Exhibit 99.2 -- Financial Statements
IT&E CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002
MARCH 31, 2004 AND
PRO FORMA CONDENSED CONSOLIDATED BLANCE SHEET
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONTENTS
--------
CONTENTS
PAGE F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PAGE F-2 BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
PAGE F-3 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
PAGE F-4 STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 2003 AND 2002
PAGES F-5 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
PAGES F-6-15 NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
PAGE F-1b BALANCE SHEET AS OF MARCH 31, 2004
PAGE F-2b STATEMENT OF OPERATIONS FOR THREE MONTHS ENDING MARCH 31, 2004
AND MARCH 31, 2003.
PAGE F-3b STATEMENTS OF CASH FLOWS FOR THREE MONTHS ENDING MARCH 31, 2004
AND MARCH 31, 2003.
PAGE F-4-5b NOTES TO FINANCIAL STATEMENTS
Beckstead and Watts, LLP
- ----------------------------
Certified Public Accountants
3340 Wynn Road, Suite B
Las Vegas, NV 89102
702.257.1984
702.362.0540 (fax)
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
Board of Directors
IT&E Corporation
San Jose, California
We have audited the Balance Sheets of IT&E Corporation (the "Company") as
of December 31, 2003 and 2002, and the related Statements of Operations,
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 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. 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
audit provides 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 IT&E Corporation as of
December 31, 2003 and 2002, and the results of its operations and cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
Beckstead and Watts, LLP
Las Vegas, Nevada
June 14, 2004
F-1
IT&E CORPORATION
BALANCE SHEETS
BALANCE SHEET
December 31, December 31,
2003 2002
----------- ------------
Assets
Current assets:
Cash $ 173,236 $ 160,036
Accounts receivable, net of allowance for
doubtful accounts of $118,118 and
$183,500 respectively 1,639,907 785,180
Unbilled revenue 195,607 83,477
Prepaid and other current assets 24,993 70,891
Advances to employees 46,971 8,244
Investments 16,000 -
---------- ----------
Total current assets 2,096,715 1,107,827
---------- ----------
Fixed assets, net 66,618 51,999
Deposits 23,382 26,236
---------- ----------
$2,186,715 $1,186,062
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit - bank $ 855,015 $ -
Accounts payable 254,855 204,075
Accrued payroll and employee benefits 168,296 140,241
Advances from stockholders - 2,594
State payroll taxes payable 24,731 1,600
Note payable - former stockholder - 36,400
Current portion of capital lease obligations - 2,363
State income tax payable 3,000 -
---------- ----------
Total current liabilities 1,305,897 387,273
---------- ----------
Stockholders' equity:
Common stock, no par value;
1,000,000 shares authorized,
481,500 shares issued and outstanding 100,750 100,750
Additional paid-in capital 273,930 273,930
Retained earnings 560,139 424,109
---------- ----------
880,818 798,789
---------- ----------
$2,186,715 $1,186,062
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
IT&E CORPORATION
STATEMENTS OF OPERATIONS
STATEMENTS OF OPERATIONS
For the years ended
December 31,
-----------------------
2003 2002
---------- ----------
Revenue $ 10,018,459 $ 7,579,261
Cost of revenue 6,444,287 5,107,430
------------ ------------
Gross profit 3,574,173 2,471,831
Operating expenses:
General and administrative expenses 2,795,472 1,831,556
Sales and marketing expenses 333,730 261,911
Depreciation expense 18,438 32,045
Officer salaries 300,000 328,385
------------ ------------
Total operating expenses 3,447,640 2,453,897
------------ ------------
Net operating income 126,533 17,934
Other income (expense):
Refund of state franchise taxes - 62,289
Interest income - 453
Loss on disposal of fixed assets (8,298) (28,633)
Interest expense (18,126) (1,998)
Finance charges (15,079) (7,507)
------------ ------------
Total other income (expense) (41,504) 24,538
Income before provision for income taxes 85,029 42,538
Provision for state income taxes 3,000 3,308
------------ ------------
Net (loss) $ 82,029 $ 39,230
============ ============
Weighted average number of
common shares outstanding 481,500 481,500
============ ============
Net loss per share $ 0.17 $ 0.08
=========== ============
The accompanying notes are an integral part of these financial statements.
F-3
IT&E CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------- ------ ----------- --------- -------------
Balance,
Dec 31, 2001 500,000 $ 27,000 $ 273,930 $ 592,192 $ 893,122
Shares issued 31,500 78,750 - - 78,750
Shares redeemed (50,000) (5,000) - (57,313) (62,313)
Distributions (150,000) (150,000)
Net income 39,230 39,230
-------- ------- ------------ --------- ------------
Balance,
Dec 31,
2002 481,500 100,750 273,930 424,109 798,789
Net income 82,029 82,029
-------- ------- ------------ --------- ------------
Balance,
Dec 31,
2003 481,500 $100,750 $273,930 $506,139 $880,818
======== ======== ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
IT&E CORPORATION
STATEMENT OF CASH FLOWS
STATEMENT OF CASH FLOWS
For the years ended
December 31,
---------------------
2003 2002
---------- ----------
Cash flows from operating activities
Net (loss) $ 82,029 $ 39,230
Adjustments to reconcile net (loss) to
net cash (used) by operating activities:
Depreciation expense 18,438 32,045
Loss on disposal of fixed assets 8,298 28,633
Changes in operating assets:
Accounts receivable (854,727) 273,192
Unbilled revenue (112,130) (83,477)
Prepaid and other current assets 5,249 (1,193)
Advances to employees 1,921 5,487
Accounts payable 48,423 (41,515)
Accrued payroll and employee benefits 51,180 (75,717)
State franchise tax payable 3,000 1,600
---------- ---------
Net cash (used) by operating activities (748,319) 178,286
---------- ---------
Cash flows from investing activities
Purchase of fixed assets (41,355) -
Proceeds from disposal of fixed assets - 125
Deposits 2,853 2,328
Investment in stock (16,000) -
---------- ---------
Net cash (used) by investing activities (54,502) 2,453
---------- ---------
Cash flows from financing activities
Advances to shareholders - (4,092)
Proceeds from shareholders - 4,025
Payments on line of credit, net - (250,000)
Payments on capital lease obligations - (9,777)
Proceeds from line of credit, net 816,021 -
Payments made on loan to former shareholder - (21,600)
Distributions to shareholders - (187,479)
---------- ---------
Net cash provided by financing activities 816,021 (468,923)
---------- ---------
Net (decrease) in cash 13,200 (288,184)
Cash - beginning 160,036 448,220
---------- ---------
Cash - ending $ 173,236 $ 160,036
========= =========
Supplemental disclosures:
Interest paid $ - $ -
========= =========
Income taxes paid $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
F-5
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A-DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
IT&E Corporation (the "Company") was founded and incorporated in the
State of California in 1996. Its principal business operations involve
providing skilled high tech personnel and staffing services to companies
nationwide. The Company's corporate office is located in San Jose, California,
and a satellite office in San Diego, California. During 2002 and 2003, the
Company transitioned its marketing efforts from the high technology industry to
the pharmaceutical, biotech and health care industries and broadened its
services offering to include project management and consulting services. By
December 31, 2003, more than 80% of its revenues were generated by the
pharmaceutical, biotech and healthcare industries.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is based upon the weighted average
number of common shares outstanding. Diluted net income (loss) per share is
based on the assumption that stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period. There were
no dilutive options or warrants issued and outstanding as of December 31, 2003
and 2002.
Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the 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. On an on-going basis, the Company evaluates its estimates, including
those related to revenue recognition, long-lived and intangible assets, accrued
liabilities, deferred income tax asset valuation allowances, restructuring
costs, litigation and disputes, and the allowance for doubtful accounts.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from an inability of clients to make required payments. This
allowance is based on account receivables, historical collection experience,
current economic trends, and changes in the customer payment terms.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
F-6
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided on a straight-line basis in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives, which are three to five years for information systems equipment,
and three to ten years for furniture and equipment. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, whichever are shorter.
Upon sale or retirement of property and equipment, the costs and
related accumulated depreciation are eliminated from the accounts, and any gain
or loss on such disposition is reflected in the consolidated statements of
operations. Expenditures for repairs and maintenance are charged to operations
as incurred.
Revenue Recognition, Accounts Receivable, and Unbilled Receivables
Revenues are derived primarily from information technology outsourcing
services, consulting, and systems integration. Revenues are recognized on a
time-and-materials, level-of-effort, percentage-of-completion, or straight-line
basis. Before revenues are recognized, the following four criteria must be met:
(a) persuasive evidence of an arrangement exists; (b) delivery has occurred or
services rendered; (c) the fee is fixed and determinable; and
(d) collectibility is reasonably assured. The Company determines if the fee is
fixed and determinable and collectibility is reasonably assured based on its
judgments regarding the nature of the fee charged for services rendered and
products delivered and the collectibility of those fees. Arrangements range in
length from less than one year to several years. The longer-term arrangements
are generally level-of-effort or fixed price arrangements.
Revenues from time-and-materials arrangements are generally recognized
based upon contracted hourly billing rates as the work progresses. Revenues
from level-of-effort arrangements are recognized based upon a fixed price for
the level of resources provided. Revenues from fixed fee arrangements for
consulting are generally recognized on a rate per hour or percentage-of-
completion basis. The Company maintains, for each of its fixed fee contracts,
estimates of total revenue and cost over the contract term. For purposes of
periodic financial reporting on the fixed price consulting contracts, the
Company accumulates total actual costs incurred to date under the contract. The
ratio of those actual costs to its then-current estimate of total costs for the
life of the contract is then applied to its then-current estimate of total
revenues for the life of the contract to determine the portion of total
estimated revenues that should be recognized. The Company follows this method
because reasonably dependable estimates of the revenues and costs applicable to
various stages of a contract can be made.
F-7
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues recognized on fixed price consulting contracts are subject to
revisions as the contract progresses to completion. If the Company does not
accurately estimate the resources required or the scope of the work to be
performed, does not complete its projects within the planned periods of time,
or does not satisfy its obligations under the contracts, then profit may be
significantly and negatively affected or losses may need to be recognized.
Revisions in the Company's contract estimates are reflected in the period in
which the determination is made that facts and circumstances dictate a change
of estimate. Favorable changes in estimates result in additional revenues
recognized, and unfavorable changes in estimates result in a reduction of
recognized revenues. Provisions for estimated losses on individual contracts
are made in the period in which the loss first becomes known.
As of the beginning of fiscal year 2003, the Company adopted EITF 00-
21, "Accounting for Revenue Arrangements with Multiple Deliverables," which
addresses how to account for arrangements that involve the delivery or
performance of multiple products, services, and/or rights to use assets.
Revenue arrangements with multiple deliverables are divided into separate units
of accounting if the deliverables in the arrangement meet the following
criteria: (1) the delivered item has value to the customer on a stand-alone
basis; (2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered item is probable.
Arrangement consideration is allocated among the separate units of accounting
based on their relative fair values, with the amount allocated to the delivered
item being limited to the amount that is not contingent on the delivery of
additional items or meeting other specified performance conditions. The Company
has created separate units of accounting on its existing outsourcing contracts
based on the above criteria and will evaluate each future contract based on the
same criteria. Generally, the Company has separated certain elements of its
initial contract stages, where new systems are implemented and/or processes are
reengineered into a new operating environment, from the ongoing operations of
the contract. The primary impact of the adoption of this standard is that the
Company's ongoing contract operations, which constitute the vast majority of
the revenues from outsourcing contracts, are now recorded on a straight-line
basis over the life of the contract instead of on a percentage-of-completion
basis in proportion to costs incurred. In general, the Company will report
lower margins on existing contracts in the early years of a contract and
anticipate reporting increased margins in the later years of a contract;
however, no assurances can be made in that regard. The new method is no longer
based on a consistent gross profit over the life of a contract. The Company
will likely experience greater volatility of outsourcing earnings as contract
revenues remain level and contract costs move up or down, or shift from one
quarter to another.
F-8
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On certain contracts, or elements of contracts, costs are incurred
subsequent to the signing of the contract, but prior to the rendering of
service and associated recognition of revenue. Where such costs are incurred
and realization of those costs is either paid for upfront or guaranteed by the
contract, those costs are deferred and later expensed over the period of
recognition of the related revenue. At December 31, 2003 and 2002, the Company
had deferred $170,255 and $114,941, respectively, of such deferred costs.
As part of the Company's on-going operations to provide services to its
customers, incidental expenses, which are generally reimbursable under the
terms of the contracts, are billed to customers. These expenses are recorded as
both revenues and direct cost of services in accordance with the provisions of
EITF 01-14, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred," and include expenses such as airfare,
mileage, hotel stays, out-of-town meals, and telecommunication charges.
Unbilled receivables represent revenues recognized for services
performed that were not billed at the balance sheet date. The majority of these
amounts are billed in the subsequent month. Unbillable amounts arising from
contracts occur when revenues recognized exceed allowable billings in
accordance with the contractual agreements. As of December 31, 2003 and 2002,
the Company had unbillable revenues included in current unbilled receivables of
approximately $195,607 and $83,477, respectively, which were generally expected
to be billed in the following year.
Customer advances are comprised of payments from customers for which
services have not yet been performed or prepayments against work in process.
These unearned revenues are deferred and recognized as future contract costs
are incurred and as contract services are rendered.
Income Taxes
The Company, with consent of its stockholders, is taxed under the
provisions of Subchapter S of the Internal Revenue Code and Chapter 4.5 of the
California Revenue and Taxation Code. The stockholders on their respective
shares of corporate taxable income pay income taxes. The California Revenue
and Taxation Code also levies a corporate tax of 1.5% on taxable income - or a
minimum of $800 - for which a provision has been provided. It is the Company's
intention to make periodic distributions to the stockholders so that their
individual tax liabilities are met.
F-9
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Risks
Financial instruments that subject the Company to concentrations of
credit risks consist primarily of cash and cash equivalents and billed and
unbilled accounts receivable. The Company's clients are primarily involved in
the healthcare and pharmaceutical industries. Concentrations of credit risk
with respect to billed and unbilled accounts receivable are mitigated, to some
degree, based upon the Company's credit evaluation process and the nature of
its clients.
The healthcare and life sciences industries may be affected by economic
factors, which may impact accounts receivable. At December 31, 2003,
approximately 66% of the outstanding trade receivables are due from
approximately 6 to 10 customers who also accounted for approximately 64% of
total sales. Management does not believe that any single customer or geographic
area represents significant credit risk.
The Company's cash equivalents consist primarily of short-term money
market deposits. The Company has deposited its cash equivalents with reputable
financial institutions, from which the Company believes the risk of loss to be
remote. The Company principally maintains its cash balance in a financial
institution located in San Jose, California. The balance is insured by the
Federal Deposit Insurance Corporation up to $100,000. At December 31, 2003,
the Company had a balance in the institution in excess of the insured amounts
of approximately $73,000. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on its
cash and cash equivalents.
Fair Value of Financial Instruments
Management believes the fair value of financial instruments
approximates their carrying amounts. The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, and certain other
liabilities approximate their estimated fair values due to the short-term
nature of these instruments. Investments available for sale are carried at fair
value. Management believes the fair values of stockholders' notes receivable
approximate their carrying values based on current rates for instruments with
similar characteristics.
F-10
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses accounting and reporting costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period that the
liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS
No. 146 has not had a significant impact on the consolidated financial
statements at December 31, 2003.
In November 2002, the EITF reached a consensus on Issue 00-21, titled
"Accounting for Revenue Arrangements with Multiple Deliverables," which
addresses how to account for arrangements that involve the delivery or
performance of multiple products, services, and/or rights to use assets.
Revenue arrangements with multiple deliverables are divided into separate units
of accounting if the deliverables in the arrangement meet the following
criteria: (1) the delivered item has value to the customer on a standalone
basis; (2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered item is probable.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, with the amount allocated to
the delivered item being limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance conditions.
The new standard was required to be adopted for all new applicable revenue
arrangements no later than the third quarter of 2003. The Company elected to
apply the new standard to all existing outsourcing arrangements impacted by
EITF 00-21 during the year ended December 31, 2003.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for financial statements of interim or annual
reports ending after December 15, 2002. At December 26, 2003, the Company had
no guarantees outstanding.
F-11
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002. The adoption of SFAS No. 148 by the
Company has not had a significant impact on its consolidated financial
statements at December 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46") which changes the criteria by which
one company includes another entity in its consolidated financial statements.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003, and
apply in the first fiscal period beginning after June 15, 2003, for variable
interest entities created prior to February 1, 2003. The Company has not
entered into any transactions or other arrangements, which it believes, would
be considered variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
these instruments were previously classified as equity. The guidance in SFAS
No. 150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not
believe that the adoption of SFAS No. 150 will have a material impact on its
consolidated financial statements.
F-12
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition", which
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind the accounting guidance contained in SAB 101
related to multiple-element revenue arrangements that was superseded as a
result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables" and to rescind the SEC's related "Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers" issued with SAB
101 that had been codified in SEC Topic 13, "Revenue Recognition." While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104
did not have a material effect on the Company's financial position or results
of operations.
NOTE B-ADVANCES TO EMPLOYEES
At December 31, 2003, the Company had advanced $46,971 to certain
employees. The notes are non-interest bearing and due 365 days from the
advancement date.
NOTE C-PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 consisted of the
following:
2003 2002
---- ----
Computers $ 113,940 $ 76,018
Furniture and fixtures 21,082 25,361
Leased equipment 1,731 34,985
---------- ---------
136,753 136,364
Less accumulated depreciation (70,135) (84,365)
---------- ---------
$ 66,618 $ 51,999
Depreciation expense totaled $18,438 and $32,045 during the years ended
December 31, 2003 and 2002, respectively.
F-13
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D-LINE OF CREDIT - BANK
The Company has a $1,000,000 renewable line of credit with a commercial bank.
The line bears interest at the bank's prime rate (4.0% and 4.25% at December
31, 2003 and 2002, respectively) plus 1%. There was an outstanding balance as
of December 31, 2003 of $855,015 and no outstanding balance at December 31,
2002. The line expires on November 1, 2004, and is guaranteed by all of the
assets of the Company and the personal guarantees of the stockholders. The
line has certain financial covenants.
NOTE E-SHAREHOLDERS' EQUITY
In January 2002, the Company increased its authorized stock to 1,000,000
shares. Immediately thereafter, a stockholder purchased 31,500 shares of stock
for a total purchase price of $78,750.
In September 2002, a minority stockholder sold his 50,000 shares back to the
Company for a total sales price of $62,313. Prior to December 31, 2002, the
Company paid the stockholder $21,600 in cash and offset amounts owned to the
Company by the stockholder totaling $4,313. The remaining balance of $36,400
was paid in full by December 31, 2003.
NOTE F-COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities, certain office space, and
living accommodations for consultants on short-term projects under operating
leases that expire within the next one year. At December 31, 2003, the Company
was obligated under non-cancelable operating leases with future minimum rentals
as follows:
YEARS ENDING:
2004 $ 37,807
2005 -
2006 -
2007 -
2008 -
Thereafter -
---------
$ 37,807
Rent expense aggregated $206,154 and $143,984 for the years ended
December 31, 2003 and 2002, respectively.
F-14
IT&E CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into a development and product agreement with
Caliber Systems, which required an initial investment of $65,000 ($16,000 was
paid as of December 31, 2003) and an additional investment of $110,000 after
certain benchmarks are achieved. All revenues generated from the product will
be split on a 50/50 basis.
Lawsuits in favor of the Company representing approximately $586,000
were settled in 2002. As of December 31, 2003, the Company has collected
approximately $75,000 of the total amount due. Former clients who are
currently in bankruptcy owe the balance of the judgment. The Company is
doubtful it will collect the remaining amounts and they have been written off
in total in prior years. The Company is involved in various legal actions
arising in the normal course of business. Management is of the opinion that the
outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operation.
NOTE G-PROFIT SHARING PLANS
The Company has a 401(k) salary deferral plan for eligible employees.
Employees may elect to reduce their compensation by an amount that will not
exceed the total amount allowed by the Internal Revenue Code for all
contributions to qualified plans. The plan does provide for discretionary
contributions by the employer. No contributions were made to the plan for the
years ended December 31, 2003 and 2002.
NOTE H-SUBSEQUENT EVENTS
On April 14, 2004, the Company ("IT&E"), Clinical Trials Assistance
Corporation, a Nevada corporation (the "Registrant") or ("CTAL"), and Clinical
Trials Assistance Acquisition Corporation, a Nevada corporation ("Merger Sub"),
entered into an Acquisition Agreement and Plan of Merger (collectively the
"Agreement") pursuant to which the Registrant, through its wholly-owned
subsidiary, Merger Sub, acquired IT&E in exchange for 11,000,000 shares of the
Registrant's common stock which were issued to the holders of IT&E stock (the
"Merger"). Immediately after the Acquisition was consummated and further to
the Agreement, Kamill Rohny, the controlling stockholder of the Registrant,
cancelled 28,000,000 shares of the Registrant's Common Stock held by him (the
"Cancellation"). The transaction contemplated by the Agreement was intended to
be a "tax-free" reorganization pursuant to the provisions of Section 351 and
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.
The stockholders of IT&E (three stockholders owning 481,500 shares),
who unanimously approved the acquisition, and as of the closing date of the
Merger and after giving effect to the Cancellation, now own approximately 80%
of the Registrant's common stock outstanding as of April 14, 2004.
For accounting purposes, this transaction was being accounted for as a
reverse merger, since the stockholders of IT&E own a majority of the issued and
outstanding shares of common stock of the Registrant, and the directors and
executive officers of IT&E became the directors and executive officers of the
Registrant.
F-15
IT&E CORPORATION
BALANCE SHEET
BALANCE SHEET
March 31,
2004
---------
Assets
Current assets
Cash $ 215,264
Accounts receivable, net of allowance for
doubtful accounts of $6,431 2,182,260
Unbilled revenue 195,607
Prepaid and other current assets 24,993
Advances to employees 39,821
Investments 170,699
------------
Total current assets 2,828,644
------------
Fixed assets, net 63,527
Deposits 24,832
-----------
$ 2,917,003
===========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit - bank $ 998,015
Accounts payable 488,662
Accrued payroll and employee benefits 272,070
Other current liabilities 3,740
State income tax payable 4,600
-----------
Total current liabilities 1,767,087
-----------
Stockholders' equity
Stockholders' Equity
Common stock, no par value;
1,000,000 shares authorized,
481,500 shares issued and outstanding 100,750
Additional paid-in capital 273,930
Retained earnings 775,237
-----------
1,149,916
-----------
$ 2,917,003
===========
The accompanying notes are an integral part of these financial statements.
F-1b
IT&E CORPORATION
STATEMENTS OF OPERATIONS
STATEMENTS OF OPERATIONS
For the three months ended
March 31,
-----------------------
2004 2003
---------- ----------
Revenue $ 3,145,018 $ 2,008,845
Cost of revenue 1,997,354 1,187,647
------------ ------------
Gross profit 1,147,664 821,198
Operating expenses:
General and administrative expenses 799,722 679,060
Sales and marketing expenses 11,680 8,949
Depreciation expense 4,968 4,340
Officer salaries 55,000 60,000
------------ ------------
Total operating expenses 871,370 752,349
------------ ------------
Net operating income 276,294 68,849
Other income (expense):
Other income 14,490 3,755
Interest income (21,686) (684)
------------ ------------
Total other income (expense) (7,196) 3,071
Income before provision for income taxes 269,098 71,920
Provision for state income taxes - -
------------ ------------
Net income $ 269,098 $ 71,920
============ ============
Weighted average number of
common shares outstanding 481,500 481,500
============ ============
Net income per share - basic and fully diluted $ 0.56 $ 0.15
=========== ============
The accompanying notes are an integral part of these financial statements.
F-2b
IT&E CORPORATION
STATEMENT OF CASH FLOWS
STATEMENT OF CASH FLOWS
For the three months ended
March 31,
---------------------
2004 2003
---------- ----------
Cash flows from operating activities
Net income $ 269,098 $ 71,920
Adjustments to reconcile net (loss) to
net cash (used) by operating activities:
Depreciation expense 4,968 4,340
Loss on disposal of fixed assets - -
Changes in operating assets:
Accounts receivable (541,883) (154,899)
Prepaid and other current assets - 24,783
Advances to employees 7,150 1,442
Accounts payable 237,541 (10,540)
Accrued payroll and employee benefits 78,540 (83,192)
Other current liabilities 3,740 (14,423)
State franchise tax payable 1,600 -
---------- ---------
Net cash (used) by operating activities 60,754 (160,569)
---------- ---------
Cash flows from investing activities
Purchase of fixed assets (1,878) (6,682)
Deposits (1,450) (1,586)
Investment in stock (154,699) -
---------- ---------
Net cash (used) by investing activities (158,027) (8,268)
---------- ---------
Cash flows from financing activities
Advances to shareholders - (4,000)
Payments on capital lease obligations - (2,363)
Proceeds from line of credit, net 143,000 200,000
Payments made on loan to former shareholder - (11,600)
Distributions to shareholders (3,700) -
---------- ---------
Net cash provided by financing activities 139,300 182,037
---------- ---------
Net increase in cash 42,028 13,200
Cash - beginning 173,236 160,036
--------- ---------
Cash - ending $ 215,264 $ 173,236
========= =========
Supplemental disclosures:
Interest paid $ - $ -
========= =========
Income taxes paid $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
F-3b
IT&E CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated interim financial statements included herein, presented in
accordance with United States generally accepted accounting principles and
stated in US dollars, have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated interim financial statements be read in conjunction with the
consolidated financial statements of the Company for the period ended December
31, 2003 and notes thereto. The Company follows the same accounting policies
in the preparation of consolidated interim reports.
Results of operations for the interim periods are not indicative of annual
results.
NOTE 2 - FIXED ASSETS
Depreciation expense totaled $4,968 and $4,340 for the three-month periods
ended March 31, 2004 and 2003, respectively.
NOTE 3 - LINE OF CREDIT - BANK
The Company has a $1,000,000 renewable line of credit with a commercial bank.
The line bears interest at the bank's prime rate plus 1%. There was an
outstanding balance as of March 31, 2004 of $998,015. The line expires on
November 1, 2004, and is guaranteed by all of the assets of the Company and the
personal guarantees of the stockholders. The line has certain financial
covenants.
The Company recorded interest expense totaling $21,686 and $684 for the three
months ended March 31, 2004 and 2003, respectively.
F-4b
IT&E CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - SUBSEQUENT EVENTS
On April 13, 2004, the Company issued 2,000,000 warrants to several
individuals for cash totaling $2,000. The warrants are convertible on a one-
for-one basis at a price to be agreed upon on the exercise date by the
Company's board of directors and the warrant holders. The exercise date is not
sooner than one year and not later than five years.
On April 14, 2004, the Company ("IT&E"), Clinical Trials Assistance
Corporation, a Nevada corporation (the "Registrant") or ("CTAL"), and Clinical
Trials Assistance Acquisition Corporation, a Nevada corporation ("Merger Sub"),
entered into an Acquisition Agreement and Plan of Merger (collectively the
"Agreement") pursuant to which the Registrant, through its wholly-owned
subsidiary, Merger Sub, acquired IT&E in exchange for 9,000,000 shares of the
Registrant's common stock which were issued to the holders of IT&E stock and
2,820,000 preferred shares, which are convertible on a ten-for-one basis into
CTAL $0.001 par value common stock, after they are held for two years (the
"Merger"). Immediately after the Acquisition was consummated and further to
the Agreement, Kamill Rohny, the controlling stockholder of the Registrant,
cancelled 28,000,000 shares of the Registrant's Common Stock held by him (the
"Cancellation"). The transaction contemplated by the Agreement was intended to
be a "tax-free" reorganization pursuant to the provisions of Section 351 and
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.
The stockholders of IT&E (three stockholders owning 481,500 shares),
who unanimously approved the acquisition as of the closing date of the Merger
and after giving effect to the Cancellation, now own approximately 80% of the
Registrant's common stock outstanding as of June 10, 2004. This figure is
based on the issuance of 9,000,000 shares of $0.001 par value common stock and
the share dilution upon conversion of the 2,000,000 warrants into common stock.
For accounting purposes, this transaction was being accounted for as a
reverse merger, since the stockholders of IT&E own a majority of the issued and
outstanding shares of common stock of the Registrant, and the directors and
executive officers of IT&E became the directors and executive officers of the
Registrant.
F-5b