EXHIBIT 99.1
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
PAGE(S)
Report Of Independent Registered Public Accounting Firm ................... 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Deficit........................... 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements.................................6-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors,
Visual Management Systems Holding, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Visual
Management Systems Holding, Inc. (a NJ corporation) and Subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The financial statements of the Company as of and for the years ended December
31, 2006 and 2005 have been restated (see note 1).
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Visual Management
Systems Holding, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Sobel & Co. LLC
Certified Public Accountants
Livingston, NJ
July 23, 2007
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
- ------------------------------------------------------------------------------------------------------
ASSETS 2006 2005
(restated -note 1) (restated - note 1)
Current assets
Cash $ 963 $ 10,902
Accounts receivable 383,718 238,617
Inventory 246,039 120,093
Prepaid expenses 14,257 5,456
----------- -----------
Total current assets 644,977 375,068
Property and equipment - net 294,839 234,244
Equipment under capital leases - net 29,022 31,800
Deposits and other assets 58,324 7,300
Intangible assets - net 3,866 4,638
----------- -----------
$ 1,031,028 $ 653,050
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft $ 46,697 $ -
Accounts payable 787,537 237,090
Accrued expenses and other current liabilities 226,510 25,090
Deferred revenue 22,086 17,645
Sales tax payable 22,531 45,632
Current portion of long-term debt 76,094 47,082
Current portion of obligations under capital leases 18,143 11,533
----------- -----------
Total current liabilities 1,199,598 384,072
Convertible notes payable - 50,000
Long-term debt - net of current portion 298,267 221,560
Obligations under capital leases - net of current portion 12,213 19,863
Loans payable - stockholders 10,943 57,061
Stockholders' deficit
Common stock, $.01 par value; 50,000,000 shares authorized,
10,105,000 and 9,790,000 shares issued and outstanding at
December 31, 2006 and 2005, respectively 5,651 2,501
Additional paid-in-capital 2,125,281 612,304
Accumulated deficit (2,620,925) (694,311)
----------- -----------
Total stockholders' deficit (489,993) (79,506)
----------- -----------
$ 1,031,028 $ 653,050
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
2
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006 AND 2005
- -------------------------------------------------------------------------------------------------------
2006 2005
(restated - note 1) (restated - note 1)
Revenues - net $ 4,495,778 100.0% $ 2,389,860 100.0%
Cost of revenues 2,409,465 53.6 1,204,379 50.4
----------- ----------- ----------- -----------
Gross margin 2,086,313 46.4 1,185,481 49.6
Operating expenses (including stock-based
compensation of $876,137 and $230,914
for 2006 and 2005, resepectively) 3,689,171 82.1 1,576,366 66.0
----------- ----------- ----------- -----------
Loss from operations (1,602,858) (35.7) (390,885) (16.4)
Other (income) expenses
Debt conversion expense 264,990 5.9 58,890 2.5
Interest income (201) - (207) -
Interest expense 60,075 1.3 30,447 1.3
Miscellaneous (income) expense (1,108) - (2,669) (0.1)
----------- ----------- ----------- -----------
323,756 7.2 86,461 3.7
----------- ----------- ----------- -----------
Net loss $(1,926,614) (42.9)% $ (477,346) (20.1)%
=========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
3
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2006 AND 2005
- -------------------------------------------------------------------------------------------------------------------------
TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
----------- ----------- ----------- ----------- -----------
JANUARY 1, 2005 9,540,000 $ 1 $ - $ (216,965) $ (216,964)
Net loss - - - (477,346) (477,346)
Conversion of convertible debt to common stock 240,000 2,400 356,490 - 358,890
Stock option grants - - 154,642 - 154,642
Stock warrant issuances - - 76,272 - 76,272
Issuance of stock for cash 10,000 100 24,900 - 25,000
----------- ----------- ----------- ----------- -----------
DECEMBER 31, 2005 9,790,000 2,501 612,304 (694,311) (79,506)
Net loss - - - (1,926,614) (1,926,614)
Stock option grants - - 469,337 - 469,337
Stock warrant issuances - - 406,800 - 406,800
Conversion of convertible debt to common stock 315,000 3,150 636,840 - 639,990
----------- ----------- ----------- ----------- -----------
DECEMBER 31, 2006 10,105,000 $ 5,651 $ 2,125,281 $(2,620,925) $ (489,993)
=========== =========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
4
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
- ----------------------------------------------------------------------------------------------------------------------
2006 2005
(restated - note 1) (restated - note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,926,614) $ (477,346)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization 78,177 53,898
Stock-based compensation 876,137 230,914
Debt conversion expense 264,990 58,890
Change in deferred revenue 4,441 17,645
Bank overdraft 46,697 -
(Increase) decrease in operating assets
Accounts receivable (145,101) (237,089)
Inventory (125,946) (58,601)
Prepaid expenses and other assets (8,801) (5,456)
Other assets (27,640) -
Increase (decrease) in operating liabilities
Accounts payable 550,447 117,346
Accrued expenses and other current liabilities 201,420 25,090
Sales tax payable (23,101) 45,632
----------- -----------
Net cash used by operating activities (234,894) (229,077)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (22,374) (66,822)
Payment of security deposit (23,384) (5,621)
----------- -----------
Net cash used by investing activities (45,758) (72,443)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases (9,040) (7,664)
Proceeds from convertible notes payable 325,000 50,000
Proceeds from long-term debt, net of deferred financing
costs of $5,338 in 2005 50,000 194,662
Principal repayments of long-term debt (49,129) (38,157)
Proceeds from loans payable - stockholders - 49,521
Repayment of loans payable - stockholders (46,118) -
Proceeds from sale of common stock - 25,000
----------- -----------
Net cash provided by financing activities 270,713 273,362
----------- -----------
Decrease in cash (9,939) (28,158)
CASH
Beginning of year 10,902 39,060
----------- -----------
End of year $ 963 $ 10,902
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
5
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by Visual Management Systems
Holding, Inc. ("VMS Holdings") and its wholly-owned subsidiaries,
Visual Management Systems, LLC ("VMS, LLC") and Visual Management
Systems PDG, LLC ("PDG"), collectively the "Company," in the
preparation of the accompanying consolidated financial statements are
summarized below:
NATURE OF BUSINESS OPERATIONS
The Company delivers protective technology solutions and remote
management loss prevention surveillance systems and provides on-site
consultations regarding its products. The Company also sells, installs,
upgrades and services Digital Video Recording Systems. The Company is
New Jersey-based, began operations in June 2003 and services customers
throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Visual
Management Systems Holding, Inc. and its wholly owned subsidiaries,
Visual Management Systems, LLC and Visual Management Systems PDG, LLC
collectively the "Company." All inter-company transactions and balances
have been eliminated in consolidation.
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 and 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.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
Effective January 1, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123R, SHARE-BASED PAYMENTS ("SFAS 123R").
Under this method, the Company recognizes stock-based compensation over
the vesting period of each grant. Stock-based compensation is measured
based on the fair values of all stock awards on the dates of grant. The
Company has elected to use the Black-Scholes-Merton ("BSM")
option-pricing model to determine the fair value of stock-based awards
under SFAS 123R.
SFAS 123R requires compensation expense to be recognized based on
awards ultimately expected to vest. As a result, forfeitures need to be
estimated on the date of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. On January
1, 2005, the Company began to estimate forfeitures based on
management's best estimate of forfeitures to occur.
In addition, the company accounts for stock awards issued to
non-employees in accordance with the provisions of SFAS 123R, under
which the BSM method is used to measure the value of options granted to
non-employees at each vesting date to determine the appropriate charge
to stock-based compensation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash balances and
trade receivables. The Company invests its excess cash in highly liquid
investments. The Company's customer base is principally comprised of
financial institutions. The Company does not require collateral from
its customers.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has restated previously issued financial statements in
order to account for both stock options and stock warrants not
previously reported and for other adjustments resulting from changes in
circumstance subsequent to the previous reporting date. The following
financial statement line items for fiscal years 2006 and 2005 were
affected by the change in accounting principle.
7
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- -------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet, 12/31/06
AS PREVIOUSLY EFFECT OF
REPORTED AS RESTATED RESTATEMENT
----------- ----------- -----------
Current assets
Cash $ 963 $ 963 $ -
Accounts receivable 383718 383718 -
Inventory 284,248 246,039 (38,209)
Prepaid expenses 14,257 14,257 -
----------- ----------- -----------
Total current assets 683,186 644,977 (38,209)
Property and expenses - net 294,839 294,839 -
Equipment under capital leases - net 29,022 29,022 -
Deposits and other assets 30,684 58,324 27,640
Intangible assets - net 31,506 3,866 (27,640)
----------- ----------- -----------
$ 1,069,237 $ 1,031,028 $ (38,209)
=========== =========== ===========
Current liabilities
Bank overdraft $ 46,697 $ 46,697 $ -
Accounts payable 787,537 787,537 -
Accrued expenses and other current liabilities 186,510 226,510 40,000
Deferred revenue 22,086 22,086 -
Sales tax payable 29,191 22,531 (6,660)
Current portion of long-term debt 76,094 76,094 -
Current portion of obligations under capital leases 18,143 18,143 -
----------- ----------- -----------
Total current liabilities 1,166,258 1,199,598 33,340
Long-term debt - net of current portion 298,267 298,267 -
Obligations under capital leases - net of current portion 12,213 12,213 -
Loans payable - stockholders 10,943 10,943 -
Stockholders' deficit
Common stock 6,251 5,651 (600)
Additional paid-in-capital 1,017,630 2,125,281 1,107,651
Accumulated deficit (1,442,325) (2,620,925) (1,178,600)
----------- ----------- -----------
Total stockholders' deficit (418,444) (489,993) (71,549)
----------- ----------- -----------
$ 1,069,237 $ 1,031,028 $ (38,209)
=========== =========== ===========
8
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET, 12/31/05
AS PREVIOUSLY EFFECT OF
REPORTED AS RESTATED RESTATEMENT
------------------ ---------------- ----------------
Current assets
Cash $ 10,902 $ 10,902 $ -
Accounts receivable 238617 238617 -
Inventory 120,093 120,093 -
Prepaid expenses 5,456 5,456 -
--------- --------- ---------
Total current assets 375,068 375,068 -
Property and expenses - net 234,244 234,244 -
Equipment under capital leases - net 31,800 31,800 -
Deposits and other assets 7,300 7,300 -
Intangible assets - net 4,638 4,638 -
--------- --------- ---------
$ 653,050 $ 653,050 $ -
========= ========= =========
Current liabilities
Accounts payable $ 237,090 $ 237,090 $ -
Accrued expenses and other current liabilities 25,090 25,090 -
Deferred revenue 17,645 17,645 -
Sales tax payable 45,632 45,632 -
Current portion of long-term debt 47,082 47,082 -
Current portion of obligations under capital leases 11,533 11,533 -
--------- --------- ---------
Total current liabilities 384,072 384,072 -
Convertible notes payable 50,000 50,000 -
Long-term debt - net of current portion 221,560 221,560 -
Obligations under capital leases - net of current portion 19,863 19,863 -
Loans payable - stockholders 57,061 57,061 -
Stockholders' deficit
Common stock 2,501 2,501 -
Additional paid-in-capital 381,390 612,304 230,914
Accumulated deficit (463,397) (694,311) (230,914)
--------- --------- ---------
Total stockholders' deficit (79,506) (79,506) -
--------- --------- ---------
$ 653,050 $ 653,050 $ -
========= ========= =========
9
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS, 2006
AS PREVIOUSLY EFFECT OF
REPORTED AS RESTATED RESTATEMENT
----------- ----------- -----------
Revenues - net $ 4,529,118 $ 4,495,778 $ (33,340)
Cost of revenues 2,371,256 2,409,465 38,209
----------- ----------- -----------
Gross margin 2,157,862 2,086,313 (71,549)
Operating expenses 2,813,034 3,689,171 876,137
----------- ----------- -----------
Loss from operations (655,172) (1,602,858) (947,686)
Other (income) expenses
Debt conversion expense 264,990 264,990 -
Interest income (201) (201) -
Interest expense 60,075 60,075 -
Miscellaneous income (1,108) (1,108) -
----------- ----------- -----------
323,756 323,756 -
----------- ----------- -----------
Net loss $ (978,928) $(1,926,614) $ (947,686)
=========== =========== ===========
CONSOLIDATED STATEMENT OF OPERATIONS, 2005
AS PREVIOUSLY EFFECT OF
REPORTED AS RESTATED RESTATEMENT
----------- ----------- -----------
Revenues - net $ 2,389,860 $ 2,389,860 $ -
Cost of revenues 1,204,379 1,204,379 -
----------- ----------- -----------
Gross margin 1,185,481 1,185,481 -
Operating expenses 1,345,452 1,576,366 230,914
----------- ----------- -----------
Loss from operations (159,971) (390,885) (230,914)
Other (income) expenses
Debt conversion expense 58,890 58,890 -
Interest income (207) (207) -
Interest expense 30,447 30,447 -
Miscellaneous income (2,669) (2,669) -
----------- ----------- -----------
86,461 86,461 -
----------- ----------- -----------
Net loss $ (246,432) $ (477,346) $ (230,914)
=========== =========== ===========
10
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS, 2006
AS PREVIOUSLY EFFECT OF
REPORTED AS RESTATED RESTATEMENT
----------- ----------- -----------
Cash flows from operating activities
Net loss $ (978,928) $(1,926,614) $ (947,686)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation and amortization 78,177 78,177 -
Stock-based compensation - 876,137 876,137
Debt conversion expense 264,990 264,990 -
Change in deferred revenue 4,441 4,441 -
Bank overdraft 46,697 46,697 -
(Increase) decrease in operating assets
Accounts receivable (145,101) (145,101) -
Inventory (164,155) (125,946) 38,209
Prepaid expenses and other assets (8,801) (8,801) -
Other assets - (27,640) (27,640)
Increase (decrease) in operating liabilities
Accounts payable 550,447 550,447 -
Accrued expenses and other current liabilities 161,420 201,420 40,000
Sales tax payable (16,441) (23,101) (6,660)
----------- ----------- -----------
Net cash used by operating activities (207,254) (234,894) (27,640)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (22,374) (22,374) -
Cash paid for branding asset (27,640) - 27,640
Payment of security deposit (23,384) (23,384) -
----------- ----------- -----------
Net cash used by investing activities (73,398) (45,758) 27,640
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases (9,040) (9,040) -
Proceeds from convertible notes payable 325,000 325,000 -
Proceeds from long-term debt 50,000 50,000 -
Principal repayments of long-term debt (49,129) (49,129) -
Repayment of loans payable - stockholders (46,118) (46,118) -
----------- ----------- -----------
Net cash provided by financing activities 270,713 270,713 -
----------- ----------- -----------
Decrease in cash (9,939) (9,939) -
CASH
Beginning of year 10,902 10,902
----------- -----------
End of year $ 963 $ 963
=========== ===========
11
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS, 2005
AS PREVIOUSLY EFFECT OF
REPORTED AS RESTATED RESTATEMENT
----------- ----------- -----------
Cash flows from operating activities
Net loss $(246,432) $(477,346) $(230,914)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 53,898 53,898 -
Stock-based compensation - 230,914 230,914
Debt conversion expense 58,890 58,890 -
Change in deferred revenue 17,645 17,645 -
(Increase) decrease in operating assets
Accounts receivable (237,089) (237,089) -
Inventory (58,601) (58,601) -
Prepaid expenses and other assets (5,456) (5,456) -
Increase (decrease) in operating liabilities -
Accounts payable 117,346 117,346 -
Accrued expenses and other current liabilities 25,090 25,090 -
Sales tax payable 45,632 45,632 -
----------- ----------- -----------
Net cash used by operating activities (229,077) (229,077) -
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (66,822) (66,822) -
Payment of security deposit (5,621) (5,621) -
----------- ----------- -----------
Net cash used by investing activities (72,443) (72,443) -
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases (7,664) (7,664) -
Proceeds from convertible notes payable 50,000 50,000 -
Proceeds from long-term debt 194,662 194,662 -
Principal repayments of long-term debt (38,157) (38,157) -
Proceeds from loans payable - stockholders 49,521 49,521 -
Proceeds from sale of common stock 25,000 25,000 -
----------- ----------- -----------
Net cash provided by financing activities 273,362 273,362 -
----------- ----------- -----------
Decrease in cash (28,158) (28,158) -
CASH
Beginning of year 39,060 39,060
----------- -----------
End of year $ 10,902 $ 10,902
=========== ===========
ACCOUNTS RECEIVABLE AND CREDIT POLICY
Accounts receivable are uncollateralized customer obligations due under
normal trade terms, ordinarily requiring payment within 30 days from
the invoice date. Interest is not charged on unpaid receivables with
invoice dates over 30 days old.
Accounts receivable are stated at the amount billed to the customer.
Payments of accounts receivable are allocated to the specific invoices
identified on the customer's remittance advice or, if unspecified, are
applied to the earliest unpaid invoices.
12
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
Management believes all accounts receivable to be fully collectible
and, therefore, the Company has not recorded an allowance as of both
December 31, 2006 and 2005.
INVENTORY
Inventory is comprised predominantly of finished goods, which consists
of digital video recorders, security cameras and related installation
materials, is stated at the lower of cost or market value. Cost is
computed on the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation charges with
respect to property and equipment have been made by the Company using
accelerated methods based on the following estimated useful lives:
ESTIMATED
CLASSIFICATION LIFE (YEARS)
Computer hardware and software 5-7
Furniture and fixtures 7
Machinery and equipment 5-7
Vehicles 5
Expenditures for repairs and maintenance are charged to operations as
incurred. Expenditures for betterments and major renewals are
capitalized and, therefore, are included in property and equipment.
REVENUE RECOGNITION
The Company generates revenues from the sale and installation of remote
management loss prevention systems. Revenue is recognized at the time
of the installation, net of anticipated credits, returns and
allowances. Amounts billed in advance of the period in which service is
rendered, generally support, are recorded as a liability under
"Deferred revenue."
ADVERTISING
Advertising costs are expensed as incurred and approximated $46,000 and
$18,000 for the years ended December 31, 2006 and 2005, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash, accounts
receivable, accrued expenses and other current liabilities approximates
fair value because of the immediate short-term maturity of these
financial instruments. The carrying amount of long-term debt
approximates fair value based on terms currently available to the
Company.
INCOME TAXES
The Company files a consolidated tax return. Deferred income tax assets
and liabilities are recognized for the differences between financial
and income tax reporting bases of assets and liabilities based on
enacted tax rates and laws. The deferred income tax provision or
benefit generally reflects the net change in deferred income tax assets
and liabilities during the year. The current income tax provision
reflects the tax consequences of revenues and expenses currently
taxable or deductible on the Company's income tax return for the year
reported.
13
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
The major classifications of property and equipment at December 31 are
as follows:
2006 2005
Computer hardware and software $ 75,727 $ 74,108
Furniture and fixtures 25,622 24,622
Machinery and equipment 50,378 31,745
Vehicles 271,411 165,441
--------- ---------
Total cost 423,138 295,916
Accumulated depreciation (128,299) (61,672)
--------- ---------
Property and equipment - net $ 294,839 $ 234,244
========= =========
Depreciation included as a charge to operations amounted to $66,627 and
$46,750 for the years ended December 31, 2006 and 2005, respectively.
3. EQUIPMENT UNDER CAPITAL LEASES
Equipment under capital leases at December 31 are as follows:
2006 2005
Computer hardware and software $ 17,587 $ 9,587
Machinery and equipment 28,661 28,661
-------- --------
Total cost 46,248 38,248
Accumulated amortization (17,226) (6,448)
-------- --------
Equipment under capital leases - net $ 29,022 $ 31,800
======== ========
Amortization included as a charge to operations amounted to $10,778 and
$6,448 for the years ended December 31, 2006 and 2005, respectively.
4. INTANGIBLE ASSETS
Intangible assets at December 31, are as follows:
Gross
Amortization Carrying Accumulated
Period Amount Amortization Net
------ ------ ------------ ---
2006
Deferred financing costs 7 Years $5,338 $1,472 $3,866
====== ====== ======
2005
Deferred financing costs 7 Years $5,338 $ 700 $4,638
====== ====== ======
Amortization expense amounted to $772 and $700 for the years ended
December 31, 2006 and 2005, respectively.
14
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
Estimated future amortization expense within the next five years ending
December 31 and thereafter are as follows:
2007 $ 768
2008 768
2009 768
2010 768
2011 768
Thereafter 26
------
$3,866
======
5. CONVERTIBLE DEBT
In September 2005, the Company issued $50,000 of 8% convertible notes
due on March 15, 2008. Interest is payable semi-annually in March and
September. The notes are convertible by the holder into shares of the
Company's common stock and warrants to purchase the Company's common
stock at any time at a conversion price of $2.50 per share, which is
subject to adjustment based on the provisions of the agreement. The
proceeds were primarily used for general corporate purposes.
In March 2006, the Company issued $50,000 of 8% convertible notes due
on March 15, 2008. Interest is payable semi-annually in March and
September. The notes are convertible by the holder into shares of the
Company's common stock and warrants to purchase the Company's common
stock at any time at a conversion price of $2.50 per share, which is
subject to adjustment based on the provisions of the agreement. The
proceeds were primarily used for general corporate purposes.
In March 2006, the Company issued $25,000 of 8% convertible notes due
on March 15, 2008. Interest is payable semi-annually in March and
September. The notes are convertible by the holder into shares of the
Company's common stock and warrants to purchase the Company's common
stock at any time at a conversion price of $2.50 per share, which is
subject to adjustment based on the provisions of the agreement. The
proceeds were primarily used for general corporate purposes.
In September 2006, the Company issued $50,000 of 8% convertible notes
due on March 15, 2008. Interest is payable semi-annually in March and
September. The notes are convertible by the holder into shares of the
Company's common stock and warrants to purchase the Company's common
stock at any time at a conversion price of $2.50 per share, which is
subject to adjustment based on the provisions of the agreement. The
proceeds were primarily used for general corporate purposes.
In March 2006, the Company issued $50,000 of 8% convertible notes due
on March 15, 2008. Interest is payable semi-annually in March and
September. The notes are convertible by the holder into shares of the
Company's common stock and warrants to purchase the Company's common
stock at any time at a conversion price of $2.50 per share, which is
subject to adjustment based on the provisions of the agreement. The
proceeds were primarily used for general corporate purposes.
In March, 2006, the Company issued $150,000 of 8% convertible notes due
on March 15, 2008. Interest is payable semi-annually in March and
September. The notes are convertible by the holder into shares of the
Company's common stock and warrants to purchase the Company's common
stock at any time at a conversion price of $2.50 per share, which is
subject to adjustment based on the provisions of the agreement. The
proceeds were primarily used for general corporate purposes.
In accordance with FAS-84, INDUCED CONVERSIONS OF CONVERTIBLE DEBT, the
conversion of notes to common stock during the years ended December 31,
2006 and 2005 resulted in $264,990 and $58,890, respectively, of debt
conversion expense.
15
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
6. STOCK PURCHASE WARRANTS
During the years ended December 31, 2006 and 2005, the management
approved the issuance of warrants to purchase an aggregate of 540,000
shares of the Company's common stock. Such warrants are exercisable at
$1.25 per share, vest over a period of 36 months and expire at various
times through October 2009.
The issuance of stock purchase warrants was accounted for under SFAS
123R using the BSM model (with the same assumptions as those used for
the options, see note 11), which resulted in the recording of $406,800
and $76,272 in compensation cost during the years ended December 31,
2006 and 2005, respectively.
A summary of warrant activity for 2006 and 2005 is as follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE WARRANTS EXERCISE
WARRANTS PRICE EXERCISABLE PRICE
-------- ----- ----------- -----
Outstanding, January 1, 2005 -- $ -- -- $ --
Granted 240,000 1.25
Exercised -- --
-------
Outstanding, December 31, 2005 240,000 1.25 240,000 1.25
Granted 300,000 1.25
Exercised -- --
-------
Outstanding, December 31, 2006 540,000 1.25 540,000 1.25
=======
At December 31, 2006, warrants had a weighted-average exercise price of
$1.25 and a weighted-average remaining contractual life of 2.3 years.
Subsequent to December 31, 2006, all outstanding warrants were
converted into shares of the Company's common stock. The conversion was
induced by management through a 2-for-1 share offering.
7. LONG-TERM DEBT
Long-term debt at December 31 is as follows:
2006 2005
Term loans payable, collateralized by vehicles, due in monthly
installments ranging from $404 - $612, including interest at fixed
rates ranging from 3.90% - 8.69% and maturing through November 2012.
$207,700 $133,721
Term loan payable - due in monthly installments of $794 including
interest at a fixed rate of 8.61% and maturing October 2013. The loan
is secured by substantially all assets of the Company and the
personal guarantee of the majority stockholder. 50,000 --
Small Business Administration term loan due in monthly installments of
$2,282 including interest at a fixed rate of 7.23% and maturing January
2012. The loan is collateralized by substantially all
assets of the Company. 116,661 134,921
-------- --------
374,361 268,642
Less: current portion 76,094 47,082
-------- --------
Long-term debt - net of current portion $298,267 $221,560
======== ========
16
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt of the Company due within the
next five years ending December 31 and thereafter, are as follows:
2007 $ 76,094
2008 77,809
2009 80,060
2010 59,586
2011 49,892
Thereafter 30,920
--------
$374,361
========
8. OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases at December 31, are as follows:
2006 2005
Equipment leases - monthly payments ranging from $83 - $282, including
interest between 15.33% - 19.03% and maturing through June 2010. $30,356 $31,396
Less: current portion 18,143 11,533
------- -------
Obligations under capital leases - net of current portion $12,213 $19,863
======= =======
Aggregate maturities of obligations under capital leases of the Company
due within the next five years ending December 31, are as follows:
2007 $21,942
2008 12,023
2009 1,272
2010 495
2011 --
-------
Total future minimum lease payments 35,732
Less: imputed interest 5,376
-------
Present value of minimum lease payments $30,356
=======
9. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations from facilities in New Jersey, New
York and Ohio with leases expiring on January 31, 2009, November 30,
2009 and November 30, 2007, respectively. Rent expense for the years
ended December 31, 2006 and 2005 was $115,963 and $47,006,
respectively.
Minimum future rental payments under non-cancelable operating leases
for the years ended December 31 are as follows:
2007 $126,928
2008 103,024
2009 67,349
2010 16,172
2011 --
--------
$313,473
========
Included in future minimum rental payments are lease payments related
to a second facility in New Jersey under an operating lease that was
entered into subsequent to year-end, but before the issuance of these
financial statements.
17
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
10. INCOME TAXES
Income tax benefit is summarized as follows for the years ended
December 31:
2006 2005
Federal and state - current $ -- $ --
Deferred -- --
--------------- --------------
Provision for income taxes $ -- $ --
=============== ==============
The details of deferred income tax assets are as follows:
2006 2005
Deferred income tax assets $ 169,600 $ 53,600
Valuation allowance (169,600) (53,600)
--------------- -------------
Deferred income tax assets - net $ -- $ --
=============== =============
The principal temporary difference that gives rise to deferred income
tax assets is net operating loss carryforwards.
At December 31, 2006 and 2005, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately $424,000 and $134,000, respectively expiring through
2012. Utilization of such net operating losses could be limited under
the Internal Revenue Code.
11. STOCK OPTION PLAN
The Company maintains a non-qualified stock option plan (the "Plan")
that provides for the awarding of stock options to selected employees
and non-employees. Options granted under the Plan become vested 50% one
year from the date of grant and in full two years from the date of
grant. Options are exercisable immediately upon vesting. No shares are
reserved for the Plan and all shares are expected to be issued from
authorized shares not yet outstanding, or from Treasury Stock, if
available.
The Company estimated the fair value of each option award on the date
of grant using the BSM valuation model. Assumptions about stock-price
volatility have been estimated by management based upon the implied
volatilities of publicly traded companies within the industry. The
risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant.
Forfeitures were estimated as management's best approximation.
The following table presents the weighted-average assumptions used to
estimate the fair values of the stock options granted in the periods
presented:
DECEMBER 31,
2006 2005
-------- --------
Risk-free interest rate 4.90% 2.97%
Expected volatility 150% 150%
Expected life (in years) 10 10
Weighted-average estimated fair value of options
granted during the year $ 1.59 $ 0.44
18
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
The following table summarizes the activity under the Plan:
OPTIONS OUTSTANDING
------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AGGREGATE
NUMBER OF EXERCISE REMAINING INTRINSIC
SHARES PRICE TERM (YRS.) VALUE
------------- ------------- ----------- -------------
Balance, January 1, 2005 -- $ -- -- $ --
Granted 1,410,000 1.25
Exercised -- --
Lapsed -- --
Balance, December 31, 2005 1,410,000 1.25 9.50 618,567
------------- -------------
Granted 440,000 1.25
Exercised -- --
Lapsed -- --
------------- -------------
Balance, December 31, 2006 1,850,000 1.25 8.75 1,318,427
============= =============
12. SUBSEQUENT EVENT
In January 2007, the Company entered into employment agreements with
certain of its executive officers, which provide for compensation in
the form of salaries, performance based bonuses and salary escalations
and stock options.
On July 17, 2007, the Company was merged with and into VMS Acquisition
Corp., a New Jersey Corporation, and became a wholly-owned subsidiary
of Visual Management Systems, Inc., a Nevada Corporation (formely
Wildon Production, Inc.), a publicly traded entity subject to the
provisions of the Public Company Accounting Oversight Board. As a
result of the merger, each outstanding share of the Company's common
stock was converted into 0.50 shares of common stock of Visual
Management Systems, Inc.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The statements of cash flows for the years ended December 31, 2006 and
2005 contains cash paid for interest amounting to $55,157 and $29,264,
respectively.
During 2006 and 2005, the Company incurred $104,848 and $106,799,
respectively, in debt in connection with the financing of additions to
property and equipment.
During 2006 and 2005, the Company incurred $8,000 and $29,248,
respectively, in capital leases payable in connection with the
financing of additions to equipment under capital lease.
During 2006, $375,000 in convertible notes payable were converted into
315,000 shares of the Company's common stock.
During 2005, $300,000 in convertible notes payable were converted into
240,000 shares of the Company's common stock.
19