EX-99 5 ex99-5.txt EXHIBIT 99.5 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.