EXHIBIT 99.2
------------
TABLE OF CONTENTS
FINANCIAL STATEMENTS:
Balance Sheets......................................................... 1
Statements of Income and Members' Equity............................... 2
Statements of Cash Flows............................................... 3
Notes to Financial Statements.......................................... 4-7
SPECTAL, LLC
UNAUDITED BALANCE SHEETS
- ----------------------------------------- ---------------- ---------------
SEPTEMBER 30 2006 2005
- ----------------------------------------- ---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,272,765 $ 5,643,356
Accounts receivable 7,811,198 5,604,185
Employee receivable 6,262 13,509
Prepaid expenses 193,159 156,051
---------------- ----------------
Total current assets 14,283,384 11,417,101
PROPERTY AND EQUIPMENT, NET 84,601 81,367
OTHER ASSETS:
Security deposit 16,664 16,664
---------------- ----------------
TOTAL ASSETS $ 14,384,649 $ $11,515,132
================ ================
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 351,312 $ 238,491
Accrued vacation 705,502 373,338
Accrued bonuses 1,645,444 642,233
Accrued payroll and payroll taxes 2,049,614 1,267,744
Accrued retirement contribution 2,077,024 895,005
Accrued expenses - other 75,000 -
---------------- ----------------
Total current liabilities 6,903,896 3,416,811
COMMITMENTS
MEMBERS' EQUITY 7,480,753 8,098,321
---------------- ----------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 14,384,649 $ 11,515,132
================ ================
See Accompanying Notes
1
SPECTAL, LLC
UNAUDITED STATEMENTS OF INCOME AND MEMBERS' EQUITY
- ------------------------------------------- -------------- --------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30 2006 2005
- ------------------------------------------- -------------- --------------
CONTRACT REVENUE $ 42,838,838 $ 29,844,489
------------ ------------
DIRECT COSTS:
Direct labor 21,552,176 15,641,355
Other direct costs 2,230,979 387,480
Other compensation and payroll expenses 3,791,126 1,966,621
------------ ------------
Total direct costs 27,574,281 17,995,456
------------ ------------
GROSS PROFIT 15,264,557 11,849,033
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Auto 21,702 21,327
Bad debt -- 2,533
Credit card fees 460 536
Conferences and meetings 5,057 4,983
Contributions 225 1,000
Depreciation 6,929 5,962
Employee benefits 35,991 5,511
Insurance 771,630 708,018
Lease 22,143 6,877
Licenses, permits, and other taxes 106,430 121
Meals and entertainment 28,097 13,199
Miscellaneous 9,574 7,174
Office 94,740 76,642
Outside services 109,270 39,555
Payroll taxes 322,653 189,336
Professional fees 101,806 89,072
Rent 161,808 153,471
Repairs and maintenance -- 90
Retirement plan 296,146 125,301
Salaries and wages 5,539,470 3,941,635
Taxes - other 4,078 28,040
Telecommunication 29,992 39,760
Training 28,608 4,623
------------ ------------
Total general and administrative expenses 7,696,809 5,464,766
------------ ------------
INCOME FROM OPERATIONS 7,567,748 6,384,267
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 197 182
Interest expense (2,236) (293)
------------ ------------
Total other expense (2,039) (111)
------------ ------------
NET INCOME 7,565,709 6,384,156
Members' equity - beginning 7,331,036 5,184,047
Distributions (7,415,992) (3,469,882)
------------ ------------
MEMBERS' EQUITY - ENDING $ 7,480,753 $ 8,098,321
============ ============
See Accompanying Notes
2
SPECTAL, LLC
UNAUDITED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------- ------------------- -------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30 2006 2005
- --------------------------------------------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,565,709 $ 6,384,156
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 6,929 5,962
(Increase) decrease in:
Accounts receivable (2,665,075) (1,596,996)
Employee receivable (3,562) (12,509)
Prepaid expenses (66,070) (75,762)
Increase (decrease) in:
Accounts payable 126,218 130,882
Accrued expenses 2,012,445 1,238,291
----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,976,594 6,074,024
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,667) (36,165)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (7,415,992) (3,469,882)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (449,065) 2,567,977
Cash and cash equivalents - beginning 6,721,830 3,075,379
----------------- -----------------
CASH AND CASH EQUIVALENTS - ENDING $ 6,272,765 $ 5,643,356
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,236 $ 293
Income taxes -- --
See Accompanying Notes
3
SPECTAL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 2006 AND 2005
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization - SpecTal, LLC was formed on May 28, 1999. The Company
provides comprehensive security and intelligence consulting services
to government agencies and private industry. The Company creates,
develops, and executes customized programs allowing customers to
achieve desired solutions.
Basis of presentation - The Company's policy is to prepare its
financial statements on the accrual basis of accounting in accordance
with the accounting principles generally accepted in the United
States of America, whereby revenue is recognized when earned and
expenses are recognized in the period in which they are considered to
have been incurred.
Cash and cash equivalents - The Company considers cash in banks and
all highly liquid investments that have original maturities of three
months or less, when purchased, to be cash equivalents. As of
September 30, 2006 and 2005, the Company's cash and cash equivalents
were deposited primarily in one financial institution.
Accounts receivable - The Company uses the allowance method to
account for uncollectible accounts receivable. At September 30, 2006
and 2005, there were no provisions for doubtful accounts, as
management believes all receivables to be collectible based on past
experience.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives ranging from 3 to 7 years. Leasehold
improvements are amortized over the lesser of the estimated useful
life of the asset or the lease term. Expenditures for major additions
and improvements are capitalized and minor replacements, maintenance,
and repairs are expensed as incurred.
Income taxes - The Company, with the consent of its members, has
elected under the Internal Revenue Code to be treated as an
association and taxed as an S Corporation. The members of an S
Corporation are taxed on their proportionate share of the Company's
taxable income. Therefore, no provision or liability for federal or
state income taxes has been included in the financial statements
since taxable income or loss flows through to, and is reportable by,
the individual members.
4
SPECTAL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 2006 AND 2005
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
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 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.
NOTE 2: ACCOUNTS RECEIVABLE:
Accounts receivable consists of billed and unbilled accounts with
government customers. At September 30, 2006 and 2005, the composition
of accounts receivable was:
2006 2005
------------ -----------
Accounts receivable - billed $ 7,658,446 $ 5,288,421
Accounts receivable - unbilled 152,752 315,764
------------ -----------
Total accounts receivable $ 7,811,198 $ 5,604,185
============ ===========
NOTE 3: PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of September 30,
2006 and 2005:
2006 2005
------------ -----------
Office furniture and equipment $ 91,821 $ 82,154
Leasehold improvements 24,897 22,413
------------ -----------
116,718 104,567
Less: accumulated depreciation (32,117) (23,200)
------------ -----------
Total property and equipment $ 84,601 $ 81,367
============ ===========
NOTE 4: COMMITMENTS:
The Company leases office space in Reston, Virginia under a five year
lease, which commenced on March 26, 2004. The lease calls for monthly
base rent of $17,163 with an annual increase of 3% throughout the
lease term.
As of September 30, 2006, the Company leases one automobile under a
lease agreement that expires in June 2007 and requires monthly
payments of $837. The lease agreements for two additional automobiles
expired in March 2006.
5
SPECTAL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 2006 AND 2005
- --------------------------------------------------------------------------------
NOTE 4: COMMITMENTS: (continued)
The Company leases a copier under an agreement that expires in
November 2009. The monthly payment under this lease is $232.
The Company leases a telephone system under an agreement that expires
in February 2009. The monthly payment under this lease is $670.
Rent expense under all leases for the nine months ended September 30,
2006 and 2005 was $161,808 and $153,471, respectively.
Future minimum lease payments required for the periods ending
December 31 under these leases at September 30, 2006 are as follows:
December 31, 2006 $ 58,252
2007 233,514
2008 235,885
2009 61,848
-------------
$ 589,499
=============
NOTE 5: RETIREMENT PLAN:
The Company maintains a defined contribution 401(k) plan covering
substantially all full time employees. Under the plan, the Company
may, at its discretion, make matching contributions as a percentage
of the employee contributions. Matching contributions were $296,146
and $125,301 for the nine months ended September 30, 2006 and 2005,
respectively.
NOTE 6: RELATED PARTY TRANSACTIONS:
A company that is owned by a member performs information technology
services for SpecTal, LLC. For the nine months ended September 30,
2006 and 2005, total costs of $40,310 and $26,977 were incurred.
NOTE 7: ECONOMIC DEPENDENCY
For the nine months ended September 30, 2006 and 2005, the Company
derived 100% of its revenues from contracts with the United States
federal government.
6
SPECTAL, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 2006 AND 2005
- --------------------------------------------------------------------------------
NOTE 8: CONCENTRATION OF CREDIT RISK:
The Company maintains its cash balance at a financial institution in
the Washington, DC metropolitan area. At various times during the
year, the account balance at this institution may exceed the Federal
Deposit Insurance Corporation limit of $100,000. Management regularly
monitors the financial condition of the financial institution, along
with its balances in the cash account and tries to keep these
potential risks to a minimum. In the opinion of management, this does
not represent an unusual risk.
NOTE 9: CONTRACT BACKLOG:
Contract backlog comprises the following:
Funded $ 11,678,000
Unfunded 120,763,000
-------------
$ 132,441,000
=============
NOTE 10: SUBSEQUENT EVENT:
During October 2006, the owners of the Company contributed all of
their membership interests into a newly formed entity, TalSpec
Holdings, LLC ("TalSpec"), in exchange for equivalent ownership
interests in TalSpec. On October 19, 2006, TalSpec sold 100% of its
ownership interest in the Company to L-1 Identity Solutions, Inc.
7