UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________
Commission file number 000-25499
NETWORK INSTALLATION CORPORATION
--------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0390360
-------------------- -----------------------
State or other jurisdiction of (IRS Employer
Incorporation or organization Identification Number)
5625 South Arville Street, Suite E Las Vegas Nevada 89118
---------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(702) 889-8777
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of March 30, 2006 there were 31,562,766 shares of common stock issued and
outstanding, $0.001 par value.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [X]
NETWORK INSTALLATION CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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Part I - Financial Information 2
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Item 1 - Financial Statements. 2
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Consolidated Balance Sheets as of March 31, 2006 (Unaudited)
and December 31, 2005 2
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Unaudited Consolidated Statements of Operations for the Three Months
Ended March 31, 2006 and March 31, 2005 3
------------------------------------------------------------------------
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and March 31, 2005 4
------------------------------------------------------------------------
Unaudited Consolidated Stockholders' Equity (Deficit)
as of March 31, 2006 5
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Report on Review by Independent Public Accountant 6
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Notes to Consolidated Financial Statements 7
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Item 2 - Management's Discussion and Analysis or Plan of Operation. 12
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Item 3 - Controls and Procedures. 14
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Part II - Other Information 15
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Item 1 - Legal Proceedings. 15
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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds. 15
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Item 3 - Defaults Upon Senior Securities. 16
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Item 4 - Submission of Matters to a Vote of Security Holders. 16
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Item 5 - Other Information. 16
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Item 6 - Exhibits and Reports on Form 8-K. 16
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NETWORK INSTALLATION CORP. INC
Consolidated Balance Sheets
March 31, December 31,
2006 2005
(Unaudited)
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,232,706 $ 438,467
Accounts Receivable, net of allowance
for doubtful accounts of $415,733 ($356,811 at 2005). 2,507,441 1,499,704
Inventories . . . . . . . . . . . . . . . . . . . . . . . 1,579,289 3,020,113
Costs in Excess of Billings . . . . . . . . . . . . . . . 623,541 232,778
Prepaid Expenses and other current assets . . . . . . . . 106,815 133,810
------------- ------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,049,792 5,324,872
------------- ------------
Fixed assets, net of accumulated depreciation
of $486,563 ($504,853 at 2005) . . . . . . . . . . . . . . 305,635 383,728
OTHER ASSETS:
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . 7,344,216 7,344,216
Patents . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500
Advances. . . . . . . . . . . . . . . . . . . . . . . . . 300,935 195,393
Security Deposits . . . . . . . . . . . . . . . . . . . . 2,630 20,691
------------- ------------
Total Other Assets . . . . . . . . . . . . . . . . . . 7,650,281 7,562,800
------------- ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 14,005,708 $13,271,400
============= ============
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Bank Line of Credit. . . . . . . . . . . . . . . . . . . $ 586,757 $ 432,562
Accounts Payable . . . . . . . . . . . . . . . . . . . . 3,723,560 3,420,923
Billings in Excess of Costs. . . . . . . . . . . . . . . 1,046,053 1,443,588
Payroll Taxes Payable. . . . . . . . . . . . . . . . . . 348,576 371,213
Current Portion of Notes Payable. . . . . . . . . . . . 146,628 336,115
Current Portion of Related Party Notes Payable . . . . . 196,341 261,802
Current Portion of Convertible Debenture . . . . . . . . 331,333 316,333
Current Portion of Related Party Convertible Debentures 497,000 474,500
Related Party Factor Payable . . . . . . . . . . . . . . 1,288,600 -
------------- ------------
Total current liabilities. . . . . . . . . . . . . . 8,164,848 7,057,036
------------- ------------
LONG-TERM DEBT
Notes Payable . . . . . . . . . . . . . . . . . . . . . . 962,569 1,262,979
Related Party Notes Payable 102,665 95,497
Related Party Convertible Debentures, net of Debt Discount 4,022,686 3,291,265
------------- ------------
Total long-term debt . . . . . . . . . . . . . . . . 5,087,920 4,649,741
------------- ------------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value; 100,000,000 shares authorized
31,562,766 and 49,534,721 shares issued and outstanding
in 2006 and 2005, respectively . . . . . . . . . . . . . 31,563 49,535
Additional paid-in Capital . . . . . . . . . . . . . . . . . 27,077,301 26,586,266
Shares to be Returned. . . . . . . . . . . . . . . . . . . . ( 2,880) (18,568)
Shares to be Issued. . . . . . . . . . . . . . . . . . . . . 116,358 116,358
Warrants. . . . . . . . . . . . . . . . . . . . . 28,796 0
Accumulated Deficit. . . . . . . . . . . . . . . . . . . . . (26,498,198) (25,168,968)
------------- ------------
Total stockholders' equity . . . . . . . . . . 752,940 1,564,623
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . $ 14,005,708 $13,271,400
============= ============
2
NETWORK INSTALLATION CORP., INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March, 31
----------------------------
2006 2005
-------------- ------------
REVENUE:
Sales. . . . . . . . . . . . . . . . $ 6,806,146 $ 750,716
Cost of Goods Sold . . . . . . . . . 5,799,302 424,078
-------------- ------------
GROSS PROFIT . . . . . . . . . . . . . 1,006,844 326,638
-------------- ------------
OPERATING EXPENSES:
Investor relations . . . . . . . . . 115,510 347,318
Non cash officer compensation. . . . - 6,575,426
Salaries . . . . . . . . . . . . . . 550,051 210,255
Other operating expenses . . . . . . 1,008,380 249,204
-------------- ------------
Total Operating Expenses . . . . . 1,673,941 7,382,203
-------------- ------------
LOSS FROM OPERATIONS. . . . . . . . . . (667,097) (7,055,565)
-------------- ------------
OTHER EXPENSES:
Interest Expense . . . . . . . . . . (557,786) (172,177)
Loss on Sale of Assets/Inventory . . (104,347) -
-------------- ------------
Total OtherExpenses . . . . . . . (662,133) (172,177)
-------------- ------------
NET LOSS. . . . . . . . . . . . . . . . $ (1,329,230) $(7,227,742)
============== ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.03) $ (0.31)
============== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 49,310,525 23,315,297
============== ============
See Accountants Review Report
3
Network Installation Corp.
Consolidated Statement of Cash Flows
(Unaudited)
Three-Months Ended
March 31,
--------------------------
2006 2005
------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . $(1,329,230) $(7,227,742)
Stock issued for services and debt reduction . . . - 6,487,772
Beneficial conversion feature expense. . . . . . . 234,090 (170,250)
Stock rescinded. . . . . . . . . . . . . . . . . . - (530,590)
Stock warrants issued for debt inducement. . . . . - 109,342
Stock issued for acquisition . . . . . . . . . . . - 200,000
Bad debt expense . . . . . . . . . . . . . . . . . 22,766 -
Amortization of debt discount. . . . . . . . . . . 126,218 -
Conversion of debt . . . . . . . . . . . . . . . . 98,080 -
Depreciation . . . . . . . . . . . . . . . . . . . 39,903 33,648
Cost of assets, inventory sold 133,209 -
Adjustments to reconcile net loss to net cash used
by operating activities
Changes in operating assets and liabilities
(Increase) in accounts receivable. . . . . . . . (1,030,503) (97)
Decrease in inventories. . . . . . . . . . . . . 1,440,824 -
(Increase) in costs in excess of billings. . . . (390,763) -
(Increase) Decrease in other current assets . . 26,995 561,437
Decrease in other assets . . . . . . . . . . . . 18,060 -
Increase in accounts payable . . . . . . . . . . 302,637 276,063
(Decrease) in billings in excess of costs. . . . (397,535) -
(Decrease) in payroll taxes payable. . . . . . . (22,637) -
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . (727,886) (260,417)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Inventory. . . . . . . . . . . . . . . - (44,786)
Purchase of Goodwill . . . . . . . . . . . . . . . - (594,738)
Increase in advances. . . . . (105,542) -
Purchase of property and equipment . . . . . . . . (16,938) (67,223)
------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES . . . . . (122,480) (706,747)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Payments made on notes payable - related party. . (58,293) (15,000)
Proceeds from related party factor payable. . . . 3,060,000 -
Proceeds from notes payable . . . . . . . . . . . 154,195 288,566
Proceeds from long-term borrowing . . . . . . . . 750,000 200,029
Payments to factor. . . . . . . . . . . . . . . . (1,771,400) -
Payments on notes payable . . . . . . . . . . . . (489,897) (1,181)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . 1,644,605 472,414
------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS . . . . . . . 794,239 211,997
BEGINNING CASH & CASH EQUIVALENTS . . . . . . . . . . 438,467 1,732
------------ ------------
ENDING CASH & CASH EQUIVALENTS. . . . . . . . . . . . $ 1,232,706 $ 213,729
============ ============
SUPPLEMENTAL DISCLOSUE OF CASH FLOW INFORMATION
Cash paid for interest . . . . . . . . . . . . . $ 136,184 $ 605
============ ============
Cash paid for Income Taxes . . . . . . . . . . . $ - $ -
============ ============
NON-CASH TRANSACTIONS
Stocks issued for Services & Debt reduction. . . . $ 98,080 $ 6,487,772
============ ============
Stocks issued for Debt Inducement. . . . . . . . . $ 44,479 $ 109,342
============ ============
Stocks rescinded or conversion feature expense . . $ 234,090 $ (700,840)
============ ============
See Accountants Review Report
4
Network Installation Corp.
Consolidated Stockholders' Equity (Deficit)
March 31, 2006
(Unaudited)
Additional Shares Shares
Paid-In To Be To Be Accumulated
Common Stock Capital Issued Warrants Returned Deficit Total
------------------ ----------- ---------- --------- --------- ------------ ------------
# of Shares Amount
---------- -------
Balance - December 31, 2004 . . . . . . . 23,483,873 23,484 7,617,181 116,249 - - (9,634,545) ( 1,877,631)
------------------ ----------- ---------- --------- --------- ------------ ------------
Warrant Issuance, Finance Inducement - - 387,184 - - - - 387,184
Warrant Issuance, Executive Compensation - - 6,476,085 - - - - 6,476,085
Issuance of Stock for Services. . . . . . 560,000 560 372,528 - - - - 373,088
Issuance of Stock for Cash. . . . . . . . 1,460,692 1,461 941,990 - - - - 943,451
Issuance of Stock, COM Acquisition. . - - 199,891 109 - - - 200,000
Issuance of Stock, Kelley Acquisition. 14,016,577 14,016 10,218,085 - - - - 10,232,101
Issuance of Stock, Spectrum Acquisition. 18,567,639 18,568 - - - (18,568) - -
Debt Discount, Convertible Debt Issuances - - 213,358 - - - - 213,358
Conversion of Debenture 18,939 19 64,981 - - - - 65,000
Beneficial conversion feature expense . . - - 617,000 - - - - 617,000
Rescinding of Stock, CEO (7,887,482)(7,887) 7,887 - - - - -
Rescinding of Stock, Majority Investor (685,517) (686) (529,904) - - - - (530,590)
Net Loss . . . . . . . . . . . . . - - - - - - (15,534,423) (15,534,423)
------------------ ----------- ---------- --------- --------- ------------ ------------
Balance - December 31, 2005 . . . . . . . 49,534,721 $49,535 $26,586,266 $ 116,358 $ - $ (18,568)$(25,168,968) $1,564,623
Warrant Issuance, Finance Inducement - - 44,749 - - - - 44,749
Issuance of Stock, Del Mar Acquisition. . 300,000 300 139,500 - - - - 139,800
Stock exchanged for warrants - - (25,916) - 28,796 (2,880) - -
Conversion of Debenture 295,684 296 98,612 - - - - 98,908
Beneficial conversion feature expense . . - - 234,090 - - - - 234,090
Rescinding of Stock, Spectrum Acquisition(18,567,639)(18,568) - - - 18,568 - -
Net Loss . . . . . . . . . . . . - - - - - - (1,329,230) (1,329,230)
------------------ ----------- ---------- --------- --------- ------------ ------------
Balance - March 31, 2006 . . . . . . . 31,562,766 $31,563 $27,077,301 $ 116,358$ 28,796 $(2,880) $(26,498,198)$ 752,940
================== =========== ========== ========= ========= ============ ==============
See Accountants Review Report
5
JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
9175 E Kenyon Avenue
Denver, CO 80237
303-796-0099
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Network Installation Corporation and Subsidiaries
Las Vegas, Nevada
We have reviewed the accompanying consolidated balance sheet of Network
Installation Corporation and Subsidiaries as of March 31, 2006, and the related
consolidated statement of operations and consolidated statement of cash flows
for the three month period ended March 31, 2006. These financial statements are
the responsibility of the company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted 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, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Jaspers + Hall, PC
May 12, 2006
6
NETWORK INSTALLATION CORPORATION, INC.
Notes to Consolidated Financial Statements
March 31, 2006
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. DESCRIPTION OF BUSINESS
OVERVIEW
Network Installation Corporation ("NIC" or the "Company") was incorporated on
July 18, 1997 under the laws of the state of California.
The accompanying unaudited consolidated financial statements of the Company have
been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments of a normal recurring
nature considered necessary to present fairly the Company's financial position,
results of operations and cash flows for such periods. The accompanying interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005.
Results of operations for interim periods are not necessarily indicative of
results that may be expected for any other interim periods or the full fiscal
year.
The preparation of financial statements in conformity with U.S. 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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company specializes in the design, development and integration of
communication technology and system networks for the gaming, resort and
hospitality markets and has developed a patent-pending, proprietary,
next-generation race & sports book platform designed for the gaming industry.
The Company's wholly-owned subsidiary, Kelley Communication Company, Inc. (d/b/a
Kelley Technologies) ("Kelley"), is a single source technology company
specializing in providing design/build solutions for casino/resort hotel owner
requirements. Kelley Technologies designs and manages projects, and builds and
deploys communication technology for large entertainment technology and systems
networks. Kelley's systems networks include: data, telecommunications, audio and
video components, casino surveillance, security and access control systems,
entertainment audio and video, special effects and multi-million dollar video
conference systems. Kelley does work primarily in the Las Vegas area, but has
also done projects in New Jersey, Oklahoma, Colorado, California, and the
Caribbean. The Company has distinguished itself from its peers by employing
experienced and educated design personnel and by providing high quality products
and service to the gaming industry.
ACQUISITION OF KELLEY COMMUNICATION COMPANY, INC. (d/b/a Kelley Technologies)
--------------------------------------------------
Pursuant to an acquisition agreement, the Company acquired 100% of the
outstanding shares of common stock of Kelley Communication Company, Inc., a
Nevada corporation, on September 22, 2005 for $10,232,101 in common stock.
Goodwill of $11,144,216 was recorded upon the acquisition and was valued based
on Kelley's customer pipeline and customer backlog at the time of acquisition.
Kelley is a Las Vegas, Nevada-based businesses focusing on the design, project
management, installation, and deployment of data, voice, video, audio/visual,
security and surveillance systems, entertainment and special effects, and
telecom systems. Mike Kelley, the 100% owner of Kelley prior to the
acquisition, received 14,061,577 shares of the Company's common stock.
The audit of Kelley as of September 22, 2005 has not yet been completed.
However, the Company's preliminary financial analysis and due diligence related
to the acquisition is complete. Kelley's unaudited balance sheet as of the date
of acquisition is as follows.
Cash $ 177,495
Accounts receivable 1,234,668
Inventory 965,927
Costs in excess of billings 488,370
Other assets 5,599
Fixed assets 713,220
Accumulated depreciation (407,534)
Goodwill 11,144,216
Accounts payable (879,995)
Notes payable (2,297,227)
Billings in excess of earnings (912,638)
-------------
Total $ 10,232,101
=============
The following pro forma information is presented as though the Company had
completed the acquisition of Kelley as of the beginning of the year, on January
1, 2005. Revenues represent total revenues and net loss represents total net
loss of the Company for the three months ended March 31, 2005 if Kelley had
been acquired as of January 1, 2005.
7
Three Months Ended
March 31, 2005
-------------------
Net Revenues $ 3,477,700
Net loss $ (6,254,169)
ACQUISITION OF COM SERVICES, INC. ("COM")
On January, 17, 2005, the Company purchased 100% of the outstanding shares of
Com Services, Inc., a California corporation. The purchase price was $430,000,
of which $50,000 was paid in cash, $200,000 was paid in Company stock, issued at
market value, and $180,000 in promissory notes payable over a two year period,
with interest at 6%. Below is the unaudited condensed balance sheet of Com
Services, Inc. as of January 17, 2005, which is prepared only to present the
major asset captions for which the Company has applied the purchase price of
$430,000 towards.
Accounts receivable $ 142,073
Fixed Assets 56,032
Goodwill 331,895
Bank Line of Credit (100,000)
-----------
Total assets and liabilities $ 430,000
===========
The net revenues and net loss on a pro forma basis, as though the Company had
completed the acquisition of Com as of the beginning of the year, on January 1,
2005 would not be materially different than the net revenues and net loss
reported for the three months ended March 31, 2005 due to the lack of net
revenues and expenses of Com from January 1, 2005 through January 16, 2005.
ACQUITISION OF DEL MAR SYSTEMS INTERNATIONAL, INC. ("DMSI")
On March 1, 2004, NIC acquired 100% of the outstanding shares of common stock of
DMSI, a telecommunication solutions provider. The operations of DMSI have been
consolidated with the operations of the Company, since March 1, 2004 and the
operations of DMSI were consolidated into NIC and DMSI was phased out.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
-----------------------------
The accompanying consolidated financial statements include the accounts of
Network Installation Corp. ("NIC") and its 100% owned subsidiaries, Network
Installation Corporation, Kelley Communication Company, Inc.("Kelley"), COM
Services, Inc. ("COM"), and Del Mar Systems International, Inc. ("DMSI"). All
significant inter-company accounts and transactions have been eliminated in
consolidation. The results of operations included within these financial
statements include the accounts of NIC for the three months ended March 31, 2006
and 2005, respectively, Kelley for the three months ended March 31, 2006, and
COM for the three months ended March 31, 2006 and from January 17, 2005 through
March 31, 2005.
CASH & CASH EQUIVALENTS
--------------------------
The Company considers all highly liquid debt instruments, purchased with an
original maturity at date of purchase of three months or less, to be cash
equivalents. Cash and cash equivalents are carried at cost, which approximates
market value.
PROPERTY & EQUIPMENT
----------------------
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets, e.g.
computers (5 years), software (3 years), office furniture and equipment (3 to 7
years), and tenant improvements (life of the lease-approximately 60 months).
ACCOUNTS RECEIVABLE
--------------------
The Company maintains an allowance for doubtful accounts for estimated losses
that may arise if any of its consumers are unable to make required payments.
Management specifically analyzes the age of customer balances, historical bad
debt experience, customer credit-worthiness and changes in customer payment
terms when making estimates of the uncollectibility of the Company's
trade accounts receivable balances. If the Company determines that the
financial conditions of any of its customers have deteriorated, whether due
to customer specific or general economic issues, increase in the allowance
may be made. Accounts receivable are written off when all collection attempts
have failed.
INVENTORY
---------
Inventory consists of networking materials and equipment in the process of
being installed at years end. Inventories are stated at the lower of cost or
market. Cost is determined by the average cost method at the Kelley subsidiary
and the first-in-first-out method at the COM and NIC subsidiaries, respectively.
The Company has reviewed its inventory for obsolescence on a quarterly
basis since operations began and has not written-off any inventory for
obsolescence.
8
FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their face value, due to the relatively short maturity
of these instruments. As of March 31, 2006 and December 31, 2005, the Company's
notes payable have stated borrowing rates that are consistent with those
currently available to the Company and, accordingly, the Company believes the
carrying value of these debt instruments approximates their fair value.
GOODWILL
--------
Under SFAS No. 142. Goodwill and other Intangible Assets, all goodwill
amortization ceased effective January 1, 2002. Rather, goodwill is now subject
only to impairment reviews. A fair-value based test is applied at the reporting
level. This test requires various judgments and estimates. A goodwill
impairment loss will be recorded for any goodwill that is determined to be
impaired. Goodwill is tested for impairment at least annually.
ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS
----------------------------------------------------
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of assets may not be recoverable. Management periodically evaluates the carrying
value and the economic useful life of its long-lived assets based on the
Company's operating performance and the expected future undiscounted cash flows
and will adjust the carrying amount of assets which may not be recoverable.
USE OF ESTIMATES
------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, 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 revenue and expenses during
the reporting period. Significant estimates made in preparing these financial
statements include the allowance for doubtful accounts, deferred tax asset
valuation allowance, impairment of goodwill, certain gross margins on long term
construction contracts and useful lives for depreciable and amortizable assets.
Actual results could differ from those estimates.
REVENUE RECOGNITION
--------------------
The Company's revenue recognition policies are in compliance with all applicable
accounting regulations, including American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts. Revenues from
design, installations, cabling and networking contacts are recognized using the
percentage-of-completion method of accounting. Accordingly, income is recognized
in the ratio that costs incurred bears to estimated total costs. Adjustments to
cost estimates are made periodically, and losses expected to be incurred on
contracts in progress are charged to operations in the period such losses are
determined. The aggregate of costs incurred and income recognized on uncompleted
contracts in excess of related billings is shown as a current asset, and the
aggregate of billings on uncompleted contracts in excess of related costs
incurred and income recognized is shown as a current liability.
The Company's revenue recognition policy for the sale of network products is in
compliance with Staff accounting bulletin (SAB) 104. Revenue from the sale of
network products is recognized when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed and collectibility is
reasonably assured. Generally, the Company extends credit to its customers and
does not require collateral. The Company performs ongoing credit evaluations of
its customers and historic credit losses have been within management's
expectations.
STOCK-BASED COMPENSATION
-------------------------
In October 1995, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation" amended by SFAS No 148, "Accounting for Stock Based Compensation
Transition and Disclosure". SFAS No. 123R prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using the
new fair value method or (ii) using the existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for stock issued to
employees" (APB 25) and related interpretations with pro-forma disclosure of
what net income and earnings per share would have been had the Company adopted
the new fair value method. The Company uses the intrinsic value method
prescribed by APB 25 and has opted for the disclosure provisions of SFAS No.123.
On October 20, 2005, the Company issued 972,500 stock options to various Kelley
employees in accordance with the Company's 2005 Stock Option Plan. The exercise
price at the time of grant was $.79 per share, which was equal to the fair
market value of the common stock on the date of grant, and the right to exercise
the options were subject to vesting provisions over a three year period.
Subsequent to issuance, 132,500 of such options were retired resulting from
employees who left the Company prior to vesting.
On March 30, 2006, the Company issued 1,347,500 stock options to various Kelley
employees in accordance with the Company's 2005 Stock Option Plan. The exercise
price at the time of grant was $.42 per share, which was equal to the fair
market value of the common stock on the date of grant, and the right to exercise
the options were subject to vesting provisions over a three year period.
BASIC AND DILUTED NET LOSS PER SHARE
------------------------------------------
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". Basic net
loss per share is based upon the weighted average number of common shares
outstanding. For all periods, all of the Company's common stock equivalents
were excluded from the calculation of diluted loss per common share because they
were anti-dilutive, due to the Company's net losses.
The Company's significant components of common stock equivalents are its
convertible debentures and stock options.
Stock options, which would have an anti-dilutive effect on the net loss per
common share once exercised, to purchase 2,320,000 shares of common stock
remained outstanding as of March 31, 2006. There were 972,500 stock options
outstanding at December 31, 2005. These stock options have a vesting period of
three years from the date of grant. 972,500 stock options were granted on
October 20, 2005 and an additional issuance of 1,347,500 stock options were
granted on March 30, 2006.
Convertible debentures, which can be exercised on any date subsequent to the
issuance of the convertible debentures, would have an anti-dilutive effect on
the net loss per common share once and if the holders elect to exchange the
convertible debentures for shares of common stock. The number of common shares
which could be exchanged by the Company for a full release of the obligation to
repay the principal and interest balances associated with all convertible
debentures will possibly be based in part on the Company's price per common
share as quoted on the OTC bulletin board on the date of conversion. Since the
Company can not determine the price per common share of its common stock in the
future, it does not believe it can reasonably determine the number of common
shares to be issued pursuant to an exchange of its convertible debentures for
common shares. Therefore, the Company cannot accurately determine the number of
common shares which could be exchanged by the Company that are related to the
convertible debentures as of March 31, 2006 and December 31, 2005, respectively,
and going forward.
3. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has accumulated deficit of
$26,498,198, and is generating losses from operations. The continuing losses
have adversely affected the liquidity of the Company. The Company faces
continuing significant business risks, including but, not limited, to its
ability to maintain vendor and supplier relationships by making timely payments
when due.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern in the near term. Management devoted
considerable effort toward obtaining additional equity financing through various
private placements, raised funds through convertible debentures, and has
endeavored to improve operational performance using marketing methods, cost
cutting and the like.
9
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses is comprised of the following:
March 31, 2006 December 31, 2005
------------------- -------------------
Accounts payable $ 3,693,360 $ 3,250,923
Litigation accrual 30,200 170,000
------------------- -------------------
$ 3,723,560 $ 3,420,923
=================== ===================
5. GOODWILL IMPAIRMENT
Throughout 2005, the Company had witnessed declining profits within its Com
Services division. Upon the completion of an impairment review of the division's
assets, the Company decided to write down goodwill by $628,614, which had been
generated from the acquisition of Com Services, Inc., on January 17, 2005.
At December 31, 2005, upon the completion of an impairment review of the
Goodwill related to the acquisition of Kelley, the Company decided to write down
Goodwill by $3,800,000 resulting primarily from lower than expected gross
margins and the continued cash flow challenges faced by Kelley.
6. PAYROLL TAX LIABILITY
Payroll tax liabilities of $354,376 and $371,213, are payable at March 31, 2006
and December 31, 2005, respectively. As of the date of these financial
statements, the Company is in negotiations with the IRS for repayment terms.
While the negotiations are taking place, the Company has made five payments of
$15,000 each, until final settlements amount are agreed upon.
7. BANK LINE OF
CREDIT AND NOTES PAYABLE
Notes Payable Related to the Acquisition of Kelley
---------------------------------------------------------
Upon the acquisition of Kelley, the Company contracted a note payable to a Bank
dated August 30, 2005, and carrying interest at a variable rate, 2% over the
Prime Rate, or 9.50% as of March 31, 2006. Principal payments of $20,834 are due
on this note through September 15, 2008. The balance of $624,049 remaining
outstanding as of March 31, 2006, and included a current portion of $250,033 as
of March 31, 2006. This note payable is collateralized by amounts that have been
pledged by Dutchess, a related party to the Company.
Upon the acquisition of Kelley, the Company contracted a note payable to a Bank
dated September 20, 2005 and carrying interest at a fixed rate of 7.50%.
Principal and interest payments of $32,672 are payable through September 20,
2008. The balance of $889,909 remained outstanding as of March 31, 2006, and
included a current portion of $336,724 as of March 31, 2006. This note
payable is collateralized by amounts that have been pledged by Dutchess, a
related party to the Company.
Upon the acquisition of Kelley, the Company issued $360,000 in convertible
debentures to an unaffiliated individual. The convertible debentures carry an
interest rate of 0.00% and are due in September of 2006. These debentures were
issued with a discounted price from the face value of $60,000. The Holder is
entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) 100% of the closing bid prices for the twenty trading days immediately
preceding the Closing Date ("Fixed Conversion Price"), each being referred to as
the "Conversion Price". No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded up or down, as the case may be, to the nearest whole share. In
accordance with EITF 00-27 98-5, the beneficial conversion feature on the
issuance of the convertible debenture for the year ended December 31, 2005 has
been recorded in the amount of $90,000. Additionally, the Company issued
warrants to purchase 90,000 shares of the Company's common stock at a purchase
price equal to 120% of the fair market value on the date of issuance. These
warrants were valued at $14,160 and will be amortized as interest expense
through the maturity date of the convertible debentures. The balance outstanding
on this convertible debenture as of March 31, 2006 was $360,000.
Upon the acquisition of Kelley, the Company assumed $540,000 in convertible
debentures due to a member of the Company's Board of Directors. The convertible
debentures carry an interest rate of 0.00% and are due in September of 2006.
These debentures were issued with a discounted price from the face value of
$90,000. The Holder is entitled to convert the face amount of the Debentures,
plus accrued interest, anytime following the Closing Date, at the lesser of (i)
75% of the lowest closing bid price during the fifteen trading days prior to the
Conversion Date or (ii) 100% of the closing bid prices for the twenty trading
days immediately preceding the Closing Date ("Fixed Conversion Price"), each
being referred to as the "Conversion Price". No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share. In accordance with EITF 00-27 98-5, the beneficial conversion
feature on the issuance of the convertible debenture for the year ended December
31, 2005 has been recorded in the amount of $135,000. Additionally, the Company
issued warrants to purchase 135,000 shares of the Company's common stock at a
purchase price equal to 120% of the fair market value on the date of issuance.
These warrants were valued at $21,239 and will be amortized as interest expense
through the maturity date of the convertible debentures. The balance outstanding
on this convertible debenture as of March 31, 2006 was $540,000.
Upon the acquisition of Kelley, the Company assumed $492,856 in various notes
payable to the CEO and founder of Kelley, carrying interest at a fixed rate of
5.00%. These notes payable were refinanced on October 7, 2005 with a $492,856
note payable carrying interest at 6.00% and requiring 24 monthly payments of
$17,412 in principal and interest through September 2007. The balance of
$299,005, including a current portion of $196,341, remained outstanding as of
March 31, 2006.
Upon the acquisition of Kelley, the Company assumed a note payable to a Bank,
secured by three automobiles, carrying interest at a fixed rate of 6.25%.
Principal and interest payments of $1,536 are payable through March 7, 2008. The
balance of $34,628 remained outstanding as of March 31, 2006.
Upon the acquisition of Kelley, the Company assumed a note payable to a Bank,
secured by an automobile, carrying interest at a fixed rate of 5.75%. Principal
and interest payments of $371 per month are payable through May 5, 2009. The
balance of $12,470 remained outstanding as of March 31, 2006.
Upon the acquisition of Kelley, the Company assumed a note payable to a Bank,
secured by an automobile, carrying interest at a fixed rate of 5.75%. Principal
and interest payments of $369 per month are payable through May 5, 2009. The
balance of $12,526 remained outstanding as of March 31, 2006.
Notes Payable Related to the Acquisition of COM
-----------------------------------------------------
The Company assumed a $100,000 revolving line of credit with a Bank with
a balance of $100,538 in connection with the COM acquisition. This note bears
interest at a variable rate, 9.75% as of September 22, 2005 and was called due
as a result of the acquisition of Kelley, which was determined to be a
significant change in control of the Company. The balance outstanding as of
March 31, 2006 was $4,113. Subsequent to March 31, 2006, this line of credit
has been paid in full.
The Company assumed credit card liabilities in connection with the COM
acquisition. These credit card balances were paid in full in 2005.
The Company assumed a $7,850 note payable secured by an automobile with a
balance of $7,450 in connection with the COM acquisition. The loan bore
interest of 7.99%. This note payable was paid in full in 2005, subsequent to
the COM acquisition.
The Company contracted a $126,000 note payable in January 2005 in connection
with the COM acquisition. This note bears interest at 6.00% and is payable in
monthly installments of $8,000 for nine months and $6,000 for the following nine
months, the final payment being due in January 2007. The balance outstanding as
of March 31, 2006 was $53,250.
The Company contracted a $54,000 note payable in January 2005 in connection with
the COM acquisition. This note bears interest at 6.00% and is payable in monthly
installments of $2,250, maturing in January 2007. The balance outstanding as of
March 31, 2006 was $22,891.
Notes Payable Related to the Acquisition of DMSI
-------------------------------------------------------
The Company contracted a $500,000 note payable in March 2004 in connection with
the DMSI acquisition. This note bore interest at 5% and was payable in monthly
installments of $42,804, maturing in April 2005. The balance of this note
payable was paid in full during 2005.
Other Notes Payable and Convertible Debentures
---------------------------------------------------
During the year ended December 31, 2003, the Company issued $90,000 in
convertible debentures to certain shareholders of the Company. The convertible
debentures carry an interest rate of 6% per annum, and are due in April 2008.
Payments are not mandatory during the term of the convertible debenture.
However, the Company maintains the right to pay the balance in full without
penalty at any time. The Holder is entitled to convert the face amount of the
Debentures, plus accrued interest, anytime following the Closing Date, at the
lesser of (i) 75% of the lowest closing bid price during the fifteen trading
days prior to the Conversion Date or (ii) 100% of the closing bid prices for the
twenty trading days immediately preceding the Closing Date ("Fixed Conversion
Price"), each being referred to as the "Conversion Price". No fractional shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share. The balance outstanding on these convertible debentures
as of March 31, 2006 was $25,000.
During the year ended December 31, 2005, the Company issued $350,000 in
convertible debentures to a shareholder of the Company. The convertible
debentures carry an interest rate of 6% and 8% per annum, and are due between
February and December of 2009. Payments are not mandatory during the term of the
convertible debenture. However, the Company maintains the right to pay the
balance in full without penalty at any time. The Holder is entitled to convert
the face amount of the Debentures, plus accrued interest, anytime following the
Closing Date, at the lesser of (i) 75% of the lowest closing bid price during
the fifteen trading days prior to the Conversion Date or (ii) 100% of the
closing bid prices for the twenty trading days immediately preceding the Closing
Date ("Fixed Conversion Price"), each being referred to as the "Conversion
Price". No fractional shares or scrip representing fractions of shares will be
issued on conversion, but the number of shares issuable shall be rounded up or
down, as the case may be, to the nearest whole share. The balance outstanding on
these convertible debentures as of March 31, 2006 was $350,000.
10
8. RELATED PARTY TRANSACTIONS
RELATED PARTY NOTES PAYABLE
------------------------------
During the year ended December 31, 2003, the Company issued $338,000 in
convertible debentures to Dutchess Private Equities, LP. The convertible
debentures carry an interest rate of 6% per annum, and are due between April and
October of 2008. Payments are not mandatory during the term of the convertible
debenture. However, the Company maintains the right to pay the balance in full
without penalty at any time. The Holder is entitled to convert the face amount
of the Debentures, plus accrued interest, anytime following the Closing Date, at
the lesser of (i) 75% of the lowest closing bid price during the fifteen trading
days prior to the Conversion Date or (ii) 100% of the closing bid prices for the
twenty trading days immediately preceding the Closing Date ("Fixed Conversion
Price"), each being referred to as the "Conversion Price". No fractional shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share. The balance outstanding on these convertible debentures
as of March 31, 2006 was $316,400.
During the year ended December 31, 2004, the Company issued $1,867,718 in
convertible debentures to Dutchess Private Equities, LP. The convertible
debentures carry an interest rate of 6% and 8% per annum, and are due between
February and December of 2009. Payments are not mandatory during the term of the
convertible debenture. However, the Company maintains the right to pay the
balance in full without penalty at any time. These debentures were issued with a
discounted price from the face value of $248,600. The Holder is entitled to
convert the face amount of the Debentures, plus accrued interest, anytime
following the Closing Date, at the lesser of (i) 75% of the lowest closing bid
price during the fifteen trading days prior to the Conversion Date or (ii) 100%
of the closing bid prices for the twenty trading days immediately preceding the
Closing Date ("Fixed Conversion Price"), each being referred to as the
"Conversion Price". No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded up or down, as the case may be, to the nearest whole share. In
accordance with EITF 00-27 98-5, the beneficial conversion feature on the
issuance of the convertible debenture for the year ended December 31, 2005 has
been recorded in the amount of $511,275. Additionally, the Company issued
warrants to purchase 1,286,000 shares of the Company's common stock at varying
exercise prices between $1.73 and $1.90 per share. These warrants were valued at
$466,790 and will be amortized as interest expense through the maturity date of
the convertible debentures. The balance outstanding on these convertible
debentures as of March 31, 2006 was $1,830,210.
During the year ended December 31, 2005, the Company issued $2,136,360 in
convertible debentures to Dutchess Private Equities II, LP. The convertible
debentures carry an interest rate of 6% and 8% per annum, and are due between
February and December of 2009. Payments are not mandatory during the term of the
convertible debenture. However, the Company maintains the right to pay the
balance in full without penalty at any time. These debentures were issued with a
discounted price from the face value of $340,000. The Holder is entitled to
convert the face amount of the Debentures, plus accrued interest, anytime
following the Closing Date, at the lesser of (i) 75% of the lowest closing bid
price during the fifteen trading days prior to the Conversion Date or (ii) 100%
of the closing bid prices for the twenty trading days immediately preceding the
Closing Date ("Fixed Conversion Price"), each being referred to as the
"Conversion Price". No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded up or down, as the case may be, to the nearest whole share. In
accordance with EITF 00-27 98-5, the beneficial conversion feature on the
issuance of the convertible debenture for the year ended December 31, 2005 has
been recorded in the amount of $529,500. Additionally, the Company issued
warrants to purchase 1,020,000 shares of the Company's common stock at varying
exercise prices between $1.03 and $1.83 per share. These warrants were valued at
$387,184 and will be amortized as interest expense through the maturity date of
the convertible debentures. The balance outstanding on these convertible
debentures as of March 31, 2005 was $2,136,360.
During the three months ended March 31, 2006, the Company issued $936,360 in
convertible debentures to Dutchess Private Equities II, LP. The convertible
debentures carry an interest rate of 6% and 8% per annum, and are due between
January and March of 2011. Payments are not mandatory during the term of the
convertible debenture. However, the Company maintains the right to pay the
balance in full without penalty at any time. These debentures were issued with a
discounted price from the face value of $150,000. The Holder is entitled to
convert the face amount of the Debentures, plus accrued interest, anytime
following the Closing Date, at the lesser of (i) 75% of the lowest closing bid
price during the fifteen trading days prior to the Conversion Date or (ii) 100%
of the closing bid prices for the twenty trading days immediately preceding the
Closing Date ("Fixed Conversion Price"), each being referred to as the
"Conversion Price". No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded up or down, as the case may be, to the nearest whole share. In
accordance with EITF 00-27 98-5, the beneficial conversion feature on the
issuance of the convertible debenture for the three months ended March 31, 2006
has been recorded in the amount of $234,090. Additionally, the Company issued
warrants to purchase 306,000 shares of the Company's common stock at varying
exercise prices between $.60 and $.50 per share. These warrants were valued at
44,749 and will be amortized as interest expense through the maturity date of
the convertible debentures. The balance outstanding on these convertible
debentures as of March 31, 2006 was $936,360.
During December 2004, the Company entered into a $84,956 factoring and security
agreement to sell, transfer and assign certain accounts receivable to Dutchess
Private Equities Fund, LP. Dutchess may on its sole discretion purchase any
specific account. All accounts sold are with recourse on seller. All of the
Company's property of NIC including accounts receivable, inventories, equipment
and promissory notes are collateral under these agreements. The difference
between the face amount of each purchased account and advance on the purchased
account shall be reserved and will be released after deductions of discount and
charge backs. In addition, Dutchess charges finance fees in connection with
these agreements. The balance of this factoring and security agreement was paid
in full in 2005.
On January 19, 2005, the Company entered into a $128,750 factoring and security
agreement to sell, transfer and assign certain accounts receivable to Dutchess
Private Equities Fund II, LP. Dutchess may on its sole discretion purchase any
specific account. All accounts sold are with recourse on seller. All of the
Company's property of NIC including accounts receivable, inventories, equipment
and promissory notes are collateral under this agreement. The difference between
the face amount of each purchased account and advance on the purchased account
shall be reserve and will be released after deductions of discount and charge
backs on the 15th and the last day of each month. Dutchess charged $5,205 for
finance charges in connection with this agreement. During 2005, the Company
collected and made payment to Dutchess on all amounts owed in connection with
this agreement.
During the three months ended March 31, 2006, the Company entered into the
following factoring and security agreements to sell, transfer and assign certain
accounts receivable to Dutchess Private Equities Fund, LP. Dutchess may on its
sole discretion purchase any specific account. All accounts sold are with
recourse on seller. All of the Company's property of NIC including accounts
receivable, inventories, equipment and promissory notes are collateral under
these agreements. The difference between the face amount of each purchased
account and advance on the purchased account shall be reserved and will be
released after deductions of discount and charge backs. In addition, Dutchess
charges finance fees in connection with these agreements. At March 31, 2006, the
balance due is $1,288,600.
Date Amount Financing Fees
--------- ---------- ---------------
3/27/2006 $ 450,000 $ 5,000
3/20/2006 $ 650,000 $ 5,000
3/9/2006 $ 360,000 $ 5,000
2/21/2006 $ 100,000 $ 5,000
2/16/2006 $ 850,000 $ 5,000
1/30/2006 $ 150,000 $ 5,000
1/27/2006 $ 650,000 $ 5,000
---------- ---------------
Totals $3,210,000 $ 35,000
Repayments $1,921,400
----------
Balance at
March 31, 2006 $1,288,600
==========
As of May 12, 2006, the Company has repaid approximately $586,000 to
Dutchess, related to the above factoring transactions.
9. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss. Through March 31, 2006, and December 31, 2005, the Company
incurred net operating losses for tax purposes of approximately $26,500,000 and
$25,170,000, respectively. The net operating loss carry forwards may be used to
reduce taxable income through the year 2023. The availability of the Company's
net operating loss carry-forwards are subject to limitation if there is a 50% or
more positive change in the ownership of the Company's stock. A valuation
allowance for 100% of the deferred taxes asset has been recorded due to the
uncertainty of its realization.
Since the Company has not generated taxable income, no provision for income
taxes has been provided.
The availability of the Company's net operating loss carry-forwards are
subject to limitation if there is a 50% or more positive change in the
ownership of the Company's stock. The Company's total deferred tax
asset is as follows:
March 31, 2006 December 31, 2005
---------------- -------------------
Tax benefit of net operating
loss carry-forward $ 8,252,000 $ 7,800,000
Valuation allowance (8,252,000) (7,800,000)
----------------- -------------------
$ - $ -
================= ===================
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
March 31, 2006 and December 31, 2005
-------------------------------------------
Tax expense (credit) at
statutory rate-federal (34)% (34)%
State tax expense net of
federal tax (6) (6)
Changes in valuation allowance 40 40
----- -----
Tax expense at actual rate - -
===== =====
The valuation allowance increased by approximately $452,000 in the three months
ended March 31, 2006 and by $5,282,000 in the year ended December 31, 2005.
Since the realization of the operating loss carry-forwards are doubtful,
it is reasonably possible that the Company's estimate of the valuation
allowance will change.
10. COMMITMENTS & CONTINGENCIES
LITIGATION
----------
On April 25, 2003 the Superior Court of the State of California, County of
Orange, entered a judgment in the amount of $46,120 against the Company and its
former management in favor of a vendor of the Company's former subsidiary, North
Texas Circuit Board, or NTCB. On August 20, 2002 the Company sold NTCB to BC
Electronics, Inc. Pursuant to terms of the share purchase agreement, BC
Electronics assumed all liabilities of NTCB. In December 2003 the Company filed
a motion to vacate the judgment for lack of personal services. In February 2004,
the Court ruled in favor of the Company and the judgment was vacated. Although
the Company was the guarantor on the loan, NTCB is the principal debtor (i) the
Company will bring action against NTCB to seek relief or (ii) because partial
payment was made by NTCB, it could affect the legal status of the guarantee,
which the Company believes may absolve it of liability. In February 2004, the
plaintiff re-filed the complaint. In March 2005, the complaint was
settled for the sum of $25,000. Commencing in March 2005, the Company agreed to
make five equal monthly installments of $5,000 to the vendor. As of December 31,
2005, the Company has paid this obligation in full.
On January 24, 2005, the Company filed an action in the Superior Court of
California, County of Orange against the former principals of DMSI for damages
and injunctive relief based on alleged fraud and breach of contract relating to
the Company's purchase of Del Mar Systems International, Inc. The complaint was
amended on March 14, 2005 to seek rescission of the Company's purchase of Del
Mar Systems from its former owners. The Defendant also filed a cross-complaint
in the above action seeking recovery under various employment and contract
theories for unpaid compensation, expenses and benefits totaling approximately
$90,000. Defendant also sought payment of an outstanding balance of a note
related to the purchase by the Company of DMSI totaling approximately $85,000.
Further, Defendant was seeking injunctive relief for enforcement of the stock
purchase agreement of DMSI. This case was settled and the Company agreed to pay
$84,000 over a 12 month period and also agreed to issue 300,000 shares of our
common stock. During 2006, the Company paid four of the required monthly
installments and has issued 300,000 shares of common stock valued at $139,800
during the three months ended March 31, 2006.
In March 2006, Lisa Cox sued Kelley, NIC, and Kelley's CEO personally, claiming
damages related to promises she alleges were made to her husband, prior to her
husband's death. The alleged promises made resulted from business transactions
between her husband and Kelley, prior to the Company's acquisition of Kelley. At
this time, it is too early to determine the outcome of such allegations,
however, management intends to vigorously defend the Company. No adjustments
have been made in the accompanying financial statements as a result of this
allegation, and management believes that in the event Ms. Cox is successful in
her pursuit, the impact on the Company will not be material.
The Company may be involved in litigation, negotiation and settlement matters
that may occur in the day-to-day operations of the Company and its subsidiaries.
Management does not believe implication of these litigations will have any
material impact on the Company's financial statements.
OTHER COMMITMENTS
The Company is obligated to pay rent amounts as follows:
For the twelve months ended:
March 31, 2007 $155,000
March 31, 2008 $162,000
March 31, 2009 $ 70,000
The Company is obligated to pay $120,000 for the years ended December 31, 2006,
through December 31, 2010 related to an exclusive reseller agreement with a
software company.
11. STOCKHOLDERS' EQUITY
EQUITY
------
During the three months ended March 31, 2006, the Company issued and agreed to
issue common stock as follows:
The Company issued 306,000 warrants to purchase common stock, valued at $44,479
as an inducement to certain shareholders to invest in the Company.
The Company issued 300,000 shares of Common Stock related to the acquisition of
DMSI.
Beneficial conversion feature of $234,090 was recorded during the three months
ended March 31, 2006, in conjunction with the debt financing consummated during
this time period.
During the three months ended March 31, 2006, the Company issued 295,694 shares
of Common Stock in exchange for the retirement of convertible debt totaling
$98,908.
The Company issued warrants to purchase approximately 2,887,600 shares of common
stock in exchange for 2,880,000 shares of common stock to be returned to the
Company.
During the year ended December 31, 2005, the Company issued and agreed to issue
common stock as follows:
Pursuant to an acquisition agreement, on November 1, 2005, the Company acquired
100% of the outstanding shares of common stock of Spectrum Cabling Company,
Inc., a California corporation for $14,000,000 in common stock. Robert Rivera,
the 100% owner of Spectrum prior to the acquisition, received 18,567,639 shares
of the Company's common stock. On January 6, 2006, the Company rescinded the
purchase. Pursuant to the Rescission Agreement, Spectrum returned 18,567,639
shares of the Company's common stock and a promissory note for $1.5 million in
exchange for 100% of the outstanding shares of Spectrum. Additionally,
Spectrum's two appointed director's to the Company's board resigned. The
purchase and subsequent rescission of Spectrum had no financial impact on the
Company's operations or financial statements.
Pursuant to an acquisition agreement, on September 22, 2005, the Company
acquired 100% of the outstanding shares of common stock of Kelley Communication
Company, Inc., a Nevada corporation for $10,232,101 in common stock. Mike
Kelley, the 100% owner of Kelley prior to the acquisition, received 14,061,577
shares of the Company's common stock.
The Company issued 1,460,692 shares of common stock to accredited investors for
a total of $943,451.
The Company issued 18,939 shares of common stock upon notification of an
investor's intent to exchange a convertible debenture for common stock, valued
at $65,000.
The Company issued 560,000 shares of common stock valued at $373,088 for
services rendered on behalf of the Company.
The founder and former CEO agreed to rescind 7,887,482 shares of common stock
back to the Company. These shares of common stock had been acquired by
the founder and former CEO in connection with the organization of the
Company. As such, the shares were originally recorded with a $0 value and
have been rescinded with a $0 value.
The Company agreed to issue 108,696 shares of common stock in connection with
the acquisition of COM. These shares were valued at $200,000 on the date of the
acquisition. These shares had yet to be issued as of the date of these financial
statements.
A majority shareholder agreed to rescind 685,517 shares of common stock valued
at $530,590 back to the Company. These shares of common stock were acquired in
September 2003 by the majority shareholder in connection with various debt
financings consummated in 2003 and were valued at $.774 per share at the time of
issuance. Investor relations for the year ended December 31, 2005 includes a
reduction of the total expense for the period, of $530,590, recorded as a result
of the rescinding of these shares of common stock.
12. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share for the three months ended March 31, 2006
and 2005 was determined by dividing net loss for the periods by the
weighted average number of basic and diluted shares of common stock outstanding.
Weighted average number of shares used to compute basic and diluted loss per
share is the same since the effect of dilutive securities is anti-dilutive.
The Company's significant components of common stock equivalents are its
convertible debentures and stock options.
Stock options, which would have an anti-dilutive effect on the net loss per
common share once exercised, to purchase 2,320,000 and 973,500 shares of common
stock remained outstanding as of March 31, 2006 and December 31, 2005,
respectively. These stock options have a vesting period of three years from the
date of grant, October 20, 2005 and March 30, 2006, respectively.
Convertible debentures, which can be exercised on any date subsequent to the
issuance of the convertible debentures, would have an anti-dilutive effect on
the net loss per common share once and if the holders elect to exchange the
convertible debentures for shares of common stock. The number of common shares
which could be exchanged by the Company for a full release of the obligation to
repay the principal and interest balances associated with all convertible
debentures will possibly be based in part on the Company's price per common
share as quoted on the OTC bulletin board on the date of conversion. Since the
Company can not determine the price per common share of its common stock in the
future, it does not believe it can reasonably determine the number of common
shares to be issued pursuant to an exchange of its convertible debentures for
common shares. Therefore, the Company cannot accurately determine the number of
common shares which could be exchanged by the Company that are related to the
convertible debentures as of March 31, 2006 and December 31, 2005, respectively,
and going forward.
13. SUBSEQUENT EVENTS
Subsequent to March 31, 2006, the Company entered into the following factoring
and security agreements to sell, transfer and assign certain accounts receivable
to Dutchess Private Equities Fund, LP. Dutchess may on its sole discretion
purchase any specific account. All accounts sold are with recourse on seller.
All of the Company's property of NIC including accounts receivable, inventories,
equipment and promissory notes are collateral under these agreements. The
difference between the face amount of each purchased account and advance on the
purchased account shall be reserved and will be released after deductions of
discount and charge backs. In addition, Dutchess charges finance fees in
connection with these agreements.
Date Amount Financing Fees
--------- ---------- ---------------
4/13/2006 $500,000 $5,000
4/12/2006 $200,000 $5,000
On April 19, 2006, the Company issued $12,120 in convertible debentures to
Dutchess Private Equities II, LP. The convertible debentures carry an interest
rate of 8% per annum, and are due on April 19, 2011. Interest payments are due
on a monthly basis until the principal balance is paid in full. The Holder is
entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) seventy five cents ($0.75) ("Fixed Conversion Price"), each being
referred to as the "Conversion Price". No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share.
On May 1, 2006 the Company issued $252,000 in convertible debentures to Dutchess
Private Equities II, LP. The convertible debentures carry an interest rate of
10% per annum, and are due on May 1, 2011. Payments are not mandatory during the
term of the convertible debenture. However, the Company maintains the right to
pay the balance in full without penalty at any time. These debentures were
issued with a discounted price from the face value of $210,000. The Holder is
entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) forty one cents ($0.41) ("Fixed Conversion Price"), each being referred
to as the "Conversion Price". No fractional shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded up or down, as the case may be, to the nearest whole
share. Additionally, the Company issued warrants to purchase 123,000 shares of
the Company's common stock at forty-one cents ($0.41) per share for a period of
five years.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The discussion and financial statements contained herein are for the three
months ended March 31, 2006 and March 31, 2005. The following discussion should
be read in conjunction with our financial statements and notes included
herewith.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and
uncertainties. We generally use words such as "believe," "may," "could," "will,"
"intend," "expect," "anticipate," "plan," and similar expressions to identify
forward-looking statements, including statements regarding our ability to
continue to create innovative technology products, our ability to continue to
generate new business based on referrals and existing relationships, our
financing strategy and ability to access the capital markets and other risks
discussed in our Risk Factor section below. Although we believe the expectations
expressed in the forward-looking statements included in this Form 10-QSB are
based on reasonable assumptions within the bounds of our knowledge of our
business, a number of factors could cause our actual results to differ
materially from those expressed in any forward-looking statements. We cannot
assure you that the results or developments expected or anticipated by us will
be realized or, even if substantially realized, that those results or
developments will result in the expected consequences for us or affect us, our
business or our operations in the way we expect. We caution readers not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. We do not intend to update any of the forward-looking statements after
the date of this document to conform these statements to actual results or to
changes in our expectations, except as required by law.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations are discussed
throughout this section where such policies affect our reported and expected
financial results. Our preparation of our Consolidated Financial Statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period. Our actual results may differ from those
estimates.
Our accounting policies that are the most important to the portrayal of our
financial condition and results, and which require the highest degree of
management judgment relate to revenue recognition, the provision for
uncollectible accounts receivable, analysis of the value of Goodwill, and
issuance of shares for service.
Revenue Recognition
--------------------
Our revenue recognition policies are in compliance with all applicable
accounting regulations, including American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts. Revenues from
design, installations, cabling and networking contracts are recognized using the
percentage-of-completion method of accounting. Accordingly, income is recognized
in the ratio that costs incurred bears to estimated total costs. Adjustments to
cost estimates are made periodically, and losses expected to be incurred on
contracts in progress are charged to operations in the period such losses are
determined. The aggregate of costs incurred and income recognized on uncompleted
contracts in excess of related billings is shown as a current asset, and the
aggregate of billings on uncompleted contracts in excess of related costs
incurred and income recognized is shown as a current liability.
Our revenue recognition policy for sale of network products is in compliance
with Staff accounting bulletin or (SAB) 104. Revenue from the sale of network
products is recognized when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed and collectibility is reasonably
assured. Generally, we extend credit to our customers and do not require
collateral. We perform ongoing credit evaluations of our customers and historic
credit losses have been within management's expectations.
We estimate the likelihood of customer payment based principally on a customer's
credit history and our general credit experience. To the extent our estimates
differ materially from actual results, the timing and amount of revenues
recognized or bad debt expense recorded may be materially misstated during a
reporting period.
Accounts Receivable and Allowance for Doubtful Accounts
-------------------------------------------------------------
We maintain allowances for doubtful accounts, when appropriate, for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, our actual
losses may exceed our estimates, and additional allowances would be required.
Goodwill
--------
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, or SFAS 142, Goodwill and Other Intangible Assets. As required by SFAS 142,
goodwill is subject to annual impairment tests, or earlier if indicators of
potential impairment exist and suggest that the carrying value of goodwill may
not be recoverable from estimated discounted future cash flows. Because we have
one reporting segment under SFAS 142, we utilize the entity-wide approach to
assess goodwill for impairment and compare our market value to our net book
value to determine if an impairment exists. These impairment tests have resulted
in impairments of approximately $4.2 million in 2005 and may result in
additional impairment losses that could have a material adverse impact on our
results of operations in the future.
Stock-Based Compensation
-------------------------
In October 1995, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation" amended by SFAS No 148, "Accounting for Stock Based Compensation
Transition and Disclosure". SFAS No. 123 prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using the
new fair value method or (ii) using the existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for stock issued to
employees" (APB 25) and related interpretations with pro-forma disclosure of
what net income and earnings per share would have been had the Company adopted
the new fair value method. The Company uses the intrinsic value method
prescribed by APB 25 and has opted for the disclosure provisions of SFAS No.123.
On October 20, 2005, the Company issued 972,500 stock options to various Kelley
employees in accordance with the Company's 2005 Stock Option Plan. The exercise
price at the time of grant was $0.79 per share, which was equal to the fair
market value of the common stock at the time of grant, and the right to exercise
the options were subject to vesting provisions over a three year period.
Subsequent to issuance, 132,500 of such options were retired resulting from
employees who left the Company prior to vesting.
On March 30, 2006, the Company issued 1,347,500 stock options to various Kelley
employees in accordance with the Company's 2005 Stock Option Plan. The exercise
price at the time of grant was $0.42 per share, which was equal to the fair
market value of the common stock at the time of grant, and the right to exercise
the options were subject to vesting provisions over a three year period.
Going Concern
--------------
Our audited financial statements for the fiscal year ended December 31, 2005,
reflect a net loss of ($15,534,423). These conditions raise substantial doubt
about our ability to continue as a going concern if we do not acquire sufficient
additional funding or alternative sources of capital to meet our working capital
needs. Without such external funding, we would have to materially curtail our
operations and plans for expansion.
Cash and Cash Equivalents
----------------------------
We consider all highly liquid debt instruments, purchased with an original
maturity at date of purchase of three months or less, to be cash equivalents.
Cash and cash equivalents are carried at cost, which approximates market value.
Property and Equipment
------------------------
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets, e.g.
computers (5 years), software (3 years), office furniture and equipment (3
to7 years), and tenant improvements (life of the lease-approximately 60
months).
Inventory
---------
Inventory consists of networking materials and equipment in the process of
being installed at years end. Inventories are stated at the lower of cost or
market. Cost is determined by the average cost method at the Kelley subsidiary
and the first-in-first-out method at the COM and NIC subsidiaries, respectively.
The Company has reviewed its inventory for obsolescence on a quarterly
basis since operations began and has not written-off any inventory for
obsolescence.
Fair Value of Financial Instruments
---------------------------------------
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their face value, due to the relatively short maturity
of these instruments. As of March 31, 2006 and December 31, 2005, the Company's
notes payable have stated borrowing rates that are consistent with those
currently available to the Company and, accordingly, the Company believes the
carrying value of these debt instruments approximates their fair value.
Accounting for Impairments in Long-Lived Assets
----------------------------------------------------
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of assets may not be recoverable. Management periodically evaluates the carrying
value and the economic useful life of its long-lived assets based on the
Company's operating performance and the expected future undiscounted cash flows
and will adjust the carrying amount of assets which may not be recoverable.
Use of Estimates
------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, 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 revenue and expenses during
the reporting period. Significant estimates made in preparing these financial
statements include the allowance for doubtful accounts, deferred tax asset
valuation allowance, impairment of goodwill, certain gross margins on long term
construction contracts and useful lives for depreciable and amortizable assets.
Actual results could differ from those estimates.
Basic and Diluted Net Loss Per Share
------------------------------------------
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". Basic net
loss per share is based upon the weighted average number of common shares
outstanding. For all periods, all of the Company's common stock equivalents
were excluded from the calculation of diluted loss per common share because they
were anti-dilutive, due to the Company's net losses.
The Company's significant components of common stock equivalents are its
convertible debentures and stock options.
Stock options, which would have an anti-dilutive effect on the net loss per
common share once exercised, to purchase 2,320,000 and 972,500 shares of common
stock remained outstanding as of March 31, 2006 and December 31, 2005,
respectively. These stock options have a vesting period of three years from the
date of grant, October 20, 2005 and May 30, 2006, respectively.
Convertible debentures, which can be exercised on any date subsequent to the
issuance of the convertible debentures, would have an anti-dilutive effect on
the net loss per common share once and if the holders elect to exchange the
convertible debentures for shares of common stock. The number of common shares
which could be exchanged by the Company for a full release of the obligation to
repay the principal and interest balances associated with all convertible
debentures will possibly be based in part on the Company's price per common
share as quoted on the OTC bulletin board on the date of conversion. Since
management can not determine the price per common share of its common stock in
the future, management does not believe it can reasonably determine the number
of common shares to be issued pursuant to an exchange of its convertible
debentures for common shares. Therefore, management cannot accurately determine
the number of common shares which could be exchanged by the Company that are
related to the convertible debentures as of March 31, 2006 and December 31,
2005, respectively, and going forward.
THREE MONTH PERIOD ENDED MARCH 31, 2006 AS COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 2005
RESULTS OF OPERATIONS
NET REVENUE
------------
We generated consolidated net revenues of $6,806,146 for the three months ended
March 31, 2006, as compared to $750,716 for the three month period ended March
31, 2005. The increase in revenues for this quarter when compared to the same
quarter last year is due primarily to the acquisition of Kelley during 2005,
which accounted for $6,704,233 in net revenues for the three months ended March
31, 2006. With the acquisition of Kelley, we acquired in excess of 60 contracts
with over 50 customers. Such increase was offset by a decrease in net revenues
for NIC of $464,667 and COM of $184,146 due to management's decision to relocate
the business from California to Nevada and to focus on the Kelley business
opportunity.
COST OF REVENUES
------------------
Cost of revenues for the three months ended March 31, 2006 were $5,799,302
compared to $424,078 for the three months ended March 31, 2005. Our Cost of
Revenue increased for the three months ended March 31, 2006 when compared to the
same period in 2005 due primarily to the acquisition of Kelley during 2005 which
accounted for $5,678,853. Such amounts were offset by a decrease in cost of
revenues for NIC of $204,915 and COM of $119,948 due to management's decision to
relocate the business from California to Nevada and to focus on the Kelley
business opportunity.
GROSS MARGINS
--------------
Gross margins for the three months ended March 31, 2006 were $1,006,844 or 14.8%
compared to $326,638 or 44% for the three months ended March 31, 2005. The
decrease in gross margin is attributable to management's decision to focus on
revenue growth and profitability with its acquisition of Kelley in 2005.
OPERATING EXPENSES
-------------------
Operating Expenses for the three months ended March 31, 2006 $1,673,941
compared to $7,382,203 for the three months ended March 31, 2005. The decrease
was due primarily to the charge of $6,476,085 in Officer Compensation resulting
from the issuance of warrants to purchase common stock to certain officers.
Investor relations expenses were $115,510 in 2006, compared to $347,318 in
2005, while office salaries were $550,051 in 2006 compared to $210,255 in 2005
primarily as a result of the Kelley acquisition. Other significant components
of operating expenses for the three months ended March 31, 2006 included rent of
$117,538, insurance of $103,569 and professional fees of $95,793.
OTHER INCOME (EXPENSE)
------------------------
Other Income (Expense) for the three months ended March 31, 2006 was ($662,133)
compared to ($172,177) for the three months ended March 31, 2005. The increase
in Other Expenses is primarily due to interest expense for the three months
ended March 31, 2006 of ($557,786) compared to ($172,177) for the three months
ended March 31, 2005 due to increased borrowings. In addition, we experienced a
loss on sale of assets of ($104,347) for the three months ended March 31, 2006.
NET LOSS
---------
Net Loss for the three months ended March 31, 2006 was ($1,329,230) compared to
($7,227,742) for the three months ended March 31, 2005 primarily due to the
increased borrowings and ensuing interest expense and Management's decision to
wind down the operations of NIC resulting in a reduction of revenue to $0 with
expenses of $524,856 for the three months ended March 31, 2006, coupled with the
acquisitions of Kelley and Com Services during 2005, which generated Net Losses
of ($86,825) and ($237,982), respectively, for the three months ended March 31,
2006.
BASIC AND DILUTED LOSS PER SHARE
-------------------------------------
Our basic and diluted loss for the three months ended March 31, 2006 was ($0.03)
compared to ($0.31) for the three months ended March 31, 2005 due to an increase
in our net loss, as described above.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
As of March 31, 2006, our Current Assets were $6,049,792 and Current Liabilities
were $8,164,848. Cash and cash equivalents were $1,232,706. Our Stockholders'
Equity at March 31, 2006 was $752,940. We had a net usage of cash from
operating activities for the three months ended March 31, 2006 and 2005 of
$(727,886) and ($260,417), respectively. We had a net usage of cash from
investing activities for the three months ended March 31, 2006 and 2005 of
$(122,480) and $(706,747), respectively. We had net cash provided by financing
activities of $1,644,605 and $472,414 for three months ended March 31, 2006 and
2005, respectively. We had $3,964,195 from borrowings in the period ended March
31, 2006 as compared to $488,595 in the corresponding period last year.
Historically, we have operated from a cash flow deficit funded by outside debt
and equity capital raised including funds provided by Dutchess Private Equities,
L.P., Dutchess Private Equities Fund II, L.P. and Preston Capital Partners, Inc.
Without the continued availability of external funding, we would have to
materially curtail our operations and plans for expansion. Our plan to continue
operations in relation to our going concern opinion is to continue to secure
additional equity or debt capital although there can be no guarantee that we
will be successful in our efforts.
12
FINANCING ACTIVITIES
---------------------
During 2006, we entered into the following factoring and security agreements to
sell, transfer and assign certain accounts receivable to Dutchess Private
Equities Fund, LP. Dutchess may on its sole discretion purchase any specific
account. All accounts sold are with recourse on seller. All of our property at
our NIC subsidiary including accounts receivable, inventories, equipment and
promissory notes are collateral under these agreements. The difference between
the face amount of each purchased account and advance on the purchased account
shall be reserved and will be released after deductions of discount and charge
backs. In addition, Dutchess charges finance fees in connection with these
agreements.
Date Amount Financing Fees
--------- ---------- ---------------
4/13/2006 $500,000 $5,000
4/12/2006 $200,000 $5,000
3/27/2006 $450,000 $5,000
3/20/2006 $650,000 $5,000
3/9/2006 $360,000 $5,000
2/21/2006 $100,000 $5,000
2/16/2006 $850,000 $5,000
1/30/2006 $150,000 $5,000
1/27/2006 $650,000 $5,000
-------------------
Totals $3,910,000 $45,000
=====================
As of May 12, 2006, we have repaid approximately $2,507,000 to Dutchess related
to the above factoring transactions.
On April 19, 2006, the Company issued $12,120 in convertible debentures to
Dutchess Private Equities II, LP. The convertible debentures carry an interest
rate of 8% per annum, and are due on April 19, 2011. Interest payments are due
on a monthly basis until the principal balance is paid in full. The Holder is
entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) seventy five cents ($0.75) ("Fixed Conversion Price"), each being
referred to as the "Conversion Price". No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share.
On May 1, 2006, the Company issued $252,000 in convertible debentures to
Dutchess Private Equities II, LP. The convertible debentures carry an interest
rate of 10% per annum, and are due on May 1, 2011. Payments are not mandatory
during the term of the convertible debenture. However, the Company maintains the
right to pay the balance in full without penalty at any time. These debentures
were issued with a discounted price from the face value of $210,000. The Holder
is entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) forty one cents ($0.41) ("Fixed Conversion Price"), each being referred
to as the "Conversion Price". No fractional shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded up or down, as the case may be, to the nearest whole
share. Additionally, the Company issued warrants to purchase 123,000 shares of
the Company's common stock at forty-one cents ($0.41) per share for a period of
five years.
COMMITMENTS
-----------
We assumed a $100,000 revolving line of credit with a Bank with a balance of
$100,538 in connection with the COM acquisition. This note bears interest at a
variable rate, which was 9.75% as of December 31, 2005, and was called due as a
result of the acquisition of Kelley, which was determined to be a significant
change in our control. The balance outstanding as of March 31, 2006 was $4,113.
As of the date of these financial statements, this revolving line of credit has
been paid in full.
Upon the acquisition of Kelley, we contracted a note payable to a Bank dated
August 30, 2005, and carrying interest at a variable rate,2% over the Prime
Rate, or 9.50% as of March 31, 2006. Principal payments of $20,834 per month
are due on this note through September 15, 2008. We had a balance of $624,049
outstanding as of March 31, 2006 which included a current portion of $250,033.
Upon the acquisition of Kelley, we contracted a note payable to a Bank dated
September 20, 2005 and carrying interest at a fixed rate of 7.50%. Principal and
interest payments of $32,672 per month are payable through September 20, 2008.
The balance of $889,909 remained outstanding as of March 31, 2006 and
included a current portion of $336,724.
Upon the acquisition of Kelley, we assumed a note payable to a Bank, secured by
an automobile, carrying interest at a fixed rate of 5.75%. Principal and
interest payments of $371 per month are payable through May 5, 2009. The balance
of $12,470 remained outstanding as of March 31, 2006.
Upon the acquisition of Kelley, we assumed a note payable to a Bank, secured by
an automobile, carrying interest at a fixed rate of 5.75%. Principal and
interest payments of $369 per month are payable through May 5, 2009. The balance
of $12,526 remained outstanding as of March 31, 2006.
We contracted a $126,000 note payable in January 2005 in connection with the COM
acquisition. This note bears interest at 6.00% and is payable in monthly
installments of $8,000 for nine months and $6,000 for the following nine months,
the final payment being due in January 2007. The balance outstanding as of
March 31, 2006 was $53,250.
We contracted a $54,000 note payable in January 2005 in connection with the COM
acquisition. This note bears interest at 6.00% and is payable in monthly
installments of $2,250, maturing in January 2007. The balance outstanding as of
March 31, 2006 was $22,891.
Upon the acquisition of Kelley, we assumed a note payable to a Bank, secured by
three automobiles, carrying interest at a fixed rate of 6.25%. Principal and
interest payments of $1,536 per month are payable through March 7, 2008. The
balance of $34,628 remained outstanding as of March 31, 2006.
During the year ended December 31, 2003, we issued $90,000 in convertible
debentures to certain of our shareholders. The convertible debentures carry an
interest rate of 6% per annum, and are due in April 2008. Payments are not
mandatory during the term of the convertible debenture. However, we maintain the
right to pay the balance in full without penalty at any time. The Holder is
entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) 100% of the closing bid prices for the twenty trading days immediately
preceding the Closing Date ("Fixed Conversion Price"), each being referred to as
the "Conversion Price". No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded up or down, as the case may be, to the nearest whole share. The balance
outstanding on these convertible debentures as of March 31, 2006 was $25,000.
13
During the year ended December 31, 2003, we issued $338,000 in convertible
debentures to Dutchess Private Equities, LP. The convertible debentures carry an
interest rate of 6% per annum, and are due between April and October of 2008.
Payments are not mandatory during the term of the convertible debenture.
However, we maintain the right to pay the balance in full without penalty at any
time. The Holder is entitled to convert the face amount of the Debentures, plus
accrued interest, anytime following the Closing Date, at the lesser of (i) 75%
of the lowest closing bid price during the fifteen trading days prior to the
Conversion Date or (ii) 100% of the closing bid prices for the twenty trading
days immediately preceding the Closing Date ("Fixed Conversion Price"), each
being referred to as the "Conversion Price". No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share. The balance outstanding on these convertible debentures as of March
31, 2006 was $316,400.
During the year ended December 31, 2004, we issued $1,867,718 in convertible
debentures to Dutchess Private Equities, LP. The convertible debentures carry an
interest rate of 6% and 8% per annum, and are due between February and December
of 2009. Payments are not mandatory during the term of the convertible
debenture. However, we maintain the right to pay the balance in full without
penalty at any time. These debentures were issued with a discounted price from
the face value of $248,600. The Holder is entitled to convert the face amount of
the Debentures, plus accrued interest, anytime following the Closing Date, at
the lesser of (i) 75% of the lowest closing bid price during the fifteen trading
days prior to the Conversion Date or (ii) 100% of the closing bid prices for the
twenty trading days immediately preceding the Closing Date ("Fixed Conversion
Price"), each being referred to as the "Conversion Price". No fractional shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share. In accordance with EITF 00-27 98-5, the beneficial
conversion feature on the issuance of the convertible debenture for the year
ended December 31, 2005 has been recorded in the amount of $511,275.
Additionally, we issued warrants to purchase 1,286,000 shares of our common
stock at varying exercise prices between $1.73 and $1.90 per share. These
warrants were valued at $466,790 and will be amortized as interest expense
through the maturity date of the convertible debentures. The balance outstanding
on these convertible debentures as of December 31, 2005 was $1,830,210.
During the year ended December 31, 2005, we issued $2,136,360 in convertible
debentures to Dutchess Private Equities II, LP. The convertible debentures carry
an interest rate of 6% and 8% per annum, and are due between February and
December of 2009. Payments are not mandatory during the term of the convertible
debenture. However, we maintain the right to pay the balance in full without
penalty at any time. These debentures were issued with a discounted price from
the face value of $340,000. The Holder is entitled to convert the face amount of
the Debentures, plus accrued interest, anytime following the Closing Date, at
the lesser of (i) 75% of the lowest closing bid price during the fifteen trading
days prior to the Conversion Date or (ii) 100% of the closing bid prices for the
twenty trading days immediately preceding the Closing Date ("Fixed Conversion
Price"), each being referred to as the "Conversion Price". No fractional shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share. In accordance with EITF 00-27 98-5, the beneficial
conversion feature on the issuance of the convertible debenture for the year
ended December 31, 2005 has been recorded in the amount of $529,500.
Additionally, we issued warrants to purchase 1,020,000 shares of the our common
stock at varying exercise prices between $1.03 and $1.83 per share. These
warrants were valued at $387,184 and will be amortized as interest expense
through the maturity date of the convertible debentures. The balance outstanding
on these convertible debentures as of December 31, 2005 was $2,136,360.
During the year ended December 31, 2005, we issued $350,000 in convertible
debentures to Preston Capital Partners, Inc. The convertible debentures carry an
interest rate of 6% and 8% per annum, and are due between February and December
of 2009. Payments are not mandatory during the term of the convertible
debenture. However, we maintain the right to pay the balance in full without
penalty at any time. These debentures were issued with a discounted price from
the face value of $340,000. The Holder is entitled to convert the face amount of
the Debentures, plus accrued interest, anytime following the Closing Date, at
the lesser of (i) 75% of the lowest closing bid price during the fifteen trading
days prior to the Conversion Date or (ii) 100% of the closing bid prices for the
twenty trading days immediately preceding the Closing Date ("Fixed Conversion
Price"), each being referred to as the "Conversion Price". No fractional shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share. In accordance with EITF 00-27 98-5, the beneficial
conversion feature on the issuance of the convertible debenture for the year
ended December 31, 2005 has been recorded in the amount of $87,500. The balance
outstanding on these convertible debentures as of December 31, 2005 was
$350,000.
On April 19, 2006, we issued $12,120 in convertible debentures to Dutchess
Private Equities II, LP. The convertible debentures carry an interest rate of 8%
per annum, and are due on April 19, 2011. Interest payments are due on a monthly
basis until the principal balance is paid in full. The Holder is entitled to
convert the face amount of the Debentures, plus accrued interest, anytime
following the Closing Date, at the lesser of (i) 75% of the lowest closing bid
price during the fifteen trading days prior to the Conversion Date or (ii)
seventy five cents ($0.75) ("Fixed Conversion Price"), each being referred to as
the "Conversion Price". No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded up or down, as the case may be, to the nearest whole share.
On May 1, 2006, the Company issued $252,000 in convertible debentures to
Dutchess Private Equities II, LP. The convertible debentures carry an interest
rate of 10% per annum, and are due on May 1, 2011. Payments are not mandatory
during the term of the convertible debenture. However, the Company maintains the
right to pay the balance in full without penalty at any time. These debentures
were issued with a discounted price from the face value of $210,000. The Holder
is entitled to convert the face amount of the Debentures, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen trading days prior to the Conversion Date
or (ii) forty one cents ($0.41) ("Fixed Conversion Price"), each being referred
to as the "Conversion Price". No fractional shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded up or down, as the case may be, to the nearest whole
share. Additionally, the Company issued warrants to purchase 123,000 shares of
the Company's common stock at forty-one cents ($0.41) per share for a period of
five years.
Upon the acquisition of Kelley, we issued $360,000 in convertible debentures to
an individual unaffiliated with us. The convertible debentures carry an interest
rate of 0.00% and are due in September of 2006. These debentures were issued
with a discounted price from the face value of $60,000. The Holder is entitled
to convert the face amount of the Debentures, plus accrued interest, anytime
following the Closing Date, at the lesser of (i) 75% of the lowest closing bid
price during the fifteen trading days prior to the Conversion Date or (ii) 100%
of the closing bid prices for the twenty trading days immediately preceding the
Closing Date. In accordance with EITF 00-27 98-5, the beneficial conversion
feature on the issuance of the convertible debenture for the year ended December
31, 2005 has been recorded in the amount of $90,000.
Upon the acquisition of Kelley, we assumed $540,000 in convertible debentures
due to Michael Kelley, who is now a member of our Board of Directors. At the
time of the transaction, Michael Kelley was not affiliated with us. The
convertible debentures carry an interest rate of 0.00% and are due in September
of 2006. These debentures were issued with a discounted price from the face
value of $90,000. The Holder is entitled to convert the face amount of the
Debentures, plus accrued interest, anytime following the Closing Date, at the
lesser of (i) 75% of the lowest closing bid price during the fifteen trading
days prior to the Conversion Date or (ii) 100% of the closing bid prices for
the twenty trading days immediately preceding the Closing Date. In accordance
with EITF 00-27 98-5, the beneficial conversion feature on the issuance
of the convertible debenture for the year ended December 31, 2005 has been
recorded in the amount of $135,000.
Upon the acquisition of Kelley, we assumed $492,856 in various notes payable to
Michael Kelley, who is now a member of our Board of Directors. At the time of
the transaction, Michael Kelley was not affiliated with us. The notes payable
carried interest at a fixed rate of 5.00%. These notes payable were refinanced
on October 7, 2005 with a $492,856 note payable carrying interest at 6.00% and
requiring 24 monthly payments of $17,412 in principal and interest through
September 2007. The balance of $299,055, including a current portion of
$196,341, remained outstanding as of March 31, 2006.
OTHER COMMITMENTS
On April 1, 2003, Kelley entered into a lease agreement with RMS Limited
Partnership, for office and warehouse space located at 5625 Arville Street, Las
Vegas, Nevada. The lease term is for 66 months and ends on September 30, 2008.
We acquired this obligation with the acquisition of Kelley. Rent expense from
September 22, 2005 through December 31, 2005 amounted to approximately $47,000.
Kelley is obligated to pay rent amounts as follows:
For the year ended:
March 31, 2007 $155,000
March 31, 2008 $162,000
March 31, 2009 $ 70,000
Kelley may extend the lease for two additional terms of three years from October
1,2008 to September 30, 2011 and from October 1, 2011 to September 30, 2014, at
a 4% annual increase in rent.
We are obligated to pay $120,000 at $10,000 per month, for the years ended
December 31, 2006, through December 31, 2010, related to an exclusive five year
reseller agreement with Simplikate, a software company, dated December 30, 2005.
Payroll tax liabilities of $354,376 and $371,213, are payable at March 31, 2006
and December 31, 2005, respectively. As of the date of these financial
statements, we are in negotiations with the IRS for repayment terms. While the
negotiations are taking place, we have made five payments of $15,000 each, until
final settlements amount are agreed upon.
We are obligated to pay $84,000 over a 12 month period in settlement of a
lawsuit. We have paid the first four monthly installments as of May 15, 2006.
We are obligated to pay approximately $1,403,000 to Dutchess under various
factoring agreements we have executed with them in 2006. Such amounts due to
Dutchess are related to receivables to be collected by Kelley and Com during
2006.
MATERIAL TRENDS AND UNCERTAINITIES
During the first quarter of 2006, we continued to wind down business operations
at our COM and NIC subsidiaries, while continuing to focus on the growth of our
Kelley subsidiary. Kelley's primary focus is providing complex communication
technology and systems networks to the gaming industry.
During the first quarter of 2006, we continued to service Kelley's largest
contract, the Red Rock Casino project in Las Vegas, Nevada. This contract
required us to design and install most of the audio/visual systems in the Casino
in addition to the design and installation of the Race and Sports book
technology and designing and installing various other systems throughout the
hotel and casino. We completed approximately 25% of the work in the fourth
quarter of 2005 and completed an additional 60% of the work in the first quarter
of 2006, generating approximately $5 million in revenues during the first
quarter of 2006. We expect to complete the remaining work on the project during
the second quarter of 2006. The Red Rock project represented approximately 74%
of our revenue during the first quarter of 2006 and we expect a decrease in
revenues to approximately $1 million from this contract in the second quarter of
2006.
We used a substantial amount of our resources to service and deliver the Red
Rock project. As a result, our business development, and sales and marketing
efforts decreased during this time period and in some cases, we redeployed
personnel from other projects in process to service and deliver on the Red
Rock project. As a result, we expect to experience a decrease in revenues,
cash flows and net income in the second quarter of 2006, while we reestablish
our business development, and sales and marketing efforts and service and
deliver on other ongoing projects. It is possible that the effects of the Red
Rock Casino contract will occur in the third quarter of 2006 as well.
We experienced gross margins of 15% in the first quarter of 2006 compared to 18%
for the year ended December 31, 2005. The decrease in our margins is primarily
related to the wind down of the NIC and COM businesses, which had better margins
than those experienced by Kelley. However, Kelley experienced margins of
approximately 11% in the fourth quarter of 2005, compared with approximately 15%
in the first quarter of 2006. Even though gross margins are increasing at the
Kelley subsidiary, they are still lower than what is necessary to cover our
operating costs. Low gross margins, coupled with the large dollar value that is
held in retention on the Red Rock project have created continued cash flow
shortages. As a result, we have had to factor receivables with Dutchess and we
continue to experience cash flow short falls. If such cash flow shortfalls
continue, it will have an adverse impact on our relationships with our vendors
and may impact our ability to service our clients and deliver our projects on
time and on budget, which will have an adverse impact on our net revenues and
net income. While we are actively assessing our cash flow needs and pursuing
multiple avenues of financing and cash flow generation, there can be no
assurance that our activities will be successful.
Management has been aggressively addressing the need to increase our margins and
reduce operating costs. Some of our strategies include improving our contract
pricing with our customers, negotiating more favorable contract terms that will
allow us to bill for additional work, longer lead times for purchasing of
materials, negotiating with better payment terms and obtaining discounts with
vendors and suppliers, and a slight reduction in our head count. We currently
expect slight increases in our margins for the second and third quarters of 2006
and a decline in revenues, both primarily due to the completion of the Red Rock
project.
As of May 15, 2006, we are experiencing a cash shortage. Accounts receivable in
the amount of approximately $1,014,000 are currently due from Stations Casinos,
for the Red Rock project and the Green Valley project. It is anticipated that
such amounts will be collected in full by May 31, 2006, or sooner. Should such
amounts not be collected, we intend to factor such receivables with Dutchess, or
another factoring source, if Dutchess chooses not to lend against such
receivables. In the event that we do not collect such receivables and are
unsuccessful in factoring such amounts, we will be in need of a cash infusion of
approximately $1 million in order to cover our operating costs.
We began the Green Valley project during the first quarter of 2006. Between May
15, 2006 and December 31, 2006 we will continue to generate ongoing revenues
from Stations Casinos on the Green Valley Ranch project in the approximate
amount of $3 million. However, we may experience cash shortages from time to
time during this period due to the nature of the timing of our material
purchasing requirements and our general and administrative costs, related to our
billing cycles and the timing of our cash collections. If and when we experience
such cash shortages, we plan to continue to factor our receivables from Station
Casinos with Dutchess, or another factoring source should Dutchess not lend
against such receiveables. If we are unsuccessful in collecting our receiveables
timely and are unable to factor our receivables, if and when cash shortages
arise, we will scale back operations, including reductions in head count and
other general and administrative expenses, which may have a detrimental impact
on our ability to continue as a going concern.
As a result of winding down the operations of our NIC subsidiary, we no longer
generate revenues from that subsidiary. However, we continue to pay monthly
amounts to various third parties for obligations related to the past operations
of NIC. Between May 2006 and December 2006, we are obligated to pay
approximately $125,000 per month, on average. Should our cash flows from
operations be insufficient to cover such monthly obligations, we intend to
renegotiate such obligations for extended payment terms and/or we intend to
request additional financing from Dutchess, as we have in the past. However,
there can be no assurance that we will be successful in renegotiating such
payment amounts nor can there be any assurance that Dutchess will continue to
fund such obligations by further investing in our company.
Notes payable in the amount of $900,000, are due in September 2006. If our cash
flows are insufficient to cover the repayment terms of such debt, we intend to
aggressively pursue refinancing such obligations and/or raising additional
financing from third parties and to use such proceeds to pay down the amounts
owed. However, there can be no assurance that such refinancing efforts or such
fund raising efforts will be successful. If we are unable to refinance such debt
obligations and should we be unable to raise financing from outside sources to
repay amounts owed and/or to cover our operating expenses, we will scale back
operations, including reductions in head count and other general and
administrative expenses, which may have a detrimental impact on our ability to
continue as a going concern.
SUBSIDIARIES
As of March 31, 2006, we had four wholly-owned subsidiaries, Network
Installation Corp., Del Mar Systems International, Inc., Kelley Communication
Company, Inc, and Com Services, Inc.
14
ITEM 3. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Annual Report on Form 10-QSB, an
evaluation was performed under the supervision, and with the participation of,
our management, including the individual serving as both our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and (ii) is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Our disclosure controls and
procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
Management's assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance that the
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system's objectives
will be met.
There was no change in our internal controls, which are included within
disclosure controls and procedures, during our most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 24, 2005, we filed an action in the Superior Court of California,
County of Orange against Steve and Dorota Pearson for damages and injunctive
relief based on alleged fraud and breach of contract relating to our purchase of
Del Mar Systems International, Inc. from Steve and Dorota Pearson. The complaint
was amended on March 14, 2005 to seek rescission of our purchase of Del Mar
Systems from Steve and Dorota Pearson. The Defendant filed a cross-complaint in
the above action seeking recovery under various employment and contract theories
for unpaid compensation, expenses and benefits totaling approximately $90,000.
Defendant also sought payment of an outstanding balance of a note related to the
purchase by us of Del Mar Systems totaling approximately $85,000. Further,
Defendant was seeking injunctive relief for enforcement of the stock purchase
agreement of Del Mar Systems. This case was settled and we agreed to pay $84,000
over a 12 month period and we also agreed to issue 300,000 shares of our common
stock. To date, we have paid four of the required monthly installments and we
have issued the 300,000 shares of common stock at $.45 per share on the date of
issuance. At December 31, 2005, we had accrued $170,000 in its financial
statements related to this matter.
15
In March 2006, Lisa Cox sued Kelley Technologies, Mr. Kelley personally and us,
claiming damages related to promises she alleges were made to her husband, prior
to her husband's death. The alleged promises made resulted from business
transactions with Kelley and/or its affiliates and/or subsidiaries, prior to our
acquisition of Kelley. The suit was filed in Clark County, Nevada. At this time,
it is too early to determine the outcome of such allegations, however,
management intends to vigorously defend the claim. No adjustments have been made
in the accompanying financial statements as a result of this allegation, and
management believes that in the event Ms. Cox is successful in her pursuit, the
impact on us will not be material.
We may be involved in litigation, negotiation and settlement matters that may
occur in our day-to-day operations. Management does not believe the implication
of these litigations will, including those discussed above, have a material
impact on our financial statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On January 3, 2006, we issued 160,000 warrants to purchase common stock, at an
exercise price of $0.60. The warrants were issued as an inducement to certain
shareholders to invest in the Company and were valued at $23,168. The warrants
will be amortized over the effective term of the warrant agreement, five years,
or upon exercise, whichever event occurs first.
On January 24, 2006, we issued 300,000 shares of Common Stock related to the
acquisition of DMSI and in accordance with a settlement agreement between the
Company and the former shareholders of DMSI.
On March 10, 2006, we issued warrants to purchase approximately 2,887,600 shares
of common stock in exchange for 2,880,000 shares of common stock to be returned
to the Company.
On March 13, 2006, we issued 146,000 warrants to purchase common stock, at an
exercise price of $0.50. The warrants were issued as an inducement to certain
shareholders to invest in the Company and were valued at $21,581 . The warrants
will be amortized over the effective term of the warrant agreement, five years,
or upon exercise, whichever event occurs first.
3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
NONE.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
NUMBER DESCRIPTION
------------ -------------------
2.1 Plan of Reorganization between the Company and Michael Kelley, dated
September 22, 2005 (included as exhibit 2.1 to the Form 8-K filed October 6,
2005, and incorporated herein by reference).
2.2 Acquisition Agreement and Plan of Reorganization between the Company and
Robert and Sherry Rivera dated November 1, 2005 (included as exhibit 10.1 to the
Form 8-K filed November 7, 2005, and incorporated herein by reference).
3.1 Articles of Incorporation, dated March 24, 1998 (included as exhibit 3.1 to
the Form 10-SB filed March 5, 1999, and incorporated herein by reference).
3.2 By-laws, dated March 24, 1998 (included as exhibit 3.2 to the Form 10-SB
filed March 5, 1999, and incorporated herein by reference).
3.3 Amendment to By-laws, dated May 6, 1999 (included as exhibit 3.2.2 to the
Form 10-SB filed May 14, 1999, and incorporated herein by reference).
3.4 Certificate of Amendment of Articles of Incorporation (included as exhibit
3.2 to the Form 8-K filed November 29, 2000, and incorporated herein by
reference).
3.5 Certificate of Amendment of Articles of Incorporation (included as exhibit
3.3 to the Form 8-K filed November 29, 2000, and incorporated herein by
reference).
3.6 Certificate of Amendment to Articles of Incorporation, dated January 10,
2003 (included as exhibit 3.3 to the Form 10-KSB filed April 15, 2003, and
incorporated herein by reference).
3.7 Certificate of Amendment to the Certificate of Incorporation, dated June
26, 2003 (included as exhibit 4.1 to the Form 10-QSB filed November 13, 2003,
and incorporated herein by reference).
4.1 Warrant #101 issued to C.C.R.I. Corp., dated September 29, 2003 (included as
exhibit 4.1 to the Form SB-2 filed October 16, 2003, and incorporated herein by
reference).
4.2 Warrant #102 issued to C.C.R.I. Corp., dated September 29, 2003 (included as
exhibit 4.2 to the Form SB-2 filed October 16, 2003, and incorporated herein by
reference).
4.3 Convertible Debenture Exchange Agreement between the Company and Dutchess
Private Equities Fund LP, dated February 27, 2004 (included as exhibit 4.1 to
the Form 10-QSB filed May 24, 2004, and incorporated herein by reference).
4.4 Form of Debenture between the Company and Dutchess Private Equities Fund
LP, dated March 1, 2004 (included as exhibit 4.2 to the Form 10-QSB filed May
24, 2004, and incorporated herein by reference).
4.5 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, L.P., dated March 31, 2004 (included as exhibit 4.3 to the Form 10-QSB filed
May 24, 2004, and incorporated herein by reference).
4.6 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated March 31, 2004 (included as exhibit 4.8 to the Form
10-QSB filed August 23, 2004, and incorporated herein by reference).
4.7 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated April 8, 2004 (included as exhibit 4.9 to the Form
10-QSB filed August 23, 2004, and incorporated herein by reference).
4.8 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated April 13, 2004 (included as exhibit 4.10 to the Form
10-QSB filed August 23, 2004, and incorporated herein by reference).
4.9 Form of Warrant, dated May 18, 2004 (included as exhibit 4.6 to the Form
SB-2 filed July 27, 2004, and incorporated herein by reference).
4.10 Form of Warrant, dated May 26, 2004 (included as exhibit 4.7 to the Form
SB-2 filed July 27, 2004, and incorporated herein by Reference).
4.11 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated September 25, 2004 (included as exhibit 4.11 to the
Form 10-QSB filed November 22, 2004, and incorporated herein by
reference).
4.12 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated October 21, 2004 (included as exhibit 4.12 to
the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.13 Form of Warrant, dated October 21, 2004 (included as exhibit 4.13 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.14 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, L.P., dated November 2, 2004 (included as exhibit 4.14 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.15 Form of Warrant, dated November 2, 2004 (included as exhibit 4.15 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.16 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, L.P., dated November 9, 2004 (included as exhibit 4.16
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.17 Form of Warrant, dated November 9, 2004 (included as exhibit 4.17
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.18 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated December 1, 2004 (included as exhibit 4.18 to
the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.19 Form of Warrant, dated December 1, 2004 (included as exhibit 4.19
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.20 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated December 9, 2004 (included as exhibit 4.20 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.21 Form of Warrant, dated December 9, 2004 (included as exhibit 4.21
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.22 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated December 22, 2004 (included as exhibit 4.22 to
the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.23 Form of Warrant, dated December 22, 2004 (included as exhibit 4.23
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.24 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated January 6, 2005 (included as exhibit 4.24 to the Form 10-QSB filed
May 24, 2005, and incorporated herein by reference).
4.25 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated January 6, 2005 (included as exhibit 4.25 to the Form 10-QSB filed
May 24, 2005, and incorporated herein by reference).
4.26 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated January 21, 2005 (included as exhibit 4.26 to the Form 10-QSB
filed May 24, 2005, and incorporated herein by reference).
4.27 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated January 21, 2005 (included as exhibit 4.27 to the Form 10-QSB
filed May 24, 2005, and incorporated herein by reference).
4.28 Form of Debenture between the Company and Preston Capital Partners, LLC,
dated February 3, 2005 (included as exhibit 4.28 to the Form 10-QSB filed May
24, 2005, and incorporated herein by reference).
4.29 Form of Debenture between the Company and Preston Capital Partners, LLC,
dated February 10, 2005 (included as exhibit 4.29 to the Form 10-QSB filed May
24, 2005, and incorporated herein by reference).
4.30 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated April 22, 2005 (included as exhibit 4.30 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.31 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated April 22, 2005 (included as exhibit 4.31 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.32 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated May 12, 2005 (included as exhibit 4.32 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.33 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated May 12, 2005 (included as exhibit 4.33 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.34 Form of Debenture between the Company and Preston Capital Partners, dated
May 26, 2005 (included as exhibit 4.34 to the Form 10-QSB filed July 29, 2005,
and incorporated herein by reference).
4.35 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated May 27, 2005 (included as exhibit 4.35 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.36 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated May 27, 2005 (included as exhibit 4.36 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.37 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated June 6, 2005 (included as exhibit 4.37 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.38 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated June 6, 2005 (included as exhibit 4.38 to the Form 10-QSB filed
July 29, 2005, and incorporated herein by reference).
4.39 Form of Debenture between the Company and Preston Capital Partners, dated
June 20, 2005 (included as exhibit 4.39 to the Form 10-QSB filed July 29, 2005,
and incorporated herein by reference).
4.40 Collateral Agreement between the Company and Dutchess Private Equities
Fund, II, L.P., dated September 19, 2005 (included as exhibit 4.1 to the Form
8-K filed October 6, 2005, and incorporated herein by reference).
4.41 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, L.P., dated September 22, 2005 (included as exhibit 4.2 to the Form 8-K
filed October 6, 2005, and incorporated herein by reference).
4.42 Debenture Registration Rights Agreement between the Company and Dutchess
Private Equities Fund L.P., Dutchess Private Equities Fund, II, L.P., Dutchess
Capital Management, LLC, dated September 22, 2005 (included as exhibit 4.3 to
the Form 8-K filed October 6, 2005, and incorporated herein by reference).
4.43 Subscription Agreement between the Company and Dutchess Private Equities
Fund L.P., Dutchess Private Equities Fund, II, L.P., Dutchess Capital
Management, LLC, dated September 22, 2005 (included as exhibit 4.4 to the Form
8-K filed October 6, 2005, and incorporated herein by reference).
4.44 Warrant between the Company and Dutchess Private Equities Fund, II, L.P.,
dated September 22, 2005 (included as exhibit 4.5 to the Form 8-K filed October
6, 2005, and incorporated herein by reference).
4.45 Promissory Note between the Company and Michael Kelley, dated September 22,
2005 (included as exhibit 4.6 to the Form 8-K filed October 6, 2005, and
incorporated herein by reference).
4.46 Promissory Note between the Company and Robert Unger, dated September 22,
2005 (included as exhibit 4.7 to the Form 8-K filed October 6, 2005, and
incorporated herein by reference).
4.47 Security Agreement between the Company and Dutchess Private Equities Fund
L.P. and Dutchess Private Equities Fund, II, L.P., dated September 22, 2005
(included as exhibit 4.8 to the Form 8-K filed October 6, 2005, and incorporated
herein by reference).
4.48 Promissory Note between the Company and Robert and Sherry Rivera, dated
November 1, 2005 (included as exhibit 10.2 to the Form 8-K filed November 7,
2005, and incorporated herein by reference).
4.49 Security Agreement between the Company and Spectrum Communication Cabling
Services, Inc., dated November 1, 2005 (included as exhibit 10.3 to the Form 8-K
filed November 7, 2005, and incorporated herein by reference).
4.50 Form of Debenture between the Company and Preston Capital Partners,
dated July 20, 2005 (included as exhibit 4.50 to the 10QSB/A filed November
22, 2005, and incorporated herein by reference).
4.51 Form of Debenture between the Company and Preston Capital Partners,
dated August 17, 2005 (included as exhibit 4.51 to the 10QSB/A filed November
22, 2005, and incorporated herein by reference).
4.52 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated September 14, 2005 (included as exhibit 4.52 to the 10QSB/A
filed November 22, 2005, and incorporated herein by reference).
4.53 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated September 14, 2005 (included as exhibit 4.53 to the 10QSB/A
filed November 22, 2005, and incorporated herein by reference).
4.54 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated September 19, 2005 (included as exhibit 4.54 to the 10QSB/A
filed November 22, 2005, and incorporated herein by reference).
4.55 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP, dated September 19, 2005 (included as exhibit 4.55 to the 10QSB/A
filed November 22, 2005, and incorporated herein by reference).
4.56 Common Stock for Warrant Exchange Agreement between the Company and
Dutchess Private Equities Fund, LP, dated March 10, 2006 (included as exhibit
4.1 to the Form 8-K filed March 20, 2006, and incorporated herein by reference).
4.57 Common Stock for Warrant Exchange Agreement between the Company and
Dutchess Advisors, Ltd., dated March 10, 2006 (included as exhibit 4.2 to the
Form 8-K filed March 20, 2006, and incorporated herein by reference).
10.1 Reseller Agreement between the Company and Vivato, Inc., dated August 14,
2002 (included as exhibit 10.1 to the Form 10-QSB filed November 13, 2003, and
incorporated herein by reference).
10.2 Short Term Rental Agreement between the Company and Vidcon Solutions
Group, Inc., dated February 5, 2003 (included as exhibit 10.3 to the Form 10-QSB
filed November 13, 2003, and incorporated herein by reference).
10.3 Consulting Agreement between the Company and Dutchess Advisors, LLC, dated
April 1, 2003 (included as exhibit 10.3 to the Form 8-K filed April 23, 2003,
and incorporated herein by reference).
10.4 Restructuring and Release Agreement between the Company, Dutchess Advisors
LLC, Dutchess Capital Management LLC, Michael Novielli, Western Cottonwood
Corporation, Atlantis Partners, Inc., John Freeland, Greg Mardock, and VLK
Capital Corp., dated April 9, 2003 (included as exhibit 10.2 to the Form 8-K
filed April 23, 2003, and incorporated herein by reference).
10.5 Stock Purchase Agreement between the Company and Michael Cummings, dated
May 16, 2003 (included as exhibit 2.1 to the Form 8-K filed June 13, 2003, and
incorporated herein by reference).
10.6 Consulting Agreement between the Company and Marketbyte, LLC, dated July
24, 2003 (included as exhibit 10.8 to the Form SB-2 filed July 27, 2004, and
incorporated herein by reference).
10.7 Motorola Reseller Agreement between the Company and Motorola, Inc., dated
August 18, 2003 (included as exhibit 10.2 to the Form 10-QSB filed November 13,
2003, and incorporated herein by reference).
10.8 Investment Agreement between the Company and Preston Capital Partner, LLC,
dated January 21, 2004 (included as exhibit 10.7 to the Form SB-2 filed January
21, 2004, and incorporated herein by reference).
10.9 Registration Rights Agreement between the Company and Preston Capital
Partners, LLC, dated January 21, 2004 (included as exhibit 10.8 to the Form SB-2
filed January 21, 2004, and incorporated herein by reference).
10.10 Placement Agent Agreement between the Company and Park Capital
Securities, LLC, dated January 21, 2004 (included as exhibit 10.9 to the Form
SB-2 filed January 21, 2004, and incorporated herein by reference).
10.11 Premier Reseller Agreement between the Company and Aruba Wireless
Networks, Inc., dated January 29, 2004 (included as exhibit 10.10 to the Form
SB-2/A filed February 9, 2004, and incorporated herein by reference).
10.12 Investor Relations Service Agreement between the Company and Eclips
Ventures International, dated February 2, 2004 (included as exhibit 10.9 to the
Form SB-2 filed July 27, 2004, and incorporated herein by reference).
10.13 XO Communications, Inc. Agent Agreement between the Company and XO
Communications, Inc., dated March 8, 2004 (included as exhibit 10.13 to the Form
SB-2 filed July 27, 2004, and incorporated herein by reference).
10.14 Mpartner Independent Agent Agreement between the Company and Mpower
Communications Corp., dated March 23, 2004 (included as exhibit 10.10 to the
Form SB-2 filed on July 27, 2004, and incorporated herein by reference).
10.15 Sales Agent Agreement between the Company and PAETEC Communications,
dated March 23, 2004 (included as exhibit 10.11 to the Form SB-2 filed July 27,
2004, and incorporated herein by reference).
10.16 Qwest Services Corporation Master Representative Agreement between the
Company and Qwest Services Corp., dated March 23, 2004 (included as exhibit
10.12 to the Form SB-2 filed July 27, 2004, and incorporated herein by
reference).
10.17 Lease Agreement - Las Vegas location between the Company and HQ Global
Workplaces, dated January 2, 2004 (included as exhibit 10.8 to the Form SB-2
filed July 27, 2004, and incorporated herein by reference).
10.18 Lease Agreement - Los Angeles location between the Company and HQ Global
Workplaces, dated March 1, 2004 (included as exhibit 10.15 to the Form SB-2
filed July 27, 2004, and incorporated herein by reference).
10.19 Lease Agreement - Gold River location between the Company and HQ Global
Workplaces, dated May 20, 2004 (included as exhibit 10.16 to the Form SB-2 filed
July 27, 2004, and incorporated herein by reference).
10.20 Lease Agreement - Scottsdale location between the Company and HQ Global
Workplaces, dated June 1, 2004 (included as exhibit 10.17 to the Form SB-2 filed
July 27, 2004, and incorporated herein by reference).
10.21 Lease Agreement - Seattle location between the Company and HQ Global
Workplaces, dated June 1, 2004 (included as exhibit 10.18 to the Form SB-2 filed
July 27, 2004, and incorporated herein by reference).
10.22 Promissory Note Agreement between the Company and Stephen Pearson, for
the acquisition of Del Mar Systems, Inc., dated March 1, 2004 (included as
exhibit 10.19 to the Form SB-2 filed July 27, 2004, and incorporated herein by
reference).
10.23 Promissory Note between the Company and Dutchess Private Equities Fund,
dated December 17, 2003 (included as exhibit 10.20 to the Form SB-2 filed July
27, 2004, and incorporated herein by reference).
10.24 Promissory Note between the Company and Dutchess Private Equities Fund,
dated January 9, 2004 (included as exhibit 10.21 to the Form SB-2 filed July 27,
2004, and incorporated herein by reference).
10.25 Promissory Note between the Company and Dutchess Private Equities Fund,
dated February 2, 2004 (included as exhibit 10.22 to the Form SB-2 filed July
27, 2004, and incorporated herein by reference).
10.26 Promissory Note between the Company and Dutchess Private Equities Fund,
dated February 5, 2004 (included as exhibit 10.23 to the Form SB-2 filed July
27, 2004, and incorporated herein by reference).
10.27 Employment Agreement between the Company and Robert W. Barnett, dated
January 19, 2004 (included as exhibit 10.25 to the Form SB-2 filed July 27,
2004, and incorporated herein by reference).
10.28 Promissory Note between the Company and Michael Cummings, dated December
30, 2003 (included as exhibit 10.26 to the Form SB-2 filed July 27, 2004, and
incorporated herein by reference).
10.29 Promissory Note between the Company and Michael Cummings, dated March 15,
2004 (included as exhibit 10.27 to the Form SB-2 filed July 27, 2004, and
incorporated herein by reference).
10.30 Territory License Agreement between the Company and 5G Wireless
Communications, Inc., dated February 2004 (included as exhibit 10.27 to the
Form 10-QSB filed August 23, 2004, and incorporated herein by reference).
10.31 Lease Agreement between the Company and Alton Plaza Property, Inc., dated
June 29, 2004 (included as exhibit 10.28 to the Form 10-QSB filed August 23,
2004, and incorporated herein by reference).
10.32 Stock Purchase Agreement between the Company, Raymond Mallory, and Will
Stice, dated January 17, 2005 (included as exhibit 2.1 to the Form 8-K filed
January 24, 2005, and incorporated herein by reference).
10.33 Employment Agreement between the Company and Jeffrey R. Hultman, dated
March 7, 2005 (included as exhibit 99.2 to the Form 8-K filed March 9, 2005, and
incorporated herein by reference).
10.34 Employment Agreement between the Company and Michael V. Rosenthal, dated
March 14, 2005 (included as exhibit 99.2 to the Form 8-K filed March 14,
2005, and incorporated herein by reference).
10.35 Intercreditor Agreement between the Company and Nottingham Mayport, LLC,
Dutchess Private Equities Fund L.P., Dutchess Private Equities Fund II, L.P.,
and Robert Unger, dated September 22, 2005 (included as exhibit 10.1 to the Form
8-K filed October 6, 2005, and incorporated herein by reference).
10.36 Rescission and Settlement Agreement among the Company and Robert
Rivera, Sherry Perry Rivera and Spectrum Communications Cabling Services, Inc.,
dated January 6, 2006 (included as exhibit 10.1 to the Form 8-K filed January 6,
2006, and incorporated herein by reference).
14.1 Code of Ethics (included as exhibit 14.1 to the Form 10-KSB filed April 9,
2004, and incorporated herein by reference).
21.1 List of Subsidiaries (included as exhibit 21.1 to the Form 10-QSB filed
November 21, 2005, and incorporated herein by reference).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Interim Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETWORK INSTALLATION CORPORATION
(Registrant)
Date: May 15, 2006 By: /s/ Jeffrey R. Hultman
--------------------------------
Jeffrey R. Hultman
President & Chief Executive Officer
By: /s/ Christopher G. Pizzo
---------------------------------
Christopher G. Pizzo
Chief Financial Officer, (Principal
Accounting Officer)
18