Exhibit 99.2
Corporate Edge, Inc.
Financial Statements
Year Ended December 31, 2006
Contents
Report of Independent Auditors
The Shareholders
Corporate Edge, Inc.
We have audited the accompanying consolidated balance sheet of Corporate Edge, Inc. as of December 31, 2006 and the related consolidated statements of income, shareholders’ equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with the auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Edge, Inc. at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 15, 2008
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Corporate Edge, Inc.
Balance Sheet
December 31, 2006
Assets | | | |
Current assets: | | | |
Accounts receivable - net of allowance for doubtful accounts of $199,884 | | $ | 15,430,763 | |
Inventories | | 4,137,287 | |
Note receivable - related party | | 359,451 | |
Prepaid expenses and other current assets | | 405,502 | |
Total current assets | | 20,333,003 | |
Property and equipment, net | | 783,325 | |
Other assets: | | | |
Security deposits | | 182,425 | |
Deferred financing costs - net | | 37,300 | |
| | 219,725 | |
Total assets | | $ | 21,336,053 | |
| | | |
Liabilities and shareholders’ equity | | | |
| | | |
Current liabilities: | | | |
Line of credit | | $ | 5,319,421 | |
Accounts payable | | 6,905,652 | |
Accrued liabilities | | 5,326,863 | |
Customer deposits | | 761,064 | |
Total current liabilities | | 18,313,000 | |
Subordinated note payable - affiliate | | 2,250,000 | |
Total liabilities | | 20,563,000 | |
Shareholders’ equity: | | | |
Common stock, no par value, 1,000 shares authorized, 400 shares issued and outstanding | | — | |
Additional paid in capital | | 645,275 | |
Retained earnings | | 127,778 | |
Total shareholders’ equity | | 773,053 | |
Total liabilities and shareholders’ equity | | $ | 21,336,053 | |
See accompanying notes to financial statements.
2
Corporate Edge, Inc.
Statement of Income
Year Ended December 31, 2006
Revenue | | $ | 57,850,691 | |
Cost of goods sold (exclusive of depreciation and amortization shown separately below) | | 42,756,237 | |
Gross profit | | 15,094,454 | |
Operating expenses: | | | |
Selling, general, and administrative expenses | | 13,582,203 | |
Depreciation and amortization | | 239,707 | |
Income from operations | | 1,272,544 | |
Other income (expense) | | | |
Interest income | | 142 | |
Interest expense | | (627,398 | ) |
Total other (expense) | | (627,256 | ) |
Income before income taxes | | 645,288 | |
Income tax expense | | 38,320 | |
Net income | | $ | 606,968 | |
See accompanying notes to financial statements.
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Corporate Edge, Inc.
Statement of Shareholders’ Equity
Year Ended December 31, 2006
| | Common Stock | | Additional Paid | | Retained | | | |
| | Shares | | Amount | | In Capital | | Earnings | | Total | |
| | | | | | | | | | | |
Balance at December 31, 2005 | | 400 | | — | | $ | 645,275 | | $ | 482,810 | | $ | 1,128,085 | |
| | | | | | | | | | | |
Net income | | — | | — | | — | | 606,968 | | 606,968 | |
| | | | | | | | | | | |
Distributions to shareholders | | — | | — | | — | | (962,000 | ) | (962,000 | ) |
| | | | | | | | | | | |
Balance at December 31, 2006 | | 400 | | $ | — | | $ | 645,275 | | $ | 127,778 | | $ | 773,053 | |
| | | | | | | | | | | | | | | |
See accompanying notes to financial statements.
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Corporate Edge, Inc.
Statement of Cash Flows
Year Ended December 31, 2006
Cash flows from operating activities | | | |
Net income | | $ | 606,968 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | | 239,707 | |
Bad debt provision | | (22,111 | ) |
Change in assets | | | |
Accounts receivable | | (2,406,678 | ) |
Inventories | | (2,456,604 | ) |
Prepaid expenses and other current assets | | 11,434 | |
Security deposits | | (10,867 | ) |
Change in liabilities | | | |
Accounts payable and accrued expenses | | 3,780,547 | |
Customer deposits | | 405,112 | |
Net cash provided by operating activities | | 147,508 | |
Cash flows from investing activities | | | |
Purchases of property and equipment | | (419,984 | ) |
Issuance of note receivable, net | | (359,451 | ) |
Net cash used in investing activities | | (779,435 | ) |
Cash flows from financing activities | | | |
Repayments on line of credit | | (60,485,856 | ) |
Proceeds from the line of credit | | 62,113,461 | |
Payment for deferred financing costs | | (33,678 | ) |
Distributions to shareholders | | (962,000 | ) |
Net cash provided by financing activities | | 631,927 | |
Net change in cash | | — | |
Cash, beginning of year | | — | |
Cash, end of year | | $ | — | |
See accompanying notes to financial statements.
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Corporate Edge, Inc.
Notes to Financial Statements
December 31, 2006
1. Description of the Business
Corporate Edge, Inc. (the Company) is a national distributor of promotional products and is principally involved in the design, development and sale of corporate specialty items.
The Company was incorporated in the State of New Jersey on October 5, 1988 and was authorized to do business in New York on January 7, 2003.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Corporate Edge, Inc. and its wholly owned subsidiary, Screened Image, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can differ from those estimates.
Fair Value of Financial Instruments
As of December 31, 2006, the carrying value of the Company’s financial instruments, which consist of accounts receivable, line of credit, and accounts payable, approximate their fair values due to their short term nature.
Revenue Recognition
The Company recognizes revenue for goods sold when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) title transfers to the customer, (3) the fee is fixed and determinable and (4) collectibility is reasonably assured.
Accounts Receivable
Accounts receivable are uncollaterized customer obligations due under normal trade terms. Invoices require payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Interest is not accrued on outstanding balances.
The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out method, and represents the lower of replacement cost or estimated realizable value. Inventory consists primarily of finished goods.
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Corporate Edge, Inc.
Notes to Financial Statements - (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization expense is computed using accelerated and straight-line methods over the estimated useful lives of the respective assets. The estimated useful lives, by asset class, are as follows:
| | Years | |
| Equipment | 3-10 |
| Furniture | 7-10 |
| Transportation equipment | 6 |
Leasehold improvements are depreciated using the straight-line method over the shorter of their estimated useful lives or the terms of the related leases.
Advertising
The Company expenses advertising as incurred. Advertising expense for the year ended December 31, 2006 was $69,880.
Income Taxes
For income tax purposes, the Company has elected to be taxed as a Subchapter “S” Corporation under certain sections of the Internal Revenue Code. As such, the Company is not obligated to pay federal income taxes, and the individual shareholders assume the responsibility for the payment on their proportionate share of the income of the Company.
As the Company is incorporated in the State of New Jersey and authorized to do business in New York, the Company is obligated to pay state taxes based upon the respective state laws. Although New Jersey recognizes the Subchapter “S” Corporation, the Company is required to pay New Jersey corporate income taxes which are based on the difference between the corporate rate and the individual tax rate. New York City does not recognize the Subchapter “S” Corporation. Therefore, the Company is obligated to pay New York City corporate taxes on income allocable to this jurisdiction.
The Company accounts for income taxes imposed by jurisdictions that do not recognize the Subchapter “S” election pursuant to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial carrying values of assets and liabilities and their respective tax bases. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The Company had no material accrued or refundable income taxes or deferred tax assets or liabilities as of December 31, 2006.
Deferred Financing Costs
Loan fees and other debt issuance costs are deferred and included in non-current assets. Any debt discount is offset against the principal balance of the related loan. Deferred financing costs and debt discount are amortized to interest expense over the term of the related loan (3-10 years) using the effective interest method.
Deferred financing costs were $37,300, net of accumulated amortization of $36,709, as of December 31, 2006. The amortization included in interest expense for the year ended December 31, 2006 was $66,585.
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Corporate Edge, Inc.
Notes to Financial Statements - (Continued)
3. Property and Equipment
Property and equipment at December 31, 2006 consisted of the following:
Furniture and equipment | | $ | 2,729,320 | |
Leasehold improvements | | 271,709 | |
Transportation equipment | | 159,464 | |
| | 3,160,493 | |
Less accumulated depreciation | | (2,377,168 | ) |
| | $ | 783,325 | |
Depreciation and amortization expense for the year ended December 31, 2006 was $239,707.
4. Note Receivable — Related Party
The Company has a note receivable from one of its sales representatives which is due on demand and is non-interest bearing. Under the terms of the note, 20% of all commissions due to the sales representative shall be applied as payment against the note.
5. Line of Credit
On March 29, 2006, the Company refinanced its revolving line of credit with a new bank increasing the limit to $7,500,000. Interest on borrowings is payable at 1% above the prime rate (8.25% at December 31, 2006). As defined in the loan agreement, the maximum availability under the line is limited to 85% of eligible accounts receivables. The line of credit is secured by a blanket lien on all assets of the Company and is personally guaranteed by the shareholders. The line of credit expired June 1, 2007 and was renewed effective July 1, 2007 for an additonal one year term. As of December 31, 2006, the unused portion of the line totaled $2,180,579.
The line of credit contains various financial covenants relating to debt service coverage and debt to equity ratios. As of December 31, 2006, the Company was in breach of the debt to equity covenant. Under the terms of the loan agreement, the lender may call the loan if the Company is in violation of any restrictive covenant. The lender has waived the debt to equity requirement. Management is not aware of any other violations of these covenants at December 31, 2006.
Interest expense relating to the line of credit was $401,285 for the year ended December 31, 2006.
6. Subordinated Note Payable - Affiliate
The note payable to affiliate is secured by a second lien on all the Company’s assets. Under the terms of the note, the loan cannot be repaid until January 3, 2009. The note bears interest at 6.67% per annum, payable monthly, and is due on or before January 3, 2013, if certain conditions are not met. Interest expense relating to this note was $150,000 for the year ended December 31, 2006. Pursuant to a subordination agreement with the Company’s lender, the note is fully subordinate to the Company’s line of credit.
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Corporate Edge, Inc.
Notes to Financial Statements - (Continued)
7. Commitments and Contingencies
Lease Commitments
The Company leases office space under non-cancellable operating leases expiring at various times from January 2007 to December 2011. The leases contain provisions for payments relating to real estate taxes and operating expenses. Minimum future rental payments required under these leases for each of the next five years and in the aggregate are as follows:
Years ending December 31, | | Amount | |
| | | |
2007 | | $ | 484,127 | |
2008 | | 467,153 | |
2009 | | 507,153 | |
2010 | | 547,153 | |
2011 | | 347,153 | |
| | | |
Total minimum future rentals | | $ | 2,352,739 | |
Total rent expense on all operating leases for the year ended December 31, 2006 was $681,039.
8. Retirement Plan
The Company has a profit sharing plan that covers substantially all of the Company’s employees. Contributions to the plan are at the discretion of the shareholders. For the year ended December 31, 2006, the Company did not make any contributions to the plan.
9. Capital Structure and Common Stock
At December 31, 2006, the Company had 400 shares of voting, no par value common stock issued and outstanding. Dividends are paid at the discretion of the Board of Directors. A distribution of $962,000 was approved and made to the outstanding shareholders during the year ended December 31, 2006.
10. Significant Customer
During the year ended December 31, 2006, sales to one customer were approximately 33% of the Company’s total revenue. The amount included in accounts receivable for this customer at December 31, 2006 was approximately $9,738,000.
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