EX-99 2 ex992finst.txt EXHIBIT 99.2 PGI FIN STMTS EXHIBIT 99.2 PERFORMANCE GROUP, INC. REPORT ON AUDITS OF FINANCIAL STATEMENTS FOR THE 52 WEEK PERIODS ENDED DECEMBER 26, 2003 AND DECEMBER 27, 2002 NO EXTRACTS FROM THIS REPORT MAY BE PUBLISHED WITHOUT OUR WRITTEN CONSENT. STEGMAN & COMPANY TABLE OF CONTENTS INDEPENDENT AUDITORS' REPORT FINANCIAL STATEMENTS PAGE ---- Balance Sheets 1 Statements of Operations and Retained Earnings 2 Statements of Cash Flows 3 NOTES TO FINANCIAL STATEMENTS 4 - 7 SUPPLEMENTARY INFORMATION Schedules of Contract Costs 8 Schedules of Operating Expenses 9 SUPPLEMENTARY INFORMATION INDEPENDENT AUDITORS' REPORT Performance Group, Inc. King George, Virginia We have audited the accompanying balance sheets of Performance Group, Inc. (the "Company") as of December 26, 2003 and December 27, 2002 and the related statements of operations and retained earnings, and cash flows for the fifty-two week periods then ended. These financial statements are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 Performance Group, Inc. as of December 26, 2003 and December 27, 2002 and the results of their operations and cash flows for the fifty-two week periods then ended in conformity with accounting principles generally accepted in the United States of America. Our audits were made for the purpose of expressing an opinion on the basic financial statements taken as a whole. The supplementary information for the fifty-two week periods ended December 26, 2003 and December 27, 2002 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Stegman & Company Baltimore, Maryland May 24, 2004 PERFORMANCE GROUP, INC. BALANCE SHEETS DECEMBER 26, 2003 AND DECEMBER 27, 2002
ASSETS 2003 2002 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 231,094 $ 227,346 Accounts receivable - trade (billed) 957,760 561,367 Accounts receivable - trade (unbilled) 563,252 675,786 Other current assets - 2,578 ----------- ----------- Total current assets 1,752,106 1,467,077 ----------- ----------- PROPERTY AND EQUIPMENT - at cost: Automobile 38,792 38,791 Equipment 254,716 190,779 Furniture and fixtures 19,584 1,356 Leasehold improvements 4,452 - ----------- ----------- 317,544 230,926 Accumulated depreciation (176,611) (118,438) ----------- ----------- Net value of property and equipment 140,933 112,488 ----------- ----------- TOTAL ASSETS $ 1,893,039 $ 1,579,565 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued salaries and payroll withholding $ 120,380 $ 97,362 Accrued vacation and other expenses 54,999 37,545 ----------- ----------- Total current liabilities 175,379 134,907 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, par value $10 per share, 500 shares authorized; 300 shares issued and outstanding 3,000 3,000 Retained earnings 1,714,660 1,441,658 ----------- ----------- Total stockholders' equity 1,717,660 1,444,658 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,893,039 $ 1,579,565 =========== =========== See accompanying notes.
1 PERFORMANCE GROUP, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE FIFTY-TWO WEEK PERIODS ENDED DECEMBER 26, 2003 AND DECEMBER 27, 2002
2003 2002 ----------- ----------- REVENUES $ 4,502,341 $ 4,186,037 CONTRACT COST 3,347,101 2,932,397 ----------- ----------- GROSS PROFIT ON CONTRACTS 1,155,240 1,253,640 OPERATING EXPENSES 292,556 247,558 ----------- ----------- INCOME FROM OPERATIONS 862,684 1,006,082 OTHER INCOME 22,329 6,660 ----------- ----------- NET INCOME 885,013 1,012,742 RETAINED EARNINGS AT BEGINNING OF THE PERIOD 1,441,658 814,096 DISTRIBUTIONS (612,011) (385,180) ----------- ----------- RETAINED EARNINGS AT END OF THE PERIOD $ 1,714,660 $ 1,441,658 =========== =========== See accompanying notes.
2 PERFORMANCE GROUP, INC. STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEK PERIODS ENDED DECEMBER 26, 2003 AND DECEMBER 27, 2002
2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 885,013 $ 1,012,742 Noncash items included in net income - Depreciation 58,172 46,521 Net changes in: Accounts receivable - trade (billed and unbilled) (283,859) (601,928) Other current assets 2,578 596 Accrued salaries and payroll withholdings 23,018 24,752 Accrued vacation and other expenses 17,454 1,173 ----------- ----------- Net cash provided by operating activities 702,376 483,856 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES - Purchase of property and equipment (86,617) (29,736) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES - Distributions to stockholder (612,011) (385,180) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,748 68,940 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 227,346 158,406 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 231,094 $ 227,346 =========== =========== See accompanying notes.
3 PERFORMANCE GROUP, INC. NOTES TO FINANCIAL STATEMENTS FOR THE FIFTY-TWO WEEK PERIODS ENDED DECEMBER 26, 2003 AND DECEMBER 27, 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Performance Group, Inc. (the "Company") is a Virginia-based business founded in 1994 providing Geographic Information System (GIS) support in a distributed network support environment, to the Federal and local governments and private sector. The Company's primary customer is the Federal government - particularly the Armed Services. The Company operates out of offices in King George, Virginia and Fredericksburg, Virginia and from site locations throughout the United States. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTS RECEIVABLE - TRADE Accounts receivable - trade consists of billed and unbilled amounts. The majority of accounts receivable - trade are from the United States government. Therefore, collection of accounts receivable is expected and an allowance for uncollected amounts is deemed not necessary. Accounts receivable - trade (unbilled) represents work completed by the Company and not yet billed. It is common for accounts receivable - trade to take several months before it is collected, especially for government contracts. Accounts receivable - trade are charged off only after all reasonable attempts to collect the accounts receivable have been explored. Therefore, accounts receivable - trade are not normally considered past due. CONTRACT ACCOUNTING Revenue on time and materials contracts (substantially all the total revenues for 2003 and 2002) is recognized to the extent of billable rates multiplied by hours performed, plus other direct costs. Revenue on fixed-price and other contracts is recognized as the work progresses and is based on costs incurred in relation to the total estimated costs. Furthermore, time and material contracts are fully funded by appropriations and may be subject to other risks inherent in government contracts, such as termination for the convenience of the government. The majority of contracts last one or more years and are renewable each year at the discretion of the government. Since the contracts are mostly time and material, contracts in progress at the end of the Company's fiscal year are only recorded to the extent that work has been completed. 4 INCOME TAXES The Company has elected to be treated as an "S" Corporation in accordance with the Internal Revenue Code. As an "S" Corporation, the Company is not taxed, except for certain state taxes, rather the stockholder is taxed at the individual level. Additionally, the Company files its tax return on the cash basis of accounting which differs from its financial statement reporting. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using straight-line methods based on the useful lives as follows: Automobile 5 years Equipment 3 to 5 years Furniture and fixtures 5 years Leasehold improvements 2 - 5 years Expenditures for repairs and maintenance are charged to expense as incurred. When assets are retired or otherwise disposed of, the asset and the related allowance for depreciation are eliminated from the accounts and any resulting gain or loss is reflected in income. METHOD OF ACCOUNTING The Company uses the accrual method of accounting for financial reporting purposes. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, investments with maturities of three months or less at the balance sheet date are considered to be cash equivalents. ADVERTISING Advertising costs are expensed as incurred. Advertising costs totaled $531 and $1,065 for 2003 and 2002, respectively. SOFTWARE DEVELOPMENT/RESEARCH The Company primarily uses a standard software program and customizes it for the respective contracts. The program may be installed at one military base, but has applications for other locations. As a marketing tool, the Company sometimes offers the software program to other locations. The Company developed one specialized software application that it plans to sell in the future. The cost of developing this software is not material and has been expensed in 2003 and 2002. 5 2. FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF RISK CREDIT The Company grants credit to its customers in the normal course of doing business. Substantially all accounts receivable - trade are due from the Federal government. Additionally, the Company maintains cash balances in financial institutions, at varying times during the years that exceed insured limits. 3. OPERATING LEASES/RELATED PARTY The Company leases office space under a two-year lease which expires in March 2005. The monthly payment under the lease agreement is $5,191 with an annual increase of 3%. The lease includes two, three-year renewal options. As of December 26, 2003, the Company is committed to make lease payments as follows: 2004 $63,696 2005 16,041 The Company also leases office space from its President and sole stockholder on a month-to-month basis for $1,500 per month. Rental expense for the above leases and all rentals of the Company charged to operations amounted to $52,837 and $18,000 in 2003 and 2002, respectively. 4. RETIREMENT PLANS The Company maintains a profit-sharing plan for the benefit of its employees. Contributions are made quarterly, but are at the full discretion of the President and sole stockholder of the Company. Employees are eligible for the profit sharing plan after ninety days of employment and are considered full-time workers. An employee is full-time upon working 32 hours per week. Contributions for 2003 and 2002 were $102,465 and $76,818, respectively. The Company also offers a 401(k) retirement plan eligible to all full-time employees commencing on the first day of employment. The Company agrees to match employee contributions as follows: EMPLOYEE CONTRIBUTION EMPLOYER AS A % OF SALARY MATCH 3% 3% 4% 3.5% 5% 4% Contributions for 2003 and 2002 were $76,000 and $47,494, respectively. 6 5. SUBSEQUENT EVENTS/COMMITMENTS In May 2004, the Company tentatively agreed to sell substantially all its assets to Essex Corporation. The agreement calls for the seller to maintain working capital of $460,000, as of the settlement date and to transfer all existing contracts to the purchaser. The purchase price is expected to be $5,000,000 in cash. The President and sole stockholder of the Company will enter into a one-year employment agreement with the purchaser and will enter into a covenant not to compete with the purchaser for three years after closing. 6. CONCENTRATIONS As previously stated, virtually all revenue and accounts receivable are with the Federal government, particularly, the United States Army. Additionally, the Company provides specialty technical abilities as a major part of their business. 7. BACKLOG At December 26, 2003, the Company had signed contracts outstanding totaling $4,173,302 for work not yet performed. 7 PERFORMANCE GROUP, INC. SCHEDULES OF CONTRACT COSTS FOR THE FIFTY-TWO WEEK PERIODS ENDED DECEMBER 26, 2003 AND DECEMBER 27, 2002
2003 2002 ---------- ---------- DIRECT COSTS: Direct labor $2,007,940 $1,608,469 Travel 49,891 31,630 Materials 171,338 340,248 Other - 1,000 ---------- ---------- Total direct costs 2,229,169 1,981,347 ---------- ---------- INDIRECT COSTS: Automobile expenses 5,125 3,954 Bonuses 178,267 147,662 Business development 3,681 9,012 Conferences and meeting 4,993 6,590 Depreciation 52,355 41,869 Fees 41,683 32,142 Insurance 61,920 58,203 Miscellaneous 8,049 7,692 Office supplies 60,196 29,804 Payroll taxes 184,794 149,692 Retirement plans 142,772 99,450 Postage 965 1,382 Professional services 16,643 14,810 Rent 52,837 18,000 Repair and maintenance 3,763 3,965 Salaries 53,181 121,487 Telephone 14,570 11,477 Trave l2,717 6,744 Utilities 4,007 4,461 Vacation and sick leave 225,414 182,654 ---------- ---------- Total indirect costs 1,117,932 951,050 ---------- ---------- Total direct and indirect costs $3,347,101 $2,932,397 ========== ========== See accountants' report.
8 PERFORMANCE GROUP, INC. SCHEDULES OF OPERATING EXPENSES FOR THE FIFTY-TWO WEEK PERIODS ENDED DECEMBER 26, 2003 AND DECEMBER 27, 2002
2003 2002 ---------- ---------- Advertising $ 531 $ 1,065 Automobile 312 76 Bad debts 26,892 16,365 Bank charges 1,977 3,953 Business development 964 6,114 Computer supplies 1,304 - Conferences and meeting 14,055 13,444 Contributions 7,023 - Depreciation 5,817 4,652 Dues and subscriptions 7,465 10,482 Insurance 5,802 4,786 Licenses and taxes 13,986 3,841 Miscellaneous 4,250 1,923 Payroll taxes 7,620 7,878 Printing expense 1,429 2,202 Profit sharing 35,693 24,862 Repairs and maintenance 2,668 - Salaries 117,822 114,861 Training 9,763 10,358 Travel 11,843 10,523 Vacation and leave expense 15,340 10,173 ---------- ---------- Total operating expenses $ 292,556 $ 247,558 ========== ========== See accountants' report.
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