EX-99.2 3 ex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2007 AND 2006 --------------------------------------------------------------------------------------------------- ASSETS 2007 2006 (unaudited) (unaudited) Current assets Cash $ 113,993 $ 45,974 Accounts receivable 209,492 413,842 Inventory 527,507 133,088 Prepaid expenses 8,893 5,291 ----------- ----------- Total current assets 859,885 598,195 Property and equipment - net 283,518 230,022 Equipment under capital leases - net 26,300 37,105 Deposits and other assets 15,923 12,253 Intangible assets - net 3,674 4,446 ----------- ----------- $ 1,189,300 $ 882,021 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable $ 799,703 $ 120,268 Accrued expenses and other current liabilities 273,053 68,479 Sales tax payable 34,141 36,469 Deferred revenue 17,146 18,241 Convertible notes payable 125,000 - Current portion of long-term debt 71,967 47,889 Current portion of obligations under capital leases 13,917 12,039 ----------- ----------- Total current liabilities 1,334,927 303,385 Long-term debt - net of current portion 281,226 208,829 Obligations under capital leases - net of current portion 12,792 16,654 Convertible notes payable - 325,000 Loans payable - stockholders 6,000 66,956 Stockholders' deficit Common stock, $.01 par value; 50,000,000 shares authorized, 11,820,400 and 9,790,000 shares issued and outstanding at March 31, 2007 and 2006, respectively 13,399 2,501 Additional paid-in capital 2,997,686 748,515 Accumulated deficit (3,456,730) (789,819) ----------- ----------- Total stockholders' deficit (445,645) (38,803) ----------- ----------- $ 1,189,300 $ 882,021 =========== =========== The Notes to Consolidated Financial Statements are an integral part of these statements.
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS QUARTERS ENDED MARCH 31, 2007 AND 2006 ------------------------------------------------------------------------------------------- 2007 2006 (unaudited) (unaudited) Revenues - net $ 1,546,887 $ 1,195,590 Cost of revenues 730,247 633,663 ----------- ----------- Gross margin 816,640 561,927 Operating expenses (including stock-based compensation of ($164,803 and $77,321 for 2007 and 2006, respectively) 1,626,310 581,403 ----------- ----------- Loss from operations (809,670) (19,476) Other (income) expenses Interest income (49) (28) Interest expense 171 - Debt conversion expense - 58,890 Miscellaneous expenses 26,013 17,170 ----------- ----------- 26,135 76,032 ----------- ----------- Net loss (835,805) (95,508) Accumulated deficit Beginning of period (2,620,925) (694,311) ----------- ----------- End of period $(3,456,730) $ (789,819) =========== =========== The Notes to Consolidated Financial Statements are an integral part of these statements.
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS QUARTERS ENDED MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------------------------- 2007 2006 (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(835,805) $ (95,508) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 26,412 18,139 Stock-based compensation 164,803 77,321 Change in deferred revenue (4,940) 596 Debt conversion expense - 58,890 Bank overdraft (46,697) - (Increase) decrease in operating assets Accounts receivable 174,226 (175,225) Inventory (281,468) (12,995) Prepaid expenses and other assets 5,364 165 Deposits and other 42,401 - Increase (decrease) in operating liabilities Accounts payable 12,166 (116,822) Accrued expenses and other current liabilities 46,543 43,389 Sales tax payable 11,610 (9,163) --------- --------- Net cash used by operating activities (685,385) (211,213) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (12,177) (11,030) Payment of security deposits - (4,953) --------- --------- Net cash used by investing activities (12,177) (15,983) CASH FLOWS FROM FINANCING ACTIVITIES Principal repayment of obligations under capital leases (3,647) (10,703) Proceeds from convertible notes payable 125,000 275,000 Proceeds from loans payable - stockholders (4,943) 9,895 Proceeds from the sale of common stock 715,350 - Principal repayments of long-term debt (21,168) (11,924) --------- --------- Net cash provided by financing activities 810,592 262,268 --------- --------- Net change in cash 113,030 35,072 CASH Beginning of period 963 10,902 --------- --------- End of period 113,993 45,974 ========= ========= The Notes to Consolidated Financial Statements are an integral part of these statements.
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed by Visual Management Systems Holding, Inc. ("VMS Holdings") and its wholly-owned subsidiaries, Visual Management Systems, LLC ("VMS, LLC") and Visual Management Systems PDG, LLC ("PDG"), collectively the "Company," in the preparation of the accompanying consolidated financial statements are summarized below: NATURE OF BUSINESS OPERATIONS The Company delivers protective technology solutions and remote management loss prevention surveillance systems and provides on-site consultations regarding its products. The Company also sells, installs, upgrades and services Digital Video Recording Systems. The Company is New Jersey-based, began operations in June 2003. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Visual Management Systems Holding, Inc. and its wholly owned subsidiaries, Visual Management Systems, LLC and Visual Management Systems PDG, LLC collectively the "Company." All inter-company transactions and balances have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK-BASED COMPENSATION Effective January 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123R, SHARE-BASED PAYMENTS ("SFAS 123R"). Under this method, the Company recognizes stock-based compensation over the vesting period of each grant. Stock-based compensation is measured based on the fair values of all stock awards on the dates of grant. The Company has elected to use the Black-Scholes-Merton ("BSM") option-pricing model to determine the fair value of stock-based awards under SFAS 123R. SFAS 123R requires compensation expense to be recognized based on awards ultimately expected to vest. As a result, forfeitures need to be estimated on the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. On January 1, 2005, the Company began to estimate forfeitures based on management's best estimate of forfeitures to occur. In addition, the company accounts for stock awards issued to non-employees in accordance with the provisions of SFAS 123R, under which the BSM method is used to measure the value of options granted to non-employees at each vesting date to determine the appropriate charge to stock-based compensation. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash balances and trade receivables. The Company invests its excess cash in highly liquid investments. The Company's customer base is principally comprised of financial institutions. The Company does not require collateral from its customers. ACCOUNTS RECEIVABLE AND CREDIT POLICY Accounts receivable are uncollateralized customer obligations due under normal trade terms, ordinarily requiring payment within 30 days from the invoice date. Interest is not charged on unpaid receivables with invoice dates over 30 days old. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer's remittance advice or, if unspecified, are applied to the earliest unpaid invoices. VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- Management believes all accounts receivable to be fully collectible and, therefore, the Company has not recorded an allowance as of either March 31, 2007 or 2006. INVENTORY Inventory is comprised predominantly of finished goods, which consists of digital video recorders, security cameras and related installation materials, is stated at the lower of cost or market value. Cost is computed on the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation charges with respect to property and equipment have been made by the Company using accelerated methods based on the following estimated useful lives: ESTIMATED CLASSIFICATION LIFE (YEARS) -------------- ------------ Computer hardware and software 5-7 Furniture and fixtures 7 Machinery and equipment 5-7 Vehicles 5 Expenditures for repairs and maintenance are charged to operations as incurred. Expenditures for betterments and major renewals are capitalized and, therefore, are included in property and equipment. REVENUE RECOGNITION The Company generates revenues from the sale and installation of remote management loss prevention systems. Revenue is recognized at the time of the installation, net of anticipated credits, returns and allowances. Amounts billed in advance of the period in which service is rendered, generally support, are recorded as a liability under "Deferred revenue." ADVERTISING Advertising costs are expensed as incurred and approximated $14,000 and $4,000 for the quarters ended March 31, 2007 and 2006, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount reported in the balance sheet for cash, accounts receivable, accrued expenses and other current liabilities approximates fair value because of the immediate short-term maturity of these financial instruments. The carrying amount of long-term debt approximates fair value based on terms currently available to the Company. INCOME TAXES The Company files a consolidated tax return. Deferred income tax assets and liabilities are recognized for the differences between financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on the Company's income tax return for the year reported. VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- 2. PROPERTY AND EQUIPMENT The major classifications of property and equipment at March 31 are as follows: 2007 2006 Computer hardware and software $ 81,405 $ 75,536 Furniture and fixtures 25,622 24,622 Machinery and equipment 50,378 40,225 Vehicles 277,911 166,563 --------- --------- Total cost 435,316 306,946 Accumulated depreciation (151,798) (76,924) --------- --------- Property and equipment - net $ 283,518 $ 230,022 ========= ========= Depreciation included as a charge to operations amounted to $23,498 and $15,252 for the quarters ended March 31, 2007 and 2006, respectively. 3. EQUIPMENT UNDER CAPITAL LEASES Equipment under capital leases at March 31 are as follows: 2007 2006 Computer hardware and software $ 17,587 $ 17,587 Machinery and equipment 28,661 28,661 -------- -------- Total cost 46,248 46,248 Accumulated amortization (19,948) (9,143) -------- -------- Equipment under capital leases - net $ 26,300 $ 37,105 ======== ======== Amortization included as a charge to operations amounted to $2,722 and $2,695 for the quarters ended March 31, 2007 and 2006, respectively. 4. INTANGIBLE ASSETS Intangible assets at March 31, are as follows:
Gross Amortization Carrying Accumulated Period Amount Amortization Net ------ ------ ------------ --- 2007 Deferred financing costs 7 Years $ 5,338 $ 1,664 $ 3,674 ============== ============== ============== 2006 Deferred financing costs 7 Years $ 5,338 $ 892 $ 4,446 ============== ============== ==============
Amortization expense amounted to $192 for each of the quarters ended March 31, 2007 and 2006. VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- Estimated future amortization expense for each of the next five twelve month periods ending March 31, and in the aggregate, is as follows: 2008 $ 768 2009 768 2010 768 2011 768 2012 602 ------------------ $ 3,674 ================== 5. CONVERTIBLE DEBT In September 2005, the Company issued $50,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. The notes were converted in October 2006. In March 2006, the Company issued $50,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. The notes were converted in July 2006. In March 2006, the Company issued $25,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. The notes were converted in July 2006. In March 2006, the Company issued $50,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. The notes were converted in December 2006. In March 2006, the Company issued $150,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. The notes were converted in December 2006. In September 2006, the Company issued $50,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. The notes were converted in October 2006. In March 2007, the Company issued $125,000 of 8% convertible notes due in September 2007. Interest is payable in September 2007. The notes are convertible by the holder into shares of the Company's common stock at any time at a conversion price of $1.25 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. As of March 31, 2007 and 2006, the Company had $325,000 and $125,000, respectively, of convertible notes payable outstanding. VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- In accordance with FAS-84, INDUCED CONVERSIONS OF CONVERTIBLE DEBT, the conversion of previously issued notes to common stock during the period ended March 31, 2006 and 2005 resulted in $264,990 and $58,890, respectively, of debt conversion expense. 6. STOCK PURCHASE WARRANTS During the quarters ended March 31, 2007 and 2006, the management approved the issuance of warrants to purchase shares of the Company's common stock. Such warrants are exercisable at $1.25 per share, vest over a period of 36 months and expire at various times through October 2009. The issuance of stock purchase warrants was accounted for under SFAS 123R using the BSM model (with the same assumptions as those used for the options, see note 11), which did not result in the recording of compensation cost during the quarters ended March 31, 2007 and 2006. A summary of warrant activity for 2007 and 2006 is as follows:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF EXERCISE WARRANTS EXERCISE WARRANTS PRICE EXERCISABLE PRICE --------------- --------------- --------------- --------------- Outstanding, December 31, 2005 240,000 1.25 240,000 1.25 Granted -- -- Exercised -- -- --------------- Outstanding, March 31, 2006 240,000 1.25 240,000 1.25 =============== Outstanding, December 31, 2006 540,000 1.25 540,000 1.25 Granted -- -- Exercised (540,000) -- --------------- Outstanding, March 31, 2007 -- -- -- -- ===============
In March 2007, all outstanding warrants were converted into shares of the Company's common stock. The conversion was induced by management through a 2-for-1 share offering. 7. LONG-TERM DEBT Long-term debt at March 31 is as follows:
2007 2006 Term loans payable, collateralized by vehicles, due in monthly installments ranging from $404 - $612, including interest at fixed rates ranging from 3.90% - 8.69% and maturing through November 2012. $ 193,076 $ 126,691 Term loan payable - due in monthly installments of $794 including interest at a fixed rate of 8.61% and maturing October 2013. The loan is secured by substantially all assets of the Company and the personal guarantee of the majority stockholder. 48,682 -- Small Business Administration term loan due in monthly installments of $2,282 including interest at a fixed rate of 7.23% and maturing January 2012. The loan is collateralized by substantially all assets of the Company. 111,435 130,027 ------------------ ----------------- 353,193 256,718 Less: current portion 71,967 47,889 ------------------ ----------------- Long-term debt - net of current portion $ 281,226 $ 208,829
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- Aggregate maturities of long-term debt of the Company due within each of the next five twelve month periods ending March 31 and thereafter, are as follows: 2008 $ 71,967 2009 77,625 2010 75,197 2011 57,985 2012 46,863 Thereafter 23,556 ------------------ $ 353,193 ================== 8. OBLIGATIONS UNDER CAPITAL LEASES Obligations under capital leases at March 31, are as follows:
2007 2006 Equipment leases - monthly payments ranging from $83 - $282, including interest between 15.33% - 19.03% and maturing through June 2010. $ 26,709 $ 28,693 Less: current portion 13,917 12,039 ------------------ ----------------- Obligations under capital leases - net of current portion $ 12,792 $ 16,654
Aggregate maturities of obligations under capital leases of the Company due within each of the next five twelve month periods ending March 31 and thereafter, are as follows: 2008 $ 17,344 2009 11,384 2010 2,638 2011 330 2012 -- ------------------ Total future minimum lease payments 31,696 Less: imputed interest 4,987 ------------------ Present value of minimum lease payments $ 26,709 ================== 9. COMMITMENTS AND CONTINGENCIES The Company conducts its operations from facilities in New Jersey, New York and Ohio with leases expiring on January 31, 2009, November 30, 2009 and November 30, 2007, respectively. Rent expense for the quarters ended March 31, 2007 and 2006 approximated $25,000 and $12,000, respectively. Minimum future rental payments under non-cancelable operating leases for the twelve month periods ended March 31 are as follows: 2008 $ 124,288 2009 96,652 2010 60,109 2011 4,043 2012 -- ------------------ $ 285,092 ================== Included in future minimum rental payments are lease payments related to a second facility in New Jersey under an operating lease that was entered into subsequent to quarter-end. In January 2007, the Company entered into compensation agreements with key members of management. The agreements are described in full within the body of the 8-k filing.
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 ----------------------------------------------------------------------------------------------------------- 10. INCOME TAXES Income tax benefit is summarized as follows for the quarters ended March 31: 2007 2006 Federal and state - current $ -- $ -- Deferred -- -- ----------------- ---------------- Provision for income taxes $ -- $ -- ================= ================ The details of deferred income tax assets are as follows: 2007 2006 Deferred income tax assets $ 169,600 $ 53,600 Valuation allowance (169,600) (53,600) ----------------- ---------------- Deferred income tax assets - net $ -- $ -- ================= ================
The principal temporary difference that gives rise to deferred income tax assets is net operating loss carryforwards. At December 31, 2006 and 2005, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $424,000 and $134,000, respectively expiring through 2012. Utilization of such net operating losses could be limited under the Internal Revenue Code. 11. STOCK OPTION PLAN The Company maintains a non-qualified stock option plan (the "Plan") that provides for the awarding of stock options to selected employees and non-employees. Options granted under the Plan become vested 50% one year from the date of grant and in full two years from the date of grant. Options are exercisable immediately upon vesting. No shares are reserved for the Plan and all shares are expected to be issued from authorized shares not yet outstanding, or from Treasury Stock, if available. The Company estimated the fair value of each option award on the date of grant using the BSM valuation model. Assumptions about stock-price volatility have been estimated by management based upon the implied volatilities of publicly traded companies within the industry. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures were estimated as management's best approximation. The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted in the periods presented: MARCH 31, ------------------------------ 2007 2006 ------------- ------------- Risk-free interest rate 4.94% 4.51% Expected volatility 150% 150% Expected life (in years) 10 10 Weighted-average estimated fair value of options granted during the year $ 1.59 $ 1.59
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 --------------------------------------------------------------------------------------------------------- The following table summarizes the activity under the Plan: OPTIONS OUTSTANDING ----------------------------------------------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AGGREGATE NUMBER OF EXERCISE REMAINING INTRINSIC SHARES PRICE TERM (YRS.) VALUE ------------- ------------- ------------- ------------- Balance, December 31, 2005 1,410,000 1.25 9.50 618,567 Granted 25,000 1.25 Exercised -- -- Lapsed -- -- ------------- ------------- Balance, March 31, 2006 1,435,000 1.25 9.01 658,330 ============= ============= Balance, December 31, 2006 1,850,000 1.25 8.75 1,318,427 Granted 25,000 1.25 Exercised -- -- Lapsed -- -- ------------- ------------- Balance, March 31, 2007 1,875,000 1.25 9.52 1,358,192 ============= =============
12. SUBSEQUENT EVENT On July 17, 2007, the Company was merged with and into VMS Acquisition Corp., a NJ Corporation, and became a wholly-owned subsidiary of Visual Management Systems, Inc., a Nevada Corporation (formely Wildon Productions, Inc.), a publicly traded entity subject to the provisions of the Public Company Accounting Oversight Board. As a result of the merger, each outstanding share of the Company's common stock was converted into 0.50 shares of common stock of Visual Management Systems, Inc. 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION During the quarter ended March 31, 2006, the Company incurred $8,000 in capital leases payable in connection with the financing of additions to equipment under capital lease.