EX-99 3 ex99-3.txt EXHIBIT 99.3 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.