TABLE OF CONTENTS
Management Fee-Related Party
There was no change in the management fee to a related party for the year ended August, 31, 2006 compared to the year ended August 31, 2005. DARR Global, a related party, charged the Company a management fee of $350,000 annually.
Rent Expense-Related Party
Rent Expense-related party increased by 83.2% or $161,541 to $355,731 for the year ended August 31, 2006, compared to $194,190 for the year ended August 31, 2005. The increase in rent expense-related party is due to the Merger and the assumption of the lease from a limited liability company, in which officers of our company are passive investors, owning approximately 20% equity interest. Under the term of the lease, we occupy approximately 21,000 square feet of office and warehouse space out of a total of approximately 70,000 square feet in Suwannee, GA. The lease term is for 5 years with monthly base rent of $12,500. During the year ended August 31,
2006, we recorded $175,731 in expense under this lease.
We also occupy approximately 42,000 square feet of office and warehouse space in Springfield, New Jersey. This space is leased from a limited liability company, which is owned by certain directors and officers and related family members of the Company. The lease term is through April 2009 with monthly base rent of $15,000. During the year ended August 31, 2006, we recorded $180,000 in expense under this lease.
Depreciation and Amortization
Depreciation and amortization expense increased by 440.6% or $770,741 to $945,685 for the year ended August 31, 2006, compared to $174,944 for the year ended August 31, 2005. This increase is primarily attributable to the Merger. Depreciation and amortization expense associated with the Merger represented approximately for $645,706 of increase. Additionally, we made fixed asset acquisitions of $764,904 during the current fiscal year, which increased our depreciation expense. These capital assets acquisitions were primarily for the purchase of computer equipment for internal use, the purchase of software licenses to upgrade our accounting systems,
leasehold improvements, and for furniture and fixtures.
Intangible assets at August 31, 2006 and 2005 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $648,585 and $68,868, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13-15 years. Amortization expense was $579,717 and $61,598 for each of the years ended August 31, 2006 and 2005, respectively.
Interest Expense
Interest expense increased by 74.1% or $453,224 to $1.06 million for the year ended August 31, 2006, compared to $611,479 for the year ended August 31, 2005. This is mainly due to a higher balance on our line of credit and a higher interest rate due to an increasing prime rate, and higher days sales outstanding during the period.
Provision for Income Taxes
Income taxes decreased by 54.0% or $244,546 to $208,004 for the year ended August 31, 2006, compared to $452,550 for the year ended August 31, 2005. Income tax expense of $208,004 includes approximately $73,000 in estimated income tax expense related to the IRS income tax audit for the prior years recorded during the three months ended February 28, 2006. Without this income tax expense related to the income tax audit, our income tax expense would have been approximately $135,004. This decrease is primarily attributable to the 76.1% decrease in income before income taxes in the current year compared to the prior year. Effective tax rate for the year
ended August 31, 2006, without the income tax expense related to the IRS income tax audit, is 33.3% compared with 35.4% for the year ended August 31, 2005. This is mainly due to a lower effective state income tax rate for current year.
Recently Issued Accounting Standards
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or