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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended
September 30, 2002
Commission file number: 0-32789
EMTEC, INC.
(Exact name of Registrant as specified in charter)
Delaware 87-0273300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
817 East Gate Drive
Mt. Laurel, New Jersey 08054
(Address of principal executive offices)
(856) 235-2121
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock outstanding as of November 10, 2001 was
7,080,498.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and March 31, 2002....................................................1-2
Consolidated Statements of Operations
for the Three and Six months ended September 30, 2002 (Unaudited) and
2001 (Unaudited) ......................................................................................3
Consolidated Statements of Cash Flows
for the Six months ended September 30, 2002 (Unaudited) and 2001 (Unaudited) ..........................4
Notes to Consolidated Financial Statements
(Unaudited) .........................................................................................5-6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations ...................................................................7-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk .............................................14
Item 4 - Controls and Procedures.................................................................................14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K .......................................................................15
SIGNATURES & 302 Certifications...............................................................................16-18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2002 2002
------------- ---------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 118,549 $ 1,552,666
Receivables:
Trade, net 13,392,437 6,288,425
Others 692,327 296,529
Inventories 832,512 1,089,950
Prepaid expenses 563,743 388,307
Deferred tax assets 26,491 26,491
----------- -----------
Total Current Assets 15,626,059 9,642,368
Property and equipment, net 1,241,212 703,940
Investment in geothermal power unit 584,684 581,612
Deferred tax assets 33,066 42,936
Other assets 415,432 417,617
----------- -----------
Total Assets $17,900,454 $11,388,473
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2002 2002
----------- -----------
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 2,691,795 $ -
Due to related party - 19,000
Accounts payable 9,339,072 6,609,837
Customer deposits 370,300 245,387
Accrued liabilities 1,270,021 764,282
Deferred revenues 1,104,113 840,413
----------- -----------
Total Current Liabilities 14,775,300 8,478,919
Deferred revenue 778,248 799,472
Deferred tax liability 60,124 60,124
----------- -----------
Total Liabilities 15,613,672 9,338,515
----------- -----------
Shareholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized; 7,080,498 shares issued
and outstanding 70,805 70,805
Additional paid-in capital 2,210,805 2,210,805
Retained Earnings (Deficit) 5,173 (231,652)
----------- -----------
Total Shareholders' Equity 2,286,783 2,049,958
----------- -----------
Total Liabilities and
Shareholders' Equity $17,900,454 $11,388,473
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Procurement services $20,734,704 $14,158,118 $36,715,250 $28,703,661
Service and consulting 4,631,745 3,227,698 12,960,224 8,185,940
Geothermal 37,003 45,056 82,352 89,398
----------- ----------- ----------- -----------
Total Revenues 25,403,452 17,430,872 49,757,826 36,978,999
----------- ----------- ----------- -----------
Cost of Revenues:
Procurement services 18,327,198 12,520,530 32,388,859 25,367,745
Service and consulting 3,874,467 2,467,074 11,034,277 6,400,487
Geothermal 18,031 20,596 35,629 33,507
----------- ----------- ----------- -----------
Total Cost of Revenues 22,219,696 15,008,200 43,458,765 31,801,739
----------- ----------- ----------- -----------
Gross Profit:
Procurement services 2,407,506 1,637,588 4,326,391 3,335,916
Service and consulting 757,278 760,624 1,925,947 1,785,453
Geothermal 18,972 24,460 46,723 55,891
----------- ----------- ----------- -----------
Total Gross Profit 3,183,756 2,422,672 6,299,061 5,177,260
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and
administrative 3,030,999 2,063,200 6,004,798 4,217,616
Interest 20,431 75,488 47,567 167,746
E-Business costs - 123,941 - 357,357
----------- ----------- ----------- -----------
Total Operating Expenses 3,051,430 2,262,629 6,052,365 4,742,719
----------- ----------- ----------- -----------
Income (Loss) From Continuing
Operations Before Income Tax
Expense 132,326 160,043 246,696 434,541
Income tax expense 9,870 3,020 9,870 6,200
----------- ----------- ----------- -----------
Net Income $ 122,456 $ 157,023 $ 236,826 $ 428,341
=========== =========== =========== ===========
Income Per Share From Continuing
Operations {Basic And Diluted} $.02 $.02 $.03 $.06
Net Income Per Share {Basic
And Diluted} $.02 $.02 $.03 $.06
Weighted Average Number Of
Shares Outstanding {Basic
And Diluted} 7,080,498 7,080,498 7,080,498 7,080,498
The accompanying notes are an integral part of these consolidated financial
statements.
3
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(unaudited)
September 30, September 30,
2002 2001
---------- ----------
Cash Flows From Operating Activities
Net income for the six months $ 236,826 $ 428,341
Adjustments to Reconcile Net Income To Net
Cash Provided By (Used In) Operating
Activities:
Depreciation and amortization 272,752 224,569
Deferred income tax 9,870 6,200
Unrealized loss (gain) on marketable
securities - 7,200
Changes In Operating Assets and Liabilities
Decrease in marketable securities - 289,526
(Increase) Decrease in receivables (7,499,810) 2,464,283
Decrease (Increase) in inventories 257,438 (1,155,694)
(Increase) Decrease in prepaid expenses (175,436) 32,422
Increase (Decrease) in accounts payable 2,729,235 (1,385,346)
Increase (Decrease) in customer deposits 124,913 (203,202)
Increase (Decrease) in accrued liabilities 505,739 (212,514)
Increase (Decrease) in deferred revenue 242,476 449,432
----------- -----------
Net Cash (Used In) Provided By
Operating Activities (3,295,997) 945,223
----------- -----------
Cash Flows From Investing Activities
Purchases of equipment (792,144) (43,146)
Additional security deposit - (20,000)
Additional investment in Geothermal Unit (20,956) -
Dispose of other asset 2,185 -
----------- -----------
Net Cash Used In Investing Activities (810,915) (63,146)
----------- -----------
Cash Flows From Financing Activities
Net Increase (Decrease) in line of credit 2,691,795 (2,161,036)
Decrease in due to related parties (19,000) -
----------- -----------
Net Cash Provided By (Used In)
Financing Activities 2,672,795 (2,161,036)
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,434,117) (1,278,959)
Beginning Cash and Cash Equivalents 1,552,666 2,098,198
----------- -----------
Ending Cash and Cash Equivalents $ 118,549 $ 819,239
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles in the United States. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Quarterly results are not necessarily indicative of results for the full year.
For further information, refer to the annual financial statements and notes
thereto included in the Company's Form 10-K.
2. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has adopted Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). APB No. 25
provides that the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
The exercise price of these options granted to employees during the six
months ended September 30, 2002 was set at the quoted market price of Company's
stock at the date of grant, resulting in no compensation expense. Option
activity is summarized in the following table:
Options outstanding - April 1, 2002 381,328
Activity for the six months ended September 30, 2002:
Options granted 50,000
Options exercised (83,900)
Options forfeited or expired -
-------
Options outstanding - September 30, 2002 347,428
=======
3. Line of Credit
On November 21, 2001, the Company entered into a $10.0 million revolving credit
facility with Fleet Capital Corporation, formerly Summit Business Capital
Corporation ("Fleet") under which the Company may borrow on 85% of its eligible
trade receivables. Interest on outstanding loans under the revolving credit
facility with Fleet is charged monthly at a fluctuating rate per annum equal to
0.25% above the prime rate and, at our option, interest on up to 50% of the
outstanding loans may be charged at libor plus 2.75%. The Fleet revolving credit
facility is collateralized by a lien upon and security interest in substantially
all of the Company assets. Since current credit facilities with two of the
Company's primary trade vendors, (GE Access, and Ingram Micro.,) were also
collateralized by substantially all of the Company's assets, Fleet, GE Access
and Ingram Micro, have entered into intercreditor agreements, which provide that
as regards to these vendors, debt obligations to Fleet are accorded priority.
The lending agreement contains financial covenants that require the Company to
maintain a maximum leverage ratio, a minimum debt ratio, a minimum tangible net
5
worth ratio, and a minimum result of operations. As of September 30, 2002, the
Company was in compliance with all of its financial covenants. The Company has
two letters of credit totaling to $1 million assigned as security deposits
issued against their line of credit. At September 30, 2002, the Company had a
$2.69 million outstanding balance and an unused line of credit available of
$6.31 million under the credit facility.
4. Acquisitions
On August 12, 2002, the Company acquired certain assets of Acentra Technologies,
Inc., including the assumption of the State of New Jersey computer supply and
services contract for a net purchase price of $165,607 in cash.
On August 31, 2002, the Company acquired all of the customer contracts and
certain assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The purchase
price will be paid over a two-year period and will be based on earning share
derived from the customer contracts transferred from Turnkey to Emtec.
5. Segment Information
Summarized financial information relating to the Company's operating
segments are as follows:
For the six months ended September 30: 2002 2001
External Sales
Mt. Laurel, NJ $ 3,799,768 $ 5,586,222
Mt. Laurel, Government 4,018,004 -
Cranford, NJ 15,898,327 14,038,508
Cranford, Managed Building Svc 122,455 -
New York City, NY 1,900,988 -
Atlanta, GA 9,267,435 7,997,653
Norwalk, CT 1,318,394 1,499,373
Education-Atlanta 7,975,448 7,767,845
Education-Jacksonville 5,374,656
Geothermal 82,352 89,398
Total External Sales $49,757,826 $36,978,999
=========== ===========
Operating Profit/(Loss)
Mt. Laurel, NJ $ (381,263) $ (239,859)
Mt. Laurel, Government 250,314 -
Cranford, NJ 88,220 589,740
Cranford, Managed Building Svc 12,727 -
New York City, NY (576,181) -
Atlanta, GA (202,710) (284,223)
Norwalk, CT (150,484) (179,055)
Education-Atlanta 896,198 873,383
Education-Jacksonville 283,362 -
e-Business - (357,357)
Geothermal 26,513 31,912
Income (Loss) from Continuing
Operations before Income Tax Expense $ 246,696 $ 434,541
=========== ===========
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with, and is qualified in its entirety by, the unaudited financial statements,
including the notes thereto, appearing elsewhere in this quarterly report on
Form, 10-Q.
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Management believes the following critical accounting policies affect
the more significant judgment and estimates used in the preparation of the
consolidated financial statements. On an on-going basis, management evaluates
its estimates and judgments, including those related to the allowance for
doubtful accounts, inventories, intangible assets, income taxes, and litigation.
Management bases its estimates and judgments on historical experiences. These
estimates form the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ from these estimates under
different assumptions and conditions.
Critical Accounting Policies
o Revenue Recognition
The Company recognizes revenues based upon Staff Accounting Bulletin
#101 (SAB 101). SAB 101 states that revenue recognition cannot occur until the
earnings process is complete (evidenced), by an agreement between the company
and the customer, there has been delivery and acceptance, collectibility is
probable, and pricing is fixed and determinable. If significant obligations
remain after delivery, revenue is deferred until such obligations are fulfilled.
The Company had followed these principles of revenue recognition prior to the
implementation of SAB 101. Therefore, SAB 101 has had no impact on revenue
reporting. Procurement services represent sales of computer hardware and
prepackaged software. Revenue from consulting and support service contracts are
recognized ratably over the contract or service period. Revenues from
manufacturer support service contracts where the manufacturer is responsible for
fulfilling the service requirements of the customer are recognized immediately
at their contract date.
o Trade Receivables
The Company provides an allowance for losses on trade receivables based
on a review of the current status of existing receivables, its age, and
management's evaluation of periodic aging of the accounts.
7
o Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is based on standard costs generated principally by the most recent
purchase prices. The Company provides an inventory reserve for obsolescence and
deterioration based on management's review of the current status of the excess
inventory, its age, and net realizable value based upon assumptions about future
demand and market condition.
o Valuation of long lived assets
The Company evaluates its long-lived assets as prescribed by Statement
of Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144, which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of, supercedes SFAS No. 121 and is
effective for fiscal year beginning after December 15, 2001. Adoption of SFAS
No. 144 at April 1, 2002 had no material impact on Company's financial condition
and result of operations.
o Income Taxes
Income taxes are accounted for under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than the enactment of changes in tax laws or rates. A valuation allowance is
recognized if, on weight of available evidence, it is more likely than not that
some portion or all the deferred tax assets will not be realized. At September
30, 2002, the Company has reported 90% valuation allowance.
Results of Operations
Three months ended September 30, 2002 Compared to Three months ended September
30, 2001.
Total Revenues
Total revenues for the IT business which includes procurement services,
and service and consulting, increased by 45.90% or $7.98 million, to $25.37
million for the three months ended September 30, 2002, compared to $17.39
million for the three months ended September 30, 2001. This increase is
primarily attributable to our new business with a school district in
Jacksonville, Florida, and the acquisitions of Devise Associates, Inc., Acentra
Technologies, Inc. and Turnkey Computer Systems, Inc. IT revenue associated with
this added business equaled to $8.33 million for the three months ended
September 30, 2002. Services and consulting revenue increased by 43.50%, or
$1.40 million, to $4.63 million for the three months ended September 30, 2002
compared to $3.23 million for the three months ended September 30, 2001. This
increase is principally attributable to new business from our Jacksonville,
Florida location, acquisitions of Devise Associates, Inc., Acentra Technologies,
Inc., and Turnkey Computer Systems, Inc. Services and consulting revenue
associated with these added businesses, which equaled $1.58 million for the
three months ended September 30, 2002. Procurement revenues
8
also increased by 46.45%, or $6.58 million, to $20.73 million for the three
months ended September 30, 2002. This increase in product procurement revenue is
also primarily attributable to new business from our Jacksonville, Florida
location, the acquisitions of Devise Associates, Inc., Acentra Technologies,
Inc., and Turnkey Computer Systems, Inc. Product procurement revenue associated
with these added businesses equaled to $6.86 million for the three months ended
September 30, 2002.
Geothermal Revenues of $37,003 for the three months ended September 30,
2002 are consistent with the revenues for comparable previous periods.
Gross Profit
Our aggregate gross profit for IT business increased by 31.96%, or
$766,572, to $3.16 million for the three months ended September 30, 2002. This
increase is mainly attributable to a 45.90% increase in our IT revenues.
Measured as a percentage of out total revenues for IT business, our overall
gross profit margin decreased to 12.48% of total revenues for the three months
ended September 30, 2002 from 13.79% for the three months ended September 30,
2001. This decrease is mainly due to lower gross profit margin from our services
and consulting revenues.
Gross profit for product sales increased by 47.02%, or $769,918, to
$2.41 million for the three months ended September 30, 2002 as compared with
$1.64 million for the three months ended September 30, 2001. This increase is
mainly attributable to a 46.45% increase in product revenue. Measured as a
percentage of procurement revenues, our gross profit margin attributable to
procurement revenues increased to 11.61% for the three months ended September
30, 2002 from 11.57% for the three months ended September 30, 2001. This
increase is mainly attributable to better sales activities during this period
and our ability to obtain better pricing from our distributors in some cases.
Gross profit for service and consulting decreased by 0.44%, or $3,346,
to $757,278 for the three months ended September 30, 2002 as compared with
$760,624 for the three months ended September 30, 2001. This decrease is result
of a lower effective billing rates due to lower utilization of our engineers.
Also, measured as a percentage of services and consulting revenues, our gross
margin attributable to services and consulting revenue decreased to 16.35% of
services and consulting revenue for the three months ended September 30, 2002
from 23.57% for the three months ended September 30, 2001. This decrease is
also due to lower utilization of engineers during this quarter.
The geothermal gross profit of $18,972 for the three months ended
September 30, 2002 is consistent with the gross profit for comparable previous
periods.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 46.91%, or
$967,799, to $3.03 million for the three months ended September 30, 2002 as
compared with $2.06 million for the three months ended September 30, 2001. This
increase is primarily a result of the following: 1) $150,000 increase in sales
department expenses due to additional sales personnel salaries, commissions,
recruiting, travel, telephone, and other related expenses, 2) $40,000 increase
due to
9
marketing related expenses, 3) $650,000 increase due to the addition of our New
York City and Jacksonville locations and the acquisitions of Acentra
Technologies, Inc. and Turnkey Computer Systems, Inc. and related expenses,
including sales and administrative personnel costs, rent, insurance,
depreciation, building maintenance, and 4) $87,000 due to a Sales and Use tax
payment including interest to the State of New York as a result of a sales and
use tax audit covering the last five years.
Interest expense
Interest expense for the three months ended September 30, 2002
decreased by 72.93%, or $55,057, to $20,431 for the three months ended September
30, 2002 as compared with $75,488 for the three months ended September 30, 2001.
This decrease is mainly attributable to lower interest rates, lower balance on
our line of credit, and improved accounts receivable collection performance.
e-Business Costs
e-Business costs for the three months ended September 30, 2002 was $0,
as compared with $123,941 for the three months ended September 30, 2001. As of
January 2002 we have discontinued our e-Business division, which was started in
January 2000. This cost mainly consisted a sales and consulting team of
approximately 8 employees, as well as training, certifying, marketing, and
advertising expenses.
Income Taxes
Income tax expense for the three months ended September 30, 2002 was
$9,870, as compared with $3,020 for the three months ended September 30, 2001.
Six months ended September 30, 2002 Compared to Six months ended September 30,
2001.
Total Revenues
Total revenues for the IT business which includes procurement services,
and service and consulting, increased by 34.66% or $12.79 million, to $49.68
million for the six months ended September 30, 2002, compared to $36.89 million
for the six months ended September 30, 2001. This increase is primarily
attributable to our winning new business with a school district in Jacksonville,
Florida, and the acquisitions of Devise Associates, Inc., Acentra Technologies,
Inc. and Turnkey Computer Systems, Inc. IT revenue associated with this added
business equaled $11.42 million for the six months ended September 30, 2002.
Services and consulting revenue increased by 58.32%, or $4.77 million, to $12.96
million for the six months ended September 30, 2002 compared to $8.19 million
for the six months ended September 30, 2001. This increase is attributable to an
increase in our manufacturers support services contracts revenues and new
business with a school district in Jacksonville, Florida, and acquisitions of
Devise Associates, Inc., Acentra Technologies, Inc. and Turnkey Computer
Systems, Inc. Manufacturers support services contracts revenue increased by
119.83%, or $3.80 million, to $6.98 million for the six months ended September
30, 2002 compared to $3.17 million for the six months ended September 30, 2001.
This increase in manufacturers support services contracts revenue is mainly
attributable to a $3.8 million sale to one customer. Services and consulting
revenue associated
10
with this added business and acquisitions equaled to almost $2.37 million for
six months ended September 30, 2002. Procurement revenues also increased by
27.91%, or $8.01 million, to $36.72 million for the six months ended September
30, 2002. This increase in product procurement revenue is also attributable to
new business from our Jacksonville, Florida location and the acquisitions of
Devise Associates, Inc., Acentra Technologies, Inc. and Turnkey Computer
Systems, Inc. Product procurement revenue associated with this added business
equaled to almost $9.16 million for the six months ended September 30, 2002.
Geothermal Revenues of $37,003 for the six months ended September 30,
2002 are consistent with the revenues for comparable previous periods.
Gross Profit
Our aggregate gross profit for IT business increased by 22.08%, or
$1.13 million, to $6.25 million for the six months ended September 30, 2002.
This increase is mainly attributable to a 34.66% increase in our IT revenues.
Measured as a percentage of our total revenues for IT business, our overall
gross profit margin decreased to 12.59% of total revenues for the six months
ended September 30, 2002 from 13.88% for the six months ended September 30,
2001. This decrease is mainly due to lower gross profit margin from our services
and consulting revenues.
Gross profit for product sales increased by 29.69%, or $990,475, to
$4.33 million for the six months ended September 30, 2002 as compared with $3.34
million for the six months ended September 30, 2001. This increase is mainly
attributable to a 27.91% increase in product revenue. Measured as a percentage
of procurement revenues, our gross profit margin attributable to procurement
revenues increased to 11.78% for the six months ended September 30, 2002 from
11.62% for the six months ended September 30, 2001. This increase is mainly
attributable to better sales activities during this period and our ability to
obtain better pricing from our distributors in some cases.
Gross profit for service and consulting increased by 7.87%, or
$140,494, to $1.93 million for the six months ended September 30, 2002 as
compared with $1.79 million for the six months ended September 30, 2001. This
increase is mainly attributable to an increase in the gross margin of
manufacturers support services contracts revenues. Manufacturers support
services contracts gross margin increased by 79.65%, or $542,343, to $1.22
million for the six months ended September 30, 2002 as compared with $680,919
for the six months ended September 30, 2001. This increase in manufacturers
support service contracts gross margin is mainly attributable to gross margin
of approximately $580,000 associated with a $3.8 million sale to one customer.
Without this sale gross profit for services and consulting decreased by 36.38%,
or $401,849, to $702,685 for the six months ended September 30, 2002 as
compared with $1.10 million for the six months ended September 30, 2001. This
decrease is the result of lower effective billing rates due to lower utilization
rates of our engineers during this period. Also, measured as a percentage of
services and consulting revenues, our gross margin attributable to services and
consulting revenue decreased to 14.86% of services and consulting revenue for
the six months ended September 30, 2002 from 21.81% for the six months ended
September 30, 2001. This decrease is also due to lower utilization rates of
engineers during this period.
11
The geothermal gross profit of $46,723 for the six months ended
September 30, 2002 is consistent with the gross profit for comparable previous
periods.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 42.37%, or
$1.79, to $6.00 million for the six months ended September 30, 2002 as compared
with $4.21 million for the three months ended September 30, 2001. This increase
is primarily a result of the following: 1) $600,000 increase in sales department
expenses due to additional sales personnel salaries, commissions, recruiting,
travel, telephone, and other related expenses, 2) $140,000 increase due to
marketing related expenses, 3) $800,000 increase due to the addition of our New
York City and Jacksonville locations and the acquisitions of Acentra
Technologies, Inc. and Turnkey Computer Systems, Inc. and related expenses,
including sales and administrative personnel costs, rent, insurance,
depreciation, building maintenance, 4) $60,000 increase due to a change in the
allowance for bad-debt account and 5) $87,000 due to Sales and Use tax payment
including interest to the State of New York as a result a of sales and use tax
audit covering the last five years.
Interest expense
Interest expense for the six months ended September 30, 2002 decreased
by 71.64%, or $120,179, to $47,567 the six months ended September 30, 2002 as
compared with $167,746 for the six months ended September 30, 2001. This
decrease is mainly attributable to lower interest rates, lower balance on our
line of credit, and improved accounts receivable collection performance.
e-Business Costs
e-Business costs for the six months ended September 30, 2002 was $0, as
compared with $357,357 for the six months ended September 30, 2001. As of
January 2002 we discontinued our e-Business division, which was started in
January 2000. This cost mainly included the building of a sales and consulting
team of approximately 8 employees, as well as training, certifying, marketing,
and advertising expenses.
Income Taxes
Income tax expense for the six months ended September 30, 2002 was
$9,870, as compared with $6,200 for the six months ended September 30, 2001.
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 2002 of $118,549 represented
a decrease of $1,434,117 from $1,552,666 at March 31, 2002. We are a net
borrower; consequently, we believe our cash and cash equivalents balance must be
viewed along with the available balance on our line of credit.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. On November 21, 2001, we entered into a
$10.0 million revolving credit facility
12
with Fleet Capital Corporation, formerly Summit Business Capital Corporation
("Fleet"). Interest on outstanding loans under our revolving credit facility
with Fleet is charged monthly at a fluctuating rate per annum equal to 0.25%
above the Prime Rate and, at our option, interest on up to 50% of the
outstanding loans may be charged at LIBOR plus 2.75%. Our Fleet revolving credit
facility is collateralized by a lien upon and security interest in substantially
all of our assets. As our current credit facilities with two of our primary
trade vendors, GE Access, and Ingram Micro, were also collateralized by
substantially all of our assets, we, Fleet, GE Access and Ingram Micro, have
entered into intercreditor agreements, which provide that as regards to these
vendors, our obligations to Fleet are accorded priority. On November 21, 2001,
we also entered into a Wholesale Financing Security Agreement with IBM. This
credit facility, which is collateralized by a $750,000 letter of credit from
Fleet in favor of IBM, affords us up to a like amount of credit to purchase IBM
products. On January 9, 2002, Fleet has also issued $250,000 letter of credit in
favor of Vandergrand Properties Co., L.P., and our landlord for New York City
office as a security deposit for the building lease. At September 30, 2002, we
had $2.69 million outstanding balance under the credit facility and the unused
line of credit available is $6.31 million with Fleet.
Our lending agreement with Fleet contains financial covenants that
require us to maintain a minimum leverage ratio, minimum debt service coverage
ratio, minimum tangible net worth, and prohibits quarterly losses. As of
September 30, 2002 the Company was in compliance with all of its covenants.
At September 30, 2002, our credit facilities with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data were as follows: 1) Credit Line
with GE Access was $4.50 million, no interest charged, and an outstanding
balance of $2.95 million. 2) Credit line with Ingram Micro was $1.75 million, at
an 18% APR interest rate and an outstanding balance of $1.45 million. 3) Credit
line with Tech Data was $2.5 million, no interest charged and an outstanding
balance of $1.26 million. Under these credit lines we are obligated to pay each
invoice within 30 days from the date of such invoice
Capital expenditures of $813,000 during the six months ended September
30, 2002 are as follows; 1) approximately $586,000 for the purchase of computer
hardware and software for our Network Operations Center to enhance our offerings
in Managed Services, 2) approximately $146,000 for the purchase of vehicle,
furniture and fixture, and computer hardware and software for internal use, 3)
approximately $59,000 for the purchase of computer equipment to upgrade our
innovation center, and 4) approximately $21,000 for the capital improvements for
the geothermal well. We anticipate an additional $200,000 of capital
expenditures to upgrade our network operation center, and to purchase equipment
for internal use for the fiscal year ending March 31, 2003. We anticipate our
new Network Operation Center to be in operation by end of December 2002.
Currently our recurring managed services revenues equal approximately $16,000
a month.
The Company has no arrangements or other relationships with
unconsolidated entities or other persons that are reasonably likely to
materially affect liquidity or the availability of or requirements for capital
resources.
We believe that our available funds, together with existing credit
facilities, will be adequate to satisfy our current and planned operations for
at least the next 12 months.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in trading market risk sensitive instruments and do
not purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We have issued no debt
instruments, entered into no forward or future contracts, purchased no options
and entered into no swaps. Our primary market risk exposures are those of
interest rate fluctuations. A change in interest rates would affect the rate at
which we could borrow funds under our revolving credit facility. Our average
balance on the line of credit for the last six months has been approximately
$1.45 million. Assuming no material increase or decrease in such balance, a one
percent change in the interest rate would change our interest expense by
approximately $14,500 annually.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, under the
supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K filed during the quarter ended March 31, 2002:
Form 8-K filed on August 26, 2002, under Item 2, disclosing the
acquisitions of Acentra Technologies, Inc. on August 12, 2002.
Form 8-K filed on September 13, 2002, under Item 2, disclosing the
acquisitions of Turnkey Computer Systems, Inc. on August 31, 2002.
Form 8-K filed on August 14, 2002, under Item 9, Regulation FD
Disclosure.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
EMTEC, INC.
By: /s/ JOHN P. HOWLETT
--------------------------------------------
John P. Howlett
Chairman, President, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
--------------------------------------------
Sam Bhatt
Vice President - Finance and Operations
(Principal Financial and
Accounting Officer)
Date: November 14, 2002
16
I, John P. Howlett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emtec, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date:
/s/ JOHN P. HOWLETT
------------------------------
John P. Howlett
Chairman, President, and Chief
Executive Officer
(Principal Executive Officer)
17
I, Sam Bhatt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emtec, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date:
/s/ SAM BHATT
---------------------------------------
Sam Bhatt
Vice President - Finance and Operations
(Principal Financial and
Accounting Officer)
18
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as...................................'SS'