EXHIBIT 99.3
WESTWOOD COMPUTER CORPORATION AND SUBSIDIARY
AUGUST 31, 2003 AND 2002
Independent Auditors' Report
Audited Consolidated Financial Statements
Consolidated Balance Sheet - Assets
Consolidated Balance Sheet -
Liabilities and Stockholders' Equity
Consolidated Statements of Income
Consolidated Statements of -
Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Westwood Computer Corporation
11 Diamond Road
Springfield, N.J. 07081
We have audited the accompanying consolidated balance sheet of Westwood Computer
Corporation and subsidiary as of August 31, 2003, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
years ended August 31, 2003 and 2002. 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 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 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Westwood Computer
Corporation as of August 31, 2003, and the results of its operations and cash
flows for the years ended August 31, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Glassel & Bonfiglio, LLC
- ----------------------------
GLASSEL & BONFIGLIO, LLC
September 16, 2005
WESTWOOD COMPUTER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2003
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 7,493,301
Accounts receivable - net of allowance
for doubtful accounts of $200,000 12,673,133
Inventory 1,071,371
Deferred taxes - current 124,604
Other current assets 70,233
-----------
Total Current Assets 21,432,642
-----------
PROPERTY AND EQUIPMENT, NET 194,071
-----------
OTHER ASSETS
Note receivable 398,119
Deferred taxes 914,221
Other assets 45,026
-----------
Total Other Assets 1,357,366
-----------
TOTAL ASSETS $22,984,079
===========
See accompanying notes.
WESTWOOD COMPUTER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable trade $14,063,404
Accrued expenses 1,093,256
Unearned service income 535,476
-----------
Total Current Liabilities 15,692,136
-----------
LONG TERM LIABILITIES
Deferred Compensation 2,308,690
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common Stock 866,961
Retained earnings 4,131,729
Treasury stock - at cost (15,437)
-----------
Total Stockholders' Equity 4,983,253
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,984,079
===========
See accompanying notes.
WESTWOOD COMPUTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 2003 AND 2002
2003 2002
----------- -----------
NET SALES AND SERVICES $97,449,611 $94,165,222
COST OF GOODS AND SERVICES 87,843,440 85,251,031
----------- -----------
GROSS PROFIT 9,606,171 8,914,191
----------- -----------
OPERATING EXPENSES
Selling expenses 3,289,603 3,707,300
General and administrative expenses 5,333,413 4,111,473
Depreciation and amortization 125,054 155,868
----------- -----------
Total Operating Expenses 8,748,070 7,974,641
----------- -----------
Income From Operations 858,101 939,550
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (42,324) (127,071)
Interest income 50,906 70,419
Other (2,293) (4,355)
Loss on sale of land and building (102,253) 0
----------- -----------
Total Other Income (Expense) (95,964) (61,007)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 762,137 878,543
PROVISION FOR INCOME TAXES 294,747 328,938
----------- -----------
NET INCOME $ 467,390 $ 549,605
=========== ===========
Weighted Average Earnings per share, basic and
full-dilution $ .02 $ .03
=========== ===========
See accompanying notes.
Westwood Computer Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Common Stock-
Class A Additional Treasury Total
--------------------- Paid-in Retained Stock, at Stockholders'
Shares Amount Capital Earnings Cost Equity
---------- -------- ---------- ---------- --------- -------------
Balance at August 31, 2001 18,940,640 $866,961 $3,114,734 ($1,767) $3,979,928
Common Stock issued 50
Net income -- 549,605 549,605
---------- -------- --- ---------- -------- ----------
Balance at August 31, 2002 18,940,690 $866,961 $3,664,339 ($1,767) $4,529,533
========== ======== === ========== ======== ==========
Treasury Stock repurchased (273,400) ($13,670) ($13,670)
Net income -- $ 467,390 467,390
---------- -------- --- ---------- -------- ----------
Balance at August 30, 2003 18,667,290 $866,961 -- $4,131,729 ($15,437) $4,983,253
========== ======== === ========== ======== ==========
See accompanying notes.
WESTWOOD COMPUTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2003 AND 2002
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 467,390 $ 549,605
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation 125,054 155,868
Loss on Sale of Land and Building 102,253 0
(Increase) Decrease in assets:
Accounts receivable 4,918,052 (9,559,975)
Inventory 1,290,429 (1,274,414)
Other current assets 50,691 (46,275)
Increase in security deposits (5,458) (17,250)
Deferred Taxes (203,517) (163,306)
Increase (Decrease) in liabilities:
Accounts payable trade (1,056,019) 7,235,379
Accrued expenses 149,630 143,070
Deferred compensation 489,465 344,568
Unearned service income 291,583 203,899
----------- -----------
Net Cash Provided by (Used in) Operating Activities 6,619,553 (2,428,831)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (67,593) (48,542)
Payment on note receivable (2,706) 0
Repurchase of treasury stock (13,670) 0
----------- -----------
Net Cash Used in Investing Activities (83,969) (48,542)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt (44,445) (53,333)
----------- -----------
Net Cash Used in Financing Activities (44,445) (53,333)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 6,491,139 (2,530,706)
Cash and Cash Equivalents, Beginning of Year 1,002,162 3,532,868
----------- -----------
Cash and Cash Equivalents, End of Year $ 7,493,301 $ 1,002,162
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 42,324 $ 128,406
=========== ===========
Income Taxes paid $ 318,800 $ 570,212
=========== ===========
See accompanying notes.
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements
August 31, 2003
1. Organization
Business
Westwood Computer Corporation (the Company) is engaged in the sale and service
of computers and peripherals to customers which include departments of the
United States, state and local governments and commercial businesses throughout
the United States.
Westwood owns an 80% membership interest in Westwood Solutions, LLC (Solutions)
and Westwood's President owns the remaining 20% interest.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
it's 80% owned subsidiary, Westwood Solutions. Significant intercompany account
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. In addition, the Company typically
maintains cash at major financial institutions. At times throughout the year,
bank account balances exceed FDIC insurance limits, which are up to $100,000 per
bank. At August 31, 2003 the bank account balances exceeding FDIC insurance
limits totaled approximately $8,000,000.
At times throughout the year, the Company has restricted cash. Restricted cash
represents amounts collected on accounts receivable that have not been released
to the Company by its financing company. At August 31, 2003, none of the
Company's cash balances are restricted.
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk and Significant Customers
Other financial instruments that potentially subject the company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is primarily departments of the United States, state and
local governments. The Company does not require collateral or other security to
support credit sales, but provides an allowance for doubtful accounts based on
historical experience and specifically identified risks. Accounts receivable are
considered delinquent when payment is not received within standard terms of sale
and are charged off against the allowance for doubtful accounts when management
determines that recovery is unlikely and the Company ceases its collection
efforts.
For the years ended August 31, 2003, and 2002, net sales to departments of the
United States and state and local governments comprised approximately 76% and
63%, respectively, of net sales.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximate fair value because of their short-term nature.
Revenue Recognition
The Company recognizes revenue from the sale of products when risk of loss and
title passes, which is upon shipment. Shipping costs totaled approximately
$420,000 and $295,000 for the years ended August 31, 2003 and 2002,
respectively, and are recorded in costs of goods sold in the accompanying
consolidated statements of income.
Revenue from the sale of warranties and support service contracts is recognized
on a straight-line basis over the term of the contract, in accordance with
Financial Accounting Standards Board Technical Bulletin No. 90-1, Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts (FTB
90-1). Warranties and service contract terms generally range from 12 to 36
months. Revenue from the sale of original equipment manufactures' warranty and
service contracts, where the manufacturer is responsible for fulfilling the
service requirements of the contract, are recognized on their contract sale
date.
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Rebates
Rebates are recorded in the accompanying consolidated statements of income as a
reduction of cost of sales in accordance with Emerging Issues Task Force
Abstract No. 02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor (EITF 02-16).
Inventory
Inventory is stated at the lower of average cost (specific identification) or
market. Inventory consists principally of computer hardware, computer
peripherals and related supplies.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the assets,
which generally is five years.
The Company evaluates impairment of its property and equipment in accordance
with Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Live Assets (SFAS 144). SFAS 144 requires an impairment loss to
be recognized only if the carrying amounts of long-lived assets to be held and
used are not recoverable from their expected undiscounted cash flows.
Advertising
Advertising costs are expensed as incurred. Advertising expense was
approximately $71,000 and $25,000 for the years ended August 31, 2003 and 2002,
respectively.
Westwood Computer Corporation and Subsidiary and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The company provides for income taxes in accordance with Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between financial statement carrying
amounts and the tax bases of assets and liabilities.
3. Property and Equipment
Property and equipment at August 31, 2003 is as follows:
Machinery and equipment $1,026,293
Furniture and fixtures 121,335
Automobiles 96,647
----------
1,244,275
Less accumulated depreciation 1,050,204
----------
$ 194,071
==========
4. Line of Credit
The Company maintains a credit facility under two agreements with a financing
company. The credit facility finances purchases from specified vendors, as
defined, and allows for borrowings based on a percentage of eligible accounts
receivable, as defined. Borrowings under both agreements are limited to an
aggregate of $15,000,000 and bear interest at the greater of the prime rate as
published by JP Morgan Chase Bank or 5.25%. The underlying agreements allow for
an increased borrowing base during periods of high seasonal activity. At August
31, 2003, there were no borrowings outstanding under this facility. The
agreement is cancelable at the discretion of either party.
The credit facility is secured by substantially all of the Company's assets and
the agreements contain certain restrictive covenants that limit dividends to
stockholders and require the Company to meet defined financial covenants. In
addition, the credit facility requires that the Company maintain a lock-box for
all cash receipts related to trade accounts receivable, from which the financing
company releases funds to the Company for operations pursuant to terms
identified in the underlying agreements.
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Commitments and Contingencies
The Company leases its operating facilities and certain sales offices under
noncancelable operating lease agreements that expire on various dates through
August 31, 2009. Rent expense was approximately $159,000 and $70,000 for the
years ended August 31, 2003 and 2002, respectively. Future minimum payments
under operating leases with remaining or initial lease terms in excess of one
year as of August 31, 2003 approximated: 2004 - $250,000; 2005 - $221,000; 2006
- - $220,000; 2007 - $180,000; and 2008 - $180,000.
The Company was counterparty to deferred compensation arrangements with one of
its stockholders and a spouse, as beneficiary, of a former stockholder. The
amount payable under the deferred compensation arrangements at August 31, 2003
is $2,308,690.
The deferred compensation arrangements were forfeited on April 16, 2004 in
connection with the acquisition of the Company by DARR Westwood Technology
Corporation. (see note 11)
6. Income Taxes
Income tax expense for the years ended August 31, 2003 and 2002, consists of the
following:
2003 2002
--------- ---------
Current provision:
Federal $ 381,382 $ 379,515
State 116,882 112,729
--------- ---------
498,264 492,244
--------- ---------
Deferred provision (benefit):
Federal (157,047) (126,018)
State and local (46,470) (37,288)
--------- ---------
(203,517) (163,306)
--------- ---------
$ 294,747 $ 328,938
========= =========
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
Deferred taxes arise principally from differences in and the nature and timing
of the deduction for deferred compensation, depreciation expense associated with
property and equipment and certain reserves for financial and income tax
reporting purposes. Significant components of the Company's deferred tax assets
as of August 31, 2003 are as follows:
Net current deferred tax assets:
Accruals and reserves on current assets $124,604
========
Net deferred tax asset - long-term:
Deferred compensation 924,238
Depreciation (10,017)
--------
$914,221
========
The Company's effective tax rate differs from the statutory rate principally due
to expenses which are not deductible for income tax reporting purposes and state
income taxes.
The following is a reconciliation of the reported amount of income tax expense
to the amount of income tax expense that would result from applying domestic
federal statutory rates to income before income taxes:
Years ended August 31,
----------------------
2003 2002
---- ----
Federal statutory rate 34.0% 34.0%
State taxes net of federal income tax benefit 5.0 5.0
Other (.3) (1.6)
---- ----
38.7% 37.4%
==== ====
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Retirement Plan
The Company maintains a defined contribution 401(k) pension plan covering
substantially all of its employees. Contributions are determined up to 1% of
each covered employee's salary and totaled approximately $23,000 and $11,000 for
the years ended August 31, 2003 and 2002, respectively.
8. Equity
Common stock is comprised of no par value class A series I (voting) and class A
series II (non voting) stock:
Series I Series II Total
--------- ---------- ----------
Shares Authorized 2,000,000 18,000,000 20,000,000
Shares Issued 1,944,264 17,044,826 18,989,090
Shares Outstanding 1,870,424 16,796,866 18,667,290
Treasury Stock 73,840 247,960 321,800
During the year ended August 31, 2003 the Company repurchased 25,440 shares of
Series I, class A voting stock, and 247,960 shares of Series II, class A non
voting stock.
9. Earnings Per Share:
The Company reports basic and diluted earnings per share in accordance with SFAS
No. 128, "Earnings Per Share" ("SFAS No.128"). Diluted earnings per share
includes only the dilutive effects of common stock equivalents such as stock
options and contingent stock consideration. There are no dilutive shares
outstanding at August 31, 2003 and 2002.
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Earnings Per Share (continued)
The following table sets forth the computation of basic and diluted earnings per
share pursuant to SFAS No. 128:
Year ended August 31,
-------------------------
2003 2002
----------- -----------
Net Income available to common stockholders $ 467,390 $ 549,605
=========== ===========
Basic and diluted weighted average common stock
outstanding 18,806,990 18,940,665
----------- -----------
Basic and Diluted earnings per common share $ .02 $ .03
=========== ===========
10. Related Party Transactions
On August 1, 2003 the Company sold land and a building for $765,958 to a related
entity, Westwood Property Holdings, LLC. The related entity assumed a mortgage
on the property in the amount of $360,000 and issued the company a note in the
amount of $405,958. The note requires payments of principle and interest at 8%
per annum and is due on July 1, 2013.
The company's New Jersey facility is leased under a non cancelable operating
lease agreement with an entity that is controlled by officers of Westwood. Rent
expense recorded during the period ended August 31, 2003, under this lease, was
approximately $39,000. The monthly rent is approximately $19,000 through April
30, 2004 and $15,000 from May 1, 2004 through April 30, 2009. The lease expires
on April 30, 2009.
Westwood Computer Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. Subsequent Events
On April 16, 2004, DARR Westwood Technology Corporation purchased substantially
all of the net assets of Westwood Computer Corporation for $6,697,816. The
purchase price consisted of cash of $5,245,222, assumed liabilities of
$1,254,778 and related acquisition costs of $197,816. The purchase price was
allocated to the assets and liabilities based on their respective fair values on
the date of purchase as follows:
Current assets $14,152,360
Customer relationships 283,546
Property, plant and equipment 188,420
Deferred tax asset 377,154
Other assets 58,038
Current liabilities (7,853,970)
Accrued severance (507,732)
-----------
Net assets acquired $ 6,697,816
===========
On August 11, 2005, DARR Westwood Technology Corporation completed a merger
transaction with Emtec, Inc. Pursuant to the terms of the merger agreement, all
of the shares of DARR Westwood common stock issued and outstanding immediately
prior to the merger were exchanged for 9,528,110 shares of Emtec common stock
and warrants to purchase an additional 10% of Emtec's common stock, measured on
a post exercise basis. The 9,528,110 shares of Emtec represent approximately 55%
of the Emtec's total outstanding common stock post-merger. Management is
currently evaluating purchase price allocation to the assets and liabilities
based on their respective fair values on the date of the purchase.