EXHIBIT 99.4
DARR WESTWOOD TECHNOLOGY CORPORATION
Consolidated Financial Statements
For the Nine Months Ended May 31, 2005 and 2004
(Unaudited)
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
DARR Westwood Technology Corporation
Consolidated Balance Sheet
May 31, 2005 (Unaudited)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 4,270,507
ACCOUNTS RECEIVABLE-TRADE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $225,000 15,741,341
ACCOUNTS RECEIVABLE-OTHER 997,712
INVENTORY 2,697,300
PREPAID EXPENSES AND OTHER 83,192
NET DEFERRED TAX ASSET 174,076
-----------
TOTAL CURRENT ASSETS 23,964,128
PROPERTY, PLANT, AND EQUIPMENT, NET 504,388
OTHER NONCURRENT ASSETS 150,336
INTANGIBLE ASSET, NET OF ACCUMULATED AMORTIZATION 259,918
OTHER INTANGIBLE ASSETS 157,739
NET DEFERRED TAX ASSET, NONCURRENT 226,279
-----------
TOTAL ASSETS $25,262,787
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
LINE OF CREDIT $ --
ACCOUNTS PAYABLE-TRADE 16,015,882
ACCOUNTS PAYABLE-RELATED PARTY 108,333
ACCRUED EXPENSES 2,163,268
DUE TO FORMER STOCKHOLDERS 664,567
UNEARNED INCOME 378,997
INCOME TAXES PAYABLE 577,809
CURRENT PORTION OF LONG-TERM DEBT 515,803
-----------
TOTAL CURRENT LIABILITIES 20,424,658
ACCRUED SEVERANCE 413,906
LONG-TERM DEBT, NET OF CURRENT PORTION 1,916,281
DIVIDEND PAYABLE 80,000
-----------
STOCKHOLDERS' EQUITY:
REDEEMABLE PREFERRED STOCK, $0.01 PAR VALUE
AUTHORIZED SHARES - 5,000; 1,000 SHARES ISSUED AND
OUTSTANDING (LIQUIDATION VALUE OF $1,090,000) 10
COMMON STOCK, CLASS A, VOTING, $0.01 PAR VALUE
AUTHORIZED SHARES - 2,500; 198 SHARES ISSUED AND
OUTSTANDING 2
COMMON STOCK, CLASS B, NON-VOTING, $0.01 PAR VALUE
AUTHORIZED SHARES - 2,500; 302 SHARES ISSUED AND
OUTSTANDING 3
ADDITIONAL PAID-IN CAPITAL 1,624,985
RETAINED EARNINGS 802,942
-----------
TOTAL STOCKHOLDERS' EQUITY 2,427,942
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,262,787
-----------
DARR Westwood Technology Corporation
Consolidated Statements of Income
Period from April 17,
Nine Months Ended 2004 to May 31, 2004 Period from September 1,
May 31, 2005 (Successor Period) 2003 to April 16, 2004
(Unaudited) (Unaudited) (Predecessor Period)(1)
----------------- ----------------------- ------------------------
NET SALES $119,856,660 $12,256,651 $88,229,719
COST OF SALES 109,657,220 10,867,178 79,596,368
------------ ----------- -----------
GROSS PROFIT 10,199,440 1,389,473 8,633,351
OPERATING EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,942,761 1,178,193 7,292,265
MANAGEMENT FEE - RELATED PARTY 262,500 29,166 --
RENT EXPENSE - RELATED PARTY 135,000 15,000 155,333
DEPRECIATION & AMORTIZATION 83,914 13,551 51,266
------------ ----------- -----------
8,424,175 1,235,910 7,498,864
OPERATING INCOME 1,775,265 153,563 1,134,487
OTHER EXPENSE (INCOME):
FORGIVENESS OF DEBT -- -- (405,652)
INTEREST INCOME - RELATED PARTY -- -- (21,483)
INTEREST INCOME - OTHER (57,044) (3,339) (44,479)
INTEREST EXPENSE 469,340 69,137 72,819
OTHER EXPENSE (INCOME) (14,044) (1,881) --
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 1,377,013 89,646 1,533,282
PROVISION FOR INCOME TAXES 616,352 39,636 647,445
------------ ----------- -----------
NET INCOME $ 760,661 $ 50,010 $ 885,837
------------ ----------- -----------
(1) Derived from the Audited Consolidated Financial Statements included
herein.
<Page>
DARR Westwood Technology Corporation
Consolidated Statements of Cash Flows
Period from Period from
April 17, 2004 September 1, 2003
Nine Months Ended to May 31, 2004 to April 16, 2004
May 31, 2005 (Successor Period) (Predecessor
(Unaudited) (Unaudited) Period)(1)
---------------- ------------------ ----------------
Cash flows from operating activities
Net Income $ 760,661 $ 50,010 $ 885,837
Adjustments to reconcile net income to net cash provided
by operating activities:
Forgiveness of debt (405,652)
Depreciation and Amortization 83,914 13,551 51,266
Deferred income taxes (73,779) 8,136 58,303
Changes in operating assets and liabilities:
Account receivable-trade 1,990,980 (2,669,558) 737,773
Account receivable- other 193,946 437,527 (158,048)
Inventories (2,173,038) (496,755) 622,947
Prepaid expenses and other assets (113,136) (43,963) (22,063)
Account payable-trade 1,831,144 6,370,287 (1,238,723)
Accrued expenses 1,081,691 (194,285) 765,315
Unearned income (6,425) (11,542) (125,914)
Income tax payable 480,023 (270,363) --
--------------- -------------- ---------------
Net Cash Provided by Operating Activities 4,055,981 3,193,045 1,171,041
--------------- -------------- ---------------
Cash flows from investing activities
Acquisition of property, plant and equipment (221,708) (9,798) (45,616)
Acquisition of business, net of cash acquired (157,739) (4,917,499)
--------------- -------------- ---------------
Net Cash used in Investing activities (379,447) (4,927,297) (45,616)
--------------- -------------- ---------------
Cash flows from financing activities --
Net borrowings (payments) on line of credit (299,250) (7,121,955)
Proceeds from long-term debt -- 1,500,000 --
Proceeds from issuance of common stock -- 625,000 --
Proceeds from issuance of pereferred stock -- 1,000,000 --
Long term debt (322,694) --
--------------- -------------- ---------------
Net Cash Provided by Financing (621,944) 3,125,000 (7,121,955)
--------------- -------------- ---------------
Net change in cash 3,054,590 1,390,748 (5,996,530)
Cash, beginning of period 1,215,917 1,496,771 7,493,301
--------------- -------------- ---------------
Cash, end of period $ 4,270,507 $ 2,887,519 1,496,771
=============== ============== ===============
Supplemental disclosure of cash flow information
--------------- -------------- ---------------
Interest paid $ 312,948 $ 7,667 $ 28,000
=============== ============== ===============
Income taxes paid $ 245,744 $ 301,863 $ 345,000
=============== ============== ===============
Supplemental schedule of noncash investing and financing actvities
---------------
Preferred stock dividend declared, unpaid $ 80,000
=============== --------------
Issuance of Long-Term Debt to Former Shareholders $ 664,567
============== ---------------
Note Receivable Distributed To Shareholders $ 399,587
===============
Capital Contribution, net of income taxes $ 903,811
===============
(1) Derived from the audited consolidated financial statements included herein.
DARR Westwood Technology Corporation
Notes to Consolidated Financial Statements
May 31, 2005
(Unaudited)
1. Organization
Business
DARR Westwood Technology Corporation (the Company) is a holding company who
through its wholly owned subsidiary, Westwood Computer Corporation (Westwood),
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. The Company considers all of
its operating activity to be generated from a single operating segment. The
Company is an 80%-owned subsidiary of DARR Westwood, LLC.
Westwood owns a 100% membership interest in Westwood Solutions, LLC (Solutions).
Prior to its April 16, 2004 acquisition, Westwood owned an 80% membership
interest in Solutions and Westwood's President owned the remaining 20% interest.
Concurrent with the April 16, 2004 acquisition of Westwood, Westwood acquired
the remaining 20% membership interest in Solutions. Solutions did not engage in
any operating activity during the period from September 1, 2003 through April
16, 2004 (predecessor period) or during the period from April 17, 2004 to May
31, 2004 (successor period). Accordingly, the accompanying consolidated
statements of income does not reflect any minority interest in earnings of the
subsidiary.
These Notes to the Consolidated Financial Statements refer to the following
defined periods: The nine months ended May 31, 2005, the period from September
1, 2003 through April 16, 2004 (predecessor period) and the period from April
17, 2004 to May 31, 2004 (successor period).
2. Summary of Significant Accounting Policies
Interim Financial Informaion
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information. Although the interim financial statements are
not required to include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements, we have elected to include the majority of these
disclosures. In the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the
Consolidated Financial Statements have been included. The results of the interim
periods are not necessarily indicative of the results to be obtained for a full
fiscal year. The Consolidated Financial Statements and these Notes should be
read in conjunction with the Audited Consolidated Financial Statements and
Notes thereto included elsewhere in this Form 8-K/A.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Westwood, and Westwood's wholly owned subsidiary,
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
account. 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 May 31, 2005,
there was no restricted cash for the Company.
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
government. 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 periods ended May 31, 2005, May 31, 2004 and April 16, 2004 net sales to
departments of the United States and state and local governments comprised
approximately 92%, 86% and 86%, respectively, of total 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. The carrying
amount of the line of credit and long-term debt approximates their fair value
because the interest rates reflect rates the Company would be able to obtain on
debt with similar terms and conditions.
Revenue Recognition
The Company recognizes revenue from the sales of products when risk of loss and
title passes, which is upon shipment. Shipping costs totaled approximately
$379,431, $56,420 and $374,000 for the periods ended May 31, 2005, May 31, 2004
and April 16, 2004, respectively, and are recorded in cost of goods sold in the
accompanying consolidated statements of income for the periods ended May 31,
2005, May 31, 2004 and April 16, 2004, respectively.
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 Bulleting No. 90-1, Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts (FTB
90-1).
The Company may also enter into sales arrangements with customers that contain
both products and warranties. The Company recognizes revenue from these
transactions in accordance with Emerging Issues Task Force (EITF) Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables", based on the relative
fair value of the individual components. The relative fair value of individual
components is based on historical sales of the components sold separately.
Judgments and estimates are critical to determine if the multiple elements
should be accounted for as separate accounting units.
Rebates
Rebates are recorded in the accompanying consolidated statements of income as a
reduction of the cost of sales in accordance with Emerging Issues Task Force
Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor (EITF 02-16). The Company recorded rebates
of
$7,976,855, 6.7% of sales, $531,691, 4.3% of sales, and $4,399,100, 5.0% of
sales for the periods ended May 31, 2005, May 31, 2004 and April 16, 2004,
respectively. Rebates recorded in accounts receivable-other in the accompanying
consolidated balance sheet approximate $997,713.
Inventory
Inventory is stated at the lower of average cost (specific identification) or
market. Inventory is entirely finished goods purchased for resale and consists
of computer hardware, computer peripherals and related supplies.
Property, Plant and Equipment
Property, plant 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.
Intangible Assets
Intangible assets at May 31, 2005 consist of the value ascribed to
customer relationships and other intangible assets of $259,918 and $157,739,
respectively. The asset ascribed to customer relationships is being amortized
on a straight-line basis over 13 years. Amortization expense was $16,358 and
$1,818 for the periods ended May 31, 2005 and May 31, 2004, respectively.
Amortization expense of $21,811 is expected to be recorded each year through
August 31, 2016 and $14,544 for the year ended August 31, 2017.
The Company evaluates impairment of its intangible assets and property, plant
and equipment is evaluated for impairment in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived 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.
The Company evaluates impairment of Goodwill annually in accordance with
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $11,882,
$67,184 and $40,395 for the periods ending May 31, 2005, May 31, 2004 and April
16, 2004, respectively, and is included in selling, general and administrative
expenses on the consolidated statements of income.
Income Taxes
The Company provides for income taxes in accordance with Statement of 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. Acquisition
On April 16, 2004, the Company purchased substantially all of the net assets of
Westwood for $6,697,816. Prior to the acquisition, the Company had no operating
history. The acquisition was accounted for under the purchase method of
accounting and allowed the Company to enter into the computer and peripheral
sales and service industry. The accompanying financial statements present the
results of operations for the period from September 1, 2003 to April 16, 2004
under the Predecessor's basis of accounting (Predecessor Period) and for
the period from April 17, 2004 to May 31, 2004 under the Company's basis of
accounting (Successor Period). 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 acquired and
liabilities assumed 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
===========
Had the purchase occurred on September 1, 2003, pro forma net income would have
been $724,627 for the predecessor period as a result of increased amortization
and interest expense and decreased depreciation expense, net of related tax
effects. This pro forma information is provided for informational purposes only.
It is based on historical information, and does not necessarily reflect the
actual result that would have occurred, nor is it necessarily indicative of
future results of operations.
On March 1, 2005, the Company acquired selected assets of Proven Technology LLC,
a provider of data storage solutions including hardware, software and support
services for $162,610. The acquisition was accounted for under the purchase
method of accounting and allowed the Company to enter into the data storage
market. The purchase price allocation is preliminary until the Company completes
its analysis, and is based on estimated fair values at the date of purchase.
4. Property, Plant and Equipment
Property, plant and equipment consist of the following at May 31, 2005:
Leasehold improvements $197,903
Machinery and equipment 351,508
Furniture and fixtures 11,558
Automobiles 27,444
--------
588,413
Less accumulated depreciation 84,025
--------
$504,388
========
Depreciation expense was $67,556, $11,733 and $51,266 for the periods ended May
31, 2005, May 31, 2004 and April 16, 2004, respectively.
5. 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 May 31,
2005, there were no borrowings outstanding under this credit 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 underlying 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.
6. Commitments
The Company leases its operating facilities, certain sales offices and
transportation equipment under noncancelable operating lease agreements that
expire on various dates through May 31, 2010. Rent expense was $253,852, $39,299
and $222,329 for the nine month period ended May 31, 2005 and the periods
ending May 31, 2004 and April 16, 2004, respectively, and is recorded in general
and administrative expenses on the consolidated statement of income. Future
minimum payments under operating leases with a remaining or initial lease term
in excess of one year as of May 31, 2005, for the fiscal year ending August 31,
2005, approximate: 2005 - $81,700; 2006 - $281,700; 2007 - $249,700; 2008 -
$185,000 and; 2009 - $120,000.
The Company was counterparty to deferred compensation arrangements with a
spouse, as beneficiary, of a former officer and a former stockholder of Westwood
during the predecessor period. Commensurate with the acquisition of Westwood on
April 16, 2004, the arrangement was forfeited in exchange for a separation
agreement. The agreement provides quarterly severance payments to the
beneficiary of $22,000 to $33,900 through February 2009. In connection with the
exchange, the Company recorded forgiveness of debt of $405,652 for the
difference between the estimated present value of future cash flows and the
forfeited deferred compensation arrangement and the separation agreement. The
Company's liability for the period ending May 31, 2005 was $413,906, for the
separation agreement. The deferred compensation arrangement between the Company
and former stockholder of Westwood was forfeited without recompense. In
connection with this forfeiture, the Company recorded a contribution to capital,
net of income taxes, of $903,811 during the predecessor period.
7. Long-Term Debt
The Company's long-term debt at May 31, 2005 consists of the following:
5% junior subordinated notes payable to former stockholders of
Westwood $ 313,695
8% junior subordinated notes payable to former stockholders of
Westwood 627,389
Subordinate note payable to a Company stockholder, DARR Westwood,
LLC, a related entity 750,000
Subordinate note payable to Four Kings Management, LLC, a
related entity 741,000
----------
Total debt 2,432,084
Less current portion 515,803
----------
Long-term debt $1,916,281
==========
The 5% junior subordinated notes payable to the former stockholders of Westwood
requires annual principal payments of $94,108 plus accrued interest in April
2006 and April 2007. Annual principal payments of $62,739 plus accrued interest
are due in April 2008 and April 2009. The 8% junior subordinated notes payable
to the former stockholders of Westwood require principal payments of $156,847
plus accrued interest due semiannually commencing October 2004.
The subordinated note payable to DARR Westwood, LLC bears interest at a rate
equal to the prime rate, as published in the Wall Street Journal, plus 4% (9.75%
at May 31, 2005), not to exceed 10%. Annual principal payments are due in April
2007 ($194,482), April 2008 ($323,859) and April 2009 ($231,659). Accrued
interest is payable annually beginning in March 2007 through April 2009. The
Company is obligated under this note to pay additional interest in the form of a
fee based on achieving certain levels of revenue, as defined. The fee, if any,
is limited to $30,000 per quarter and is payable in March 2008 and April 2009.
Interest expense was $151,505 and $28,748 for the periods ended May 31, 2005 and
May 31, 2004, respectively, all of which is accrued at the end of each
respective period.
The subordinated note payable to Four Kings Management, LLC (Four Kings) bears
interest at a rate equal to the prime rate, as published in the Wall Street
Journal, plus 4% (9.75% at May 31, 2005), not to exceed 10%. Interest is payable
monthly. Monthly principal payments of $9,000 begin in May 2005 and continue
through March 2009. The remaining balance plus accrued interest is due in April
2009. The Company is obligated under this note to pay additional interest in the
form of a fee based on achieving certain levels of revenue, as defined. The fee,
if any, is limited to $30,000 per quarter and is payable quarterly. Officers of
Westwood own membership interests in Four Kings. Interest expense was $151,468
and $28,748 for the periods ended May 31, 2005 and May 31, 2004, respectively,
of which $26,081 and $21,081 is accrued at the end of each respective period.
Principal maturities of long-term debt at May 31, 2005 are as follows for the
periods ended August 31:
2005 $ 27,000
2006 515,803
2007 710,285
2008 494,598
2009 684,398
----------
$2,432,084
==========
8. Income Taxes
Income tax expense (benefit) for the periods ended May 31, 2005, May 31, 2004
and April 16, 2004 consists of the following:
Period from Period from
April 17, 2004 to September 1, 2003
May 31, 2004 to April 16, 2004
Nine Months Ended (Successor (Predecessor
May 31, 2005 Period) Period)
--------------------- ----------------- -----------------
Current provision:
Federal $575,126 $24,300 $ 454,620
State 150,742 7,200 134,522
-------- ------- ----------
725,868 31,500 589,142
Deferred provision (benefit):
Federal (84,508) 6,278 45,019
State (25,008) 1,858 13,284
-------- ------- ----------
$616,352 $39,636 $ 647,445
======== ======= ==========
The effective income tax rate of 44.8% and 44.2% for the nine month periods
ended May 31,2005 and May 31,2004 respectively, differ from the federal
statutory rate of 34% because of the difference in treatment of certain expense
items for financial and income tax reporting purposes and state taxes. A
reconciliation of the statutory provision and the provision for financial
reporting purposes is as follows:
Period from Period from
April 17, 2004 to September 1, 2003
May 31, 2004 to April 16, 2004
Nine Months Ended (Successor (Predecessor
May 31, 2005 Period) Period)
--------------------- ----------------- -----------------
Statutory Federal Tax Provision $468,273 $29,653 $ 521,316
State Income Taxes net of Federal 87,918 6,379 92,503
Other permanent difference 60,161 3,604 33,626
-------- ------- ----------
Provision for income taxes $616,352 $39,636 $ 647,445
======== ======= ==========
Deferred taxes arise principally from differences in and the nature and timing
of the deduction for 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 for the period ended
May 31, 2005 consists of the following:
Net current deferred tax asset $174,076
--------
Accruals and reserves on current assets $174,076
========
Net deferred tax asset - long-term:
Deferred compensation $236,361
Depreciation (10,082)
--------
$226,279
========
9. Retirement Plan
The Company maintains a defined contribution 401(k) pension plan. Contributions
are based on up to 1% of each covered employees salary and totaled $31,700,
$5,025 and $19,333 for the nine month periods ended May 31, 2005 and the periods
ending May 31, 2004 and April 16, 2004, respectively. The expense is included in
selling, general and administrative expenses in the consolidated statement of
income.
10. Equity
Concurrent with the purchase of Westwood, the Company authorized 2,500 shares of
class A voting and class B non-voting common stock and issued 198 shares and 302
shares respectively. Holders of class A common stock are entitled to convert any
or all of their shares into the same number of shares of class B common stock.
Holders of class B common stock are entitled to convert any or all of their
shares into the same number of shares of class A common stock.
Concurrent with the purchase of Westwood, the Company authorized 5,000 shares
and issued 1,000 shares of series A redeemable preferred stock for $1,000,000.
Series A redeemable preferred stock is senior to all securities outstanding. The
holders of series A redeemable preferred stock are entitled to dividends at a
rate of 8% per annum. Dividends are cumulative and are due and payable after
April 2008. The series A redeemable preferred stock has no voting rights and is
redeemable at the option of the Company commencing April 17, 2009 at 100% of its
liquidation value. The liquidation value of series A redeemable preferred stock
is equal to $1,000 plus accumulated but unpaid dividends and is $1,090,000
(including $80,000 that have been accrued) at May 31, 2005.
11. Related Party Transactions
During the period ended April 16, 2004, the Company held a note receivable from
a company controlled by the Westwood stockholders which was repaid through
periodic payments. The note receivable was distributed to the stockholders of
Westwood through a dividend on April 16, 2004. Interest income recorded on this
note for the period ended April 16, 2004 totaled $21,483.
Beginning April 17, 2004, the Company is charged a monthly management fee of
$29,166 by DARR Global Holding, LLC, Inc. For the nine month periods ended May
31, 2005, and May 31, 2004, the Company recorded $262,500 and $29,166,
respectively for this management fee in the accompanying consolidated statement
of income. At May 31, 2005, $108,333 of the fee is included in accounts payable
- - related party.
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 for the period ended May 31, 2005, May 31, 2004 and April 17,
2004 was $135,000, $13,351 and $155,335, respectively. The spouse of one of
those officers is a stockholder of the Company.
12. Subsequent Event
On August 5, 2005, DARR Westwood Technology Corporation entered into a merger
agreement 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 represents approximately
55% of the Emtec's total outstanding common stock post-merger and resulted in a
change of control of Emtec, Inc. DARR Westwood is deemed to the acquiring
company for financial reporting purposes. Accordingly, the reverse merger was
treated as an acquisition of Emtec by DARR Westwood and a recapitalization of
DARR Westwood.