EXHIBIT 99.7
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On August 13, 2008, Emtec Global Services LLC (“EGS”), a wholly-owned subsidiary of Emtec Inc. (the “Emtec” or the “Company”), eBusiness Application Solutions, Inc. (“eBAS”), Aveeva, Inc. (“Aveeva”) and Jessica Chopra (“Ms. Chopra”) entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which EGS agreed to acquire all of the outstanding stock of eBAS and Aveeva (collectively referred to as “Target”) from Ms. Chopra. The purchase price consisted of (i) cash at closing in an aggregate amount equal to $7,313,500, and (ii) the potential to pay contingent consideration up to $1 million each year for the next three years on the anniversary of the closing if certain performance goals are met. Additionally, the Company capitalized $191,859 in professional fees associated with this transaction. The purchase price may be increased or decreased pursuant to a post-closing working capital adjustment. It is anticipated that the Company will realize future income tax benefits of approximately $1.3 million over the next 15 year as a result of the Target’s former shareholder agreeing to a Section 338(h)(10) election under the Internal Revenue Code of 1986.
The acquisition has been accounted for using purchase price accounting in accordance with Financial Accounting Standard No. 141, Business Combinations. The following unaudited pro forma condensed consolidated statements of operations for the fiscal year ended August 31, 2007 and the nine months ended May 31, 2008 give effect to the Company’s purchase of the Target. The unaudited pro forma condensed consolidated statements of operations assume that this transaction was consummated on September 1, 2006. The pro forma condensed consolidated balance sheet presents the financial position of the Company as if the acquisition of the Target occurred on May 31, 2008. The pro forma adjustments, which are based on available information and certain assumptions that the Company believes are reasonable under the circumstances, are applied to the historical financial statements of the Company. The pro forma allocation of the purchase price to the acquired assets and liabilities is based upon an independent appraisal and other studies completed subsequent to the acquisition of the Target. The fair value adjustments contained in the pro forma financial information are preliminary estimates. Furthermore, the information does not include the impact of possible revenue enhancements, expense efficiencies and asset dispositions, among other factors. The Company also expects to incur certain integration expenses.
These pro forma condensed consolidated financial statements, which have been prepared in accordance with rules prescribed by Article 11 of Regulation S-X, are provided for informational purposes only and are not necessarily indicative of the past or future results of operations or financial position of the Company.
This information should be read in conjunction with the Company’s previously filed Current Report on Form 8-K, filed August 19, 2008, the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended August 31, 2007, quarterly report on Form 10-Q for the quarter ended May 31, 2008, and the historical financial statements and accompanying notes of the Target included in this Current Report on Form 8-K/A.
Pro Forma Combined Balance Sheet
May 31, 2008
Unaudited
Historical | Pro Forma | Pro Forma | |||||||||||
Emtec, Inc. | Combined Target | Adjustments (2) | Combined | ||||||||||
Assets | |||||||||||||
Current Assets | |||||||||||||
Cash | $ | 1,268,626 | $ | 1,202,919 | $ | (1,139,919 | )(A) | $ | 1,331,626 | ||||
Receivables: | - | - | - | ||||||||||
Trade, less allowance for doubtful accounts | 19,788,007 | 6,292,863 | (261,832 | )(A) | 25,819,038 | ||||||||
Others | 3,690,219 | - | - | 3,690,219 | |||||||||
Inventories, net | 2,411,115 | - | - | 2,411,115 | |||||||||
Prepaid expenses | 501,841 | 497,706 | - | 999,547 | |||||||||
Deferred tax asset - current | 685,623 | - | - | 685,623 | |||||||||
Total current assets | 28,345,431 | 7,993,489 | (1,401,752 | ) | 34,937,168 | ||||||||
Property and equipment, net | 1,006,057 | 134,492 | - | 1,140,549 | |||||||||
- | |||||||||||||
Other intangible assets, net | 8,364,167 | - | 3,170,000 | (A) | 11,534,167 | ||||||||
Goodwill | 10,718,346 | - | 55,585 | (A) | 10,773,931 | ||||||||
Deferred tax asset - long term | 147,930 | - | - | 147,930 | |||||||||
Restricted cash | 150,000 | - | - | 150,000 | |||||||||
Other assets | 108,743 | - | - | 108,743 | |||||||||
Total assets | $ | 48,840,674 | $ | 8,127,980 | $ | 1,823,835 | $ | 58,792,488 | |||||
Liabilities and Stockholders' Equity | |||||||||||||
Current Liabilities | |||||||||||||
Line of credit | $ | 400,066 | - | $ | 7,313,500 | (A) | 7,713,566 | ||||||
Accounts payable | 22,154,365 | 1,292,763 | - | 23,447,127 | |||||||||
Current portion of long term debt - related party | 2,645,307 | - | - | 2,645,307 | |||||||||
Income taxes payable | 472,722 | - | 135,695 | (A) | 608,417 | ||||||||
Accrued liabilities | 3,153,225 | 934,319 | 20,192 | (A) | 4,299,595 | ||||||||
191,859 | (A) | ||||||||||||
Due to former stockholders | 631,415 | - | 63,488 | (A) | 694,903 | ||||||||
Customer deposits | 47,131 | - | - | 47,131 | |||||||||
Deferred revenue | 1,165,494 | - | - | 1,165,494 | |||||||||
Total current liabilities | 30,669,723 | 2,227,082 | 7,724,733 | 40,621,537 | |||||||||
Deferred tax liability | 2,363,932 | - | - | 2,363,932 | |||||||||
Accrued liabilities | 174,739 | - | - | 174,739 | |||||||||
Long term debt - related party | 1,159,408 | - | - | 1,159,408 | |||||||||
Total liabilities | 34,367,802 | 2,227,082 | 7,724,733 | 44,319,616 | |||||||||
Commitments and contingent liabilities | |||||||||||||
Stockholders' Equity | |||||||||||||
Common stock $0.01 par value; 25,000,000 shares authorized; 17,714,180 shares issued and 14,849,591, outstanding at May 31, 2008 | 177,142 | 225,100 | (225,100 | )(A) | 177,142 | ||||||||
Additional paid-in capital | 20,557,148 | - | - | 20,557,148 | |||||||||
Retained earnings (accumulated deficit) | (665,371 | ) | 5,675,798 | (5,675,798 | )(A) | (665,371 | ) | ||||||
20,068,919 | 5,900,898 | (5,900,898 | ) | 20,068,919 | |||||||||
Less: treasury stock, at cost, 2,864,589 shares | (5,596,047 | ) | (5,596,047 | ) | |||||||||
Total stockholders' equity | 14,472,872 | 5,900,898 | (5,900,898 | ) | 14,472,872 | ||||||||
Total liabilities and stockholders' equity | $ | 48,840,674 | $ | 8,127,980 | $ | 1,823,835 | $ | 58,792,488 |
The accompanying notes are integral parts of these pro forma combined financial statements.
For the nine months ended May 31, 2008
Unaudited
Historical | Proforma | Pro Forma | |||||||||||
Emtec, Inc. | Combined Target | Adjustments (2) | Combined | ||||||||||
Revenues | $ | 157,637,879 | $ | 26,732,506 | $ | 184,370,385 | |||||||
Cost of revenues | 138,326,110 | 20,600,948 | 158,927,058 | ||||||||||
Gross profit | 19,311,769 | 6,131,558 | - | 25,443,327 | |||||||||
Operating expenses: | |||||||||||||
Selling, general, and administrative expenses (a) | 16,025,377 | 3,963,680 | 600,000 | (B) | 20,521,118 | ||||||||
(67,939 | )(C) | ||||||||||||
Management fee – related party | - | - | - | ||||||||||
Amended employment agreements and management agreement charges | - | - | - | ||||||||||
Rent expense – related party | 270,089 | - | 270,089 | ||||||||||
Depreciation and amortization | 944,100 | 72,559 | 475,500 | (D) | 1,492,159 | ||||||||
Total operating expenses | 17,239,565 | 4,036,239 | 1,007,561 | 22,283,366 | |||||||||
Operating income (loss) | 2,072,204 | 2,095,319 | (1,007,561 | ) | 3,159,961 | ||||||||
Other expense (income): | |||||||||||||
Interest income – other | (77,807 | ) | (7,221 | ) | (85,028 | ) | |||||||
Interest expense | 833,018 | 6,743 | 377,697 | (E) | 1,217,458 | ||||||||
Other | (274 | ) | (708 | ) | (982 | ) | |||||||
Income (loss) before income taxes | 1,317,267 | 2,096,504 | (1,385,258 | ) | 2,028,512 | ||||||||
Provision for income taxes | 614,226 | - | 284,498 | (F) | 898,724 | ||||||||
Net income (loss) | $ | 703,041 | $ | 2,096,504 | $ | (1,669,757 | ) | $ | 1,129,788 | ||||
Net income per common share | |||||||||||||
Basic and Diluted | $ | 0.05 | $ | 0.08 | |||||||||
Weighted Average Shares Outstanding | |||||||||||||
Basic | 14,519,049 | 14,519,049 | |||||||||||
Diluted | 14,636,249 | 14,636,249 |
Note:
(a) | Selling, general and administrative expenses for the Target includes non-recurring legal fees in the amount of $159,273. |
The accompanying notes are integral parts of these pro forma combined financial statements.
For the year ended August 31, 2007
Unaudited
Historical | Proforma | Pro Forma | |||||||||||
Emtec, Inc. | Combined Target | Adjustments (2) | Combined | ||||||||||
Revenues | $ | 216,980,138 | $ | 38,328,645 | $ | 255,308,783 | |||||||
Cost of revenues | 193,825,950 | 29,956,256 | 223,782,206 | ||||||||||
Gross profit | 23,154,188 | 8,372,389 | - | 31,526,577 | |||||||||
Operating expenses: | |||||||||||||
Selling, general, and administrative expenses (a) | 21,830,037 | 7,479,592 | 800,000 | (B) | 30,023,598 | ||||||||
- | (86,031 | )(C) | |||||||||||
Management fee – related party | 145,834 | - | 145,834 | ||||||||||
Amended employment agreements and management agreement charges | 2,329,800 | - | 2,329,800 | ||||||||||
Rent expense – related party | 357,300 | - | 357,300 | ||||||||||
Depreciation and amortization | 1,171,815 | 31,925 | 634,000 | (D) | 1,837,740 | ||||||||
Total operating expenses | 25,834,786 | 7,511,517 | 1,347,969 | 34,694,272 | |||||||||
Operating income (loss) | (2,680,598 | ) | 860,873 | (1,347,969 | ) | (3,167,695 | ) | ||||||
Other expense (income): | |||||||||||||
Interest income – other | (105,507 | ) | (30,665 | ) | (136,172 | ) | |||||||
Interest expense | 1,079,209 | 17,201 | 566,796 | (E) | 1,663,206 | ||||||||
Other | (462 | ) | - | (462 | ) | ||||||||
Income (loss) before income taxes (benefit) | (3,653,838 | ) | 874,337 | (1,914,766 | ) | (4,694,266 | ) | ||||||
Provision for income taxes (benefit) | (1,373,851 | ) | - | (416,171 | )(F) | (1,790,022 | ) | ||||||
Net income (loss) | $ | (2,279,987 | ) | $ | 874,337 | $ | (1,498,594 | ) | $ | (2,904,244 | ) | ||
Net loss per common share | |||||||||||||
Basic and Diluted | $ | (0.16 | ) | $ | (0.20 | ) | |||||||
Weighted Average Shares Outstanding | |||||||||||||
Basic | 14,385,286 | 14,385,286 | |||||||||||
Diluted | 14,385,286 | 14,385,286 |
Note:
(a) | Selling, general and administrative expenses for the Target includes non-recurring legal fees in the amount of $1,141,281. |
The accompanying notes are integral parts of these pro forma combined financial statements.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. | BASIS OF PRO FORMA PRESENTATION |
On August 13, 2008, EGS, a wholly-owned subsidiary of Emtec, eBAS, Aveeva and Ms. Chopra entered into a Purchase Agreement, pursuant to which EGS agreed to acquire all of the outstanding stock of eBAS and Aveeva from Ms. Chopra. The purchase price consists of (i) cash at closing in an aggregate amount equal to $7,313,500 and (ii) the potential to pay contingent consideration of $1 million each year for the next three years on the anniversary of the closing if certain performance goals are met. Additionally, the Company capitalized $191,859 in professional fees associated with this transaction.
The acquisition has been accounted for as a purchase business combination. Assets acquired and liabilities assumed were recorded at their fair values as of August 12, 2008. Acquisition-related transaction costs include legal and accounting fees, and other external costs directly related to the acquisition.
Preliminary Purchase Price Allocation
Under purchase accounting, the purchase price was comprised of the cash paid at closing and acquisition related costs and allocated to the Target’s net tangible and identifiable intangible assets based on their estimated fair values as of August 12, 2008, as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon an independent valuation of the identifiable intangibles and management’s estimate of fair value of all other identified assets and liabilities. The Company’s estimates and assumptions underlying the valuation are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to the working capital adjustment and residual goodwill associated with the payment of contingent consideration in future years.
Pre-Acquisition Contingencies
The Company has not identified any pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available which would indicate it is probable that such events have occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.
2. | PRO FORMA ADJUSTMENTS |
The following is a summary of pro forma adjustments in the unaudited combined financial statements based on preliminary estimates, which may change as additional information is obtained. Pro forma adjustments do not include the impact of contingencies that will not be known until they are resolved.
A. | Pro forma adjustment to give effect to the purchase of the Target for $7,505,359, including transaction costs of $191,859, as if the acquisition occurred on May 31, 2008. The purchase prince is expected to be funded through line of credit borrowings. The preliminary allocation of the purchase price is as follows: |
Cash | $ | 63,000 | ||
Accounts receivable, net | 6,031,031 | |||
Prepaid expenses | 497,706 | |||
Property and equipment | 134,492 | |||
Goodwill | 55,585 | |||
Customer relationships | 2,900,000 | |||
Non-compete agreements | 270,000 | |||
Total assets acquired | 9,951,815 | |||
Accounts payable | (1,292,763 | ) | ||
Income taxes payable | (135,695 | ) | ||
Accrued expenses | (954,512 | ) | ||
Due to former shareholder | (63,486 | ) | ||
Liabilities assumed | (2,446,456 | ) | ||
Net assets acquired | $ | 7,505,359 |
B. | Pro forma adjustment to reflect annual bonuses payable to key management personnel of the Target for continued employment post-closing. The aggregate bonuses each year are up to $800,000 for a period of three years, not to exceed $2.0 million in total. For the nine months ended May 31, 2008, the bonus was pro-rated. |
C. | Pro forma adjustment to eliminate lease expense for autos utilized by Target’s senior management that were excluded from this transaction. |
D. | Pro forma adjustment to give effect to the amortization of the intangible assets recorded as a result of the acquisition. |
The fair values and useful lives of identifiable intangible assets acquired are detailed below:
Pro Forma Amortization Expense | |||||||||||||
For year ended | For 9 months | ||||||||||||
Intangible Asset | Fair Value | Useful Life | 8/31/07 | ended 5/31/08 | |||||||||
Customer Relationships | $ | 2,900,000 | 5 years | 580,000 | 435,000 | ||||||||
Non-Compete Agreements | 270,000 | 5 years | 54,000 | 40,500 | |||||||||
$ | 3,170,000 | $ | 634,000 | $ | 475,500 |
E. | Pro forma adjustment to reflect interest expense associated with borrowings under the Company’s line of credit to finance this acquisition. |
F. | Pro forma adjustment to reflect income taxes for Target at a combined Federal and state rate of 40%. No tax expense was historically calculated as the Target was an S corporation. |