EXHIBIT 99.2
DARR WESTWOOD TECHNOLOGY CORPORATION
Consolidated Financial Statements
For the period from April 17, 2004 to August 31, 2004 (Successor Period) and the
period from September 1, 2003 to April 16, 2004 (Predecessor Period) with Report
of Independent Registered Public Accounting Firm
DARR Westwood Technology Corporation
Consolidated Financial Statements
Periods ended April 16, 2004 and August 31, 2004
Contents
Report of Independent Registered Public Accounting Firm........................1
Audited Consolidated Financial Statements
Consolidated Balance Sheet.....................................................2
Consolidated Statements of Income..............................................3
Consolidated Statements of Changes in Stockholders' Equity.....................4
Consolidated Statements of Cash Flows..........................................5
Notes to Consolidated Financial Statements.....................................6
Report of Independent Registered Public Accounting Firm
Board of Directors
DARR Westwood Technology Corporation
We have audited the accompanying consolidated balance sheet of DARR Westwood
Technology Corporation as of August 31, 2004, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
period from April 17, 2004 to August 31, 2004 (Successor Period) and for the
period from September 1, 2003 to April 16, 2004 (Predecessor Period). 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 standards of The Public Company
Accounting Oversight Board (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 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 DARR Westwood
Technology Corporation at August 31, 2004, and the consolidated results of its
operations and its cash flows for the period from April 17, 2004 to August 31,
2004 (Successor Period) and for the period from September 1, 2003 to April 16,
2004 (Predecessor Period), in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 3, the accompanying consolidated financial statements for
the period from September 1, 2003 to April 16, 2004 (Predecessor Period) have
been restated for the correction of an error.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 22, 2004, Except for Note 3
as to which the date is October 19, 2005
1
DARR Westwood Technology Corporation
Consolidated Balance Sheet
August 31, 2004
Assets
Current assets:
Cash and cash equivalents $ 1,215,917
Accounts receivable - trade, net of allowance for
doubtful accounts of $225,000 17,732,321
Accounts receivable - other 1,191,658
Inventory 524,262
Prepaid expenses and other 79,388
Net deferred tax asset 172,232
-----------
Total current assets 20,915,778
Property, plant, and equipment, net 350,236
Other noncurrent assets 41,004
Intangible asset, net of accumulated amortization 276,276
Net deferred tax asset, noncurrent 154,344
-----------
Total assets $21,737,638
===========
Liabilities and stockholders' equity
Current liabilities:
Line of credit $ 299,250
Accounts payable - trade 14,259,738
Accounts payable - related party 33,333
Accrued expenses 1,021,994
Due to former stockholders 664,567
Unearned income 385,422
Income taxes payable 97,786
Current portion of long-term debt 349,694
-----------
Total current liabilities 17,111,784
Accrued severance 473,489
Long-term debt, net of current portion 2,405,084
Stockholders' equity:
Redeemable preferred stock, $0.01 par value
Authorized shares--5,000; 1,000 shares issued and
outstanding (liquidation value of $1,030,000) 10
Common stock, Class A, voting, $0.01 par value
Authorized shares--2,500; 198 shares issued and
outstanding 2
Common stock, Class B, non-voting, $0.01 par value
Authorized shares--2,500; 302 shares issued and
outstanding 3
Additional paid-in capital 1,624,985
Retained earnings 122,281
-----------
Total stockholders' equity 1,747,281
-----------
Total liabilities and stockholders' equity $21,737,638
===========
See accompanying notes.
2
DARR Westwood Technology Corporation
Consolidated Statements of Income
Period from Period from
April 17, 2004 September 1, 2003
to August 31, 2004 to April 16, 2004
(Successor Period) (Predecessor Period)
------------------ --------------------
(Restated)
Net sales $41,641,604 $88,229,719
Cost of sales 37,617,860 79,596,368
----------- -----------
Gross profit 4,023,744 8,633,351
Operating expenses:
Selling, general, and administrative
expenses 3,418,755 7,292,265
Management fee - related party 116,664 --
Rent expense - related party 60,000 155,333
Depreciation and amortization 23,739 51,266
----------- -----------
3,619,158 7,498,864
----------- -----------
Operating income 404,586 1,134,487
Other expense (income):
Forgiveness of debt -- (405,652)
Interest income - related party -- (21,483)
Interest income - other (25,783) (44,479)
Interest expense 184,665 72,819
----------- -----------
Income before income taxes 245,704 1,533,282
Provision for income taxes 123,423 647,445
----------- -----------
Net income $ 122,281 $ 885,837
=========== ===========
See accompanying notes.
3
DARR Westwood Technology Corporation
Consolidated Statements of Changes in Stockholders' Equity
Common Stock - Common Stock -
Preferred Stock Class A Class B Common Stock - Prior
--------------- --------------- --------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ---------- --------
Predecessor period (restated)
Balance at August 31, 2003 18,667,290 $866,961
Capital contribution,
net of income taxes -- --
Noncash distribution -- --
Net income -- --
----- --- --- --- --- --- ---------- --------
Balance at April 16, 2004
(restated) 18,667,290 $866,961
===== === === === === === ========== ========
Successor period
Balance at April 17, 2004 1,000 $10 198 $ 2 302 $ 3
Net income -- -- -- -- -- --
----- --- --- --- --- --- ---------- --------
Balance at August 31, 2004 1,000 $10 198 $ 2 302 $ 3
===== === === === === === ========== ========
Additional Treasury Total
Paid-in Retained Stock, at Stockholders'
Capital Earnings Cost Equity
---------- ---------- ---------- -------------
Predecessor period (restated)
Balance at August 31, 2003 $ -- $4,131,729 $(15,437) $4,983,253
Capital contribution,
net of income taxes 903,811 -- -- 903,811
Noncash distribution -- (399,587) -- (399,587)
Net income -- 885,837 -- 885,837
---------- ---------- -------- ----------
Balance at April 16, 2004
(restated) $ 903,811 $4,617,979 $(15,437) $6,373,314
========== ========== ======== ==========
Successor period
Balance at April 17, 2004 $1,624,985 $ -- $ -- $1,625,000
Net income -- 122,281 -- 122,281
---------- ---------- -------- ----------
Balance at August 31, 2004 $1,624,985 $ 122,281 $ -- $1,747,281
========== ========== ======== ==========
See accompanying notes.
4
DARR Westwood Technology Corporation
Consolidated Statements of Cash Flows
Period from Period from
April 17, 2004 September 1, 2003
to August 31, 2004 to April 16, 2004
(Successor Period) (Predecessor Period)
------------------ --------------------
(Restated)
Cash flows from operating activities
Net income $ 122,281 $ 885,837
Adjustments to reconcile net income to net cash provided by
operating activities:
Forgiveness of debt -- (405,652)
Depreciation and amortization 23,739 51,266
Deferred income taxes 50,578 58,303
Changes in operating assets and liabilities:
Accounts receivable - trade (6,822,126) 737,773
Accounts receivable - other (32,441) (158,048)
Inventory (75,838) 622,947
Prepaid expenses and other assets 7,706 (22,063)
Accounts payable - trade 8,707,348 (1,238,723)
Accrued expenses (637,962) 765,315
Unearned income 16,815 (125,914)
----------- -----------
Net cash provided by operating activities 1,360,100 1,171,041
Cash flows from investing activities
Additions of property, plant, and equipment (147,705) (45,616)
Acquisition of business, net of cash acquired (4,917,499) --
----------- -----------
Net cash used in investing activities (5,065,204) (45,616)
Cash flows from financing activities
Net borrowings (payments) on line of credit 299,250 (7,121,955)
Proceeds from long-term debt 1,500,000 --
Proceeds from issuance of common stock 625,000 --
Proceeds from issuance of preferred stock 1,000,000 --
----------- -----------
Net cash provided by (used in) financing activities 3,424,250 (7,121,955)
----------- -----------
Net change in cash and cash equivalents (280,854) (5,996,530)
Cash and cash equivalents at beginning of period 1,496,771 7,493,301
----------- -----------
Cash and cash equivalents at end of period $ 1,215,917 $ 1,496,771
=========== ===========
Supplemental disclosure of cash flow information
Interest paid $ 52,500 $ 28,000
=========== ===========
Income taxes paid $ 433,000 $ 345,000
=========== ===========
Supplemental schedule of noncash investing and financing activities
Capital contribution, net of income taxes $ -- $ 903,811
=========== ===========
Note receivable distributed to stockholders $ -- $ 399,587
=========== ===========
Issuance of long-term debt to former stockholders in acquisition $ 664,567 $ --
=========== ===========
See accompanying notes.
5
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements
August 31, 2004
1. Organization
Business
DARR Westwood Technology Corporation (the Company) is a holding company who
through its wholly owned subsidiary, Westwood Computer Corporation (Westwood),
is engaged in the sale and service of computers and peripherals to customers
which include departments of the United States, state and local governments and
commercial businesses throughout the United States. The Company considers all of
its operating activity to be generated from a single operating segment. The
Company is an 80%-owned subsidiary of DARR Westwood, LLC.
Westwood owns a 100% membership interest in Westwood Solutions, LLC (Solutions).
Prior to its April 16, 2004 acquisition, Westwood owned an 80% membership
interest in Solutions and Westwood's President owned the remaining 20% interest.
Concurrent with the April 16, 2004 acquisition of Westwood, Westwood acquired
the remaining 20% membership interest in Solutions. Solutions did not engage in
any operating activity during the period from September 1, 2003 through April
16, 2004 (predecessor period) or during the period from April 17, 2004 to August
31, 2004 (successor period). Accordingly, the accompanying consolidated
statement of income does not reflect any minority interest in earnings of the
subsidiary.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Westwood, and Westwood's wholly owned subsidiary,
Solutions. Significant intercompany account balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
6
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. In addition, the Company typically
maintains cash at major financial institutions. At times throughout the year,
bank account balances exceed FDIC insurance limits, which are up to $100,000 per
account.
At times throughout the year, the Company has restricted cash. Restricted cash
represents amounts collected on accounts receivable that have not been released
to the Company by its financing company. At August 31, 2004, none of the
Company's cash balances are restricted.
Concentration of Credit Risk and Significant Customers
Other financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is primarily departments of the United States
government. The Company does not require collateral or other security to support
credit sales, but provides an allowance for doubtful accounts based on
historical experience and specifically identified risks. Accounts receivable are
considered delinquent when payment is not received within standard terms of sale
and are charged off against the allowance for doubtful accounts when management
determines that recovery is unlikely and the Company ceases its collection
efforts.
For the periods ended August 31, 2004 and April 16, 2004, net sales to
departments of the United States and state and local governments comprised
approximately 83% and 86%, respectively, of total net sales.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximate fair value because of their short-term nature. The carrying
amount of the line of credit and long-term debt approximates their fair value
because the interest rates reflect rates that the Company would be able to
obtain on debt with similar terms and conditions.
Revenue Recognition
The Company recognizes revenue from the sales of products when risk of loss and
title passes, which is upon shipment. Shipping costs totaled approximately
$167,000 and $374,000 for the periods ended August 31, 2004 and April 16, 2004,
respectively, and are
7
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
recorded in cost of goods sold in the accompanying consolidated statements of
income for the periods ended August 31, 2004 and April 16, 2004, respectively.
Revenue from the sale of warranties and support service contracts is recognized
on a straight-line basis over the term of the contract, in accordance with
Financial Accounting Standards Board Technical Bulletin No. 90-1, Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts (FTB
90-1). Warranties and service contract terms generally range from 12 to 36
months. Revenue from the sale of original equipment manufacturers' warranty and
service contracts, where the manufacturer is responsible for fulfilling the
service requirements of the contract, are recognized on their contract sale
date.
The Company may also enter into sales arrangements with customers that contain
both product and warranties. The Company recognizes revenue from these
transactions in accordance with Emerging Issues Task Force (EITF) Issue No.
00-21, Revenue Arrangements with Multiple Deliverables, based on the relative
fair value of the individual components. The relative fair value of individual
components is based on historical sales of the components sold separately.
Judgments and estimates are critical to determine if the multiple elements
should be accounted for as separate accounting units.
Rebates
Rebates are recorded in the accompanying consolidated statements of income as a
reduction of cost of sales in accordance with Emerging Issues Task Force
Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor (EITF 02-16). The Company recorded rebates
of $1,501,700, 3.6% of sales, and $4,399,100, 5.0% of sales, for the periods
ended August 31, 2004 and April 16, 2004, respectively. At August 31, 2004,
approximately $1,009,000 of rebates are recorded in accounts receivable - other
in the accompanying consolidated balance sheet.
Inventory
Inventory is stated at the lower of average cost (specific identification) or
market. Inventory is entirely finished goods purchased for resale and consists
of computer hardware, computer peripherals and related supplies.
8
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives of the assets, which generally is five years.
Intangible Asset
The intangible asset consists of the value ascribed to customer relationships.
The asset is being amortized on a straight-line basis over 13 years.
Amortization expense was $7,270 for the period ended August 31, 2004.
Amortization expense of $21,811 is expected to be recorded each year through
August 31, 2016 and $14,544 for the year ended August 31, 2017.
The Company evaluates impairment of its intangible asset and property, plant and
equipment in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144). SFAS 144 requires an impairment loss to be recognized only if the
carrying amounts of long-lived assets to be held and used are not recoverable
from their expected undiscounted cash flows.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $134,983 and
$40,395 for the periods ended August 31, 2004 and April 16, 2004, respectively,
and is included in selling, general, and administrative expenses on the
consolidated statements of income.
Income Taxes
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities.
3. Restatement of Predecessor Financial Statements
During the period from September 1, 2003 to April 16, 2004 (Predecessor Period),
the Company accounted for the forgiveness, by a predecessor officer/principal
stockholder, of a deferred compensation liability as a contribution to capital.
However, the associated income tax effect was included in tax expense. The
accompanying financial statements have been restated to reflect the associated
income tax effect as a reduction of contributed capital. The error correction
did not affect the Successor Period financial statements or the August 31, 2004
balance sheet. The correction of this error resulted in a decrease in income
tax expense and a decrease in the contribution to capital originally reported
for the Predecessor Period of $603,370.
4. Acquisition
On April 16, 2004, the Company purchased substantially all of the net assets of
Westwood for $6,697,816. Prior to the acquisition, the Company had no operating
history. The acquisition was accounted for under the purchase method of
accounting and
9
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
allowed the Company to enter into the computer and peripheral sales and service
industry. The accompanying financial statements present the results of
operations for the period from September 1, 2003 to April 16, 2004 under the
Predecessor's basis of accounting (Predecessor Period) and for the period from
April 17, 2004 to August 31, 2004 under the Company's basis of accounting
(Successor Period). The purchase price consisted of cash of $5,245,222, assumed
liabilities of $1,254,778 and related acquisition costs of $197,816. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values, on the date of purchase, as follows:
Current assets $14,152,360
Customer relationships 283,546
Property, plant and equipment 188,420
Deferred tax asset 377,154
Other assets 58,038
Current liabilities (7,853,970)
Accrued severance (507,732)
-----------
Net assets acquired $ 6,697,816
===========
At August 31, 2004, $664,567 is payable to former stockholders for their
proportionate share of cash proceeds from the sale of Westwood to the Company
Had the purchase occurred on September 1, 2003, unaudited pro forma net income
would have been $724,627 for the predecessor period as a result of increased
amortization and interest expense and decreased depreciation expense, net of
the income tax effects of those adjustments. This pro forma information is
provided for informational purposes only. It is based on historical information,
and does not necessarily reflect the actual results that would have occurred,
nor is it necessarily indicative of future results of operations.
5. Property, Plant, and Equipment
Property, plant, and equipment at August 31, 2004 is as follows:
Leasehold improvements $132,018
Machinery and equipment 199,504
Furniture and fixtures 7,738
Automobiles 27,445
--------
366,705
Less accumulated depreciation 16,469
--------
$350,236
========
10
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
Depreciation expense was $16,469 and $51,266 for the periods ended August 31,
2004 and April 16, 2004, respectively.
6. Line of Credit
The Company maintains a credit facility under two agreements with a financing
company. The credit facility finances purchases from specified vendors, as
defined, and allows for borrowings based on a percentage of eligible accounts
receivable, as defined. Borrowings under both agreements are limited to an
aggregate of $15,000,000 and bear interest at the greater of the prime rate as
published by JP Morgan Chase Bank or 5.25%. The underlying agreements allow for
an increased borrowing base during periods of high seasonal activity. At August
31, 2004, there were $299,250 of borrowings outstanding under this facility. The
agreement is cancelable at the discretion of either party.
The credit facility is secured by substantially all of the Company's assets and
the underlying agreements contain certain restrictive covenants that limit
dividends to stockholders and require the Company to meet defined financial
covenants. In addition, the credit facility requires that the Company maintain a
lock-box for all cash receipts related to trade accounts receivable, from which
the financing company releases funds to the Company for operations pursuant to
terms identified in the underlying agreements.
7. Commitments (Restated)
The Company leases its operating facilities, certain sales offices and
transportation equipment under noncancelable operating lease agreements that
expire on various dates through August 31, 2009. Rent expense was $118,958 and
$222,329 for the periods ended August 31, 2004 and April 16, 2004, respectively,
and is recorded in selling, general, and administrative expenses on the
consolidated statements of income. Future minimum payments under operating
leases with a remaining or initial lease term in excess of one year as of
August 31, 2004, approximate: 2005 - $297,900; 2006 - $225,800; 2007 - $186,700;
2008 - $185,600; and 2009 - $180,000.
The Company was a counterparty to deferred compensation arrangements with a
spouse, as beneficiary, of a former officer and a former stockholder of Westwood
during the predecessor period. Commensurate with the acquisition of Westwood on
April 16, 2004, the arrangements were forfeited. The arrangement with the
spouse, as beneficiary, of the former officer was forfeited in exchange for a
separation agreement. The agreement provides quarterly severance payments to the
beneficiary of $22,000 to $33,900 through February 2009. In connection with the
exchange, the Company recorded forgiveness of debt of $405,652 for the
difference between the estimated present value of future cash flows of the
forfeited deferred compensation arrangement and the separation agreement.
11
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
The Company has a liability of $473,489 at August 31, 2004 for the separation
agreement. The deferred compensation arrangement between the Company and former
stockholder of Westwood was forfeited without recompense. In connection with
this forfeiture, the Company recorded a contribution of capital, net of income
taxes, of $903,811 during the predecessor period.
8. Long-Term Debt
The Company's long-term debt at August 31, 2004 consists of the following:
5% junior subordinated notes payable to former stockholders of
Westwood $ 313,695
8% junior subordinated notes payable to former stockholders of
Westwood 941,083
Subordinated note payable to a Company stockholder, DARR Westwood,
LLC, a related entity 750,000
Subordinated note payable to Four Kings Management, LLC, a related
entity 750,000
----------
Total debt 2,754,778
Less current portion 349,694
----------
Long-term debt $2,405,084
==========
The 5% junior subordinated note payable to the former stockholders of Westwood
requires annual principal payments of $94,108 plus accrued interest in April
2006 and April 2007. Annual principal payments of $62,739 plus accrued interest
are due in April 2008 and April 2009.
The 8% junior subordinated notes payable to the former stockholders of Westwood
require principal payments of $156,847 plus accrued interest due semiannually
commencing October 2004.
The subordinated note payable to DARR Westwood, LLC bears interest at a rate
equal to the prime rate, as published in the Wall Street Journal, plus 4% (8.25%
at August 31, 2004), not to exceed 10%. Annual principal payments are due in
April 2007 ($194,482), April 2008 ($323,859) and April 2009 ($231,659). Accrued
interest is payable annually beginning in March 2007 through April 2009. The
Company is obligated under this note to pay additional interest in the form of
a fee based on achieving certain levels of revenue, as defined. The fee, if any,
is limited to $30,000 per quarter and is payable in March 2008 and April 2009.
Interest expense recorded on this note during the successor period was $69,879
all of which is accrued at August 31, 2004.
12
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
The subordinated note payable to Four Kings Management, LLC (Four Kings) bears
interest at a rate equal to the prime rate, as published in the Wall Street
Journal, plus 4% (8.25% at August 31, 2004), not to exceed 10%. Interest is
payable monthly. Monthly principal payments of $9,000 begin in May 2005 and
continue through March 2009. The remaining balance plus accrued interest is
due in April 2009. The Company is obligated under this note to pay additional
interest in the form of a fee based on achieving certain levels of revenue,
as defined. The fee, if any, is limited to $30,000 per quarter and is payable
quarterly. Officers of Westwood own membership interests in Four Kings.
Interest expense recorded on this note during the successor period was $69,879
of which $27,217 is accrued at August 31, 2004.
Principal maturities of long-term debt at August 31, 2004 are as follows:
2005 $ 349,694
2006 515,803
2007 710,285
2008 494,598
2009 684,398
----------
$2,754,778
==========
9. Income Taxes (Restated)
Income tax expense (benefit) for the periods ended August 31, 2004 and April 16,
2004, consists of the following:
Period from Period from
April 17, 2004 September 1, 2003
to August 31, 2004 to April 16, 2004
(Successor Period) (Predecessor Period)
------------------ --------------------
(Restated)
Current provision:
Federal $ 56,208 $ 454,620
State 16,637 134,522
---------- ----------
72,845 589,142
Deferred provision:
Federal 39,029 45,019
State 11,549 13,284
---------- ----------
50,578 58,303
---------- ----------
$ 123,423 $ 647,445
========== ==========
13
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
The effective income tax rate of 50.2% and 42.3% for the periods ended August
31, 2004 and April 16, 2004, respectively, differs from the federal statutory
rate of 34% because of the difference in treatment of certain expense items for
financial and income tax reporting purposes and state taxes. A reconciliation
between the statutory provision and the provision for financial reporting
purposes is as follows:
Period from Period from
April 17, 2004 September 1, 2003
to August 31, 2004 to April 16, 2004
(Successor (Predecessor
Period) Period)
------------------ -----------------
(Restated)
Statutory federal tax provision $ 83,539 $ 521,316
State income taxes, net of federal
income tax benefit 14,823 92,503
Other permanent difference 25,061 33,626
-------- ----------
Provision for income taxes $123,423 $ 647,445
======== ==========
Deferred taxes arise principally from differences in and the nature and timing
of the deduction for depreciation expense associated with property and equipment
and certain reserves for financial and income tax reporting purposes.
Significant components of the Company's deferred tax assets as of August 31,
2004 are as follows:
Net current deferred tax asset:
Accruals and reserves on current assets $172,232
--------
$172,232
========
Net deferred tax asset - long-term:
Deferred compensation $189,552
Depreciation (35,208)
--------
$154,344
========
At August 31, 2004, the Company has approximately $11,700 of Federal and state
operating loss carryforwards from its wholly owned subsidiary, Solutions. The
deferred tax asset associated with the loss carryforwards is $4,700. The Company
recorded a valuation allowance for the entire amount due to the uncertainty of
the asset's recovery before the losses expire.
14
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
10. Retirement Plan
The Company maintains a defined contribution 401(k) pension plan covering
substantially all of its employees. Contributions are based on up to 1% of each
covered employee's salary and totaled $13,317 for the period ended August 31,
2004. The expense is included in selling, general and administrative expenses in
the consolidated statement of income.
11. Equity
Concurrent with the purchase of Westwood, the Company authorized 2,500 shares of
class A voting and class B non-voting common stock and issued 198 shares and 302
shares, respectively. Holders of class A common stock are entitled to convert
any or all of their shares into the same number of shares of class B common
stock. Holders of class B common stock are entitled to convert any or all of
their shares into the same number of shares of class A common stock.
Concurrent with the purchase of Westwood, the Company authorized 5,000 shares
and issued 1,000 shares of series A redeemable preferred stock for $1,000,000.
Series A redeemable preferred stock is senior to all securities outstanding. The
holders of series A redeemable preferred stock are entitled to dividends at a
rate of 8% per annum. Dividends are cumulative and are due and payable after
April 2008. The series A redeemable preferred stock has no voting rights and is
redeemable at the option of the Company commencing April 17, 2009 at 100% of its
liquidation value. The liquidation value of series A redeemable preferred stock
is equal to $1,000 plus accumulated but unpaid dividends and is $1,030,000 at
August 31, 2004.
12. Related Party Transactions
During the period ended April 16, 2004, the Company held a note receivable from
a company controlled by the Westwood stockholders which was repaid through
periodic payments. The note receivable was distributed to the stockholders of
Westwood through a dividend on April 16, 2004. Interest income recorded on this
note for the period ended April 16, 2004 totaled $21,483.
Beginning April 17, 2004, the Company is charged a monthly management fee of
$29,166 by DARR Global Holdings, LLC. For the period ended August 31, 2004, the
Company recorded $116,664 for this management fee in the accompanying
consolidated statement of income. At August 31, 2004, $33,333 of the fee is
included in accounts payable.
15
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements (continued)
The Company's New Jersey facility is leased under a noncancelable operating
lease agreement with an entity that is controlled by officers of Westwood. Rent
expense recorded during the periods ended August 31, 2004 and April 16, 2004,
under this lease, was $60,000 and $155,333, respectively. The spouse of one of
those officers is a stockholder of the Company.
13. Accrued Expenses
Accrued expenses consisted of the following at August 31, 2004:
Accrued payroll $ 263,952
Accrued commissions 334,551
Other accrued expenses 423,491
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$1,021,994
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