EX-99 3 ex99-1.txt EX. 99.1 - INFO SYSTEMS FINANCIALS - 2004 & 2003 INFO SYSTEMS, INC. AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2004 CONTENTS INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS BALANCE SHEET 2 STATEMENT OF OPERATIONS 3 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 4 STATEMENT OF CASH FLOWS 5 NOTES TO FINANCIAL STATEMENTS 6 INDEPENDENT AUDITORS' REPORT To the Board of Directors Info Systems, Inc. We have audited the accompanying balance sheet of Info Systems, Inc. as of December 31, 2004 and 2003, and the related statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Info Systems, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. March 17, 2005 -1- BALANCE SHEET INFO SYSTEMS, INC. DECEMBER 31, 2004 AND 2003
ASSETS 2004 2003 ---- ---- CURRENT ASSETS Cash $ 586,869 $ 1,076 Accounts receivable Trade, net of allowance for doubtful accounts of $325,004 and $379,307 in 2004 and 2003, respectively 8,761,574 8,637,907 Inventories 427,258 745,888 Prepaid expenses and other current assets 244,986 94,751 Deferred income taxes 166,462 306,869 Income taxes receivable 0 7,059 ------------- ------------- Total current assets 10,187,149 9,793,550 AMOUNTS DUE FROM SHAREHOLDERS 102,593 95,565 PROPERTY AND EQUIPMENT, NET 361,845 391,427 GOODWILL 286,246 286,246 OTHER ASSETS 12,165 16,083 ------------- ------------- $ 10,949,998 $ 10,582,871 ============= ============= LIABILITIES CURRENT LIABILITIES Line of credit $ 0 $ 56,584 Accounts payable - trade 6,154,166 6,355,272 Accrued expenses 1,845,734 1,635,275 Customer deposits 10,750 14,525 Deferred revenue 493,157 594,264 Current portion of notes payable 220,371 202,858 Income taxes payable 174,378 0 ------------- ------------- Total current liabilities 8,898,556 8,858,778 LONG-TERM LIABILITIES Notes payable, less current portion 460,510 630,290 ------------- ------------- Total liabilities 9,359,066 9,489,068 STOCKHOLDERS' EQUITY COMMON STOCK, NO PAR VALUE 5,105 5,105 PREFERRED STOCK, $1,000 PAR VALUE 600,000 600,000 PAID-IN CAPTIAL 85,907 85,907 RETAINED EARNINGS 1,811,920 1,314,791 TREASURY STOCK, AT COST (912,000) (912,000) ------------- ------------- Total stockholders' equity 1,590,932 1,093,803 ------------- ------------- $ 10,949,998 $ 10,582,871 ============= =============
See accompanying notes to financial statements. -2- STATEMENT OF OPERATIONS INFO SYSTEMS, INC. FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003 ---- ---- REVENUES Service, net $ 19,636,055 $ 16,809,559 Product, net 38,723,906 40,546,270 ------------- ------------- Total 58,359,961 57,355,829 COST OF SALES 46,474,060 46,737,412 ------------- ------------- GROSS PROFIT FROM SALES 11,885,901 10,618,417 ------------- ------------- OPERATING EXPENSES Compensation and related benefits 6,755,982 6,608,715 General and administrative 2,417,488 2,280,401 Sales and marketing 1,613,914 1,485,703 Depreciation and amortization 185,853 295,855 ------------- ------------- Total operating expenses 10,973,237 10,670,674 ------------- ------------- INCOME (LOSS) FROM OPERATIONS 912,664 (52,257) INTEREST EXPENSE (56,922) (37,120) ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 855,742 (89,377) PROVISION FOR INCOME TAXES 358,613 49,134 ------------- ------------- NET INCOME (LOSS) $ 497,129 $ (138,511) ============= =============
See accompanying notes to financial statements. -3- STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY INFO SYSTEMS, INC. FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock No par value 100 shares authorized Preferred Stock 100 shares issued, $1,000 par value Additional 75 shares outstanding 1,500 shares authorized Treasury Stock Paid-In Retained Stockholders' Shares Amount Shares Amount Shares Amount Capital Earnings Equity -------- -------- -------- -------- -------- ---------- ---------- ---------- ------------- BALANCE, DECEMBER 31, 2002 75.000 $5,105 600 $600,000 25.000 $(912,000) $85,907 $1,453,302 $1,232,314 NET LOSS (138,511) (138,511) ------ ------ ------ -------- ------ ---------- ------- ---------- ---------- BALANCE, DECEMBER 31, 2003 75.000 5,105 600 600,000 25.000 (912,000) 85,907 1,314,791 1,093,803 NET INCOME 497,129 497,129 ------ ------ ------ -------- ------ ---------- ------- ---------- ---------- BALANCE, DECEMBER 31, 2004 75.000 $5,105 600 $600,000 25.000 $(912,000) $85,907 $1,811,920 $1,590,932 ====== ====== ====== ======== ====== ========== ======= ========== ==========
See accompanying notes to financial statements. -4- STATEMENT OF CASH FLOWS INFO SYSTEMS, INC. FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003 ---- ---- OPERATING ACTIVITIES Net income (loss) $ 497,129 $ (138,511) Noncash items included in net income (loss) Depreciation and amortization 185,853 295,855 Provision for losses on accounts receivable (54,303) 7,541 Deferred income taxes 140,407 (6,010) Net change in accounts receivable (69,364) (2,144,346) Net change in inventories 318,630 135,389 Net change in other current assets, net (150,204) 317,830 Net change in other assets 3,918 2,273 Net change in accounts payable (201,106) 2,471,833 Net change in deferred revenue (101,107) (239,443) Net change in accrued expenses 381,062 (92,011) Loss from sale of equipment 3,244 6,428 ------------- ------------- Net cash flow from operating activities 954,159 616,828 ------------- ------------- INVESTING ACTIVITIES Purchases of property and equipment (47,060) (97,561) ------------- ------------- Net cash flow used by investing activities (47,060) (97,561) ------------- ------------- FINANCING ACTIVITIES Net repayments under line of credit agreement (56,584) (874,772) Principal payments on capital leases obligations 0 (28,153) Principal payments on notes payable (264,722) (197,818) ------------- ------------- Net cash flow used by financing activities (321,306) (1,100,743) ------------- ------------- NET CHANGE IN CASH 585,793 (581,476) CASH, BEGINNING OF YEAR 1,076 582,552 ------------- ------------- CASH, END OF YEAR $ 586,869 $ 1,076 ============= ============= CASH PAID FOR Interest $ 56,922 $ 75,129 ============= ============= Income taxes $ 35,800 $ 3,000 ============= ============= SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchase of property and equipment financed by notes payable $ 112,455 $ 39,467 ============= ============= Repayment of debt through trade-in of property and equipment $ 0 $ 17,530 ============= =============
See accompanying notes to financial statements. -5- NOTES TO FINANCIAL STATEMENTS INFO SYSTEMS, INC. Note 1 Summary of Company activities and significant accounting policies ----------------------------------------------------------------- Company activities ------------------ Info Systems, Inc. ("the Company") is an information technology management and consulting company. The business is to assess, design, integrate and manage technologies and resources that relate directly to the way voice, data, and video are distributed, stored, managed, and secured. Offerings include consulting, infrastructure solutions, managed services, staffing augmentation and telecommunications, as well as related equipment sales. The Company has offices located in Delaware, Pennsylvania and Maryland. Use of estimates in the preparation of financial statements ----------------------------------------------------------- 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. Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories principally consist of computer hardware and software for resale, and computer parts and supplies. Inventories are stated net of an allowance for obsolete inventory of $ 40,512 and $ 53,529 in 2004 and 2003, respectively. Property and equipment ---------------------- Property and equipment is recorded at cost. Depreciation, which includes amortization of assets under capital leases, is provided using a straight-line method over the estimated useful lives of the respective assets which are generally three to seven years. Renewals and improvements are capitalized. Normal maintenance and repairs are charged to income as incurred. Concentrations of credit risk and major customer ------------------------------------------------ Credit risk ----------- Financial instruments which potentially subject the Company to significant concentrations of credit risk are principally cash and accounts receivable. -6- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 1 Summary of Company activities and significant accounting policies (cont'd) ----------------------------------------------------------------- Credit risk (cont'd) -------------------- Cash deposits are maintained in a highly rated financial institution within the Company's operating area. Management continually monitors the financial strength of the institution to minimize its risk. The maximum loss that would have resulted from that risk totaled $ 991,750 at December 31, 2004 and $ 0 at December 31, 2003, representing the excess of the deposit liabilities reported by the institution over the amounts that would have been covered by federal insurance. Accounts receivable represent unsecured credit sales. Economic conditions in this industry have a direct effect on the Company's operations. The collectibility of these accounts is periodically reviewed by management, and an allowance for doubtful accounts is maintained. Major customer -------------- Financial instruments that potentially subject the Company to credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Revenues to one customer represented 22% of total revenues during 2004 and one customer represented 22% of total revenues during 2003. Accounts receivable from the customer represented 6% of the accounts receivable balance at December 31, 2004 and accounts receivable from the customer represented 15% of the accounts receivable balance at December 31, 2003. Revenue recognition ------------------- Revenue from sales of computer equipment and related software products is recognized upon shipment. Revenue from service contracts is recognized over the term of the respective contracts. Revenue from design and installation projects, which are usually of short-term duration, is recognized upon completion of the installation. Revenue from staff augmentation and consulting projects is recognized during the period the project is performed. Included in deferred revenue are amounts billed and received on staff augmentation, telecommunications and consulting projects which will be earned in subsequent periods. Deferred revenue also represents the unamortized portion of service contract revenue also recognized ratably over the term of the contract. Advertising costs ----------------- Advertising costs are expensed as incurred. Advertising expense was $ 62,464 and $ 23,657 during the years ended December 31, 2004 and 2003, respectively. -7- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 1 Summary of Company activities and significant accounting policies (cont'd) ----------------------------------------------------------------- Impairment of goodwill ---------------------- In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. In accordance with FAS No. 142, Goodwill and Other Intangible Assets, goodwill cannot be amortized, however, it must be tested annually for impairment. This impairment test is calculated at the operating unit level. The goodwill impairment test has two steps. The first identifies potential impairments by comparing the fair value of an operating unit with its book value, including goodwill. If the fair value of the operating unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. Based on the impairment tests performed, the value of goodwill recorded was deemed not impaired at December 31, 2004 and 2003. Note 2 Amounts due from shareholders ----------------------------- Amounts due from shareholders represents unsecured, non-interest bearing advances, and are due on demand. Outstanding advances totaled $102,593 at December 31, 2004 ($95,565 in 2003). Note 3 Property and equipment ---------------------- Property and equipment consist of the following:
2004 2003 ---- ---- Office equipment $ 700,400 $ 2,114,220 Software 465,103 475,543 Vehicles 373,073 378,055 Leasehold improvements 306,406 330,508 Machinery and equipment 11,200 11,200 ----------- ----------- 1,856,182 3,309,526 Less accumulated depreciation and amortization 1,494,337 2,918,099 ----------- ---------- $ 361,845 $ 391,427 =========== ===========
-8- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 4 Short-term borrowings --------------------- The Company has a credit facility with its bank that is effective through September 2005 and is renewable annually. This credit facility, as amended, has a maximum borrowing availability of $ 12,000,000. At December 31, 2004 and 2003, there were $ 0 and $ 56,584 outstanding on this facility. The available borrowings on this facility were reduced by a $ 6,000,000 irrevocable letter of credit related to the Company's inventory credit facility. This agreement bears interest at the bank's prime rate of 5.25% and 4.00% at December 31, 2004 and 2003, respectively. The credit facility is for working capital purposes and borrowings at any point in time are limited based on eligible assets of the Company. Borrowings under the credit facility are secured by substantially all of the assets of the Company. The credit facility is personally guaranteed by the majority stockholder of the Company. The Company also has a $ 6,000,000 floor plan credit facility with another bank available for eligible inventory purchases ("inventory facility") which extends the Company's trade payment terms with certain vendors. At December 31, 2004 and 2003, accounts payable includes $ 1,827,544 and $ 2,045,863 related to these inventory purchases. The inventory facility is guaranteed by the letter of credit referenced above. -9- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 5 Notes payable ------------- Notes payable are summarized as follows:
2004 2003 ---- ---- Note payable to shareholder (amended in March 2001), interest at 7% per annum, monthly principal and interest payments of $ 11,000 through March 2009. The note is secured by 25 shares of the Company's common stock. Interest expense for the year ended December 31, 2004 was $ 37,505 ($ 43,875 in 2003). $ 484,053 $ 578,548 Note payable to bank, interest at prime plus .5% (5.75%), monthly principal and interest payments of $ 8,300 through February 2006. The note is secured by substantially all of the assets of the Company and is guaranteed by the majority stockholder. 71,893 165,648 Note payable to bank, interest at prime (5.25%) per annum; monthly principal and interest payments of $ 1,936 through July 2006. The note is secured by an automobile. 35,504 44,500 Notes payable to banks, with interest ranging from 4.9% to 8.09%, maturing from March 2005 to August 2008. The notes are generally secured by automobiles and certain of the notes are guaranteed by the majority stockholder. 89,431 44,452 --------- --------- 680,881 833,148 Less current portion 220,371 202,858 --------- --------- $ 460,510 $ 630,290 ========= =========
-10- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 5 Notes payable (cont'd) ------------- Principal repayments on long-term debt are summarized as follows: 2005 $ 220,371 2006 147,053 2007 142,964 2008 137,858 2009 32,635 --------- $ 680,881 =========
Note 6 Income taxes ------------ The components of the Company's net deferred income tax asset are as follows:
2004 2003 ---- ---- Allowance for doubtful accounts $ 130,002 $ 151,723 Inventory reserves and uniform capitalization costs 21,381 30,256 Goodwill (25,211) (16,807) Net operating loss 0 18,624 Depreciation expense (13,905) 47,998 Other 54,195 75,075 ----------- ----------- Total deferred income taxes $ 166,462 $ 306,869 =========== ===========
The provision (benefit) for income taxes is as follows:
2004 2003 ---- ---- Current: Federal $ 190,768 $ 35,096 State 27,438 20,048 ----------- ----------- 218,206 55,144 Deferred: Federal 115,694 (12,243) State 24,713 6,233 ----------- ----------- 140,407 (6,010) ----------- ----------- Total $ 358,613 $ 49,134 =========== ===========
-11- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 6 Income taxes (cont'd) ------------ The provision for income taxes differs from the statutory U.S. Federal rate due to state income taxes and certain nondeductible items. A valuation allowance has not been established as management believes it is more likely than not the deferred tax asset will be realized. Note 7 Commitments ----------- The Company leases office and warehouse space from a partnership which is 83% owned by current and past shareholders of the Company which, based on its terms, is classified for financial statement purposes as an operating lease. The lease expires in April 2012, requires minimum annual rent payments and is subject to adjustment at the end of each lease year based on the consumer price index for the prior twelve-month period. Rent expense under this lease, including base rental adjustments, was $ 186,516 in 2004 and $ 172,879 in 2003. The Company had leased equipment under capital lease obligations expiring through November 2003. The equipment is recorded at the present value of minimum lease payments and amortized over its estimated productive life. Property and equipment includes the following amounts for capitalized leases:
2004 2003 ---- ---- Equipment cost $ 0 $ 437,766 Less: accumulated amortization 0 393,315 ----------- ----------- $ 0 $ 44,451 =========== ===========
The Company also leases office space, equipment, and vehicles under various noncancelable operating leases expiring through December 2012. Rent expense under these leases was $ 379,351 and $ 538,969 for the years ended December 31, 2004 and 2003, respectively. -12- NOTES TO FINANCIAL STATEMENTS (CONT'D) INFO SYSTEMS, INC. Note 7 Commitments (cont'd) ----------- Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2004 are as follows:
Operating Leases --------- 2005 $ 260,440 2006 239,143 2007 196,002 2008 165,000 2009 165,000 Thereafter 357,500 ------------ Total minimum lease payments $ 1,383,085 ===========
Note 8 Employee benefit plan --------------------- The Company sponsors a defined contribution 401(k) plan (Plan) which covers substantially all employees. Employees become eligible upon attaining age 21 and completing six months of service. Employees may elect to contribute up to 15% of their annual compensation up to the maximum allowable under the Internal Revenue Code. The Company pays all administrative costs of the Plan and matches employee contributions up to fifty percent of the first six percent of employee contributions. The Company's contributions to the Plan were $ 275,815 and $ 292,211 for the years ended December 31, 2004 and 2003, respectively. Note 9 Equity ------ The Company has authorized the issuance of 1,500 shares of $ 1,000 par, 6% cumulative preferred stock, of which 600 shares are outstanding. Cumulative dividends in arrears at December 31, 2004 and 2003 were approximately $ 216,000 and $ 182,000, respectively. On March 8, 2005, the Board of Directors declared the dividends for payment. Note 10 Subsequent event ---------------- Subsequent to year end, a total of 7.71 shares of common stock were issued to certain employees of the Company as part of their compensation. The stock was issued out of Treasury stock. The total cost of compensation that will be recognized in 2005 for this transaction is $ 206,018, using the fair value method. In 2004, the shareholders of the Company entered into an agreement to sell their stock in the Company to MTM Technologies, Inc. for $ 8,300,000 in cash plus shares in the acquiring entity valued at $ 3,200,000. Payment for the stock is subject to the terms of the Stock Purchase Agreement between the Company and MTM Technologies, Inc. The sale was completed on March 11, 2005. -13-