EXHIBIT 99.5
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
On August 11, 2005, Emtec, Inc. ("Emtec") filed a Form 8-K to report the August
5, 2005 closing of a reverse merger transaction with Darr Westwood Technology
Corporation, a Delaware corporation ("Darr Westwood"). 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 new issuance of common
stock represented approximately 55% of the issuer's total outstanding common
stock post-merger and resulted in a change of control of the registrant.
Further, as a condition of the transaction, Emtec was to commence, within 30
days of the close of the merger transaction, a self tender offer to repurchase
its issued and outstanding common stock having an aggregate purchase price of up
to $5.5 million at $1.92 per share.
Darr Westwood is deemed to be 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. The registrant's
historical financial statements for periods prior to the merger become those of
Darr Westwood. The aforementioned Form 8-K also reported the change in the
fiscal year of the registrant to the August 31 fiscal year of Darr Westwood.
The following unaudited pro forma condensed combined consolidated balance sheet
as of May 31, 2005 and the unaudited pro forma condensed combined consolidated
statements of operations for the nine months ended May 31, 2005 and for the year
ended August 31, 2004 are based on the historical financial statements of Darr
Westwood and Emtec after giving effect to the merger as a purchase of Emtec by
Darr Westwood using the purchase method of accounting and the assumptions and
adjustments described in the accompanying notes to the unaudited pro forma
condensed combined consolidated financial statements.
The unaudited pro forma condensed combined consolidated balance sheet as of May
31, 2005 is presented to give effect to the reverse merger as if it occurred on
May 31, 2005 and, due to different fiscal period ends, combines the historical
balance sheet of Darr Westwood at May 31, 2005 and the historical balance sheet
of Emtec at June 30, 2005.
The unaudited pro forma condensed combined consolidated statement of operations
of Darr Westwood and Emtec for the nine months ended May 31, 2005 is presented
as if the combination had taken place on September 1, 2004 and, due to different
fiscal period ends, combines the historical results of Darr Westwood for the
nine months ended May 31, 2005 and the historical results of Emtec for the nine
months ended June 30, 2005. The unaudited pro forma condensed combined
consolidated statement of operations of Darr Westwood and Emtec for the year
ended August 31, 2004 is presented as if the combination had taken place on
September 1, 2003 and, due to different fiscal period ends, combines the
historical results of Darr Westwood for the year ended August 31, 2004 and the
historical results of Emtec for the twelve months ended September 30, 2004. The
fiscal period ends of Emtec have been adjusted to conform within 93 days of the
August 31, 2004 fiscal year and May 31, 2005 nine month period of Darr Westwood.
Under the purchase method of accounting, the total estimated purchase price,
calculated as described in Note 1 to these unaudited pro forma condensed
combined consolidated financial statements, is allocated to the net tangible and
intangible assets of Emtec acquired in connection with the merger, based on
their fair values as of the date of the merger.
The unaudited pro forma condensed combined consolidated financial statements
should be read in conjunction with the historical consolidated financial
statements and accompanying notes of Darr Westwood for the fiscal year ended
August 31, 2004 and nine months ended May 31, 2005, included in this Form
8-K/A, and with Emtec's historical financial statements included in Emtec's
annual reports and quarterly reports on Forms 10-K and Forms 10-Q.
for its fiscal years ended March 31, 2005 and 2004 and Emtec's Quarterly Reports
on Form 10-Q for the periods ended June 30, 2005, December 31, 2004, September
30, 2004, and December 31, 2003. The unaudited pro forma condensed combined
consolidated financial statements are not intended to represent or be indicative
of the consolidated results of operations or financial condition of the
registrant that would have been reported had the merger been completed as of the
dates presented, and should not be taken as representative of the future
consolidated results of operations or financial condition.
DARR WESTWOOD and EMTEC, INC.
PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MAY 31, 2005
HISTORICAL
-------------------------
Pro Forma Pro Forma
DARR WESTWOOD EMTEC Adjustments(2) Combined
- --------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash & cash equivalents $ 4,270,507 $ 916,563 -- $ 5,187,070
Receivables:
Trade, less allowance
for doubtful accounts 15,741,341 15,846,909 $ 216,922 (a) 31,805,172
Others 997,712 1,225,909 -- 2,223,621
Inventories, net 2,697,300 2,587,738 -- 5,285,038
Prepaid expenses 83,192 441,126 (50,045)(a) 474,273
Deferred tax asset - current 174,076 437,923 (155,806)(h) 456,193
----------- ----------- ----------- -----------
Total Current Assets 23,964,128 21,456,168 11,071 45,431,367
----------- ----------- ----------- -----------
Net property and equipment 504,388 315,046 (73,400)(b) 746,034
Deferred tax asset - long term 226,279 359,907 3,453 (h) 589,639
Intangible assets 417,656 105,219 8,272,947 (c) 15,264,262
6,468,440 (d)
Restricted cash -- 150,825 -- 150,825
Other assets 150,336 55,677 -- 206,013
----------- ----------- ----------- -----------
Total Assets $25,262,787 $22,442,842 $14,682,511 $62,388,140
=========== =========== =========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ -- $ 3,052,202 $ 5,500,000 (4) $ 8,552,202
Accounts payable 16,124,215 9,084,385 760,866 (j) 26,721,300
751,834 (e)
Current portion of long term debt 515,803 -- 515,803
Customer deposits -- 944,352 -- 944,352
Income taxes payable 577,809 413,114 67,474 (h) 1,058,397
Accrued liabilities 2,163,267 1,787,256 (450,840)(f) 3,499,683
Due to former stockholders 664,567 -- 664,567
Deferred revenue 378,997 918,032 (272,962)(g) 1,024,067
Tender offer obligation -- -- 315,104 (4) 315,104
Total Current Liabilities 20,424,658 16,199,341 6,671,476 43,295,475
Accrued severance 413,906 413,906
Long-term debt 1,916,281 1,080,000 (3) 2,996,281
Dividend payable 80,000 (80,000) (3) --
----------- ----------- ----------- -----------
Total Liabilities 22,834,845 16,199,341 7,671,476 46,705,662
----------- ----------- ----------- -----------
Total Shareholders' Equity 2,427,942 6,243,501 (6,243,501)(i) 15,682,478
----------- ----------- -----------
20,506,370 (1)
(1,000,000) (3)
(751,834)(e)
(5,500,000)(4)
Total Liabilities and Shareholders' Equity $25,262,787 $22,442,842 $14,682,511 $62,388,140
----------- ----------- ----------- -----------
DARR WESTWOOD and EMTEC, INC.
PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED MAY 31, 2005
HISTORICAL
--------------------------- Pro Forma Pro Forma
DARR WESTWOOD EMTEC Adjustments(2) Combined
- -------------------------------------------------------------------------------------------------------------
Net revenues $119,856,660 $81,803,976 $201,660,636
Cost of revenues
109,657,220 69,334,132 178,991,352
------------ ----------- ------------
Gross profit 10,199,440 12,469,844 22,669,284
------------ ----------- ------------
Operating Expenses:
Selling, general and administrative
8,424,175 9,395,253 607,500 (k) 19,050,868
236,250 (l)
(31,218)(b)
418,908 (c)
Interest expense 469,340 180,105 60,000 (3) 922,570
213,125 (4)
------------ ----------- ----------- ------------
Total operating expenses 8,893,515 9,575,358 1,504,565 19,973,438
------------ ----------- ----------- ------------
Other income 71,088 71,088
------------ ------------
Income from continuing operations
before income taxes 1,377,013 2,894,486 (1,504,565) 2,766,934
Income tax expense 616,352 754,317 (434,263)(m) 936,406
------------ ----------- ----------- ------------
Income from continuing operations $ 760,661 $ 2,140,169 $(1,070,303) $ 1,830,528
============ =========== =========== ============
Income per share from continuing operations:
Basic $ 0.29 (5) $ 0.11
Diluted $ 0.28 (5) $ 0.11
Weighted average number of shares:
Basic 7,441,444 (5) 16,969,554
Diluted 7,518,069 (5) 17,046,179
DARR WESTWOOD and EMTEC, INC.
PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED AUGUST 31, 2004
HISTORICAL
----------------------------------------
DARR WESTWOOD
----------------------------------------
Period from Period from
April 17, 2004 Sept. 1, 2003
to August 31, 2004 to April 16, 2004 Pro Forma Pro Forma
(Successor period) (Predecessor period) EMTEC Adjustments(2) Combined
- --------------------------------------------------------------------------------------------------------------------------------
Net revenues $41,641,604 $88,229,719 $103,617,323 $233,488,646
Cost of revenues 37,617,860 79,596,368 88,352,149 205,566,377
----------- ----------- ------------ ----------- ------------
Gross profit 4,023,744 8,633,351 15,265,174 -- 27,922,269
----------- ----------- ------------ ----------- ------------
Operating Expenses:
Selling, general and administrative 3,619,158 7,498,864 12,579,856 810,000 (k) 25,309,798
285,000 (l)
(41,624)(b)
558,544 (c)
Interest expense 184,665 72,819 253,301 80,000 (3) 813,077
222,292 (4)
----------- ----------- ------------ ----------- ------------
Total operating expenses 3,803,823 7,571,683 12,833,157 1,914,212 26,122,875
----------- ----------- ------------ ----------- ------------
Other income:
Forgiveness of debt 405,652(1) 405,652
----------- ------------
Interest income 25,783 65,962 91,745
----------- ----------- ------------
Income from continuing operations
before income taxes 245,704 1,533,282 2,432,017 (1,914,212) 2,296,791
Income tax expense 123,423 647,445 811,072 (542,267)(m) 1,039,673
----------- ----------- ------------ ----------- ------------
Income from continuing operations $ 122,281 $ 885,837 $ 1,620,945 $(1,371,945) $ 1,257,118
=========== =========== ============ =========== ============
Income per share from continuing
operations:
Basic $ 0.22 (5) $ 0.07
Diluted $ 0.22 (5) $ 0.07
Weighted average number of shares:
Basic 7,380,498 (5) 16,908,608
Diluted 7,515,902 (5) 17,044,012
Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements
1. Basis of Pro Forma Presentation
The unaudited pro forma condensed combined consolidated financial statements
provide for the deemed purchase for financial reporting purposes of Emtec by
Darr Westwood valued based upon (a) the estimated fair value of 7,676,024 shares
of Emtec stock outstanding at August 5, 2005 (pre-merger); (b) the estimated
fair value of 120,543 Emtec stock options outstanding at August 5, 2005
(pre-merger); (c) the estimated fair value of the obligation to purchase shares
in the tender offer and (d) estimated direct transaction costs incurred by Darr
Westwood.
Estimated fair value of Emtec common stock outstanding @ 8/5/05 $19,266,820
Estimated fair value of Emtec options outstanding @ 8/5/05 172,612
Estimated fair value of tender offer obligation 315,104
Estimated direct transaction costs- Darr Westwood 751,834
-----------
Estimated Purchase Price of Emtec $20,506,370
-----------
The Company based the purchase price upon an estimated fair value per share of
Emtec common stock of $2.51, which was the average quoted market price from two
days before and until two days after the announcement of the transaction.
Under the purchase method of accounting, the total estimated purchase price is
as shown in the table above is preliminarily allocated to Emtec's net tangible
and intangible assets based on their estimated fair values as of August 5,
2005 as follows:
Accounts and other receivables $ 16,902,548
Inventory 2,155,339
Prepaid expenses & other assets 410,911
Restricted Cash 300,000
Property & equipment 210,770
Customer relationships 8,378,166
Goodwill 6,092,481
Deferred tax assets 627,904
Line of credit (58,752)
Accts payable & accrued liabilities (11,426,017)
Customer deposits (1,312,607)
Income taxes payable (644,874)
Deferred revenue (814,395)
Tender offer obligation (315,104)
------------
$ 20,506,370
------------
The Company has not completed the analysis and action plan for severance or
relocation costs related to Emtec employees, and for the cost of vacating a
facility leased by Emtec. Upon future completion of our plan, we shall adjust
the purchase price allocation to record any exit cost liabilities that result
from our plan.
The estimated purchase price has been allocated in the unaudited pro forma
condensed combined consolidated balance sheet based upon the estimated fair
values of Emtec's assets and liabilities as of the pro forma balance sheet date.
The 9,528,110 shares of common stock and warrants to purchase an additional 10%
of Emtec's common stock, measured on a post exercise basis are recorded as a
recapitalization of the capital structure of Darr Westwood as of August 5, 2005.
2. Pro Forma Adjustments
Pro forma adjustments are necessary to reflect the estimated purchase price, to
adjust amounts related to Emtec's net tangible and intangible assets to
estimates of their fair values, to reflect the amortization expense related to
the estimated amortizable customer relationships intangible asset, to reflect
changes in depreciation and amortization expense resulting from the estimated
fair value adjustments to net tangible assets and to reflect the income tax
effect related to the pro forma adjustments.
The pro forma combined provision for income taxes does not reflect the amounts
that would have resulted had Emtec and Darr Westwood filed consolidated income
tax returns during the periods presented.
The registrant has not identified any preacquisition 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.
The pro forma adjustments included in the unaudited pro forma condensed combined
consolidated financial statements are as follows:
(a) Adjustments to reflect the difference between the estimate of fair value and
the historical amount of Emtec's receivables and prepaid expenses.
(b) Adjustments to reflect the difference between the estimate of fair value and
the historical amount of Emtec's property, plant and equipment and the resulting
adjustment to depreciation expense.
(c) Adjustments to reflect the estimate of the fair value of amortizable
customer relationships and the resulting increase in amortization expense, based
upon an estimated 15-year life.
(d) Adjustments to reflect the difference in goodwill attributable to the
acquisition of Emtec by Darr and the historical amount of Emtec's goodwill
subject to annual impairment tests.
(e) Adjustments to reflect the estimated direct merger transaction costs of Darr
Westwood.
(f) Adjustments to reflect the difference between the estimate of fair value and
the historical amount of Emtec's accrued liabilities.
(g) Adjustments to reflect the difference between the estimate of fair value and
the historical amount of Emtec's deferred revenue.
(h) Adjustments to deferred income tax assets and income taxes payable to
reflect the effect of the accounting for the purchase of the net assets of
Emtec.
(i) Adjustment to eliminate the historical stockholders' equity of Emtec.
(j) Adjustment to the pro forma balance sheet to reflect a liability for the
direct transaction expenses of Emtec, the acquired company for accounting
purposes. These expenses are nonrecurring and therefore are not reflected in the
pro forma statement of operations.
(k) Adjustment to reflect additional compensation expense to Darr Westwood
executive management personnel effective August 5, 2005. These costs in the
aggregate, including staff, result in additional compensation cost including
payroll taxes and employee benefits of approximately $810,000 annually.
(l) Adjustment to reflect additional bonus compensation to Emtec executive
management based upon terms of new employment agreements effective August 5,
2005.
(m) Adjustment to reflect the income tax effect of the pro forma adjustments to
the statement of operations.
3. Redemption of Darr Westwood Preferred Stock
Pursuant to the August 5, 2005 merger agreement, Darr Westwood issued notes
payable with a face value of $ 1,102,794 at an 8% annual rate in full redemption
of its outstanding $1 million of preferred stock previously issued by Darr
Westwood at April 16, 2004 and in payment of $102,794 of dividends payable at
the merger date. The unaudited pro forma condensed combined financial statements
have been adjusted to give effect to this transaction as of May 31, 2005 and for
the periods presented in the pro forma statements of operations as if the
transaction occurred on the first day of each period. A pro forma adjustment is
included to reflect the payment of the $80,000 amount of dividends payable on
preferred stock at May 31, 2005. The payment was satisfied by increasing the
long term debt by $80,000. A pro forma adjustment is presented to reflect
additional interest expense of $60,000 for the nine months ended May 31, 2005
and $80,000 for the year ended August 31, 2004.
4. Tender Offer
Pursuant to the August 5, 2005 merger agreement, the registrant issued a tender
offer to the pre-merger shareholders of Emtec at August 5, 2005 to redeem $5.5
million of outstanding Emtec common stock at a $1.92 per share price. The
unaudited pro forma condensed combined consolidated balance sheet has been
adjusted to reflect a $315,104 liability for the estimated fair value of the
obligation to purchase shares tendered by stockholders during a 60-day period
post-August 5, 2005. The estimated fair value of this liability is the estimated
fair value of the 60-day put warrant that was, in substance, granted to Emtec
shareholders upon issuance of the tender offer.
The Company borrowed $5.5 million from its line of credit after closing the
merger transaction and deposited these funds into a restricted cash account
which was ultimately utilized to acquire treasury stock. A pro forma adjustment
to reflect additional interest expense is presented in the pro forma condensed
combined consolidated statement of operations for the year ended August 31, 2004
and for the nine months ended May 31, 2005 as if the $5.5 million borrowing
occurred at the beginning of each period.
5. Earnings Per Share
Pro forma earnings per share has been adjusted in the pro forma condensed
combined consolidated statement of operations for the year ended August 31, 2004
and for the nine months ended May 31, 2005 as if the 9,528,110 shares of Company
stock issued in the merger were issued on the first day of each period
presented.
Stock warrants were issued at August 5, 2005 to Darr Westwood shareholders that
evidence the obligation of the Company to issue a variable number of shares, in
the aggregate, equal to 10% of the total issued and outstanding shares of the
Company's stock, measured on a post exercise basis, at any date during the 5
year term of the warrants ending August 5, 2010. The aggregate exercise price of
these warrants is fixed at $3,645,752. The exercise price per warrant will vary
based upon the number of shares issuable under the warrants. The aggregate
number of shares issuable under these warrants totaled 1,911,570 with an initial
exercise price per share of $1.91 at August 5, 2005. These warrants had no
effect on pro forma earnings per share for the periods presented due to the fact
that the warrants would have been anti-dilutive to these prior periods.