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To the Board of Directors and Stockholders of

Speedemissions, Inc.

We have audited the accompanying balance sheet of Twenty Dollar Emission, Inc. as of December 31, 2003 and the related statements of operations, stockholder’s deficit and cash flows for the period from inception (October 22, 2003) through December 31, 2003. 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 audits.

We conducted our audit 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 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 Twenty Dollar Emission, Inc. as of December 31, 2003 and the results of its operations and its cash flows for the period from inception (October 22, 2003) through December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

/s/ Bennett Thrasher PC

 

Bennett Thrasher PC

Atlanta, Georgia

April 12, 2004

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Twenty Dollar Emission, Inc. ($20 or the Company) was incorporated on October 22, 2003, under the laws of the state of Georgia for the primary business purpose of opening, acquiring, developing and operating vehicle emissions testing stations. The federal government and a number of state and local governments in the United States (and in certain foreign countries) mandate vehicle emissions testing as a method of improving air quality.

Effective October 22, 2003, $20 purchased substantially all assets and assumed specified liabilities of $20 Emission Place, LLC (Emission Place or the Seller) (see Note 2).

As of December 31, 2003, the Company operated, seven emissions testing stations. All of the operations were located in the metropolitan Atlanta, Georgia area. The Company does business under the trade name $20 Emissions. At its emissions testing stations, the Company uses computerized emissions testing equipment that tests vehicles for compliance with emissions standards; in the emissions testing industry, such stations are known as decentralized facilities. The Company utilizes “basic” testing systems that test a motor vehicle’s emissions while in neutral and “enhanced” testing systems that test a vehicle’s emissions under simulated driving conditions.

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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue is recognized as the testing services are performed. Under current state of Georgia law, the charge for an emissions test is limited to a maximum of $25.00 per vehicle, which is recorded by the Company as gross revenue. As a continuation of the marketing strategy of Emission Place, the Company has chosen to charge $20, rather than $25, for an emissions test. The cost of emissions certificates due to the state is $6.95 per certificate and is shown separately in the accompanying statement of operations.

The Company generally requires that the customer’s payment be made with cash, check or credit card; accordingly, the Company does not have significant levels of accounts receivable.

Under current Georgia laws, if a vehicle fails an emissions test, it may be retested at no additional charge during a specified period after the initial test, as long as the subsequent test is performed at the same facility. At the time of initial testing, the Company provides an allowance for potential retest costs, based on prior retest experience and information furnished by the state of Georgia, which is comprised mainly of the labor cost associated with performing a retest. When a retest is performed, the incremental cost of performing a retest is applied against the retest allowance. For the period from inception (October 22, 2003) through December 31, 2003, the allowance for retest costs was not significant.

 

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Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: emissions testing equipment, seven years; and office equipment, five years.

Leasehold improvements are amortized using the straight-line method over the lesser of the remaining lease terms or the estimated useful lives of the improvements.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When indicators of impairment are present, the Company evaluates the carrying amount of such assets in relation to the operating performance and future estimated undiscounted net cash flows expected to be generated by the assets or underlying businesses. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The assessment of the recoverability of assets will be impacted if estimated future operating cash flows are not achieved. In the opinion of management, no assets were impaired as of December 31, 2003.

The Company has adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which prescribes the accounting for all purchased goodwill and intangible assets. In accordance with SFAS 142, goodwill and certain intangible assets deemed to have an indefinite useful life are no longer amortized but are tested for impairment upon adoption of SFAS 142 and annually thereafter and whenever an impairment indicator arises.

Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of the specific reporting unit of the Company, as defined, to which the goodwill is attributable and a comparison of such fair value to the carrying amount of the reporting unit, including goodwill. If the carrying amount exceeds fair value, the second step is performed to measure the amount of the impairment loss, which equals the amount by which the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill (the implied fair value of goodwill represents the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit). Intangible assets not subject to amortization are tested for impairment by comparing the fair value of the intangible asset with its carrying amount. In the opinion of management, goodwill and intangible assets not subject to amortization were not impaired as of December 31, 2003.

Deferred income taxes are provided for temporary differences between the financial reporting basis and tax basis of assets and liabilities.

Advertising costs are expensed as incurred. Advertising expense totaled $632 in 2003.

 

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The amounts recorded in the financial statements for the Company’s other current assets and accounts payable and accrued liabilities approximate fair value. Management believes the carrying amount of its promissory note payable and obligations under capital leases approximate fair value due to the short-term nature of the debt.

The net loss per share computations for 2003 reflects 1,000 outstanding shares of the Company's common stock.

Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding for the period.

Cash and cash equivalents include cash and highly liquid investments that are readily convertible into cash and have a maturity of ninety days or less when purchased. At times, cash and cash equivalent balances may exceed federally insured amounts. The Company believes it mitigates risks by depositing cash and investing in cash equivalents with major financial institutions.

The current and future demand for the Company’s services is substantially dependent upon federal, state, local and foreign legislation and regulations mandating air pollution controls and emissions testing. If any or all of these governmental agencies should change their positions or eliminate or revise their requirements related to air pollution controls and emissions testing (including a shift to centralized facilities versus decentralized facilities), the Company could experience a significant adverse impact on its financial position and results of operations.

Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Debt and Equity (SFAS 150), was issued in May 2003. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity. SFAS 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period subsequent to June 15, 2003. The effective date for certain provisions regarding mandatorily redeemable noncontrolling interests has been deferred indefinitely. The Company’s adoption of SFAS 150 has not had a material impact on its financial statements.

Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), was issued in April 2003. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The Company’s adoption of SFAS 149 has not had a significant impact on its financial statements.

 

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Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), was issued in June 2002. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company’s adoption of SFAS 146 has not had a significant impact on its financial statements.

Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction (SFAS 145), was issued in April 2002. SFAS 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. The Company’s adoption of SFAS 145 has not had a significant impact on its financial statements.

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements in FIN 45 are currently effective; the initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company’s adoption of FIN 45 has not had a significant impact on its financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) which was revised in December 2003. FIN 46 addresses consolidation by business enterprises of variable interest entities, as defined in FIN 46; it applies to interest in special-purpose entities for periods ending after December 15, 2003. For interests in entities other than special-purpose entities, FIN 46 is applicable at various dates through 2004 and 2005. The Company does not expect FIN 46 to have a significant impact on its financial statements.

Effective October 22, 2003, the Company purchased substantially all the assets and assumed specified liabilities of Emission Place. The assets purchased included the business assets of seven emissions testing stations. The Company acquired Emission Place to enter the emissions testing industry.

The aggregate cash purchase price totaled $800,000 and was funded via proceeds from borrowings under a promissory note payable (see Note 6). In addition, the Company agreed to issue a total of $200,000 worth of the Company’s common stock to the seller. Such stock had not been issued as of December 31, 2003.

The acquisition was accounted for using the purchase method of accounting, whereby a new basis of accounting and reporting for the assets acquired and liabilities assumed was established. The purchase price allocation was based on the estimated fair values of the assets acquired and liabilities assumed. Such fair values were estimated by management. The accompanying financial statements include the results of operations of Emission Place from the date of acquisition.

 

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Speedemissions, Inc.

Pro Forma Condensed Combined Balance Sheets

December 31, 2003

(a)

Speedemissions, Inc.

Twenty Dollar Emission, Inc.

Pro Forma Adjustments

Pro Forma Combined

(f)  To eliminate the equity accounts of Twenty Dollar Emission, Inc due to the acquisition.

(g)  To record the effect of a discount of $0.175 per share on 622,985 shares issued in the acquisition of $20 Emission.

(h)  To record transaction expenses relating to the acquisition cost exceeding the fair market value of the assets of $20 Emission.

 

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