[July 29, 2011] SERVIDYNE, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tweet (Edgar Glimpses Via Acquire Media NewsEdge) INTRODUCTION The Company has one reportable operating segment, the Building Performance Efficiency, or BPE, Segment. The Company continues to add new BPE products and service offerings, which may come in part from future business acquisitions. Information previously reported as "Real Estate" or "Parent" is now reported below as "Corporate" or "Other." In "RESULTS OF OPERATIONS" below, changes in revenues, costs of revenues, selling, general and administrative expenses, and loss from continuing operations before income taxes from period to period are analyzed on a segment basis. For other information on a consolidated basis, please see the Company's consolidated financial statements. On June 26, 2011, the Company entered into an agreement to be acquired by Scientific Conservation, Inc. ("SCI") for $3.50 per share in an all-cash transaction. The Company's board of directors has approved the merger and has unanimously recommended that the Company's shareholders vote in favor of it at a special meeting of the shareholders to be held to consider the merger. The merger has also been approved by the board of directors of SCI. The acquisition is subject to approval by Company shareholders holding a majority of the outstanding voting power of the Company, as well as other customary closing conditions, and is expected to be completed in the Company's second fiscal quarter ending October 31, 2011. Shareholders representing approximately 56% of the voting power of the Company have agreed to vote in favor of the merger, subject to termination of such agreements with respect to approximately 27% of the voting power if Servidyne's board should change its recommendation supporting the merger. If the merger is approved and is consummated, the Company will no longer be a publicly-traded company, and its shares will cease to be traded on the NASDAQ Global Market. For more information, see Note 18 "Subsequent Events" to the consolidated financial statements, as well as the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on June 28, 2011. OVERVIEW The Company entered fiscal year 2011 with an order backlog at its BPE Segment of $15.4 million, which at that time represented the highest backlog achieved by BPE in the Company's history. The Company recognized historic levels of BPE revenues during fiscal year 2011. In addition, BPE's new order activity showed continued strength in fiscal 2011. BPE closed the year with a backlog of $13.9 million as of April 30, 2011. The new order activity in fiscal 2011 included the award of a $5.8 million design-build retro-commissioning project for the Georgia Department of Corrections under a contract with the Georgia Environmental Finance Authority, which the Company commenced during the fiscal second quarter and expects to substantially complete by the end of calendar year 2011. 14 -------------------------------------------------------------------------------- Table of Contents More specifically, BPE generated $25.7 million in revenues, $556,000 in pre-tax earnings (including intercompany costs and expenses), and $1,270,000 in EBITDA1 (pre-tax earnings, plus interest, depreciation and amortization of $714,000) in fiscal 2011. The current year revenues increased 42% compared to fiscal 2010, including a 70% year-over-year increase in Energy Savings Projects revenues. During the fourth quarter, BPE generated $7.5 million in revenues, a new record for revenues recognized in a fiscal quarter, and generated $492,000 in pre-tax earnings (including intercompany costs and expenses) and $648,000 in EBITDA (pre-tax earnings, plus interest, depreciation and amortization of $157,000). The Company believes that the increase in BPE order activity, revenues and profitability over the last year is a direct result of three distinct factors: the success of the Company's enhanced sales and marketing efforts, which were initiated in fiscal 2009; an overall improvement in the capital spending environment for many BPE customers; and the infusion of U.S. government expenditures for energy efficiency upgrades of government facilities. The Company believes that these factors will continue to be favorable in fiscal year 2012. Management expects that BPE will generate positive EBITDA in fiscal year 2012, exceeding the EBITDA achieved in fiscal year 2011, with revenues and order activity remaining strong. However, the Company on a consolidated basis in not expected to generate positive EBITDA in fiscal 2012. Moreover, EBITDA on a quarterly basis is more sensitive to fluctuations in the timing of revenues and may not be positive in an individual quarter. Management believes that a longer period of time will be required before the BPE Segment is able to generate sufficient sustained cash flow to fully fund the Company's consolidated operations. See the "Liquidity" section below for more information. To support ongoing revenue growth, the Company anticipates continued strong order growth from customers in the government sector, the private sector and from utility companies. The Company offers government sector customers many of the same offerings it provides to private sector customers, including energy savings projects and other energy efficiency-focused products and services, by entering into direct contracts and by acting as a subcontractor to large energy services companies ("ESCOs"). The Company has a long history of providing energy efficiency services for a wide range of government facilities, including U.S. military bases, federal, state and county prisons, large public educational facilities, municipal school districts, and a variety of other federal, state, county and municipal buildings and facilities. The Company has existing business relationships with a number of government entities and with several of the large ESCOs currently authorized by the U.S. Department of Energy to perform federally-funded projects to improve the energy efficiency of government buildings. In addition, the Company expects to build on its recent successes in the private sector by continuing to broaden its customer base of Fortune 500 companies and large asset and property managers that own or manage numerous facilities across the country, due to the growing corporate awareness of the solid investment potential of sustainable and energy efficient facility upgrades. The Company also has recently developed relationships with a number of major U.S. utility companies, who are actively seeking the Company's energy efficiency expertise, demand response services, project management capabilities, and engineering and implementation services to offer to their end-use customers' buildings and facilities. Demand from utilities is growing rapidly, driven by increasing pressures on these companies to provide more power without adding a commensurate amount of new generating capacity, as construction of new generating plants in most regions of the U.S. is either politically unpopular or economically unfeasible, or both. As the combined result of the many funded and proposed 1 The Company believes earnings before interest, taxes, depreciation and amortization ("EBITDA") is a useful non-GAAP measurement of the BPE Segment's performance because it assists investors in comparing the Company's performance across reporting periods on a consistent basis by excluding items that the Company does not believe are indicative of its core operating performance. One should not consider EBITDA as an alternative to, or a more meaningful indicator of the segment's operating performance than, earnings before taxes as determined in accordance with GAAP. EBITDA has limitations as an analytical tool. Some of these limitations are: • EBITDA does not reflect the Company's cash expenditures, or future requirements for capital expenditures, or contractual commitments; • EBITDA does not reflect changes in, or cash requirements for, working capital needs; • EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and • other companies in the Company's industry may calculate EBITDA differently, potentially limiting its usefulness as a comparative measure. 15 -------------------------------------------------------------------------------- Table of Contents government mandates to improve the efficiency of federal, state and local government facilities, the growing awareness in corporate America of the benefits of sustainability and energy efficiency, and the increasing pressures faced by utility companies to meet customer demand, the Company believes that it is well positioned for ongoing revenue growth. The Company also anticipates that increased order activity will continue to be generated by its Fifth Fuel Management® service offering over the next several quarters. The BPE Segment offers this technology-enabled demand response and energy efficiency system to a network of utilities and independent system operators in the U.S., as well as to owners and operators of large commercial office buildings, retail stores, hotels, light industrial facilities and institutional buildings. Demand response is emerging as a critical tactic to help address the growing imbalance in the supply and demand of generated electric power in the United States. The Company expects Fifth Fuel Management® will provide additional opportunities for sales of other energy efficiency services and products as well, which can enable the Company to leverage its established customer base of building owners and operators to help utilities gain better utilization of their existing energy generating facilities and infrastructures. The Company believes that it is now better positioned to participate in the growing utility market sector; however, the Company's ability to develop the Fifth Fuel Management® offering to its full potential will require the investment of additional capital. While market demand for the BPE Segment's offerings appears to be strong and growing, there can be no assurance that this will result in sustained revenue growth, particularly if recent improvements in macro-economic conditions do not continue, or if such conditions were to worsen, for an extended period of time. DISCONTINUED OPERATIONS In recent years, the Company has generated substantial liquidity from sales of its real estate assets, and the proceeds from such sales largely have been redeployed to fund the establishment and growth of the BPE Segment. In June 2010, the Company successfully closed on the sale of its owned shopping center in Jacksonville, Florida, generating net cash proceeds of approximately $2 million, and in December 2010, successfully closed on the sale of its owned shopping center in Smyrna, Tennessee, generating net cash proceeds of approximately $250,000. (See Note 4 "Discontinued Operations" to the consolidated financial statements for more information). As a cumulative result of the real estate asset sales in recent years, the Company's real estate assets now consist of only its corporate headquarters building in metropolitan Atlanta, Georgia; a commercially-zoned land parcel in North Ft. Myers, Florida; and commercially-zoned land parcels in Oakwood, Georgia. LIQUIDITY The Company's cash increased by $201,000 during the fourth quarter of fiscal 2011, as operating activities provided cash of $363,000. On a full year basis, the Company's cash increased by $202,000, as operating and investing activities used cash of $1,294,000 and $725,000, respectively, offset primarily by cash generated from sales of real estate assets. Despite the recent successes and achievements described above, the Company's full year loss from continuing operations in fiscal 2011 resulted in significant usage of the Company's cash, continuing the trend of substantial cash usage to fund operating losses in recent years. Although the BPE Segment generated positive EBITDA and net earnings from operations in four of the last five fiscal quarters, and generated positive EBITDA and net earnings for the full fiscal year, a longer period of time will be required before the BPE Segment is able to generate sufficient sustained cash flow to fully fund the Company's consolidated operations. If the merger, as described in Note 18 "Subsequent Events" to the consolidated financial statements, should not occur, the Company believes that it has, or can obtain, sufficient capital resources to operate its business in the ordinary course until the BPE Segment begins to generate sufficient sustained cash flow to fund the Company's consolidated operations, which it may seek to obtain by using any of the methods described below in "Liquidity and Capital Resources;" however, there can be no assurance that the Company will be successful in these efforts. Historically, earnings before taxes have been indicative of the BPE Segment's cash flows, before taking into account the timing of receivables and payables. Despite the revenue growth, positive EBITDA and earnings that 16-------------------------------------------------------------------------------- Table of Contents the BPE Segment achieved in fiscal 2011, and which the Company expects the BPE Segment to achieve in fiscal 2012, the timing of when BPE will generate consistent and sustainable cash flow from operations will be dependent on a number of factors, including the timing of collections on customer receivables and payments to vendors and suppliers. In addition, there can be no guarantee that the expected revenue growth, positive EBITDA and earnings at the BPE Segment will actually occur, particularly if recent improvements in macro-economic conditions do not continue, or if such conditions were to worsen, for an extended period of time. See "Liquidity and Capital Resources" later in this discussion and analysis section for more information. RESULTS OF OPERATIONS In the following charts, changes in revenues, cost of revenues, selling, general and administrative expenses, and loss from continuing operations before income taxes from period to period are analyzed on a segment basis, prior to intercompany revenues, costs and expenses. For other information on a consolidated basis, refer to the Company's consolidated financial statements. For net earnings presented by segment including intercompany revenues, costs and expenses, refer to Note 14 "Segment Reporting" to the consolidated financial statements. REVENUES Consolidated revenues from continuing operations, prior to intercompany revenues, were $26,157,928 in fiscal 2011 compared to $18,561,530 in fiscal 2010. This represents an increase in revenues of 41%. CHART A REVENUES FROM CONTINUING OPERATIONS (Dollars in Thousands) Years Ended April 30, Amount Percentage 2011 2010 Change Change BPE (1) $ 25,735 $ 18,172 $ 7,563 42 Other 423 390 33 8 $ 26,158 $ 18,562 $ 7,596 41 NOTES TO CHART A (1) The following table indicates the BPE Segment revenues by service and product type: BPE SEGMENT REVENUES - SUMMARY BY SERVICE & PRODUCT TYPE (Dollars in Thousands) Years Ended April 30 Amount Percentage 2011 2010 Change Change Energy Savings Projects $ 18,791 $ 11,051 $ 7,740 70 Lighting Products 2,227 1,933 294 15 Energy Management Services 1,515 1,801 (286 ) (16 ) Fifth Fuel Management® Services 241 28 213 761 Productivity Software 2,961 3,359 (398 ) (12 ) $ 25,735 $ 18,172 $ 7,563 42 17 -------------------------------------------------------------------------------- Table of Contents BPE Segment revenues increased by approximately $7,563,000, or 42%, in fiscal 2011 compared to fiscal 2010, primarily due to: (a) an increase in energy savings project revenues of approximately $7,740,000, primarily due to the substantial increase in revenues from customers in both the private sector and the government sector, including revenues of approximately $3,300,000 from several new energy savings project customers, representing the completion of the initial phases of new energy savings program initiatives for those customers; (b) an increase in lighting product revenues of approximately $294,000 due to improved business conditions; and (c) an increase in Fifth Fuel Management® revenues of approximately $213,000, which was introduced as a new offering by the Company in the prior fiscal year and initially generated revenues in the fourth quarter of fiscal 2010, due to increased customer orders as demand response emerges as a critical tactic to help address the growing imbalance in the supply and demand of generated electric power in the United States; partially offset by: (d) a decrease in energy management services of approximately $286,000, primarily due to the completion of multi-year consulting services projects in the prior fiscal year, which contributed approximately $506,000 in revenues in fiscal 2010, partially offset by an increase of approximately $220,000 in other energy management services revenues; and (e) a decrease in productivity software revenues of approximately $398,000, primarily due to fewer new implementations with existing large-portfolio customers. COST OF REVENUES As a percentage of total revenues from continuing operations (see Chart A), the total applicable costs of revenues (see Chart B), prior to intercompany costs, were 72% and 70% for fiscal years 2011 and 2010, respectively. In reviewing Chart B, the reader should recognize that the volume of revenues generally will affect the amounts and percentages presented. CHART B COST OF REVENUES FROM CONTINUING OPERATIONS (Dollars in Thousands) Percentage of Revenues for the Years Ended Years Ended April 30, April 30, 2011 2010 2011 2010 BPE (1) $ 18,246 $ 12,301 71 68 Other 685 747 162 192 $ 18,931 $ 13,048 72 70 NOTES TO CHART B (1) BPE Segment cost of revenues increased by approximately $5,945,000, or 48%, in fiscal 2011 compared to fiscal 2010, primarily due to the corresponding increase in revenues (see Chart A). On a percentage-of-revenues basis, BPE Segment cost of revenues increased from 68% of revenues in fiscal 2010 to 71% of revenues in fiscal 2011, primarily due to a change in the mix of services and products and an increasingly competitive market pricing environment for energy savings projects. 18 -------------------------------------------------------------------------------- Table of Contents SELLING, GENERAL AND ADMINISTRATIVE EXPENSES As a percentage of total revenues from continuing operations (see Chart A), the total applicable selling, general and administrative expenses ("SG&A") (see Chart C), prior to intercompany expenses, were 38% and 53% in fiscal years 2011 and 2010, respectively. In reviewing Chart C, the reader should recognize that the volume of revenues generally will affect the amounts and percentages presented. The BPE Segment percentages in Chart C are based upon expenses as they relate to segment revenues from continuing operations (see Chart A), whereas the Corporate and total expenses relate to total consolidated revenues from continuing operations. CHART C SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FROM CONTINUING OPERATIONS (Dollars in Thousands) Percentage of Revenues for the Years Ended Years Ended April 30, April 30, 2011 2010 2011 2010 BPE (1) $ 5,739 $ 5,830 22 32 Corporate (2) 4,201 3,953 16 21 $ 9,940 $ 9,783 38 53 NOTES TO CHART C (1) BPE Segment SG&A expenses decreased by approximately $91,000, or 2%, in fiscal 2011 compared to fiscal 2010, primarily due to lower personnel-related costs and project development expenses. On a percentage-of-revenues basis, BPE Segment SG&A expenses decreased from 32% of revenues in fiscal 2010 to 22% of revenues in fiscal 2011, primarily due to the increase in revenues (see Chart A) without a corresponding proportional increase in expenses. (2) Corporate SG&A expenses increased by approximately $248,000, or 6%, in fiscal 2011 compared to fiscal 2010, primarily due to increases in consulting, legal, and non-employee directors' fees and investor relations expenses, partially offset by lower personnel-related costs. On a percentage-of-revenue basis, Corporate SG&A expenses decreased from 21% of revenues in fiscal 2010 to 16% of revenues in fiscal 2011, primarily due to the increase in revenues (see Chart A) without a corresponding proportional increase in expenses. EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Consolidated loss from continuing operations before income taxes was $2,966,799 in fiscal 2011 compared to $4,350,601 in fiscal 2010, a year-over-year improvement of $1,383,802, or 32%. The figures in Chart D are prior to intercompany revenues, costs and expenses. 19-------------------------------------------------------------------------------- Table of Contents CHART D EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (Dollars in Thousands) Years Ended Increase April 30, (Decrease) 2011 2010 Amount BPE (1) $ 1,753 $ 64 $ 1,689 Corporate (2) (4,720 ) (4,415 ) (305 ) Total $ (2,967 ) $ (4,351 ) $ 1,384 NOTES TO CHART D (1) BPE Segment earnings before income taxes increased by approximately $1,689,000 in fiscal 2011 compared to fiscal 2010, primarily due to the increase in revenues of approximately $7,563,000 (see Chart A), an increase in gross margin of approximately $1,618,000, and a decrease in SG&A expenses of approximately $91,000 (see Chart C). The financial performance improvement of the BPE Segment is the result of improving business conditions combined with the containment of overhead costs. (2) Corporate loss before income taxes increased by approximately $305,000, or 7%, in fiscal 2011 compared to fiscal 2010, primarily due to increases in SG&A expenses of approximately $248,000 (see Chart C), partially offset by an improvement in gross margin of rental activities at the corporate headquarters building of approximately $94,000. INCOME TAX BENEFIT The Company's effective rate for income taxes, based upon estimated annual income tax rates, approximated 31.6% of loss from continuing operations before income taxes in fiscal 2011 and 36.4% in fiscal 2010. The effective rates in both years reflect the valuation allowances recorded against the Company's state deferred tax assets as described in Note 10 to the consolidated financial statements. The change in the valuation allowance between fiscal 2010 and fiscal 2011 has resulted in a decreased benefit driving lower effective rates. INTEREST COSTS Interest costs of $448,484 and $402,104 in fiscal years 2011 and 2010, respectively, were primarily related to the mortgage on the corporate headquarters building. There was no capitalized interest in either of the years presented. ACQUISITIONS There were no acquisitions in fiscal 2011 or fiscal 2010. DISCONTINUED OPERATIONS On January 29, 2010, the Company disposed of its interest in its owned office building in Newnan, Georgia. In this transaction, the Company transferred its approximately $2.0 million interest in the property and related assets to the note holder, which satisfied in full the Company's liability for the approximately $3.2 million remaining balance on the property's non-recourse mortgage loan. Correspondingly, the Company recognized a non-cash pre-tax gain of approximately $1.2 million in the third quarter of fiscal 2010 as a result of the elimination of the balance of the indebtedness on the property. Prior to the disposition, the Company had recorded an impairment loss of approximately $2,007,000 in the fourth quarter of fiscal 2009. See Note 4 "Discontinued Operations" to the consolidated financial statements for more information. The Company's federal and state tax liabilities on the disposition were approximately $0.4 million. These tax liabilities primarily resulted from the pre-tax gain on the disposition, partially offset by operating losses of the property during fiscal 2010. These tax liabilities were offset by the Company's net operating loss carry-forwards for tax purposes. On June 9, 2010, the Company sold its owned shopping center in Jacksonville, Florida, for a sales price of approximately $9.9 million. The sale generated net cash proceeds of approximately $2 million, after deducting 20-------------------------------------------------------------------------------- Table of Contents approximately $0.5 million for funding of repair escrows and approximately $0.6 million for closing costs and prorations, and net of the approximately $6.9 million mortgage note, which was assumed by the buyer. The Company recognized a pre-tax gain on the sale of approximately $190,000, including approximately $75,000 in additional pre-tax gain recognized in the last three quarters of fiscal 2011 as a result of the successful completion of contractual conditions and other cost-basis adjustments. See Note 4 "Discontinued Operations" to the consolidated financial statements for more information. The Company's federal and state tax liabilities on the disposition were approximately $75,000. These tax liabilities primarily resulted from the pre-tax gain on the disposition and the operating earnings of the property during the current fiscal year. These tax liabilities were offset by the Company's net operating loss carry-forwards for tax purposes. On December 15, 2010, the Company sold its owned shopping center in Smyrna, Tennessee, for a sales price of approximately $4.3 million. The sale generated net cash proceeds of approximately $250,000, after deducting approximately $125,000 for closing costs and prorations, and net of the approximately $3.9 million mortgage note, which was assumed by the buyer. The Company recognized a pre-tax loss on the sale of approximately $6,000. Prior to the sale, the Company recorded an impairment loss of approximately $590,000 in the second quarter of fiscal 2011. See Note 4 "Discontinued Operations" to the consolidated financial statements for more information. The Company recognized federal and state tax benefits of approximately $206,000 on the disposition. These tax benefits primarily resulted from the operating losses of the property during the current fiscal year, which included the impairment loss of approximately $590,000 mentioned above. In accordance with GAAP, the Company's financial statements have been prepared with the results of operations and cash flows of these disposed properties shown as discontinued operations. All historical statements have been recast in accordance with GAAP. LIQUIDITY AND CAPITAL RESOURCES Between April 30, 2010, and April 30, 2011, the Company's cash increased by $201,664, or 10%, to $2,125,305. The Company's working capital increased by approximately $33,000, or 1%, between April 30, 2010, and April 30, 2011, which was primarily the result of cash generated from the sales of real estate assets, largely offset by current year losses from continuing operations before depreciation, amortization and income taxes, as well as discretionary capital expenditures and scheduled regular debt service payments. The following describes the changes in the Company's cash from April 30, 2010, to April 30, 2011: Operating activities used cash of approximately $1,294,000, primarily as a result of: (a) current year losses from continuing operations before depreciation, amortization and income taxes of approximately $2,019,000; (b) an increase in cost and earnings in excess of billings of approximately $797,000; and (c) an increase in other current and long-term assets of approximately $129,000; partially offset by: (d) a net increase in trade accounts payable, accrued expenses, and other liabilities of approximately $1,275,000, primarily due to an increase in costs in line with the BPE Segment's revenue growth, as well as the timing and submission of payments; and (e) a decrease in net accounts receivable of approximately $347,000, primarily due to the timing of billings and receipt of payments. Investing activities used cash of approximately $725,000, primarily as a result of: (a) $500,000 used for the purchase of a held-to-maturity investment; (b) approximately $366,000 used for additions to intangible assets, primarily related to enhancements to the BPE Segment's proprietary technology solutions; and (c) approximately $54,000 used for additions to property and equipment, primarily related to the purchase of computer hardware; 21 -------------------------------------------------------------------------------- Table of Contents partially offset by: (d) proceeds of approximately $195,000 from the termination of a split-dollar life insurance agreement. Financing activities provided cash of approximately $69,000, primarily as a result of: (a) proceeds from other long-term debt of approximately $500,000; partially offset by: (b) scheduled principal payments on other debt of $163,000; (c) scheduled principal payments on the mortgage note on the corporate headquarters building of approximately $121,000; and (d) payment of the regular quarterly cash dividends to shareholders of approximately $148,000. Discontinued operations provided cash of approximately $2,152,000, primarily as a result of the sales of real estate assets. While the Company's operations used approximately $1,994,000 of cash during the first quarter of fiscal 2011, primarily due to the operating loss in the quarter and a reduction in accounts payable, the level of cash from operations increased during the remainder of fiscal 2011, as operations provided approximately $700,000 of cash during the last three quarters of the fiscal year. In the fourth quarter of fiscal 2011, operating activities provided approximately $363,000 of cash, primarily due to an increase in accounts payable, partially offset by the operating loss in the quarter. The substantial growth in BPE activity in the current year led to the segment generating positive cash flow from operations of approximately $785,000 in fiscal 2011, a significant milestone for the Company. However, management believes that a longer period of time will be required before the BPE Segment is able to generate sufficient sustained cash flow to fully fund the Company's consolidated operations. If the merger, as described in Note 18 "Subsequent Events" to the consolidated financial statements, should not occur, the Company believes that it has sufficient capital resources on hand to operate its business in the ordinary course for the next twelve months; the Company also currently believes that it has, or can obtain, sufficient capital resources to continue to operate its business in the ordinary course until the BPE Segment begins to generate sufficient cash flow to fund the Company's operations, although there can be no guarantee that this will be the case, particularly if recent improvements in macro-economic conditions do not continue, or if such conditions were to worsen, for an extended period of time. In addition, achieving sufficient sustained cash flow from the operations of the BPE Segment to fully fund the Company's consolidated operations will depend on the occurrence of a number of assumed factors, including the timing, margins and volume of additional revenues generated by new material contracts, which historically have been difficult to predict, and the timing of collections of customer receivables and payments to vendors and suppliers. Consequently, there can be no assurance that the Company will achieve sufficient sustained cash flow through BPE Segment operations to fully fund the Company's consolidated operations in the near term, or at all. The Company historically has generated substantial liquidity from the periodic sales of real estate assets, and the proceeds from such sales largely have been redeployed to fund the establishment and growth of the BPE Segment. In June 2010, the Company successfully closed on the sale of its owned shopping center in Jacksonville, Florida, generating net cash proceeds of approximately $2 million. In December 2010, the Company successfully closed on the sale of its owned shopping center in Smyrna, Tennessee, generating net cash proceeds of approximately $250,000. As a cumulative result of real estate asset sales in recent years, the Company's real estate assets now consist of only the corporate headquarters building in metropolitan Atlanta, Georgia (which is subject to a $4.1 million mortgage); a commercially-zoned land parcel in North Ft. Myers, Florida; and commercially-zoned land parcels in Oakwood, Georgia. Given the declines in commercial real estate markets and asset valuations in the United States in recent years, the Company may be unable to sell any of its remaining real estate assets at acceptable prices, or at all, in the near future. The Company in recent years has not utilized bank lines of credit for operating purposes and does not currently have in place any such line of credit. At April 30, 2010, the Company did have a term note payable in the principal amount of approximately $850,000 maturing in December 2011. In the third quarter of fiscal 2011, the Company and the lender amended the note to, among other things, extend its maturity to January 2016 (see the "Mortgage Notes and Other Long-Term Debt"section below for more information). In addition, in October 2010, 22-------------------------------------------------------------------------------- Table of Contents the Company borrowed $500,000 from related parties through the issuance of promissory notes (see the "Sales of Promissory Notes to Related Parties" section below for more information). Also, as of April 30, 2011 and 2010, the Company had $588,000 and $982,000, respectively, in loans against its interests in the cash surrender values of certain life insurance policies (see the "Termination of Split Dollar Life Insurance Agreement" section below for more information). There is currently minimal additional borrowing capacity left under such policies. In the event that the merger does not occur and that currently available cash, cash generated from operations, and cash generated from real estate sales were not sufficient to meet future operating cash requirements, the Company would need to seek another merger partner or sell additional real estate or other assets at potentially otherwise unacceptable prices, seek external debt financing or refinancing of existing debt, seek to raise funds through the issuance of equity securities, or limit growth or curtail operations to levels consistent with the constraints imposed by the available cash and cash flow, or any combination of these options. Depending on the form of any additional capital, the equity interests of the Company's existing shareholders could be diluted as a result. In addition, the development of the Fifth Fuel Management® service offering to its full potential will require the investment of additional capital, which the Company may seek to raise through outside sources or the sale of assets. The Company's ability to find another merger partner, to secure debt or equity financing, or to sell real estate or other assets could be limited by economic and financial conditions at any time, but likely would be severely limited by credit, equity and real estate market conditions similar to those that have existed in recent years. Sales of Promissory Notes to Related Parties On October 14, 2010, the Company borrowed an aggregate of $500,000 from related parties by issuing a total of four promissory notes to Samuel E. Allen, a Director of the Company; Herschel Kahn, a Director of the Company; Alan R. Abrams, Chairman of the Board and Chief Executive Officer of the Company; and J. Andrew Abrams, Executive Vice President of the Company, respectively. The largest of the four notes, amounting to $400,000, was issued to Mr. Allen. Each of the notes bears interest at twelve percent (12%) per annum and matures on May 14, 2012, subject to acceleration under certain specified circumstances. The notes are collectively secured by a security deed on real property granted by a subsidiary of the Company. The notes are included in "Other Long-Term Debt" in the Company's consolidated balance sheet. The cash proceeds from the borrowings were used to fund working capital and for other operating purposes. Termination of Split Dollar Life Insurance Agreement Historically, the Company has been a party to "split dollar" life insurance agreements pursuant to which, among other things, the Company has agreed to pay premiums on life insurance policies for certain executive officers of the Company. The cash surrender values of these insurance policies are recorded as long-term other assets in the Company's consolidated balance sheet. As of April 30, 2010, the Company was a party to three split dollar agreements regarding policies insuring the lives of current and former executive officers of the Company, and had long-term loans of approximately $982,000 against its interests in the cash surrender values of these policies. On October 21, 2010, the split dollar life insurance agreement related to the policy jointly insuring the lives of Edward M. Abrams (deceased), the Company's former Chairman of the Board and Chief Executive Officer, and his widow, Ann U. Abrams (the parents of Alan R. Abrams, the Company's Chairman of the Board and Chief Executive Officer, and J. Andrew Abrams, the Company's Executive Vice President) was terminated prior to the death of the remaining insured. Prior to the termination of the agreement, the Company had a long-term loan of approximately $412,000 against its interest in the cash surrender value of this policy, which loan amount approximately equaled the cumulative policy premiums paid by the Company through the date the loan was originated, and represented a substantial majority of the policy's cash surrender value prior to the loan. Under the terms of the agreement, in the event of an early termination prior to the death of the insured, the Company was entitled to receive the remaining cash surrender value of the policy, if any, on the date of termination. However, in consideration of the consent to the early termination of the agreement by the trust that owns the policy, the Company agreed to reduce the net cash surrender value otherwise payable to the Company by $42,000. As a result of the early termination of the agreement: (1) the long-term loan against the Company's interest in the cash surrender value of the policy of approximately $412,000, and the related accrued interest of approximately $13,000, was repaid in full; (2) the Company received approximately $195,000 in cash proceeds; (3) the 23-------------------------------------------------------------------------------- Table of Contents Company's ongoing obligation to pay premiums on the policy and its entitlement to any portion of the policy's death benefit were terminated; and (4) the Company reduced its long-term other assets by approximately $662,000, representing the Company's interest in the cash surrender value of the policy prior to termination. Capital Expenditures The Company has no material commitments for capital expenditures. However, the Company does expect that total capital spending in fiscal year 2012 will be approximately $970,000, including BPE Segment expenditures of approximately $310,000 for proprietary technology solutions and approximately $410,000 for property and equipment, and Corporate Headquarters expenditures of approximately $250,000. Significant Uses of Cash Significant uses of cash in the future are anticipated to be regular scheduled principal payments of the corporate headquarters building mortgage note and other long-term debt, capital expenditures for property and equipment, capital expenditures for enhancing BPE's proprietary technology solutions, funding collateral for performance bonds when required by energy savings projects contracts, and the regular cash operating requirements of corporate headquarters. The Company's uses of cash are not expected to change materially in the near future. Mortgage Notes and Other Long-Term Debt At April 30, 2011, the Company had a mortgage note in the principal amount of approximately $4.1 million and two other long-term debt obligations in the approximate aggregate amount of $1.4 million. The mortgage note is associated with the corporate headquarters building and has a maturity date of August 1, 2012. This property is pledged as collateral on the note. Exculpatory provisions of the mortgage note limit the Company's liability for repayment to its interest in the property. Additionally, the mortgage note contains a provision that requires a Company subsidiary to maintain a net worth of at least $2 million. The subsidiary's net worth was approximately $16.3 million as of April 30, 2011. The mortgage note contains no other financial covenants. Other long-term debt at April 30, 2011, included a note payable of approximately $837,000, which originated from the acquisition of a wholly-owned subsidiary in fiscal year 2004. In the third quarter of fiscal 2011, the Company and the lender entered into an agreement to amend the note as follows: • The maturity date of the note, originally December 18, 2011, and principal payment structure were amended such that principal payments commenced on February 19, 2011, based on a 60-month amortization. In addition, a $150,000 principal payment is due on October 19, 2011, with a balloon payment of the remaining principal balance of approximately $408,000 due on January 19, 2016; and • The interest rate was changed from the prime rate plus 1.5% to a fixed rate of 6% per annum. The note continues to be secured by the general assets of a Company subsidiary. None of the Company's long-term debt obligations have any financial or non-financial covenants. The cash principal payment obligations during the next twelve months related to the Company's long-term debt are expected to be approximately $334,000. Secured Letter of Credit In conjunction with terms of the mortgage on the corporate headquarters building, the Company is required to provide for potential future tenant improvement costs and lease commissions with additional collateral, in the form of a letter of credit in the amount of $450,000 from July 17, 2008, through August 1, 2012. The letter of credit is secured by a certificate of deposit, which was recorded as a long-term other asset in the Company's consolidated balance sheet as of April 30, 2011 and 2010. 24-------------------------------------------------------------------------------- Table of Contents Repurchases of Common Stock In February 2009, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock during the twelve-month period ending on March 5, 2010. In March 2010, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock during the twelve-month period ending on March 15, 2011. In March 2011, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock during the twelve-month period ending on March 9, 2012. The Company repurchased 16,981 shares of its common stock in fiscal 2010 for a total cost of approximately $31,000. The Company repurchased one share in fiscal 2011 at a cost of $3. EFFECTS OF INFLATION ON REVENUES AND OPERATING PROFITS The effects of inflation upon the Company's operating results are varied. Inflation in recent years has been modest and has had minimal effect on the Company. The BPE Segment generally engages in contracts of short duration with fixed prices, which typically would minimize any erosion of its profit margin due to inflation. The BPE Segment also has some contracts that are renewed on an annual basis. At the time of renewal, contract fees may be increased by either the year-over-year increase in the consumer price index, as stated in the contract, or upon customer approval. As inflation affects the Company's costs, primarily personnel, the Company could seek a price increase for its contracts in order to protect its profit margin. CRITICAL ACCOUNTING POLICIES A critical accounting policy is one that is both important to the portrayal of the Company's financial position and results of operations, and requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, the Company has made its best estimates and used its best judgments regarding certain amounts included in the financial statements, giving due consideration to materiality. The application of these accounting policies involves the exercise of judgment and the use of assumptions regarding future uncertainties, and as a result, actual results could differ from those estimates. Management believes that the Company's critical accounting policies include: Revenue Recognition Revenues derived from implementation, training, support, and base service license fees from customers accessing certain of the Company's proprietary technology solutions on an application service provider ("ASP") basis are recognized when all of the following conditions are met: there is persuasive evidence of an arrangement; service has been provided to the customer; the collection of fees is probable; and the amount of fees to be paid by the customer is fixed and determinable. The Company's license arrangements do not include general rights of return. Revenues are recognized ratably over the contract period, which is typically no longer than twelve months, beginning on the commencement date of each contract. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on the timing of when the revenue recognition criteria have been met. Additionally, the Company defers such direct costs and amortizes them over the same time period as the revenue is recognized. Energy management services are accounted for separately and are recognized as the services are rendered. Revenues derived from sales of proprietary technology solutions (other than ASP solutions) and hardware products are recognized when the technology solutions and products are sold. Energy savings project revenues are reported on the percentage-of-completion method, using costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. Original contract prices are adjusted for change orders in the amounts that are reasonably estimated. The nature of the change orders usually involves a change in the scope of the project, for example, a change in the number or type of units being installed. The price of change orders is based on the specific materials, labor, and other project costs affected. Contract revenue and costs are adjusted to reflect change orders when they are approved by both the 25-------------------------------------------------------------------------------- Table of Contents Company and its customer for both scope and price. For a change order that is unpriced; that is, the scope of the work to be performed is defined, but the adjustment to the contract price is to be negotiated later, the Company evaluates the particular circumstances of that specific instance in determining whether to adjust the contract revenue and/or costs related to the change order. For unpriced change orders, the Company will record revenue in excess of costs related to a change order on a contract only when the Company deems that the adjustment to the contract price is probable based on its historical experience with that customer. The cumulative effects of changes in estimated total contract costs and revenues (change orders) are recorded in the period in which the facts requiring such revisions become known, and are accounted for using the percentage-of-completion method. At the time it is determined that a contract is expected to result in a loss, the entire estimated loss is recorded. Energy efficient lighting product revenues are recognized when the products are shipped. Long-Lived Assets: Property & Equipment and Capitalized Software The Company's corporate headquarters building and related assets are stated at historical cost or, if the Company determines that impairment has occurred, at fair market value, and are depreciated for financial reporting purposes using the straight-line method over the respective estimated useful lives. Significant additions that extend asset lives are capitalized and are depreciated over their respective estimated useful lives. Normal maintenance and repair costs are expensed as incurred. Other property and equipment are recorded at historical cost and are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the respective assets. The Company's most significant tangible long-lived assets are the corporate headquarters building and related assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company examines long-lived assets for such indications of impairment on a quarterly basis. The types of events and circumstances that might indicate impairment include, but are not limited to, the following: • A significant decrease in the market price of a long-lived asset; • A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; • The Company has received purchase offers at prices below carrying value; • A real estate asset that has a significant vacancy rate or significant rollover exposure from one or more tenants; • A major tenant experiencing financial difficulties that may jeopardize the tenant's ability to meet its lease obligations; and • Depressed market conditions. When there are one or more indications of impairment, the recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset against the future net undiscounted cash flows expected to be generated by the asset. The Company estimates future undiscounted cash flows using assumptions regarding occupancy, counter-party creditworthiness, costs of leasing including tenant improvements and leasing commissions, rental rates and expenses of the property, as well as the expected holding period and cash to be received from disposition. The Company has considered all of these factors in its undiscounted cash flows. The BPE Segment has long-lived assets that consist primarily of capitalized software costs, classified as intangible assets, net on the balance sheet, as well as a portion of the property and equipment on the balance sheet. Software development costs are accounted as required for software in a Web hosting arrangement. Software development costs that are incurred in a preliminary project stage are expensed as incurred. Costs that are incurred during the application development stage are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the computer software development project, including testing of the computer software, is substantially complete and the software product is ready for its intended use. Capitalized costs are amortized on a straight-line basis over the estimated economic life of the product. 26-------------------------------------------------------------------------------- Table of Contents Events or circumstances which would trigger an impairment analysis of these long-lived assets include: • A change in the estimated remaining useful life of the asset; • A change in the manner in which the asset is used in the income-generating business of the Company; or • A current-period operating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset. Long-lived assets in the BPE Segment are grouped together for purposes of impairment analysis, as assets and liabilities of the BPE Segment are not independent of one another. Annually at the end of the fiscal third quarter, unless events or circumstances occur in the interim as discussed above, the Company reviews its BPE Segment's long-lived assets for impairment. Future undiscounted cash flows of the segment, as measured in its goodwill impairment analysis, are used to determine whether impairment of long-lived assets exists in the BPE Segment. Valuation of Goodwill and Other Indefinite-Lived Intangible Assets Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually at the end of the fiscal third quarter, or whenever events or changes in circumstances indicate that the carrying basis of an asset may not be recoverable. All of the Company's goodwill and other indefinite-lived intangible assets are assigned to the BPE Segment, which has also been determined to be the reporting unit. The Company performed the annual impairment analysis of goodwill and other indefinite-lived intangible assets in the fiscal quarter ended January 31, 2011. The annual analysis resulted in a determination of no impairment. Further, management has noted no indications of impairment in the fourth quarter of fiscal 2011 that would require the Company to perform an interim test of impairment as of April 30, 2011. Although management believes goodwill and other indefinite-lived intangible assets are appropriately stated in the consolidated financial statements, future changes in strategy or market conditions could significantly impact these judgments and result in an impairment charge. Goodwill The valuation methodologies used to calculate the fair value of the BPE Segment were the discounted cash flow method of the income approach and the guideline company method of the market approach. The Company believes that these two methodologies are commonly used valuation methodologies. GAAP states that both methodologies are acceptable in determining the fair value of a reporting unit. In assessing the fair value of the BPE Segment, the Company believes a market participant would likely consider the cash flow generating ability of the reporting unit, as well as current market multiples of companies facing similar risks in the marketplace. With the income approach, the cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Projected cash flows are discounted to present value using an estimated weighted average cost of capital, reflecting returns to both equity and debt investors. The Company believes that this is a relevant and beneficial method to use in determining fair value, because it explicitly considers the future cash flow generating potential of the reporting unit. In the guideline company method of the market approach, the value of a reporting unit is estimated by comparing the subject to similar businesses or "guideline" companies whose securities are actively traded in public markets. The comparison is generally based on data regarding each of the companies' stock prices and earnings, which is expressed as a fraction known as a "multiple." The premise of this method is that if the guideline public companies are sufficiently similar to each other, then their multiples should be similar. The multiples for the guideline companies are analyzed, adjusted for differences as compared to the subject company, and then applied to the applicable business characteristics of the subject company to arrive at an indication of the fair value. The Company believes that the inclusion of a market approach analysis in the fair value calculation is beneficial, because it provides an indication of value based on external, market-based measures. 27-------------------------------------------------------------------------------- Table of Contents In the application of the income approach, financial projections were developed for use in the discounted cash flow calculations. Significant assumptions included revenue growth rates; margin rates; SG&A costs; and working capital and capital expenditure requirements over a period of ten years. Revenue growth rate and margin rate assumptions were developed using historical Company data, current backlog, specific customer commitments, status of outstanding customer proposals, and future economic and market conditions expected. Consideration was then given to the SG&A costs, working capital, and capital expenditures required to deliver the revenue and margin determined. The other significant assumption used with the income approach was the assumed rate at which to discount the cash flows. The rate was determined by utilizing the weighted average cost of capital method. In the income approach model, three separate financial projection scenarios were prepared using the above assumptions: the first used the expected revenue growth rates, the second used higher revenue growth rates, and the third used lower revenue growth rates. The discount rates used in the scenarios ranged from 17% for the lower growth scenario to 19% for the higher growth scenario. In each of the three discounted cash flow models, there was no indication of goodwill impairment. For the assessment of fair value of the BPE Segment based on the income approach, the results of the three scenarios were weighted to produce the applicable fair value indication as follows: 50% for the expected case and 25% each for the other scenarios. The weightings reflect the Company's view of the relative likelihood of each scenario. In the application of the market approach, the Company considered valuation multiples derived from five public companies that were identified as belonging to a group of industry peers. The applicable financial multiples of the comparable companies were adjusted for profitability and size and then applied to the BPE Segment. This result also indicated that no impairment existed. The comparable companies selected for the market approach were similar to the BPE Segment in terms of business description and markets served. As such, the Company believes a market participant is likely to consider the market approach in determining the fair value of the BPE Segment. In addition, the Company believes a market participant will consider the cash flow generating capacity of the BPE Segment using an income approach. Both the market and income approaches provide meaningful indications of the fair value of the BPE Segment. The outcomes of the income approach and market approach were weighted 80% and 20%, respectively, with the resulting fair value compared to the carrying value of the BPE Segment. This test of fair value indicated that no impairment existed at January 31, 2011. Other Indefinite-Lived Intangible Assets The Company holds several trademarks, which comprise all of the other indefinite-lived intangible assets reported by the Company. The relief from royalty valuation methodology was used to analyze the fair value of the Company's trademarks, and the result of the analysis determined that no impairment existed at January 31, 2011. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and to tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company periodically reviews its deferred tax assets ("DTA") to assess whether it is more likely than not that a tax asset will not be realized. The realization of a DTA ultimately depends on the existence of sufficient taxable income. A valuation allowance is established against a DTA if there is not sufficient evidence that it will be realized. The Company weighs all available evidence in order to determine whether it is more-likely-than-not that a DTA will be realized in a future period. The Company considers general economic conditions, market and industry conditions, as well as internal Company specific conditions, trends, management plans, and other data in making this determination. 28-------------------------------------------------------------------------------- Table of Contents Evidence considered is weighted according to the degree that it can be objectively verified. Reversals of temporary differences are weighted with more significance than projections of future earnings of the Company. Positive evidence considered includes, among others, the following: deferred tax liabilities in excess of DTA, future reversals of temporary differences, Company historical evidence of not having DTAs expire prior to utilization, and long carryforward period remaining for net operating loss ("NOL") carryforwards. Negative evidence considered includes, among others, lack of cumulative taxable income in recent years, and the fact that the current real estate market conditions and lack of readily available credit could make it difficult for the Company to trigger gains on sales of real estate. The valuation allowance currently recorded against the DTA for state NOL carryforwards was recorded because of a lack of sufficient positive evidence to support its realization due to the recent dispositions of real estate assets and recurring losses. The Company will have to generate $2.7 million of taxable income in future years to realize the federal NOL carryforwards and an additional $25.9 million of taxable income in future years to realize the state NOL carryforwards. These amounts of taxable income would allow for the reversal of the $2.0 million DTA related to NOL carryforwards. There is a long carryforward period remaining for the NOL carryforwards. The oldest federal NOL carryforwards will expire in the April 30, 2029, tax-year, and the most recent federal NOL carryforwards will expire in the April 30, 2030, tax-year. The significant state NOL carryforwards will also expire between the April 30, 2022, and April 30, 2031, tax years. The Company has no material permanent book/tax differences. The Company has no material uncertain tax position obligations. The Company's policy is to record interest and penalties as a component of income tax expense (benefit) in the consolidated statement of operations. Discontinued Operations The gains and losses from the disposition of certain income-producing real estate assets, and associated liabilities, operating results, and cash flows are reflected as discontinued operations in the consolidated financial statements for all periods presented. Although net earnings are not affected, the Company has reclassified results that were previously included in continuing operations as discontinued operations for qualifying dispositions. Recent Accounting Pronouncements In September 2009, the Financial Accounting Standards Board ("FASB") reached a consensus on two new pronouncements: Accounting Standards Update ("ASU") No. 2009-13, Revenue Recognition (Topic 605)-Multiple-Deliverable Revenue Arrangements, and ASU No. 2009-14, Software (Topic 985)-Certain Revenue Arrangements That Include Software Elements. ASU No. 2009-13 eliminates the requirement that all undelivered elements must have either (i) vendor specific objective evidence ("VSOE") or (ii) third-party evidence ("TPE") of stand-alone selling price before an entity can recognize the portion of the consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the stand-alone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity's estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU No. 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product's essential functionality. These new pronouncements are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these pronouncements will have on the determination or reporting of the Company's financial results; however, the impact is not expected to be material given the current volume of multiple-element arrangements. In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) -Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Accounting 29-------------------------------------------------------------------------------- Table of Contents Standards Codification ("ASC") Subtopic 820-10. ASU 2010-06 amends ASC Subtopic 820-10 to now require (1) an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value measurements using significant Level 3 unobservable inputs, an entity should present separately information about purchases, sales, issuances, and settlements; and (3) an entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This new pronouncement was effective for interim and annual reporting periods beginning after December 15, 2009. The Company has determined that adoption did not have a significant impact on the determination or reporting of the Company's financial results. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained or incorporated by reference in this Annual Report on Form 10-K, including without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "plans," "projects," "forecasts," and words of similar import, are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements in this report include, without limitation: the expected continued strength of order activity and the expected continued achievement of positive EBITDA and earnings by the Company's BPE Segment; trends in BPE's government sector business and private sector business; the Company's expectations of generating additional recurring revenues as a result of BPE's Fifth Fuel Management® offering; the expected timing of the recognition as revenue of current backlog; the expected successful completion of the merger, as described in Note 18 "Subsequent Events" to the consolidated financial statements; and the Company's expectations concerning the adequacy of its capital resources for future operations. Such forward-looking statements involve known and unknown risks, uncertainties, and other matters which may cause the actual past results, performance, or achievements of the Company to be materially different from any future results, performance, or uncertainties expressed or implied by such forward-looking statements. The factors set forth in "ITEM 1A. RISK FACTORS" could cause actual results to differ materially from those predicted in the Company's forward-looking statements. In addition, factors relating to general global, national, regional, and local economic conditions, including international political instability, national defense, homeland security, natural disasters, terrorism, employment levels, wage and salary levels, consumer confidence, availability of credit and financial market conditions, taxation policies, the Sarbanes-Oxley Act, SEC reporting requirements, fees paid to vendors in order to remain in compliance with the Sarbanes-Oxley Act and SEC requirements, interest rates, capital spending, energy and other utility costs, and inflation could positively or adversely impact the Company and its customers, suppliers, and sources of capital. Any significant adverse impact from these factors could result in material adverse effects on the Company's results of operations and financial condition. The Company is also at risk for many other matters beyond its control, including, but not limited to: the potential loss of significant customers; the Company's future ability to sell or refinance its real estate; the possibility of not achieving projected revenues from existing backlog or not realizing earnings from such revenues; the cost and availability of insurance; the ability of the Company to attract and retain key personnel; weather conditions; changes in laws and regulations, including changes in GAAP and regulatory requirements of the SEC and the NASDAQ stock market; overall capital spending trends in the economy; the timing and amount of earnings recognition related to the possible sale of real estate properties held for sale; delays in or cancellations of customers' orders; inflation; the level and volatility of energy and gasoline prices; the level and volatility of interest rates; the failure of a subcontractor to perform; the deterioration in the financial stability of a significant customer, or subcontractor; and the possible impact, if any, on earnings due to the ultimate disposition of legal proceedings in which the Company may be involved. 30-------------------------------------------------------------------------------- Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Servidyne, Inc. Atlanta, Georgia We have audited the accompanying consolidated balance sheets of Servidyne, Inc. and subsidiaries (the "Company") as of April 30, 2011 and 2010, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended April 30, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of Servidyne, Inc. and subsidiaries as of April 30, 2011 and 2010, and the results of their operations and their cash flows for each of the two years in the period ended April 30, 2011, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Atlanta, Georgia July 29, 2011 31 -------------------------------------------------------------------------------- Table of Contents SERVIDYNE, INC. CONSOLIDATED BALANCE SHEETS April 30, 2011 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 2) $ 2,125,305 $ 1,923,641 Receivables: Trade accounts and notes, net of allowance for doubtful accounts of $141,225 and $58,989, respectively 962,614 953,075 Contracts, net of allowance for doubtful accounts of $130,833 and $22,530, respectively, including retained amounts of $472,034 and $675,281, respectively (Note 16) 2,980,430 3,337,177 Costs and earnings in excess of billings (Notes 5 and 16) 1,511,706 715,129 Assets of discontinued operations (Note 4) 30,174 188,827 Deferred income taxes (Note 10) 471,231 360,097 Other current assets (Note 2) 1,432,011 1,247,844 Total current assets 9,513,471 8,725,790 PROPERTY AND EQUIPMENT, net (Note 6) 4,518,675 4,805,542 ASSETS OF DISCONTINUED OPERATIONS (Note 4) - 13,767,227 DEFERRED INCOME TAXES (Note 10) - 1,160,371 OTHER ASSETS: Real estate held for future development or sale 853,109 853,109 Intangible assets, net (Note 15) 2,150,040 2,395,874 Goodwill (Note 15) 6,354,002 6,354,002 Other assets (Note 2) 2,838,271 2,890,357 Total assets $ 26,227,568 $ 40,952,272 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade and subcontractors payables $ 3,455,683 $ 2,465,112 Accrued expenses 1,683,701 1,378,538 Deferred revenue 469,449 507,383 Billings in excess of costs and earnings (Note 5) 7,408 53,100 Liabilities of discontinued operations (Note 4) - 520,308 Short-term debt and current maturities of long-term debt 333,830 270,592 Total current liabilities 5,950,071 5,195,033 DEFERRED INCOME TAXES (Note 10) 590,564 - LIABILITIES OF DISCONTINUED OPERATIONS (Note 4) - 13,587,832 OTHER LIABILITIES 1,106,272 1,039,633 MORTGAGE NOTES PAYABLE, less current maturities (Note 7) 3,977,589 4,107,996 OTHER LONG-TERM DEBT, less current maturities (Note 8) 1,721,706 1,832,000 Total liabilities 13,346,202 25,762,494 COMMITMENTS AND CONTINGENCIES (Note 17) SHAREHOLDERS' EQUITY: Common stock, $1 par value; 10,000,000 shares authorized; 3,919,173 issued and 3,675,782 outstanding at April 30, 2011; 3,919,773 issued and 3,676,383 outstanding at April 30, 2010; 3,919,173 3,919,773 Additional paid-in capital 6,364,899 6,206,521 Retained earnings 3,603,442 6,069,629 Treasury stock (common shares) of 243,391 and 243,390, respectively (1,006,148 ) (1,006,145 ) Total shareholders' equity 12,881,366 15,189,778 Total liabilities and shareholders' equity $ 26,227,568 $ 40,952,272 See accompanying notes to consolidated financial statements. 32-------------------------------------------------------------------------------- Table of Contents SERVIDYNE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended April 30, 2011 2010 REVENUES: Building Performance Efficiency ("BPE") (Note 16) $ 25,734,826 $ 18,171,536 Other 423,102 389,994 26,157,928 18,561,530 COST OF REVENUES: BPE 18,245,824 12,300,803 Other 685,544 746,919 18,931,368 13,047,722 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,939,583 9,783,066 OTHER (INCOME) AND EXPENSES: Other income (Note 2) (194,646 ) (308,279 ) Interest income (62 ) (12,482 ) Interest expense 448,484 402,104 253,776 81,343 LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,966,799 ) (4,350,601 ) INCOME TAX EXPENSE (BENEFIT) (Note 10): Current 45,940 13,309 Deferred (983,104 ) (1,595,357 ) (937,164 ) (1,582,048 ) LOSS FROM CONTINUING OPERATIONS (2,029,635 ) (2,768,553 ) DISCONTINUED OPERATIONS (Note 4): (Loss) earnings from discontinued operations, adjusted for applicable income tax (benefit) expense of ($308,898) and $235,423, respectively (294,404 ) 142,443 Gain on disposition of income-producing properties, adjusted for applicable income tax expense of $178,555 and $447,808, respectively 5,479 740,831 (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS (288,925 ) 883,274 NET LOSS $ (2,318,560 ) $ (1,885,279 ) NET (LOSS) EARNINGS PER SHARE (Note 13): From continuing operations - basic and diluted $ (0.55 ) $ (0.75 ) From discontinued operations - basic and diluted (.08 ) .24 NET LOSS PER SHARE - BASIC AND DILUTED $ (0.63 ) $ (0.51 ) See accompanying notes to consolidated financial statements. 33-------------------------------------------------------------------------------- Table of Contents SERVIDYNE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Common Stock Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total BALANCES at April 30, 2009 3,917,778 $ 3,917,778 $ 6,026,101 $ 8,139,988 $ (974,800 ) $ 17,109,067 Net loss - - - (1,885,279 ) - (1,885,279 ) Stock compensation expense - - 182,415 - - 182,415 Common stock acquired - - - - (31,345 ) (31,345 ) Common stock issued 1,995 1,995 (1,995 ) - - - Cash dividends declared - $0.047 per share - - - (185,080 ) - (185,080 ) BALANCES at April 30, 2010 3,919,773 $ 3,919,773 $ 6,206,521 $ 6,069,629 $ (1,006,145 ) $ 15,189,778 Net loss - - - (2,318,560 ) - (2,318,560 ) Stock compensation expense - - 157,778 - - 157,778 Common stock acquired - - - - (3 ) (3 ) Cash dividends declared - $0.04 per share - - - (147,627 ) - (147,627 ) Stock forfeitures (600 ) (600 ) 600 - - - BALANCES at April 30, 2011 3,919,173 $ 3,919,173 $ 6,364,899 $ 3,603,442 $ (1,006,148 ) $ 12,881,366 See accompanying notes to consolidated financial statements. 34-------------------------------------------------------------------------------- Table of Contents SERVIDYNE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended 2011 2010 Cash flows from operating activities: Net loss $ (2,318,560 ) $ (1,885,279 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss (earnings) from discontinued operations, net of tax 288,925 (883,274 ) (Gain) loss on disposal of assets (1,385 ) 1,378 Depreciation and amortization 948,236 985,174 Deferred tax benefit (Note 10) (983,104 ) (1,621,430 ) Stock compensation expense 157,778 182,415 Adjustment to cash surrender value of life insurance (36,008 ) (62,442 ) Straight-line rent (1,162 ) 22,357 Provision for doubtful accounts, net 190,539 (38,197 ) Changes in assets and liabilities: Receivables 156,669 (1,357,368 ) Costs and earnings in excess of billings (796,577 ) (306,179 ) Other current and long-term assets (128,938 ) 84,611 Trade and subcontractors payable 990,570 1,623,729 Accrued expenses and deferred revenue 285,295 27,437 Billings in excess of costs and earnings (45,692 ) 24,885 Other liabilities (471 ) (2,900 ) Net cash used in operating activities (1,293,885 ) (3,205,083 ) Cash flows from investing activities: Premiums paid on officers' life insurance policies (5,464 ) (61,464 ) Purchase of money market account investment (500,000 ) - Proceeds from termination of split-dollar life insurance agreement 194,601 - Additions to property and equipment (53,953 ) (257,195 ) Additions to intangible assets (365,650 ) (462,750 ) Proceeds from sale of property and equipment 5,454 2,000 Net cash used in investing activities (725,012 ) (779,409 ) Cash flows from financing activities: Long-term loan proceeds - 982,000 Mortgage repayments (120,653 ) (111,684 ) Debt repayments (162,879 ) (185,000 ) Repurchase of common stock - (31,345 ) Proceeds from other long-term debt 500,000 - Cash dividends paid to shareholders (147,627 ) (185,080 ) Net cash provided by financing activities 68,841 468,891 DISCONTINUED OPERATIONS: Operating activities (4,616 ) 1,051,139 Investing activities 2,205,829 (141,881 ) Financing activities (49,493 ) (291,142 ) Net cash provided by discontinued operations 2,151,720 618,116 Net increase (decrease) in cash and cash equivalents 201,664 (2,897,485 ) Cash at beginning of period 1,923,641 4,821,126 Cash at end of period $ 2,125,305 $ 1,923,641 Supplemental disclosure of non-cash investing and financing activities: Issuance of Common Stock under 2000 Stock Award Plan $ - $ 4,434 Reduction in cash surrender value of life insurance policies $ 412,000 $ - Reduction in loans against interest in cash surrender value of life insurance policies $ (412,000 ) $ - Change in fair market value of deferred executive compensation plan assets and liabilities $ 124,465 $ - Supplemental schedule of cash flow information: Cash paid during the year for interest $ 462,007 $ 1,094,304 Cash paid during the year for income taxes, net $ 1,962 $ - See accompanying notes to consolidated financial statements. 35-------------------------------------------------------------------------------- Table of Contents On January 29, 2010, the Company transferred its interest in an income-producing property and related assets to the note holder, which satisfied in full the Company's liability for the related mortgage note payable. Elimination of mortgage note payable $ (3,159,348 ) Disposition of income-producing property, net 1,727,165 Disposition of other related assets and liabilities, net 193,545 See accompanying notes to consolidated financial statements. 36-------------------------------------------------------------------------------- Table of Contents SERVIDYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended April 30, 2011, and April 30, 2010 1. ORGANIZATION AND BUSINESS Servidyne, Inc. (together with its subsidiaries, the "Company") was organized under Delaware law in 1960. In 1984, the Company changed its state of incorporation from Delaware to Georgia. The Company provides comprehensive energy efficiency and demand response solutions, sustainability programs, and other building performance-enhancing products and services to owners and operators of existing buildings, energy services companies, and public and investor-owned utilities. During the third quarter of fiscal 2011, the Company sold its last owned income-producing property, other than its corporate headquarters facility. As a result, the Company's Real Estate Segment is no longer considered a reportable segment. Accordingly, the Company has removed all references to the Real Estate Segment herein. The only operating segment of the Company is the Building Performance Efficiency ("BPE") Segment, which performs the services described above. See Note 14 "Segment Reporting" for more information. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Principles of consolidation and basis of presentation The consolidated financial statements include the accounts of Servidyne, Inc., and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has made reclassifications related to certain income-producing properties that have been sold in accordance with ASC 360-35, Property, Plant and Equipment ("ASC 360-35"). As a result of these sales, the Company's financial statements have been prepared with the results of operations and cash flows of these disposed properties shown as discontinued operations. Further, the assets and liabilities of these disposed properties are reflected in discontinued operations on the balance sheets. In addition, the book value of the corporate headquarters facility which was previously presented in "Income-Producing Properties, net" is now presented in "Property and Equipment, net" in the balance sheets. (B) Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (C) Revenue recognition Revenues derived from implementation, training, support, and base service license fees from customers accessing certain of the Company's proprietary technology solutions on an ASP basis are recognized when all of the following conditions are met: there is persuasive evidence of an arrangement; service has been provided to the customer; the collection of fees is probable; and the amount of fees to be paid by the customer is fixed and determinable. The Company's license arrangements do not include general rights of return. Revenues are recognized ratably over the contract period, which is typically no longer than twelve months, beginning on the commencement date of each contract. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on the timing of when the revenue recognition criteria have been met. Additionally, the Company defers such direct costs and amortizes them over the same time period as the revenue is recognized. 37-------------------------------------------------------------------------------- Table of Contents Energy management services are recognized as the services are rendered. Revenues derived from sales of proprietary technology solutions (other than ASP solutions) and hardware products are recognized when the technology solutions and products are sold. Energy savings project revenues are reported on the percentage-of-completion method, using costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. Original contract prices are adjusted for change orders in the amounts that are reasonably estimated. The nature of the change orders usually involves a change in the scope of the project, for example, a change in the number or type of units being installed. The price of change orders is based on the specific materials, labor, and other project costs affected. Contract revenue and costs are adjusted to reflect change orders when they are approved by both the Company and its customer for both scope and price. For a change order that is unpriced; that is, the scope of the work to be performed is defined, but the adjustment to the contract price is to be negotiated later, the Company evaluates the particular circumstances of that specific instance in determining whether to adjust the contract revenue and/or costs related to the change order. For unpriced change orders, the Company will record revenue in excess of costs related to a change order on a contract only when the Company deems that the adjustment to the contract price is probable based on its historical experience with that customer. The cumulative effects of changes in estimated total contract costs and revenues (change orders) are recorded in the period in which the facts requiring such revisions become known, and are accounted for using the percentage-of-completion method. At the time it is determined that a contract is expected to result in a loss, the entire estimated loss is recorded. Energy efficient lighting product revenues are recognized when the products are shipped. (D) Cash and cash equivalents and short-term investments Cash and cash equivalents include money market funds and other highly liquid financial instruments. The Company considers all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. The Company considers financial instruments with maturities of three months to one year to be short-term investments. The Company has classified all short-term investments as "held to maturity." As of April 30, 2011 and 2010, the Company had an investment in a certificate of deposit, which is included in long-term other assets, that secures a letter of credit on the mortgage note payable on the corporate headquarters building that matures in August 2012. Additionally, as of April 30, 2011, the Company had an investment in a money market account, which is also included in long-term other assets, as it serves as security for the Company's surety program, including the payment and performance bonds required by a significant long-term BPE energy savings project contract. (E) Long-lived assets: property & equipment and capitalized software The Company's corporate headquarters building and related assets are stated at historical cost or, if the Company determines that impairment has occurred, at fair market value, and are depreciated for financial reporting purposes using the straight-line method over the respective estimated useful lives. Significant additions that extend asset lives are capitalized and are depreciated over their respective estimated useful lives. Normal maintenance and repair costs are expensed as incurred. Other property and equipment are recorded at historical cost and are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the respective assets. The Company's most significant tangible long-lived assets are the corporate headquarters building and related assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company examines long-lived assets for such indications of impairment on a quarterly basis. The types of events and circumstances that might indicate impairment include, but are not limited to, the following: • A significant decrease in the market price of a long-lived asset; • A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; • The Company has received purchase offers at prices below carrying value; 38 -------------------------------------------------------------------------------- Table of Contents • A real estate asset that has a significant vacancy rate or significant rollover exposure from one or more tenants; • A major tenant experiencing financial difficulties that may jeopardize the tenant's ability to meet its lease obligations; and • Depressed market conditions. When there are one or more indications of impairment, the recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset against the future net undiscounted cash flows expected to be generated by the asset. The Company estimates future undiscounted cash flows using assumptions regarding occupancy, counter-party creditworthiness, costs of leasing including tenant improvements and leasing commissions, rental rates and expenses of the property, as well as the expected holding period and cash to be received from disposition. The Company has considered all of these factors in its undiscounted cash flows. The BPE Segment has long-lived assets that consist primarily of capitalized software costs, classified as intangible assets, net on the balance sheet, as well as a portion of property and equipment on the balance sheet. Software development costs are accounted for as required for software in a Web hosting arrangement. Software development costs that are incurred in a preliminary project stage are expensed as incurred. Costs that are incurred during the application development stage are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the computer software development project, including testing of the computer software, is substantially complete and the software product is ready for its intended use. Capitalized costs are amortized on a straight-line basis over the estimated economic life of the product. Events or circumstances which would trigger an impairment analysis of these long-lived assets include: • A change in the estimated remaining useful life of the asset; • A change in the manner in which the asset is used in the income-generating business of the Company; or • A current-period operating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset. Long-lived assets in the BPE Segment are grouped together for purposes of impairment analysis, as assets and liabilities of the BPE Segment are not independent of one another. Annually at the end of the fiscal third quarter, unless events or circumstances occur in the interim, as discussed above, the Company reviews its BPE Segment's long-lived assets for impairment. Future undiscounted cash flows of the segment, as measured in its goodwill impairment analysis, are used to determine whether impairment of long-lived assets exists in the BPE Segment. (F) Goodwill and other intangible assets Intangible assets primarily consist of trademarks, acquired computer software, proprietary technology solutions, and customer relationships. The trademarks are not amortized as they have indefinite lives. However, the acquired computer software, proprietary technology solutions, and customer relationships are amortized using the straight-line method over the following estimated useful lives: Acquired computer software 3 years Proprietary technology solutions 5 years Customer relationships 5 years Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually at the end of the fiscal third quarter, or whenever events or changes in circumstances indicate that the carrying basis of an asset may not be recoverable. All of the Company's goodwill and other indefinite-lived intangible assets are assigned to the BPE Segment, which has also been determined to be the reporting unit. 39-------------------------------------------------------------------------------- Table of Contents The Company performed the annual impairment analysis of goodwill and other indefinite-lived intangible assets for the BPE Segment in the quarter ended January 31, 2011. The annual analysis resulted in a determination of no impairment. Further, management has noted no indications of impairment in the fourth quarter of fiscal 2011 that would require the Company to perform an interim test of impairment as of April 30, 2011. Although management believes goodwill and other indefinite-lived intangible assets are appropriately stated in the consolidated financial statements, future changes in strategy or market conditions could significantly impact these judgments and result in an impairment charge. Goodwill The valuation methodologies used to calculate the fair value of the BPE Segment were the discounted cash flow method of the income approach and the guideline company method of the market approach. The Company believes that these two methodologies are commonly used valuation methodologies. GAAP states that both methodologies are acceptable in determining the fair value of a reporting unit. In assessing the fair value of the BPE Segment, the Company believes a market participant would likely consider the cash flow generating ability of the reporting unit, as well as current market multiples of companies facing similar risks in the marketplace. With the income approach, the cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Projected cash flows are discounted to present value using an estimated weighted average cost of capital, reflecting returns to both equity and debt investors. The Company believes that this is a relevant and beneficial method to use in determining fair value, because it explicitly considers the future cash flow generating potential of the reporting unit. In the guideline company method of the market approach, the value of a reporting unit is estimated by comparing the subject to similar businesses or "guideline companies" whose securities are actively traded in public markets. The comparison is generally based on data regarding each of the companies' stock prices and earnings, which is expressed as a fraction known as a "multiple." The premise of this method is that if the guideline public companies are sufficiently similar to each other, then their multiples should be similar. The multiples for the guideline companies are analyzed, adjusted for differences as compared to the subject company, and then applied to the applicable business characteristics of the subject company to arrive at an indication of the fair value. The Company believes that the inclusion of a market approach analysis in the fair value calculation is beneficial, because it provides an indication of value based on external, market-based measures. In the application of the income approach, financial projections were developed for use in the discounted cash flow calculations. Significant assumptions included revenue growth rates, margin rates, SG&A costs, and working capital and capital expenditure requirements over a period of ten years. Revenue growth rate and margin rate assumptions were developed using historical Company data, current backlog, specific customer commitments, status of outstanding customer proposals, and future economic and market conditions expected. Consideration was then given to the SG&A costs, working capital, and capital expenditures required to deliver the revenue and margin determined. The other significant assumption used with the income approach was the assumed rate at which to discount the cash flows. The rate was determined by utilizing the weighted average cost of capital method. In the income approach model, three separate financial projection scenarios were prepared using the above assumptions: the first used the expected revenue growth rates, the second used higher revenue growth rates, and the third used lower revenue growth rates. The discount rates used in the scenarios ranged from 17% for the lower growth scenario to 19% in the higher growth scenario. In each of the three discounted cash flow models, there was no indication of goodwill impairment. For the assessment of fair value of the BPE Segment based on the income approach, the results of the three scenarios were weighted to produce the applicable fair value indication as follows: 50% for the expected case and 25% each for the other scenarios. The weightings reflect the Company's view of the relative likelihood of each scenario. In the application of the market approach, the Company considered valuation multiples derived from five public companies that were identified as belonging to a group of industry peers. The applicable financial multiples of the 40-------------------------------------------------------------------------------- Table of Contents comparable companies were adjusted for profitability and size and then applied to the BPE Segment. This result also indicated that no impairment existed. The comparable companies selected for the market approach were similar to the BPE Segment in terms of business description and markets served. As such, the Company believes a market participant is likely to consider the market approach in determining the fair value of the BPE Segment. In addition, the Company believes a market participant will consider the cash flow generating capacity of the BPE Segment using an income approach. Both the market and income approaches provide meaningful indications of the fair value to the BPE Segment. The outcomes of the income approach and the market approach were weighted 80% and 20%, respectively, with the resulting fair value compared to the carrying value of the BPE Segment. This test of fair value indicated no impairment existed at January 31, 2011. Other Indefinite-Lived Intangible Assets The Company holds several trademarks, which comprise all of the other indefinite-lived intangible assets reported by the Company. The relief from royalty valuation methodology was used to analyze the fair value of the Company's trademarks, and the result of the analysis determined that no impairment existed at January 31, 2011. (G) Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company periodically reviews its DTA to assess whether it is more likely than not that a tax asset will not be realized. The realization of a DTA ultimately depends on the existence of sufficient taxable income. A valuation allowance is established against a DTA if there is not sufficient evidence that it will be realized. The Company weighs all available evidence in order to determine whether it is more-likely-than-not that a DTA will be realized in a future period. The Company considers general economic conditions, market and industry conditions, as well as internal Company specific conditions, trends, management plans, and other data in making this determination. Evidence considered is weighted according to the degree that it can be objectively verified. Reversals of temporary differences are weighted with more significance than projections of future earnings of the Company. (H) Discontinued operations The gains and losses from the disposition of certain income-producing real estate assets, and associated liabilities, operating results, and cash flows are reflected as discontinued operations in the consolidated financial statements for all periods presented. Although net earnings are not affected, the Company has reclassified results that were previously included in continuing operations as discontinued operations for qualifying dispositions. 41-------------------------------------------------------------------------------- Table of Contents (I) Other current assets Other current assets consisted of the following as of April 30, 2011 and 2010: 2011 2010 Inventory $ 632,112 $ 537,624 Prepaid real estate taxes 49,926 48,928 Deferred costs 45,520 31,248 Prepaid insurance 911 47,468 Prepaid rent 8,766 35,783 Deposits 28,140 44,400 Prepaid consulting fees 55,500 25,000 Unbilled engineering revenue 215,379 170,520 Other receivables 62,169 117,660 Vendor credits 175,800 36,361 Other 157,788 152,852 $ 1,432,011 $ 1,247,844 (J) Other assets Other assets consisted of the following as of April 30, 2011, and 2010: 2011 2010 Cash surrender value of life insurance $ 826,866 $ 1,447,224 Deferred executive compensation 1,014,248 947,023 Money market account investment 500,000 - Certificate of deposit 450,000 450,000 Straight-line rent receivable 25,390 24,228 Notes receivable 9,000 9,000 Other 12,767 12,882 $ 2,838,271 $ 2,890,357 Money Market Account Investment On October 15, 2010, the Company purchased a money market account investment in the amount of $500,000. This investment is classified as a non-current other asset, as it serves as security for the Company's surety program, including the payment and performance bonds required by a significant long-term BPE energy savings project contract. Termination of Split Dollar Life Insurance Agreement Historically, the Company has been a party to "split dollar" life insurance agreements pursuant to which, among other things, the Company has agreed to pay premiums on life insurance policies for certain executive officers of the Company. The cash surrender values of these insurance policies are recorded as long-term other assets in the Company's condensed consolidated balance sheet. As of April 30, 2010, the Company was a party to three (3) split dollar agreements regarding policies insuring the lives of current and former executive officers of the Company, and had long-term loans of approximately $982,000 against its interests in the cash surrender values of these policies. On October 21, 2010, in the Company's fiscal second quarter, the split dollar life insurance agreement related to the policy jointly insuring the lives of Edward M. Abrams (deceased), the Company's former Chairman of the Board and Chief Executive Officer, and his widow, Ann U. Abrams (the parents of Alan R. Abrams, the Company's Chairman of the Board and Chief Executive Officer, and J. Andrew Abrams, the Company's Executive Vice President) was terminated prior to the death of the remaining insured. Prior to the termination of the agreement, the Company had a long-term loan of approximately $412,000 against its interest in the cash surrender value of this policy, which loan amount approximately equaled the cumulative policy premiums paid by the Company through the date the loan was originated, and represented a substantial majority of the policy's cash surrender value prior to the loan. Under the terms of the agreement, in the event of an early termination prior to 42-------------------------------------------------------------------------------- Table of Contents the death of the insured, the Company was entitled to receive the remaining cash surrender value of the policy, if any, on the date of termination. However, in consideration of the consent to the early termination of the agreement by the trust that owns the policy, the Company agreed to reduce the net cash surrender value otherwise payable to the Company by $42,000. As a result of the early termination of the agreement: (1) the long-term loan against the Company's interest in the cash surrender value of the policy of approximately $412,000 and the related accrued interest of approximately $13,000 were repaid in full; (2) the Company received approximately $195,000 in cash proceeds; (3) the Company's ongoing obligation to pay premiums on the policy and its entitlement to any portion of the policy's death benefit were terminated; and (4) the Company reduced its long-term other assets by approximately $662,000, representing the Company's interest in the cash surrender value of the policy prior to termination. (K) Other income Other income for the years ended April 30, 2011 and 2010, included changes in the fair value of deferred executive compensation plan assets of approximately $124,000 and $174,000, respectively. (L) Recent accounting pronouncements In September 2009, the FASB reached a consensus on two new pronouncements: ASU No. 2009-13, Revenue Recognition (Topic 605)-Multiple-Deliverable Revenue Arrangements, and ASU No. 2009-14, Software (Topic 985)-Certain Revenue Arrangements That Include Software Elements. ASU No. 2009-13 eliminates the requirement that all undelivered elements must have either (i) VSOE or (ii) TPE of stand-alone selling price before an entity can recognize the portion of the consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the stand-alone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity's estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU No. 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product's essential functionality. These new pronouncements are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these pronouncements will have on the determination or reporting of the Company's financial results; however, the impact is not expected to be material given the current volume of multiple-element arrangements. In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) -Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in ASC Subtopic 820-10. ASU 2010-06 amends ASC Subtopic 820-10 to now require (1) an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value measurements using significant Level 3 unobservable inputs, an entity should present separately information about purchases, sales, issuances, and settlements; and (3) an entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This new pronouncement was effective for interim and annual reporting periods beginning after December 15, 2009. The Company has determined that adoption did not have a significant impact on the determination or reporting of the Company's financial results. 3. EQUITY-BASED COMPENSATION The Company has three outstanding types of equity-based incentive compensation instruments in effect with employees, non-employee directors and certain outside service providers: stock options, stock appreciation rights (SARs"), and restricted stock. Most of these equity-based instruments were granted under the terms of the Company's 2000 Stock Award Plan (the "2000 Award Plan"). The total number of shares that could be granted under the 2000 Award Plan was 1,155,000 shares. The Company typically used authorized, unissued shares to provide shares for these equity-based instruments. As of April 30, 2010, no additional awards of equity-based incentive compensation instruments can be granted under the 2000 Award Plan, as the Plan has expired. 43-------------------------------------------------------------------------------- Table of Contents For the years ended April 30, 2011 and 2010, the Company's net loss included $157,778 and $182,415, respectively, of total equity-based compensation expenses, and $59,957 and $69,319, respectively, of related income tax benefits. All of these expenses are included in selling, general and administrative expenses in the consolidated statements of operations. At April 30, 2011, there were total unrecognized equity-based compensation expenses of $181,502 that are expected to be recognized over a weighted average period of approximately 1.7 years. Stock Options A summary of stock options activity for the fiscal years ended April 30 is as follows: 2011 2010 Weighted Weighted Options to Average Options to Average Purchase Exercise Purchase Exercise Shares Price Shares Price Outstanding at beginning of year 482,486 $ 4.46 482,486 $ 4.46 Granted - - - - Forfeited - - - - Expired - - - - Exercised - - - - Outstanding at end of year 482,486 $ 4.46 482,486 $ 4.46 Vested at end of year 482,486 $ 4.46 471,986 $ 4.44 Non-vested at end of year, that are expected to vest - $ - 10,500 $ 5.24 Stock options typically vest over a period of two years. The maximum contractual term of the stock options is ten years. As of April 30, 2011 and 2010, none of the outstanding stock options, vested or non-vested, were "in the money." A summary of information about stock options outstanding as of April 30, 2011, is as follows: Weighted Average Exercise Number of Remaining Contractual Price Outstanding Options Term (Years) $4.42 415,629 1.53 $4.59 55,440 3.90 $5.19 917 3.13 $5.24 10,500 2.12 The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes option-pricing model. The risk free interest rate utilized in the Black-Scholes calculation is the interest rate of the U.S. Treasury Bill having the same maturity period as the expected life of the stock option awards. The expected life of the stock options granted is based on the estimated holding period of the respective awarded stock options. The expected volatility of the stock options granted is based on the historical volatility of the Company's stock over the preceding five-year period using the month-end closing stock price. Compensation expenses related to the vesting of stock options, and the related income tax benefits, were not material for any of the periods presented. 44-------------------------------------------------------------------------------- Table of Contents Stock Appreciation Rights A summary of SARs activity for the fiscal years ended April 30 is as follows: 2011 2010 Weighted Weighted Average Average Exercise Exercise SARs Price SARs Price Outstanding at beginning of year 927,425 $ 3.85 565,350 $ 4.37 Granted - - 381,500 3.11 Exercised - - - - Forfeited (97,125 ) 4.46 (19,425 ) 4.62 Outstanding at end of year 830,300 $ 3.78 927,425 $ 3.85 Vested at end of year 204,278 $ 4.09 88,200 $ 3.88 Non-vested at end of year, that are expected to vest 464,712 $ 3.75 589,305 $ 3.91 All SARs have a five-year vesting period. Typically, thirty percent (30%) of the SARs will vest on the third year anniversary of the date of grant, thirty percent (30%) will vest on the fourth year anniversary of the date of grant, and forty percent (40%) will vest on the fifth year anniversary of the date of grant. All SARs have early vesting provisions by which one hundred percent (100%) of the SARs would vest immediately (1) on the date of a change in control of the Company; or (2) if the Company's stock price were to close at or above a certain price for ten consecutive trading days. For SARs granted prior to the stock dividend that occurred in the first quarter of fiscal 2009, the triggering price for early vesting is $19.05 per share. For SARs granted subsequent to the stock dividend that occurred in the first quarter of fiscal 2009, the triggering price for early vesting for SARs issued under the 2000 Award Plan is $20.00 per share, and the triggering price for early vesting for SARs not issued under the 2000 Award Plan is $19.05 per share. The maximum contractual term of all SARs is ten years. As of April 30, 2011, 181,500 of the non-vested outstanding SARs, with a weighted average exercise price of $2.13, were "in the money," whereas none of the vested outstanding SARs were "in the money." A summary of information about SARs outstanding as of April 30, 2011, is as follows: Weighted Average Exercise Outstanding Vested Remaining Contractual Price SARs SARs Term (Years) $3.94 153,720 108,959 5.16 $3.79 102,480 66,339 5.61 $4.19 10,500 3,150 6.12 $6.19 33,600 10,080 6.42 $5.00 52,500 15,750 6.99 $4.76 73,500 0 7.13 $4.00 22,500 0 7.39 $2.30 30,000 0 8.11 $4.00 200,000 0 8.55 $2.12 20,000 0 8.61 $2.09 131,500 0 8.90 The Company estimates the fair value of each award of SARs on the date of grant using the Black-Scholes option-pricing model. The risk-free interest rate utilized in the Black-Scholes calculation is the interest rate of the U.S. Treasury Bill having the same maturity period as the expected life of the Company's SARs awards. The expected life of the SARs granted is based on the estimated holding period of the respective SARs awards. The expected volatility is based on the historical volatility of the Company's stock over the preceding five-year period using the month-end closing stock price. 45-------------------------------------------------------------------------------- Table of Contents There were no SARs granted in fiscal 2011. The fair value of the SARs granted during fiscal 2010 was estimated on the respective grant dates using the following weighted average assumptions in the Black-Scholes option-pricing model: Expected life (years) 5 Dividend yield 3.82 % Expected stock price volatility 55.88 % Risk-free interest rate 2.38 % Fair value of SARs granted $ 0.40 Compensation expenses related to the vesting of SARs for fiscal years 2011 and 2010 were $155,381 and $169,721, respectively, and related income tax benefits were $59,046 and $64,495, respectively. Shares of restricted stock Periodically, the Company has awarded shares of restricted stock to employees, non-employee directors and certain outside service providers. The awards are recorded at fair market value on the date of grant and typically vest over a period of one year. As of April 30, 2011, there were no unrecognized compensation expenses related to grants of shares of restricted stock. Compensation expenses related to the vesting of shares of restricted stock for fiscal years 2011 and 2010 were $2,155 and $8,827, respectively, and related income tax benefits were $819 and $3,354, respectively. A summary of restricted stock activity for the fiscal years ended April 30 is as follows: 2011 2010 Weighted Number of Average Weighted Shares of Fair Value Shares of Fair Value Restricted per Share Restricted per Share Stock on Grant Date Stock on Grant Date Non-vested restricted stock at beginning of year 3,150 $ 2.99 5,295 $ 4.77 Granted - - 2,600 2.11 Forfeited (600 ) 2.11 (500 ) 2.12 Vested (2,550 ) 3.20 (4,245 ) 4.55 Non-vested restricted stock at end of year - $ - 3,150 $ 2.99 4. DISCONTINUED OPERATIONS The gains and losses from the disposition of certain income-producing real estate assets, and associated liabilities, operating results, and cash flows are reflected as discontinued operations in the consolidated financial statements for all periods presented. Although net earnings are not affected, the Company has reclassified results that were previously included in continuing operations as discontinued operations for qualifying dispositions. The Company classifies an asset as held for sale when the asset is under a binding sales contract with minimal contingencies, and the buyer is materially at risk if the buyer fails to complete the transaction. However, each potential transaction is evaluated based on its separate facts and circumstances. Pursuant to this standard, as of April 30, 2011 and 2010, the Company had no income-producing real estate assets that were classified as held for sale. Interest expense specifically related to mortgage debt on real estate assets that have been sold or otherwise disposed is allocated to the results of discontinued operations. The Company has elected not to allocate to discontinued operations other consolidated interest that is not directly attributable to the sold properties or related to other operations of the Company. 46-------------------------------------------------------------------------------- Table of Contents On January 29, 2010, the Company disposed of its interest in its owned office building in Newnan, Georgia. In this transaction, the Company transferred its approximately $2.0 million interest in the property and related assets to the note holder, which satisfied in full the Company's liability for the approximately $3.2 million remaining balance on the property's non-recourse mortgage loan. Correspondingly, the Company recognized a pre-tax gain of approximately $1.2 million in the third quarter of fiscal 2010 as a result of the elimination of the balance of the indebtedness on the property. Prior to the disposition, the Company had recorded an impairment loss of approximately $2,007,000 in the fourth quarter of fiscal 2009. On June 9, 2010, the Company sold its owned shopping center in Jacksonville, Florida, for a sales price of approximately $9.9 million. The sale generated net cash proceeds of approximately $2 million, after deducting approximately $0.5 million for funding of repair escrows and approximately $0.6 million for closing costs and prorations, and net of the approximately $6.9 million mortgage note, which was assumed by the buyer. The Company recognized a pre-tax gain on the sale of approximately $190,000, including approximately $75,000 in additional pre-tax gain recognized in the last three quarters of fiscal 2011 as a result of the successful completion of contractual conditions and other cost-basis adjustments. On December 15, 2010, the Company sold its owned shopping center in Smyrna, Tennessee, for a sales price of approximately $4.3 million. The sale generated net cash proceeds of approximately $250,000, after deducting approximately $125,000 for closing costs and prorations, and net of the approximately $3.9 million mortgage note, which was assumed by the buyer. The Company recognized a pre-tax loss on the sale of approximately $6,000. Prior to the sale, the Company recorded an impairment loss of approximately $590,000 in the second quarter of fiscal 2011. The estimated fair value of the Smyrna shopping center at October 31, 2010, was approximately $4,220,000. This determination was based on an executed sales contract, a Level 2 input, received in December 2010, which was indicative of the fair value as of October 31, 2010 (see also Note 9 "Fair Value Measurements" for hierarchy of fair value inputs). As a result of these real estate transactions, the Company's financial statements have been prepared with the results of operations and cash flows of these three disposed properties shown as discontinued operations. All historical statements have been recast in accordance with GAAP. Summarized financial information for discontinued operations for the fiscal years ended April 30 is as follows: 2011 2010 Rental revenues $ 509,411 $ 2,388,143 Rental property operating expenses, including depreciation 523,154 2,010,277 Loss on impairment of income-producing property 589,559 - Operating (loss) earnings from discontinued operations (603,302 ) 377,866 Income tax benefit (expense) 308,898 (235,423 ) Operating (loss) earnings from discontinued operations, net of tax (294,404 ) 142,443 Gain on disposition of income-producing properties 184,034 1,188,639 Income tax expense (178,555 ) (447,808 ) Gain on disposition of income-producing properties, net of tax 5,479 740,831 (Loss) earnings from discontinued operations, net of tax $ (288,925 ) $ 883,274 47 -------------------------------------------------------------------------------- Table of Contents Balances at April30, 2011 April 30, 2010 Assets of discontinued operations Accounts receivable $ 16,346 $ 92,402 Deferred income taxes 13,828 50,660 Other current assets - 45,765 Total current 30,174 188,827 Property and equipment - 13,259,155 Intangible assets - 414,543 Other assets - 93,529 Total non-current - 13,767,227 Total assets of discontinued operations $ 30,174 $ 13,956,054 Liabilities of discontinued operations Accounts payable and accrued expenses $ - $ 274,077 Deferred revenue - - Current maturities of mortgage notes and long-term debt payable - 246,231 Total current - 520,308 Deferred income taxes - 2,972,327 Mortgage notes payable - 10,615,505 Total non-current - 13,587,832 Total liabilities of discontinued operations $ - $ 14,108,140 5. CONTRACTS IN PROGRESS Assets and liabilities that are related to contracts in progress, including contracts receivable, are included in current assets and current liabilities, respectively, as they will be liquidated in the normal course of contract completion, which is expected to occur within one year. Amounts billed and costs and earnings recognized on contracts in progress at April 30 were: 2011 2010 Costs and earnings in excess of billings: Accumulated costs and earnings $ 13,259,293 $ 4,030,255 Amounts billed 11,747,587 3,315,126 $ 1,511,706 $ 715,129 Billings in excess of costs and earnings: Amounts billed $ 552,945 $ 5,149,164 Accumulated costs and earnings 545,537 5,096,064 $ 7,408 $ 53,100 48 -------------------------------------------------------------------------------- Table of Contents 6. PROPERTY AND EQUIPMENT The major components of property and equipment and their estimated useful lives at April 30 were as follows: Estimated useful lives 2011 2010 Land N/A $ 660,000 $ 660,000 Buildings and improvements 3-39 years 5,996,584 5,991,900 Equipment 3-10 years 1,345,463 1,296,278 Vehicles 3-5 years 322,042 344,562 $ 8,324,089 $ 8,292,740 Less - accumulated depreciation 3,805,414 3,487,198 $ 4,518,675 $ 4,805,542 Depreciation expense from continuing operations for the years ended April 30, 2011 and 2010, was $336,751 and $390,404, respectively. These amounts are included in selling, general, and administrative expenses on the accompanying consolidated statements of operations. 7. MORTGAGE NOTE PAYABLE AND LEASES At April 30, 2011, the Company had one remaining mortgage note associated with the corporate headquarters building. As of April 30, 2011 and 2010, the outstanding balance was $4.1 million and $4.2 million, respectively. This property is pledged as collateral on the note. Exculpatory provisions of the mortgage loan limit the Company's liability for repayment to its interest in the mortgaged property. The mortgage loan contains a provision that requires a Company subsidiary to maintain a net worth of at least $2 million. The subsidiary referred to in this loan provision had a net worth of approximately $16.3 million and $16.4 million as of April 30, 2011 and 2010, respectively. The mortgage note contains no other financial covenants. The Company leases a shopping center under a leaseback arrangement expiring in fiscal year 2013. The Company's lease on that property contains exculpatory provisions that limit the Company's liability for payment to its interest in the lease. The leaseback shopping center is subleased to the Kmart Corporation. The term of the Company's lease either is the same as, or may be extended to correspond to, the term of the sublease. All leases are operating leases. The leases with tenants in the Company's corporate headquarters building require tenants to make fixed rental payments over a period of approximately five years. Base rental revenues recognized from tenants in the corporate headquarters building in fiscal years 2011 and 2010 were approximately $77,000 and $169,000, respectively. Base rental revenues recognized from the leaseback shopping center were approximately $255,000 in both fiscal years 2011 and 2010. The approximate future minimum annual rental revenues from the corporate headquarters building and the leaseback center at April 30, 2011, were projected as follows: Year ending April 30, Owned Leaseback 2012 $ 147,000 $ 255,000 2013 141,000 149,000 2014 95,000 - 2015 91,000 - 2016 91,000 - Thereafter 15,000 - Total $ 580,000 $ 404,000 49 -------------------------------------------------------------------------------- Table of Contents The expected future minimum principal and interest payments on the mortgage note payable for the corporate headquarters building at April 30, 2011, and the approximate future minimum rentals expected to be paid on the leaseback center, were as follows: Owned Income-Producing Properties Leaseback Mortgage Payments Center Rental Year ending April 30, Principal Interest Payments 2012 $ 130,346 $ 313,799 $ 105,203 2013 3,977,589 76,846 61,368 2014 - - - 2015 - - - 2016 - - - Thereafter - - - Total $ 4,107,935 $ 390,645 $ 166,571 The mortgage note payable was due on August 21, 2012, and bore interest at a rate of 7.75% as of both April 30, 2011 and 2010. At April 30, 2011 and 2010, the weighted average interest rate for all outstanding debt was 7.6% and 6.9%, respectively, including other long-term debt and credit facilities (see Note 8 "Other Long-Term Debt"). Secured letter of credit In conjunction with terms of the mortgage on the corporate headquarters building, the Company is required to provide for potential future tenant improvement costs and lease commissions with additional collateral in the form of a letter of credit in the amount of $450,000 from July 17, 2008, through August 1, 2012. The letter of credit is secured by a certificate of deposit, which is recorded on the accompanying consolidated balance sheets as a non-current other asset as of April 30, 2011 and 2010. 50-------------------------------------------------------------------------------- Table of Contents 8. OTHER LONG-TERM DEBT Other long-term debt at April 30 was as follows: 2011 2010 Note payable bearing interest at 5.0%; principal and interest payments due in full at maturity; no maturity date; secured by related life insurance policy $ 382,210 $ 370,000 Note payable bearing interest at 5.0%; principal and interest payments due in full at maturity; no maturity date; secured by related life insurance policy 205,859 200,000 Note payable bearing interest at 6.0%; principal and interest payments due in full at maturity - 412,000 Note payable bearing interest at 6.0%; principal and interest payments due monthly; $150,000 of principal due on October 19, 2011, with remaining principal maturing on January 19, 2016; secured by all general assets of a Company subsidiary 837,121 850,000 Note payable bearing interest at 6.8%; interest due annually on December 31, beginning December 31, 2004, and principal payments due annually in installments as defined in the agreement commencing on December 19, 2008; matures on December 19, 2010 - 150,000 Note payable to a Director of the Company bearing interest at 12.0%; interest payments due monthly; matures on May 14, 2012; secured by security deed on real property granted by a Company subsidiary (1) 400,000 - Note payable to the Chairman of the Board and Chief Executive Officer of the Company bearing interest at 12.0%; interest payments due monthly; matures on May 14, 2012; secured by security deed on real property granted by a Company subsidiary (1) 50,000 - Note payable to the Executive Vice President of the Company bearing interest at 12.0%; interest payments due monthly; matures on May 14, 2012; secured by security deed on real property granted by a Company subsidiary (1) 25,000 - Note payable to a Director of the Company bearing interest at 12.0%; interest payments due monthly; matures on May 14, 2012; secured by security deed on real property granted by a Company subsidiary (1) 25,000 - Total other long-term debt 1,925,190 1,982,000 Less current maturities 203,484 150,000 Total other long-term debt, less current maturities $ 1,721,706 $ 1,832,000 (1) See Note 16 "Related Parties" for more information. 51 -------------------------------------------------------------------------------- Table of Contents The future minimum principal payments due on other long-term debt are as follows: Fiscal Year Ending April 30, 2012 $ 203,484 2013 556,784 2014 60,286 2015 64,004 2016 452,562 Thereafter 588,070 Total $ 1,925,190 The other long-term debt obligations have no financial or non-financial covenants. In the third quarter of fiscal 2011, the Company refinanced the approximately $837,000 note payable listed above. The note was amended as follows: • The maturity date of the note, originally December 18, 2011, and principal payment structure were amended such that principal payments commenced on February 19, 2011, based on a 60-month amortization. In addition, a $150,000 principal payment is due on October 19, 2011, with a balloon payment of the remaining principal balance of approximately $408,000 due on January 19, 2016; and • The interest rate was changed from the prime rate plus 1.5% to a fixed rate of 6% per annum. The note continues to be secured by the general assets of a Company subsidiary. 9. FAIR VALUE MEASUREMENTS Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs, and the lowest priority is given to Level 3 inputs. The three broad categories are: • Level 1 - Quoted prices in active markets for identical assets or liabilities. • Level 2 - Inputs other than quoted prices which are observable for an asset or liability, either directly or indirectly. • Level 3 - Unobservable inputs for an asset or liability when little or no market data is available. In determining fair values, the Company utilizes valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs. Considerable judgment is necessary to interpret Level 2 and Level 3 inputs in determining fair value. Accordingly, there can be no assurance that the fair values of financial instruments presented in this footnote are indicative of amounts that may ultimately be realized upon sale or disposition of these financial instruments. Financial instruments in the Company's consolidated financial statements that are measured and recorded at fair value on a recurring basis are (1) executive deferred compensation plan and directors' deferred compensation plan assets, which are included in "Other assets" in the consolidated balance sheet; and (2) the corresponding liability owed to the plans' participants that is equal in value to the plans' assets, which is included in "Other liabilities" in the consolidated balance sheet. Given that the plans' assets are invested in mutual funds and money market funds for which quoted market prices are readily available, the quoted prices are considered Level 1 inputs. Based on the quoted prices of the related investments, the fair value of the executive deferred compensation plan and directors' deferred compensation plan assets and the corresponding liability were $1,014,248 and $947,023 as of April 30, 2011, and April 30, 2010, respectively. In addition to the financial instruments listed above which are required to be carried at fair value, the Company has determined that the carrying amounts of its cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities. 52-------------------------------------------------------------------------------- Table of Contents The Company had a certificate of deposit ("CD") in the amount of $450,000 as of April 30, 2011, which is included within "Other assets" in the Company's consolidated balance sheet. This CD secures a letter of credit, which is required by the terms of the mortgage on the Company's owned corporate headquarters building. Based on the rates currently available on certificates of deposit with similar terms, the CD's carrying amount approximates its fair value as of April 30, 2011. See Note 7 "Mortgage Note Payable and Leases" for more information. The Company had a money market account ("MMA") investment in the amount of $500,000 as of April 30, 2011, which is included in "Other assets" in the Company's consolidated balance sheet (see the "(J) Other assets" section of Note 2 "Summary of Significant Accounting Policies" for more information). Based on the rates currently available on money market accounts with similar terms, this MMA investment's carrying amount approximates its fair value as of January 31, 2011. Based on the borrowing rates currently available for mortgage notes with similar terms and average maturities, the fair value of the mortgage note payable on the Company's corporate headquarters building was $4,186,613 and $4,368,245 as of April 30, 2011 and 2010, respectively. Based on the borrowing rates currently available for bank loans with similar terms and average maturities, the fair value of other debt was $1,923,781 and $1,950,109 as of April 30, 2011 and 2010, respectively. Non-Recurring Measurements The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company examines long-lived assets for such indications of impairment on a quarterly basis. The results of this examination determined that no impairment of long-lived assets existed at April 30, 2011. 53-------------------------------------------------------------------------------- Table of Contents 10. INCOME TAXES The expense (benefit) for income taxes from continuing operations consists of the following: Current Deferred Total Year ended April 30, 2011 Federal $ - $ (993,497 ) $ (993,497 ) State and local 45,940 10,393 56,333 $ 45,940 $ (983,104 ) $ (937,164 ) Year ended April 30, 2010 Federal $ - $ (1,486,321 ) $ (1,486,321 ) State and local 13,309 (109,036 ) (95,727 ) $ 13,309 $ (1,595,357 ) $ (1,582,048 ) Total income tax benefits from continuing operations recognized in the consolidated statements of operations differs from the amounts computed by applying the federal income tax rate of 34% to pretax loss, as a result of the following: 2011 2010 Computed "expected" benefit $ (1,008,712 ) $ (1,479,204 ) State and local income taxes (250,409 ) (265,038 ) Permanent items 15,213 (8,803 ) Valuation Allowance 291,122 170,238 Other 15,622 759 $ (937,164 ) $ (1,582,048 ) 54 -------------------------------------------------------------------------------- Table of Contents The tax effects of the temporary differences that gave rise to the significant portions of the deferred income tax assets and deferred income tax liabilities at April 30 are presented below: 2011 2010 Deferred income tax assets: Items not currently deductible for tax purposes: Net operating loss carryforwards, federal and state, and credits (1) $ 2,030,231 $ 3,898,970 Valuation allowance (990,162 ) (750,214 ) Property and equipment, principally because of differences in capitalized interest 50,740 54,118 Capitalized costs 32,163 38,116 Bad debt reserves 79,398 30,005 Deferred compensation plan expenses 395,711 369,423 Equity-based compensation expenses 321,867 223,107 Compensated absences 48,104 52,354 Other accrued expenses 343,555 318,266 Other 68,374 54,197 Gross deferred income tax assets 2,379,981 4,288,342 Deferred income tax liabilities: Property and equipment, principally because of differences in depreciation and capitalized interest (610,773 ) (441,552 ) Intangible assets, principally because of differences in amortization (786,534 ) (870,182 ) Gain on real estate sales structured as tax-deferred like-kind exchanges (1,075,125 ) (1,363,186 ) Other (26,882 ) (92,954 ) Gross deferred income tax liability (2,499,314 ) (2,767,874 ) Net deferred income tax asset of continuing operations $ (119,333 ) $ 1,520,468 Net deferred income tax asset (liability) of discontinued operations (Note 4) 13,828 (2,921,667 ) Total net deferred income tax liability $ (105,505 ) $ (1,401,199 ) (1) The federal NOL carryforwards and all significant state NOL carryforwards expire between the fiscal years 2022 and 2031. The valuation allowance against deferred tax assets at April 30, 2011, and April 30, 2010, was $990,162 and $750,214, respectively. The valuation allowance reduces tax deferred tax assets to an amount that represents management's best estimate of the amount of such deferred tax assets that most likely will be realized. The increase in the valuation allowance is primarily driven by additional book losses incurred during the year ended April 30, 2011. The Company has no material FIN 48 obligations. The Company's policy is to record interest and penalties as a component of income tax expense (benefit) in the consolidated statement of operations. The Company and its subsidiaries' income tax returns are subject to examination by federal and state tax jurisdictions for fiscal years 2008 through 2010. 11. 401(K) PLAN The Company has a 401(k) plan (the "Plan") which covers the majority of its employees. Pursuant to the provisions of the Plan, eligible employees may make salary deferral (before tax) contributions of up to one hundred percent (100%) of their total compensation per plan year, not to exceed a specified maximum annual contribution as determined by the Internal Revenue Service. The Plan also includes provisions that authorize the Company to make additional discretionary contributions. Such contributions, if made, are allocated among all eligible employees as determined under the Plan. The trustee under the Plan invests the assets of each participant's account, as directed by the participant. The Plan assets currently do not include any stock of the Company. Funded discretionary employer contributions to the Plan for fiscal years 2011 and 2010 were approximately $69,000 and $61,000, respectively. The net assets in the Plan, which is administered by an independent trustee and which are not included in the Company's consolidated financial statements, were approximately $6,238,000 and $5,619,000 at April 30, 2011 and 2010, respectively. In conjunction with the acquisition of the assets of Servidyne Systems, Inc. in fiscal 2002, the Company assumed a 401(k) plan (the 55 -------------------------------------------------------------------------------- Table of Contents "Servidyne Systems Plan"), which covered a significant number of the employees. Under the provisions of the Servidyne Systems Plan, participants could contribute up to one hundred percent (100%) of their compensation per plan year, not to exceed a specified maximum annual contribution as determined by the Internal Revenue Service. The Servidyne Systems Plan was frozen as of January 1, 2003, and no additional employee or employer contributions were funded after that date. 12. SHAREHOLDERS' EQUITY In fiscal 2001, the Company's shareholders approved the 2000 Stock Award Plan (the "2000 Award Plan"). The 2000 Award Plan permits the grant of incentive and non-qualified stock options, non-restricted, restricted and performance stock awards, and stock appreciation rights to directors, employees, independent contractors, advisors, consultants and other outside service providers to the Company, as determined by the Compensation Committee of the Board of Directors. The term and vesting requirements of each award are determined by the Compensation Committee, but in no event may the term of any award exceed ten years. Incentive Stock Options granted under the 2000 Award Plan provide for the purchase of the Company's common stock at not less than fair market value on the date the stock option is granted. As of May 1, 2010, there could be no additional grants of awards under the 2000 Award Plan, as the ten-year term of the plan had ended. Prior to that date, the total number of shares that could have been granted under the 2000 Award Plan was 1,155,000 shares (share amount adjusted for stock dividends). The Company issued 52,500 SARs (adjusted for stock dividend) outside of the 2000 Stock Award Plan, with an exercise price of $5.00 (adjusted for stock dividends) and an exercise period of ten years, to one employee in April 2008. The SARs awarded have a five-year vesting period, in which thirty percent (30%) of the SARs will vest on the third year anniversary of the date of grant, thirty percent (30%) will vest on the fourth year anniversary of the date of grant, and forty percent (40%) will vest on the fifth year anniversary of the date of grant, with an early vesting provision by which one hundred percent (100%) of SARs would vest immediately if the Company's stock price closes at or above $19.05 per share (adjusted for stock dividends) for ten consecutive trading days or on the date of a change in control of the Company. The Company issued 200,000 SARs outside of the 2000 Stock Award Plan, with an exercise price of $4.00 and an exercise period of ten years, to two outside service providers in November 2009. These SARs may not be exercised by the grantees prior to shareholder approval of the grants or a determination by the Company that such shareholder approval is not required. Further, the Company issued 20,000 SARs outside of the 2000 Stock Award Plan, with an exercise price of $2.12 and an exercise period of ten years, to one employee in December 2009. The SARs awarded have a five-year vesting period, in which thirty percent (30%) of the SARs will vest on the third year anniversary of the date of grant, thirty percent (30%) will vest on the fourth year anniversary of the date of grant, and forty percent (40%) will vest on the fifth year anniversary of the date of grant, with an early vesting provision by which one hundred percent (100%) of SARs would vest immediately if the Company's stock price closes at or above $19.05 for ten consecutive trading days or on the date of a change in control of the Company. The Company issued 57,750 stock warrants (adjusted for stock dividends) outside the 2000 Stock Award Plan with an exercise price of $4.42 (adjusted for stock dividends), to unrelated third parties in December 2003, of which none had been exercised as of April 30, 2011. In February 2009, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock during the twelve-month period ending on March 5, 2010. In March 2010, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock during the twelve-month period ending on March 15, 2011. In March 2011, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock during the twelve-month period ending on March 9, 2012. The Company repurchased 16,981 shares in fiscal year 2010. The Company repurchased one share in fiscal year 2011. 56 -------------------------------------------------------------------------------- Table of Contents 13. NET (LOSS) EARNINGS PER SHARE Earnings per share are calculated in accordance with GAAP, which requires dual presentation of basic and diluted earnings per share on the face of the statement of operations for all entities with complex capital structures. Basic and diluted weighted average share differences, if any, result solely from dilutive common stock options, restricted stock, SARs and stock warrants. Basic earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average shares outstanding during the reporting period. Potential dilutive common shares are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all stock options, restricted stock, SARs and stock warrants would be used to repurchase common shares at the average market value. The number of shares remaining after the exercise proceeds were exhausted represents the potentially dilutive effect of the stock options, restricted stock, SARs and stock warrants. The dilutive effect on the number of common shares would have been 25,008 in 2011 and 10,337 in 2010. Because the Company had losses from continuing operations for all periods presented, all stock equivalents were anti-dilutive during these periods, and therefore, are excluded when determining the diluted weighted average number of shares outstanding. The following tables set forth the computations of basic and diluted net earnings (loss) per share: For the year Ended April 30, 2011 Loss Shares Per Share Amount Basic EPS - loss per share from continuing operations $ (2,029,635 ) 3,675,987 $ (0.55 ) Basic EPS - loss per share from discontinued operations (288,925 ) 3,675,987 (0.08 ) Effect of dilutive securities - - - Diluted EPS - loss per share $ (2,318,560 ) 3,675,987 $ (0.63 ) For the Year Ended April 30, 2010 (Loss) Earnings Shares Per Share Amount Basic EPS - loss per share from continuing operations $ (2,768,553 ) 3,685,834 $ (0.75 ) Basic EPS - earnings per share from discontinued operations 883,274 3,685,834 0.24 Effect of dilutive securities - - - Diluted EPS - loss per share $ (1,885,279 ) 3,685,834 $ (0.51 ) 14. SEGMENT REPORTING In recent years the Company disposed of the vast majority of its real estate holdings, selling its last owned income-producing property, other than its corporate headquarters facility, in December 2010 (see Note 4 "Discontinued Operations" for more information). As a result, during the third quarter of fiscal 2011, following authoritative guidance in ASC 280, Segment Reporting, the Company performed a reassessment of the applicable quantitative and qualitative thresholds for segment reporting and determined that the BPE Segment is the Company's only reportable segment. The Company identified this reportable segment based on internal management reporting and management decision-making responsibilities. The BPE Segment assists its customer base of multi-site owners and operators of corporate, commercial office, hospitality, gaming, retail, education, light industrial, government, institutional, and health care buildings, as well as energy services companies and public and investor-owned utilities, in improving facility operating performance, reducing energy consumption, and lowering ownership and operating costs, while improving the level of service and comfort for building occupants, through its: (1) energy efficiency engineering and analytical consulting services, including energy surveys and audits, facility studies, retro-commissioning services, utility monitoring services, building qualification for ENERGY STAR® and LEED® certifications, HVAC retrofit design, and energy simulations and modeling; (2) facility management software programs, including its iTendant platform using Web and wireless technologies; (3) energy saving lighting programs and energy related services and infrastructure upgrade projects that reduce energy consumption and operating costs; and (4) comprehensive technology-enabled real-time demand response programs (automatic, semi-automatic and manual) and services through the Company's new Fifth Fuel Management® platform, including two-way, fast and secure communication and tracking; retro-commissioning of existing systems; customized site training; and step-by-step processes for optimized demand response participation. The primary geographic focus for the BPE Segment is the continental United States. 57-------------------------------------------------------------------------------- Table of Contents The BPE Segment is managed separately and maintains separate personnel, except for accounting, human resources, information technology, and some clerical shared services. Management evaluates and monitors the performance of the segment based primarily on the consistency with the Company's long-term strategic objectives. The significant accounting policies utilized by the BPE Segment are the same as those summarized in Note 2 "Summary of Significant Accounting Policies." Total revenues by operating segment include both revenues from unaffiliated customers, as reported in the Company's consolidated statements of operations, and intersegment revenues, which are generally at prices negotiated between segments. The Company derived revenues from direct transactions with customers aggregating more than ten percent (10%) of consolidated revenues from continuing operations as follows: 2011 2010 Customer 1 25 % 27 % The table below shows selected financial data on an operating segment basis, including intersegment revenues, costs and expenses. Information previously reported as "Real Estate" and "Parent" is now combined in "Corporate." BPE Segment assets are those that are used in the operation of the segment, including receivables due from Corporate, if any. Corporate's assets primarily consist of its investments in subsidiaries, the corporate headquarters building and related assets, cash and cash equivalents, the cash surrender value of life insurance, assets related to deferred compensation plans, and assets from discontinued operations. 58-------------------------------------------------------------------------------- Table of Contents For the Year Ended April 30, 2011 BPE Corporate (1) Eliminations Consolidated Revenues from unaffiliated customers BPE Segment services and products: Energy savings projects $ 18,790,872 $ 18,790,872 Lighting products 2,226,827 2,226,827 Energy management services 1,515,007 1,515,007 Fifth fuel management services 240,986 240,986 Productivity software 2,961,134 2,961,134 Total revenues from unaffiliated customers $ 25,734,826 $ 423,102 $ - $ 26,157,928 Intersegment revenue - 203,700 (203,700 ) - Total revenues from continuing operations $ 25,734,826 $ 626,802 $ (203,700 ) $ 26,157,928 Earnings (loss) from continuing operations before income taxes $ 556,096 $ (3,538,798 ) $ 15,903 $ (2,966,799 ) Segment assets $ 15,829,280 $ 27,439,154 $ (17,040,866 ) $ 26,227,568 Goodwill $ 6,354,002 $ - $ - $ 6,354,002 Interest expenses $ 106,949 $ 395,599 $ (54,064 ) $ 448,484 Depreciation and amortization $ 660,695 $ 287,541 $ - $ 948,236 Capital expenditures (2) $ 34,438 $ 19,515 $ - $ 53,953 For the Year Ended April 30, 2010 BPE Corporate (1) Eliminations Consolidated Revenues from unaffiliated customers BPE Segment services and products: Energy savings projects $ 11,051,059 $ 11,051,059 Lighting products 1,932,521 1,932,521 Energy management services 1,801,271 1,801,271 Fifth fuel management services 28,000 28,000 Productivity software 3,358,685 3,358,685 Total revenues from unaffiliated customers $ 18,171,536 $ 389,994 $ - $ 18,561,530 Intersegment revenue 223,799 301,702 (525,501 ) - Total revenues from continuing operations $ 18,395,335 $ 691,696 $ (525,501 ) $ 18,561,530 Loss from continuing operations before income taxes $ (998,225 ) $ (3,279,661 ) $ (72,715 ) $ (4,350,601 ) Segment assets $ 14,715,108 $ 43,535,833 $ (17,298,669 ) $ 40,952,272 Goodwill $ 6,354,002 $ - $ - $ 6,354,002 Interest expenses $ 82,044 $ 339,393 $ (19,333 ) $ 402,104 Depreciation and amortization $ 702,424 $ 282,750 $ - $ 985,174 Capital expenditures (2) $ 93,270 $ 163,925 $ - $ 257,195 (1) The Corporate net loss in each period is derived from corporate headquarters activities, which consist primarily of the following: rental revenues from tenants in the Company's corporate headquarters building and related rental and operating costs, salaries and benefits of Corporate Headquarters executive officers and staff, equity-based compensation expenses, depreciation and amortization expenses, and costs related to the Company's status as a publicly-held company, which include, among other items, legal fees, non-employee directors' fees, consulting expenses, investor relations expenses, corporate audit and tax fees, Nasdaq listing fees, and other Securities & Exchange Commission ("SEC") and Sarbanes-Oxley compliance and financial reporting costs. All relevant costs related to the business operations of the Company's BPE Segment are either paid directly by BPE or are allocated to BPE by the Corporate Headquarters. The allocation method is dependent on the nature of each expense item. Allocated expenses include, among other items, accounting services, information technology services, insurance costs, and audit and tax preparation fees. (2) Includes property and equipment expenditures only. 59 -------------------------------------------------------------------------------- Table of Contents 15. GOODWILL AND OTHER INTANGIBLE ASSETS The gross carrying amounts and accumulated amortization for all of the Company's intangible assets are as follows: April 30, 2011 Gross Carrying Accumulated Amount Amortization Intangible assets, subject to amortization: BPE proprietary technology solutions $ 4,405,389 $ 3,311,762 Acquired computer software 706,032 548,205 Real estate lease costs 45,339 15,192 Customer relationships 404,632 326,873 Deferred loan costs 140,630 108,037 Non-compete agreements 63,323 63,323 Tradename 61,299 11,919 Other 44,882 44,882 $ 5,871,526 $ 4,430,193 Intangible assets and goodwill, not subject to amortization: Trademark $ 708,707 Goodwill $ 6,354,002 April 30, 2010 Gross Carrying Accumulated Amount Amortization Intangible assets, subject to amortization: BPE proprietary technology solutions $ 4,096,802 $ 2,827,071 Acquired computer software 676,837 493,885 Real estate lease costs 49,170 19,459 Customer relationships 404,632 286,433 Deferred loan costs 122,686 95,082 Non-compete agreements 63,323 60,684 Tradename 61,299 7,834 Other 44,882 42,016 $ 5,519,631 $ 3,832,464 Intangible assets and goodwill, not subject to amortization: Trademark $ 708,707 Goodwill $ 6,354,002 Aggregate amortization expense for all amortizable intangible assets: For the year ended April 30, 2011 $ 611,484 For the year ended April 30, 2010 594,770 Estimated future amortization expenses for all amortized intangible assets for the fiscal years ended: 2012 $ 530,382 2013 382,228 2014 282,003 2015 160,391 2016 86,329 Thereafter - $ 1,441,333 The Company capitalized $308,794 and $406,143 for the development of proprietary technology solutions in fiscal years 2011 and 2010, respectively. 60-------------------------------------------------------------------------------- Table of Contents 16. RELATED PARTIES On October 14, 2010, the Company borrowed an aggregate of $500,000 from related parties by issuing a total of four promissory notes to Samuel E. Allen, a Director of the Company; Herschel Kahn, a Director of the Company; Alan R. Abrams, Chairman of the Board and Chief Executive Officer of the Company; and J. Andrew Abrams, Executive Vice President of the Company, respectively. The largest of the four notes, amounting to $400,000, was issued to Mr. Allen. Each of the notes bears interest at twelve percent (12%) per annum and matures on May 14, 2012, subject to acceleration under certain specified circumstances. The notes are collectively secured by a security deed on real property granted by a subsidiary of the Company. The notes are included in "Other Long-Term Debt" in the Company's consolidated balance sheet as described above in Note 8 "Other Long-Term Debt." The cash proceeds from the borrowings were used to fund working capital and for other operating purposes. On October 21, 2010, the Company terminated a split dollar life insurance agreement related to a policy jointly insuring the lives of the Company's former Chairman of the Board and Chief Executive Officer, who is deceased, and his widow. See the "(J) Other assets" section of Note 2 "Summary of Significant Accounting Policies" for more information. The Company recognized approximately $6,653,000 and $958,000 in revenue for fiscal years 2011 and 2010, respectively, from an affiliate of a member of the Board of Directors associated with a contract for energy savings projects. The related accounts receivable as of April 30, 2011 and 2010, were approximately $733,000 and $238,000, respectively, and the related costs and earnings in excess of billings as of April 30, 2011 and 2010, were approximately $199,000 and $290,000, respectively. 17. COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings and other claims that arise from time to time in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, the Company believes that the final outcome of any such matters would not have a material effect on the Company's financial position or results of operations. 18. SUBSEQUENT EVENTS On June 26, 2011, the Company entered into an agreement to be acquired by Scientific Conservation, Inc. ("SCI") for $3.50 per share in an all-cash transaction. The Company's board of directors has approved the merger and has unanimously recommended that the Company's shareholders vote in favor of it at a special meeting of the shareholders to be held to consider the merger. The merger has also been approved by the board of directors of SCI. The acquisition is subject to approval by Company shareholders holding a majority of the outstanding voting power of the Company, as well as other customary closing conditions, and is expected to be completed in the Company's second fiscal quarter ending October 31, 2011. Shareholders representing approximately 56% of the voting power of the Company have agreed to vote in favor of the merger, subject to termination of such agreements with respect to approximately 27% of the voting power if the Company's board should change its recommendation supporting the merger. If the merger is approved and is consummated, the Company will no longer be a publicly-traded company, and its shares will cease to be traded on the NASDAQ Global Market. At the effective time of the merger, the following will occur regarding the Company's common stock and outstanding equity incentives and warrants: • each share of the Company's $1.00 par value common stock that is issued and outstanding immediately prior to the completion of the merger will be converted into the right to receive $3.50 in cash; • each share of restricted stock that is outstanding immediately prior to the effective time of the merger will vest (if not previously vested), and the holder thereof will be entitled to receive the per share consideration in exchange for each such restricted share, less any applicable withholding taxes. 61 -------------------------------------------------------------------------------- Table of Contents • each unexercised outstanding stock option or SAR that is "out-of the money" (i.e., the exercise price of such incentive is equal to or greater than $3.50), whether or not vested, will expire and be cancelled as of the effective time of the merger for no consideration; • each unexercised outstanding stock option that is "in-the-money" (i.e., the exercise price of such stock option is less than $3.50) will vest (if not vested) and be cancelled and settled, and the holder thereof will be entitled to receive an amount in cash, without interest, equal to the product of (i) the excess, if any, of (x) $3.50 over (y) the exercise price per share of Company common stock subject to such in-the-money stock option, multiplied by (ii) the number of shares of Company common stock represented by such stock option (other than shares for which such stock option had previously been exercised, if any); and • each SAR that is "in-the-money" will vest (if not previously vested) and the holder thereof will be entitled to receive in exchange therefore an amount in cash equal to the product of (i) the excess, if any, of (x) $3.50 over (y) the exercise price of such in-the-money SAR, multiplied by (ii) the number of units represented by such SAR (other than SARs for which such grant had previously been exercised, if any). As of July 14, 2011, no in-the-money stock options, in-the-money warrants, or unvested shares of restricted stock were outstanding. [ Back To TMCnet.com's Homepage ]