Exhibit 99.2
ALPHANATIONAL
TECHNOLOGY SERVICES, INC.
FINANCIAL REPORT
DECEMBER 31, 2003 AND 2002
C O N T E N T S
Page | ||||
INDEPENDENT AUDITOR’S REPORT | 1 | |||
FINANCIAL STATEMENTS | ||||
Balance Sheets | 2 | |||
Statements of Income | 3 | |||
Statements of Changes in Stockholders’ Equity (Deficit) | 4 | |||
Statements of Cash Flows | 5 | |||
Notes to Financial Statements | 6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
AlphaNational Technology Services, Inc.
Fort Worth, Texas
We have audited the accompanying balance sheets of AlphaNational Technology Services, Inc. as of December 31, 2003 and 2002 and the related statements of income, changes in stockholders’ equity (deficit), 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the balance sheet is 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 AlphaNational Technology Services, Inc. as of December 31, 2003 and 2002, 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.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
December 5, 2004
4206
ALPHANATIONAL TECHNOLOGY SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 | 2002 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 3,256 | $ | 97,869 | ||||
Accounts receivable | 667,393 | 477,773 | ||||||
Inventory, lower of average cost or market | 301,053 | 314,567 | ||||||
Other receivables | 16,594 | 1,875 | ||||||
Prepaid Expenses | — | 12,857 | ||||||
Deferred taxes | 26,860 | 8,283 | ||||||
Total current assets | 1,015,156 | 913,224 | ||||||
PROPERTY AND EQUIPMENT, at cost | ||||||||
Land | 732,094 | 732,094 | ||||||
Furniture and fixtures | 39,622 | 39,622 | ||||||
Equipment | 366,368 | 364,369 | ||||||
System software | 206,580 | 206,579 | ||||||
Leasehold improvements | 64,185 | 64,185 | ||||||
1,408,849 | 1,406,849 | |||||||
Less accumulated depreciation | 603,135 | 589,446 | ||||||
805,714 | 817,403 | |||||||
OTHER ASSETS | ||||||||
Deposits | 5,100 | 11,948 | ||||||
Lexmark customer list - net of amortization | 404,761 | 547,619 | ||||||
409,861 | 559,567 | |||||||
TOTAL ASSETS | $ | 2,230,731 | $ | 2,290,194 | ||||
The accompanying notes are an integral part of these financial statements.
ALPHANATIONAL TECHNOLOGY SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 | 2002 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES | ||||||||
Checks issued in excess of bank balances | $ | 27,997 | $ | — | ||||
Current portion of long-term debt | 485,402 | 104,571 | ||||||
Notes payable | 481,631 | 483,408 | ||||||
Note payable to stockholder | 17,000 | — | ||||||
Accounts payable | 247,638 | 95,259 | ||||||
Accrued liabilities | 176,962 | 148,891 | ||||||
Income tax payable | 193,156 | 490,035 | ||||||
Other current liabilities | — | 16,359 | ||||||
Deferred income | 593,676 | 890,324 | ||||||
Total current liabilities | 2,223,462 | 2,228,847 | ||||||
LONG-TERM DEBT | 40,414 | 80,724 | ||||||
Total liabilities | 2,263,876 | 2,309,571 | ||||||
STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Common stock, $1 par value; authorized 500,000 shares; issued and outstanding 2003 39,000 shares and 2002 issued 121,000 shares | 39,000 | 121,000 | ||||||
Retained earnings (deficit) | (72,145 | ) | 1,444,723 | |||||
Less cost of common shares reacquired for the treasury; 2002 76,500 shares | — | (1,585,100 | ) | |||||
Total stockholders’ equity (deficit) | (33,145 | ) | (19,377 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 2,230,731 | $ | 2,290,194 | ||||
The accompanying notes are an integral part of these financial statements.
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 | 2002 | |||||||
REVENUE | ||||||||
Service revenue | $ | 6,638,522 | $ | 7,438,284 | ||||
Miscellaneous income | 7,134 | 6,404 | ||||||
Total revenue | 6,645,656 | 7,444,688 | ||||||
COST OF SALES AND SERVICE REVENUES | ||||||||
Technician salaries and wages | 773,325 | 875,416 | ||||||
Contracted services | 1,107,352 | 683,179 | ||||||
Cost of parts | 814,922 | 1,263,540 | ||||||
2,695,599 | 2,822,135 | |||||||
Gross profit | 3,950,057 | 4,622,553 | ||||||
OPERATING EXPENSES | ||||||||
Salaries, wages, and payroll taxes | 1,923,229 | 2,036,943 | ||||||
Depreciation and amortization | 177,480 | 188,958 | ||||||
Insurance | 264,073 | 164,408 | ||||||
Rent | 176,715 | 172,776 | ||||||
Other general operating expenses | 1,083,456 | 936,339 | ||||||
3,624,953 | 3,499,424 | |||||||
Income from operations | 325,104 | 1,123,129 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense | 84,551 | 51,709 | ||||||
Income before income tax expense | 240,553 | 1,071,420 | ||||||
INCOME TAX EXPENSE | 81,788 | 364,283 | ||||||
Net income | $ | 158,765 | $ | 707,137 | ||||
Weighted averages shares outstanding | 46,944 | 48,717 | ||||||
Earnings per common share – basic and diluted | $ | 3.38 | $ | 14.52 | ||||
The accompanying notes are an integral part of these financial statements.
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003 AND 2002
Common | Retained | Treasury | ||||||||||||||
Stock | Earnings | Stock | Total | |||||||||||||
BALANCE, | ||||||||||||||||
December 31, 2001 | $ | 121,000 | $ | 737,586 | ($1,420,000 | ) | ($561,414 | ) | ||||||||
Repurchase of common stock | — | — | (165,100 | ) | (165,100 | ) | ||||||||||
Net income | 707,137 | 707,137 | ||||||||||||||
BALANCE, | ||||||||||||||||
December 31, 2002 | 121,000 | 1,444,723 | (1,585,100 | ) | (19,377 | ) | ||||||||||
Repurchase of common stock | — | — | (100,000 | ) | (100,000 | ) | ||||||||||
Cancellation of treasury stock | (82,000 | ) | (1,603,100 | ) | 1,685,100 | — | ||||||||||
Dividends | — | (72,533 | ) | — | (72,533 | ) | ||||||||||
Net income | — | 158,765 | 158,765 | |||||||||||||
BALANCE, | ||||||||||||||||
December 31, 2003 | $ | 39,000 | ($72,145 | ) | $ | — | ($33,145 | ) | ||||||||
The accompanying notes are an integral part of these financial statements.
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
2003 | 2002 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 158,765 | $ | 707,137 | ||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 177,480 | 188,958 | ||||||||||
Deferred taxes | (18,577 | ) | (8,283 | ) | ||||||||
Change in operating assets and liabilities: | ||||||||||||
Accounts receivable | (189,620 | ) | 942,458 | |||||||||
Other receivables | (14,719 | ) | 10,321 | |||||||||
Inventory | 13,514 | (73,033 | ) | |||||||||
Prepaids and deposits | 19,705 | (2,297 | ) | |||||||||
Checks issued in excess of bank balances | 27,997 | — | ||||||||||
Accounts payable | 152,379 | (101,841 | ) | |||||||||
Accrued liabilities | (306,131 | ) | 76,016 | |||||||||
Deferred income | (296,648 | ) | (910,457 | ) | ||||||||
Net cash provided by (used in) operating activities | (275,855 | ) | 828,979 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Capital expenditures | (3,693 | ) | (25,046 | ) | ||||||||
Net cash used in investing activities | (3,693 | ) | (25,046 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds on short-term debt | 462,039 | 120,000 | ||||||||||
Principal payments on debt | (104,571 | ) | (697,092 | ) | ||||||||
Distributions to shareholders | (72,533 | ) | — | |||||||||
Common stock repurchased | (100,000 | ) | (165,100 | ) | ||||||||
Net cash provided by (used in) financing activities | 184,935 | (742,192 | ) | |||||||||
Net change in cash and cash equivalents | (94,613 | ) | 61,741 | |||||||||
CASH AND CASH EQUIVALENTS, beginning of year | 97,869 | 36,128 | ||||||||||
CASH AND CASH EQUIVALENTS, end of year | $ | 3,256 | $ | 97,869 | ||||||||
SUPPLEMENTARY DISCLOSURE | ||||||||||||
Interest Paid | $ | 75,504 | $ | 51,709 | ||||||||
The accompanying notes are an integral part of these financial statements.
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies relative to the carrying value of property and equipment and inventory are indicated in the captions on the balance sheet. Other significant accounting policies are as follows:
Nature of Operations
AlphaNational Technology Services, Inc. (AlphaNational or Company) provides nationwide on-site service on personal computers, printers, fax terminals, typewriters and related products. Services are provided through service contracts for parts and labor repair or time and materials billings. AlphaNational has over 200 technicians strategically located to meet clients’ demands and a central service depot located with the Company’s home office in Fort Worth, Texas.
Revenue Recognition
Revenue is recognized either ratably over the life of maintenance contracts or as service is rendered in the instance of non-contract maintenance. Unearned revenue is stated as deferred income on the balance sheet. The Company bills maintenance contracts either monthly, quarterly, or annually in advance.
Advertising
Advertising costs are expensed as incurred. The amount charged to expense for the years ended December 31, 2003 and 2002 was $354 and $895, respectively.
Depreciation
Depreciation is provided using the straight-line method over the estimated useful lives of the applicable assets, which are generally five to ten years. Leasehold improvements are amortized over eighteen years. The IBM/Lexmark customer list acquired in November 1999 is being amortized over its expected life of seven years. Depreciation and amortization expense charged to operations during the years ended December 31, 2003 and 2002 was $177,480 and $188,958, respectively.
Software Development
The Company capitalizes eligible software development costs associated with computer software used in its development of internet ordering capability. The costs are amortized using the straight-line method over the remaining estimated economic life of the product, which is generally five years.
Inventories
Inventories are stated at the lower of average cost or market. Inventories consist of used parts either purchased in bulk or reclaimed from used machine purchases.
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES - continued
Cash Flows Presentation
The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.
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.
Accounts Receivable
All receivables considered doubtful have been charged to current operations and it is management’s opinion that no significant amounts are doubtful of collection.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
NOTE 2. OPERATING LEASES
The Company leases its Fort Worth, Texas offices under a long-term operating lease. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year, as of December 31, 2003, are as follows:
2004 | $ | 64,513 |
The Company leases small offices in other states under various operating leases. Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year, as of December 31, 2003, are as follows:
2004 | $ | 23,280 |
Rental expense for office space was $176,715 and $172,776 for the years ended December 31, 2003 and 2002, respectively.
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. CONCENTRATION OF CREDIT RISK
The Company operates in one industry segment. The Company receives the majority of its revenue in advance through either month-to-month, quarterly or annual maintenance agreements. Historically, credit losses have been minimal. One major customer accounted for more than 26.18% and 60% of net sales for the years ended December 31, 2003 and 2002, respectively.
NOTE 4. SHORT-TERM NOTES PAYABLE
The Company has a bank revolving line-of-credit which expires on April 28, 2004. Under the terms of the line of credit, the Company may borrow up to $400,000 secured by substantially all of its assets, including a specific assignment of $500,000 key-man life insurance on the lives of the Company’s president and chief financial officer. In addition, the stockholders pledged all stock in the Company as security and have personally guaranteed the loan. During 2003, the Company added an additional line-of-credit to borrow up to $100,000 more under the same terms until March 15, 2004. Upon expiration, the $400,000 line-of-credit was renewed under the same terms through April 28, 2005 without the additional $100,000. As of December 31, 2003 and 2002, the Company had an outstanding balance borrowed against the lines-of-credit of $481,631 and $483,408, respectively. Interest is payable monthly at a variable rate of 1.5% above the highest prime rate published in the Wall Street Journal (5.50% at December 31, 2003). As part of the line-of-credit agreement, deposits to the Company’s lockbox are deposited into the Company’s bank account and the bank drafts 70% of the deposits to pay down the line-of-credit.
During 2003, the Company borrowed $17,000 from a majority stockholder with an agreement to repay the note within one week; therefore, no interest was charged on the note.
NOTE 5. LONG-TERM DEBT
Long-term debt at December 31, 2003 and 2002 consisted of the following:
2003 | 2002 | |||||||
Note payable to a financial institution in monthly installments of $6,000 including interest at prime plus 2.5% (6.5% at December 31, 2003), due on demand or January 20, 2006 | $ | 446,816 | $ | — | ||||
Note payable to current stockholders | — | 81,295 | ||||||
Note payable to a former stockholder in monthly installments of $3,500 including interest at 6%, due November 2005 | 79,000 | 112,000 | ||||||
525,816 | 185,295 | |||||||
Less current maturities | 485,402 | 104,571 | ||||||
$ | 40,414 | $ | 80,724 | |||||
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ALPHANATIONAL TECHNOLOGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. LONG-TERM DEBT - continued
Future maturities of long-term debt are as follows: | ||||
2004 | $ | 485,402 | ||
2005 | 40,414 | |||
$ | 525,816 | |||
NOTE 6. INCOME TAXES
Income tax expense consists of the following for the years ended December 31, 2003 and 2002:
2003 | 2002 | |||||||
Federal | ||||||||
Current | $ | 108,648 | $ | 372,566 | ||||
Deferred | (26,860 | ) | (8,283 | ) | ||||
$ | 81,788 | $ | 364,283 | |||||
The estimated provision for income tax expense differs from the amount calculated by applying the statutory federal income tax rates to income before taxes due to expenses which are non-deductible for federal income tax purposes. The tax effects of temporary differences that give rise to the deferred tax assets at December 31, 2003 and 2002 are inventory reserves which are not deductible for tax purposes until realized.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company paid approximately $43,000 and $7,650 to a shareholder for legal fees for the years ended December 31, 2003 and 2002, respectively.
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