Net Income -- 155,809 155,809
Stock repurchase (372) (49,628) (50,000)
--------- ---------- ----------
Balance - December 31, 2005 $ 453 $ 325,091 $ 325,544
========= ========== ==========
The accompanying notes are an integral part of these financial statements.
-4-
Trinity Information Management Services, Inc.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
--------- ---------
Cash flows from operating activities
Net income $ 155,809 $ 21,932
Adjustments to reconcile net cash from operating activities:
Depreciation 33,899 21,079
Deferred rent - less current portion (413) (2,207)
Deferred income taxes (2,587) 25,549
Change in:
Accounts receivable 328,852 (30,052)
Settlement receivable 34,375 (118,750)
Prepaid expenses (3,750) (1,400)
Employee receivables (2,769) --
Related party receivable 2,111 2,324
Deposit -- (4,104)
Accounts payable and accrued expenses 100,314 (28,809)
--------- ---------
Net cash from operating activities 645,841 (114,438)
--------- ---------
Cash flows from investing activities
Property and equipment acquisitions (42,655) (65,109)
--------- ---------
Cash flows from financing activities
Credit card liabilities 11,361 23,170
Net borrowings on line of credit (470,759) 169,300
Repayment on stockholder advances (8,940) (34,539)
Repayment on auto financing (7,658) (7,721)
Repurchase of shares (10,000) --
--------- ---------
Net cash from financing activities (485,996) 150,210
--------- ---------
Net change in cash $ 117,190 $ (29,337)
Cash - beginning of year 4,464 33,801
--------- ---------
Cash - end of year $ 121,654 $ 4,464
========= =========
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 5,586 $ 2,025
Cash paid for interest $ 23,496 $ 12,690
The accompanying notes are an integral part of these financial statements.
-5-
Trinity Information Management Services, Inc.
Notes to Financial Statements
================================================================================
December 31, 2006 and 2005
- --------------------------------------------------------------------------------
1. Organization and Nature of Business
Trinity Information Management Services, Inc. (Company), a Nevada
corporation, is a privately held, SBA Certified 8(a), small, disadvantaged,
minority, woman-owned company headquartered in McLean, Virginia. The
Company provides specialized management, security and technology services
to government and commercial customers.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company generates revenue under time-and-material contracts with the
U.S. government and its prime contractors. Revenue on time-and-materials
contracts is recognized to the extent of fixed hourly rates for direct
labor hours expended (proportional performance) plus burdened reimbursable
expenses incurred. Costs and profit estimates are reviewed periodically as
the work progresses, and adjustments, if needed, are reflected in the
period in which the revisions are made. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Because of inherent uncertainties in estimating costs, it is at
least reasonably possible that the estimates used could change within the
near term.
Accounts Receivable
The Company evaluates each of its accounts receivables individually, and
provides a charge to income which is appropriate, in the opinion of
management, to absorb probable credit losses. Trade accounts receivable are
recorded, net of allowance, at the amount the Company expects to collect on
balances outstanding at year-end. Management closely monitors outstanding
balances and writes off balances when they are deemed uncollectible. The
Company recorded an allowance for doubtful accounts of $10,000 and $0 at
December 31, 2006 and 2005, respectively.
Property and Equipment
Property and equipment acquisitions are recorded at cost. Depreciation is
based on estimated useful lives and is computed on the accelerated method,
which is not materially different from the straight-line method. Estimated
useful lives are as follows:
Computer equipment 5 years
Furniture 7 years
Leasehold improvements 4 years
Maintenance and repairs are charged to expense, but renewals and
betterments are capitalized. When property and equipment are sold or
otherwise disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations. The Company's policy is to expense property and equipment with
a cost of less than $50.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising
expense was $10,312 and $18,617 for 2006 and 2005, respectively.
-6-
Estimates
The preparation of 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
disclosure of contingent assets and liabilities at the date of the
financial statements. Such estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could
vary from the estimates that were used.
Capital
The Company has authorized 75,000,000 common shares, with a par value of
$0.001. As of December 31, 2006 and 2005, 453,000 and 825,000 common shares
were issued and outstanding, respectively.
During 2005, the stockholders authorized a 3,000 for 1 stock split, thereby
increasing the number of authorized shares from 25,000 to 75,000,000, and
the number of issued and outstanding shares from 275 to 825,000. The par
value of each share also increased from zero to $0.001. The stock split is
retroactively adjusted for all periods presented.
On November 17, 2006, the Company retired 372,000 shares of common stock
from its stockholders for $50,000, which will be paid out within a period
of 5 months. As of December 31, 2006 the outstanding balance owed was
$40,000. On January 17, 2007 and March 14, 2007, the Company paid $10,000
and $30,000, respectively, for final settlement of the outstanding balance.
As of June 15, 2007, the Company had a total of 453,000 issued and
outstanding shares of common stock.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related to the difference between the bases of certain assets and
liabilities for financial and tax reporting. The deferred taxes represent
the future tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are recovered or
settled.
Concentration of Credit Risk
At times, the Company may have cash at a financial institution in excess of
insured limits. The Company places its cash with high credit quality
financial institutions whose credit rating is monitored by management to
minimize credit risk. The Company's balances in excess of the FDIC
insurance limits were $54,690 and $0 at December 31, 2006 and 2005,
respectively.
Accounts receivable consist of amounts primarily due from prime or
subcontracts with the federal government. These amounts are reviewed
periodically by management in order to determine amounts which may be
potentially deemed uncollectible.
3. Accounts Receivable
Accounts receivable at December 31 consisted of the following:
2006 2005
---------- ----------
Accounts receivable $ 328,946 $ 725,863
Accrued billings 304,864 226,799
---------- ----------
633,810 952,662
Less - allowance for doubtful accounts (10,000) -
---------- ----------
$ 623,810 $ 952,662
========== ==========
Bad debt expense was $29,312 and $0 for 2006 and 2005, respectively.
-7-
4. Settlement Receivable
In February 2005, the Company entered into an agreement to settle a lawsuit
in which the Company was the plaintiff. The agreement required the
defendant to pay the Company $150,000. The defendant provided a promissory
note to the Company for the amount due. The note requires equal monthly
payments of $3,125 for thirty-six months beginning April 1, 2005. The note
is interest free over the first thirty-six months. Following the thirty-six
months, there are an additional twelve monthly payments. The payments
include principle and interest at 6% per annum on the outstanding balance.
5. Property and Equipment
Major classes of property and equipment at December 31 consisted of the
following:
2006 2005
---------- ---------
Computer equipment $ 104,630 $ 72,932
Furniture 36,372 25,415
Automobiles - 40,275
Leasehold improvements 30,717 30,717
---------- ---------
171,719 169,339
Less - accumulated depreciation (77,086) (83,462)
---------- ---------
$ 94,633 $ 85,877
========== =========
6. Operating Leases
The Company leases office space and an automobile under operating lease
agreements that expire in 2010. Total rent expense for 2006 and 2005 was
approximately $194,000 and $153,000, respectively. Total automobile lease
expense for 2006 and 2005 was approximately $15,000 and $13,000,
respectively. Future commitments under these leases are as follows:
2007 $ 195,207
2008 184,337
2009 94,046
2010 45,162
----------
$ 518,752
==========
7. Capital Lease Obligations
The Company leased an automobile under a capital lease that expired in
2006. After the expiration of the lease the automobile was disposed.
8. Pension Plan
Effective January 1, 2005, the Company established a defined contribution
pension plan. The plan covers employees who are at least 21 years of age
and have completed 1,000 hours of service. The Company, at its discretion,
may elect to contribute a percentage of the participant's elective
deferral. Employer contributions to this plan totaled $40,727 and $12,010
for 2006 and 2005, respectively.
-8-
9. Related Party Transactions
A stockholder advanced the Company $58,300 in 2003 and $17,100 in 2004. All
advances were due on demand and no written agreements for the advances were
made. The balance of the advances at December 31, 2005 was $8,940. The
advances were paid in full in 2006.
10. Line of Credit
The Company maintains a revolving line of credit with a financial
institution that provides for borrowings not to exceed $500,000 and
$750,000 at December 31, 2006 and 2005, respectively. The line is secured
by all current and future accounts receivable and by all equipment owned by
the Company and is payable on demand. Interest accrues on the outstanding
balance at the prime lending rate plus 1% and .25% for 2006 and 2005,
respectively (9.25 percent and 7.5 percent at December 31, 2006 and 2005,
respectively). Borrowings as of December 31, 2006 and 2005 under the line
of credit were $0 and $470,759, respectively.
The Company also has a borrowing agreement with another financial
institution in which the Company may be advanced funds not to exceed
$25,000. The agreement does not have an expiration date. The advances
accrue interest at 21% per annum. There were no borrowings under the
agreement as of December 31, 2006 and 2005.
11. Commitments and Contingencies
Substantially all of the Company's revenues have been derived from
contracts with the U.S. government. These contract revenues are subject to
adjustment upon audit by various government agencies. Management does not
expect the results of such audits to have a material effect on the
Company's financial position or results of future operations.
12. Income Taxes
Deferred taxes result from differences in the bases of assets and
liabilities for income and financial statement purposes. The source of
these differences mainly resulted from timing differences related to
accounts receivable, accrued expenses and carryforward of taxable net
operating losses.
The tax effect as of December 31 is as follows:
2006 2005
---------- ---------
Deferred tax assets $ 90,738 $ 230,284
Deferred tax liabilities (300,147) (442,280)
---------- ---------
Net deferred tax assets (liability) $ (209,409) $(211,996)
========== =========
The tax effects of principal temporary differences are as follows:
2006 2005
---------- ---------
Accounts receivable $ (249,524) $(381,065)
Settlement receivable (33,750) (47,500)
Prepaid expenses (2,060) (560)
Accelerated tax depreciation (14,813) (13,155)
Accounts payable and accrued expenses 80,120 72,455
Deferred rent 10,618 10,783
Net operating loss carryforward - 147,046
---------- ----------
$ (209,409) $ (211,996)
========== ==========
-9-
The components of income tax expense (benefit) are as follows:
2006 2005
--------- ---------
Federal:
Current $ 90,959 $ --
Deferred (119,706) (7,730)
Tax expense of net operating loss carryforward 117,636 29,446
--------- ---------
88,889 21,716
--------- ---------
State:
Current 21,342 2,025
Deferred (29,927) (3,529)
Tax expense of net operating loss carryforward 29,410 7,362
--------- ---------
20,825 5,858
--------- ---------
$ 109,714 $ 27,574
========= =========
The Company's income tax expense differed from the statutory federal rate
of 34% as follows:
2006 2005
-------- --------
Statutory rate applied to earnings before income taxes $ 90,278 $ 16,832
Increase (decrease) in income taxes resulting from:
State income taxes 17,355 4,996
Permanent tax differences 2,081 5,746
-------- --------
Income tax expense $109,714 $ 27,574
======== ========
13. Related Party Receivable
In 2004, the Company advanced $6,866 to a stockholder payable in
twenty-four installments of $286 without interest. The note was paid in
full in 2006. The balance of the advance at December 31, 2005 was $2,111.
14. Subsequent Events
On January 29, 2007, the Company entered into and finalized a purchase
agreement with Paradigm Holdings, Inc. (Paradigm), a publicly traded
corporation, whereby Paradigm agreed to purchase, subject to the terms and
conditions of the stock purchase agreement, all shares of the Company for
the purchase price of $4,000,000. Final settlement on the sale of the
Company was made on April 9, 2007.
On January 17, 2007 and March 14, 2007 the Company paid $10,000 and
$30,000, respectively, for the remaining balance owed for the repurchase of
its shares.
On March 23, 2007, the Company renewed a contract with one of its major
customers. The contract value is anticipated to be $11,876,000 and funding
was $726,921 as of June 15, 2007. The performance period for the contract
is from May 15, 2007 to May 8, 2012.
-10-