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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
December 31, 2002
Commission file number: 0-32789
EMTEC, INC.
(Exact name of Registrant as specified in its 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 February 10, 2003 was
7,080,498.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2002
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
December 31, 2002 (Unaudited) and March 31, 2002.....................................................1-2
Consolidated Statements of Operations
for the Three and Nine months ended December 31, 2002 (Unaudited) and
2001 (Unaudited) ......................................................................................3
Consolidated Statements of Cash Flows
for the Nine months ended December 31, 2002 (Unaudited) and 2001 (Unaudited) ..........................4
Notes to Consolidated Financial Statements
(Unaudited) .........................................................................................5-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations .................................................................9-19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk .............................................20
Item 4 - Controls and Procedures.................................................................................21
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a vote by Securities Holders...................................................22
Item 6 - Exhibits and Reports on Form 8-K .......................................................................22
SIGNATURES & 302 Certifications...............................................................................23-25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2002
------------- ------------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 290,053 $ 1,552,666
Receivables:
Trade, net 14,806,400 6,288,425
Others 1,159,067 296,529
Inventories 1,607,669 1,089,950
Prepaid expenses 695,709 388,307
Deferred tax assets 26,491 26,491
----------- -----------
Total Current Assets 18,585,389 9,642,368
Property and equipment, net 1,268,963 703,940
Investment in geothermal power unit 575,866 581,612
Deferred tax assets 33,066 42,936
Other assets 421,256 417,617
----------- -----------
Total Assets $20,884,540 $11,388,473
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
1
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2002
----------- ----------
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 326,483 $ -
Due to related party - 19,000
Accounts payable 14,489,639 6,609,837
Customer deposits 190,000 245,387
Accrued liabilities 1,578,050 764,282
Deferred revenues 1,952,860 840,413
----------- -----------
Total Current Liabilities 18,537,032 8,478,919
Deferred revenue 767,626 799,472
Deferred tax liability 60,124 60,124
----------- -----------
Total Liabilities 19,364,782 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
Deficit ( 761,852) ( 231,652)
----------- -----------
Total Shareholders' Equity 1,519,758 2,049,958
----------- -----------
Total Liabilities and
Shareholders' Equity $20,884,540 $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 Nine Months Ended
December 31, December 31,
------------------------- ------------------------
2002 2001 2002 2001
-------- --------- -------- ---------
Revenues:
Procurement services $18,522,103 $14,255,967 $55,237,353 $42,959,628
Service and consulting 6,332,241 6,228,978 19,292,465 14,414,918
Geothermal 45,353 45,256 127,705 134,654
----------- ----------- ----------- -----------
Total Revenues 24,899,697 20,530,201 74,657,523 57,509,200
----------- ----------- ----------- -----------
Cost of Revenues:
Procurement services 16,681,947 12,783,001 49,070,806 38,150,746
Service and consulting 5,891,255 4,958,895 16,925,532 11,359,382
Geothermal 18,154 13,262 53,783 46,769
---------- ---------- ---------- ----------
Total Cost of Revenues 22,591,356 17,755,158 66,050,121 49,556,897
----------- ----------- ----------- -----------
Gross Profit:
Procurement services 1,840,156 1,472,966 6,166,547 4,808,882
Service and consulting 440,986 1,270,083 2,366,933 3,055,536
Geothermal 27,199 31,994 73,922 87,885
---------- ---------- ---------- ----------
Total Gross Profit 2,308,341 2,775,043 8,607,402 7,952,303
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and
administrative 3,016,008 2,564,068 9,020,806 6,781,684
Interest 59,359 36,347 106,926 204,093
E-Business costs - 145,248 - 502,605
---------- ---------- ---------- ----------
Total Operating Expenses 3,075,367 2,745,663 9,127,732 7,488,382
----------- ----------- ----------- -----------
Income (Loss) From Continuing
Operations Before Income Tax
Expense ( 767,026) 29,380 ( 520,330) 463,921
Income tax expense - - 9,870 6,200
----------- ----------- ----------- -----------
Net (Loss) Income $( 767,026) $ 29,380 $( 530,200) $ 457,721
=========== =========== =========== ===========
(Loss) Income Per Share From Continuing
Operations {Basic And Diluted} $ (0.11) $ .00 $ (0.07) $ .06
Net (Loss) Income Per Share {Basic
And Diluted} $ (0.11) $ .00 $ (0.07) $ .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 NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
December 31, December 31,
2002 2001
------------- --------------
Cash Flows From Operating Activities
Net (loss)income for the nine months $(530,200) $ 457,721
Adjustments to Reconcile Net Income To Net
Cash Provided By (Used In) Operating
Activities:
Depreciation and amortization 439,855 386,075
Deferred income tax 9,870 6,200
Unrealized loss (gain) on marketable
securities - 8,476
Changes In Operating Assets and Liabilities
Decrease in marketable securities - 288,256
(Increase) Decrease in receivables (9,380,513) 2,883,219
(Increase) Decrease in inventories (517,719) 245,787
(Increase) Decrease in prepaid expenses (307,402) 83,223
Increase in accounts payable 7,879,802 138,637
(Decrease) in customer deposits (55,387) (203,206)
Increase in accrued liabilities 813,768 172,104
Increase in deferred revenue 1,080,610 230,862
---------- ----------
Net Cash (Used In)Provided By
Operating Activities (567,316) 4,697,354
---------- ----------
Cash Flows From Investing Activities
Purchases of equipment (978,185) (99,211)
Additional security deposit - (20,000)
Additional investment in Geothermal Unit (20,956) -
(Purchase) Dispose of other asset (3,639) 2,364
---------- ----------
Net Cash Used In Investing Activities (1,002,780) (116,847)
---------- ----------
Cash Flows From Financing Activities
Net increase (decrease) in line of credit 326,483 (6,535,405)
(Decrease) in due to related parties (19,000) -
---------- ----------
Net Cash Provided By (Used In)
Financing Activities 307,483 (6,535,405)
---------- ----------
Net Decrease in Cash and Cash Equivalents (1,262,613) (1,954,898)
---------- ----------
Beginning Cash and Cash Equivalents 1,552,666 2,098,198
---------- ----------
Ending Cash and Cash Equivalents $ 290,053 $ 143,300
========== ==========
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 nine months
ended December 31, 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 nine months ended December 31, 2002:
Options granted 80,000
Options exercised
Options forfeited or expired (83,900)
--------
Options outstanding - December 31, 2002 377,428
========
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 worth ratio, and a minimum result of operations. As of December 31,
2002, the Company
5
was not in compliance with any of its financial covenants. The Company has two
letters of credit totaling $1 million assigned as security deposits and issued
against its line of credit. At December 31, 2002, the Company had a $326,483
outstanding balance under the credit facility.
Fleet is currently reviewing the Company's financial performance for the nine
months ended December 31, 2002. The Company cannot state with any certainty the
terms, if any, upon which Fleet will waive such non-compliance, the terms, if
any, upon which the credit facility will be continued or the duration of the
facility. The Company's non-compliance could result in a demand for immediate
repayment or revised terms that could materially limit our financial and
operating flexibility.
4. Trade Receivables
The Company provides an allowance for losses on trade receivables based on a
review of the current status of existing receivables and management's evaluation
of periodic aging of the accounts. Trade accounts receivable consists of the
following:
December 31, 2002 March 31, 2002
----------------- --------------
Trade Receivable $14,999,675 $6,441,028
Allowance for doubtful accounts (193,275) (152,603)
----------- ----------
Trade Receivable, net $14,806,400 $6,288,425
----------- ----------
5. Inventory
Inventories are stated at lower of cost (first-in, first-out) or market. Cost is
based on standard costs generated principally by the most recent purchase price.
The Company provides an inventory reserve for obsolescence and deterioration
based on management's review of product sales. Inventory is recorded on the
balance sheet net of allowances for inventory valuation of $482,000 and $452,000
at December 31, 2002 and March 31, 2002, respectively.
6. Acquisitions
On January 9, 2002, the Company acquired substantially all of the assets of
Devise Associates, Inc., an information technology consulting and managed
services organization located in New York City. The Company paid an aggregate
price of $355,051 in cash.
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 an earning share
derived from the customer contracts transferred from Turnkey to Emtec.
6
7. Segment Information
Summarized financial information relating to the Company's operating segments
are as follows:
For the three months ended December 31: 2002 2001
External Sales
Mt. Laurel, NJ $ 1,278,036 $ 2,485,358
Mt. Laurel, Government 3,161,905 --
Cranford, NJ 4,639,065 9,136,015
Cranford, Managed Building Svc 483,032 --
New York City, NY 1,207,628 --
Atlanta, GA 2,921,978 6,706,604
Norwalk, CT 648,083 517,154
Education-Atlanta 8,108,791 1,639,814
Education-Jacksonville 2,405,826 --
Geothermal 45,353 45,256
------------ ------------
Total External Sales $ 24,899,697 $ 20,530,201
============ ============
Operating Profit/(Loss)
Mt. Laurel, NJ $ (275,135) $ (257,481)
Mt. Laurel, Government (303,356) --
Cranford, NJ (93,932) 207,279
Cranford, Managed Building Svc 43,572 --
New York City, NY (630,677) --
Atlanta, GA (209,316) 142,785
Norwalk, CT (36,718) (94,143)
Education-Atlanta 670,699 154,104
Education-Jacksonville 51,775 --
e-Business -- (145,248)
Geothermal 16,062 22,084
------------ ------------
Income (Loss) from Continuing
Operations before Income Tax Expense $ (767,026) $ 29,380
============ ============
For the nine months ended December 31: 2002 2001
External Sales
Mt. Laurel, NJ $ 5,077,804 $ 8,096,309
Mt. Laurel, Government 7,179,900 --
Cranford, NJ 20,537,392 23,150,217
Cranford, Managed Building Svc 605,487 --
New York City, NY 3,108,616 --
Atlanta, GA 12,189,413 14,703,842
Norwalk, CT 1,966,477 2,016,527
Education-Atlanta 16,059,247 9,407,651
Education-Jacksonville 7,805,482 --
Geothermal 127,705 134,654
------------ ------------
Total External Sales $ 74,657,523 $ 57,509,200
============ ============
7
Operating Profit/(Loss)
Mt. Laurel, NJ $ (657,299) $ (497,499)
Mt. Laurel, Government (53,380) --
Cranford, NJ 3,216 797,019
Cranford, Managed Building Svc 48,833 --
New York City, NY (1,206,858) --
Atlanta, GA (412,026) (141,438)
Norwalk, CT (187,202) (273,198)
Education-Atlanta 1,566,897 1,027,930
Education-Jacksonville 335,137 --
e-Business -- (502,605)
Geothermal 42,352 53,712
------------ ------------
Income (Loss) from Continuing
Operations before Income Tax Expense $ (520,330) $ 463,921
============ ============
8
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/sale 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, their respective age,
and management's evaluation of periodic aging of the accounts.
9
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 March 31,
2002, the Company reported 90% valuation allowance on deferred tax asset. For
the nine months ended December 31, 2002 a 100% valuation allowance has been
recorded to offset the value of income tax benefits from the current operating
loss.
Results of Operations
Three months ended December 31, 2002 Compared to Three months ended December 31,
2001.
Total Revenues
Total revenues for the IT business which includes procurement services,
and services and consulting, increased by 21.33% or $4.37 million, to $24.85
million for the three months ended December 31, 2002, compared to $20.48 million
for the three months ended December 31, 2001. This increase is primarily
attributable to our new business, which commenced in March 2002, with a school
district in Jacksonville, Florida, and our acquisitions of Devise Associates,
Inc. in January 2002, Acentra Technologies, Inc. in August 2002 and Turnkey
Computer Systems, Inc. in August 2002, IT revenue associated with this added
business equaled $7.26 million for the three months ended December 31, 2002.
Excluding the new business attributable to these added businesses, total
revenues for the IT business decreased by 14.11%, or $2.89 million for the three
months ended December 31, 2002. This decrease is primarily due to a slow-down in
the economy, especially in the IT industry.
10
Services and consulting revenue increased by 1.66%, or $103,263, to
$6.33 million for the three months ended December 31, 2002, compared to $6.23
million for the three months ended December 31, 2001. This increase is the net
result of (a) additional revenues of approximately $2.19 in the three months
ended December 31, 2002 from the new school district business from the
Jacksonville, Florida location and from the acquired businesses mentioned above
and (b) reduced revenues of $2.09 million for the same period from our existing
businesses. This decrease in services and consulting revenue is also due to a
slow-down in the economy and less demands for the IT services we offer.
Procurement revenues increased by 29.93%, or $4.27 million, to $18.52
million for the three months ended December 31, 2002. This increase in product
procurement revenue is also primarily 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 these added businesses equaled $5.06 million
for the three months ended December 31, 2002. Excluding the business
attributable to these added businesses, procurement revenue decreased by 5.57%,
or $793,864 for the three months ended December 31, 2002. This decrease is
primarily due to a slow-down in the economy, especially in the IT industry.
Geothermal Revenues of $45,353 for the three months ended December 31,
2002 are consistent with the revenues for comparable previous periods.
Gross Profit
Our aggregate gross profit for the IT business decreased by 16.84%, or
$461,907, to $2.28 million for the three months ended December 31, 2002,
compared to $2.74 million for the three months ended December 31, 2001. Measured
as a percentage of our total revenues for the IT business, our overall gross
profit margin decreased to 9.18% of total revenues for the three months ended
December 31, 2002 from 13.39% for the three months ended December 31, 2001. This
decrease is mainly due to a lower gross profit margin from our services and
consulting revenues.
Gross profit for service and consulting decreased by 65.28%, or
$829,097, to $440,986 for the three months ended December 31, 2002 as compared
with $1.27 million for the three months ended December 31, 2001. This decrease
is the result of lower effective billing rates (total revenue generated divided
by total billable hours available during the period) due to lower utilization
rates (billable hours divided by paid hours) of our engineers. Also, measured as
a percentage of services and consulting revenues, our gross margin attributable
to services and consulting revenue decreased to 6.96% of services and consulting
revenue for the three months ended December 31, 2002, from 20.39% for the three
months ended December 31, 2001. This decrease is also due to lower effective
billing rates and utilization rates of engineers during this quarter.
Gross profit for product sales increased by 24.93%, or $367,190 to
$1.84 million for the three months ended December 31, 2002, as compared with
$1.47 million for the three months ended December 31, 2001. This increase is
mainly attributable to a 29.93% increase in product revenue. Measured as a
percentage of procurement revenues, our gross profit margin attributable to
procurement revenues decreased to 9.93% for the three months ended December 31,
2002,
11
from 10.33% for the three months ended December 31, 2001. This decrease is
principally due to the competition and the slow-down in the economy.
The geothermal gross profit of $27,199 for the three months ended
December 31, 2002 is consistent with the gross profit for comparable previous
periods.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 17.63%, or
$451,940, to $3.02 million for the three months ended December 31, 2002,
compared with $2.56 million for the three months ended December 31, 2001. This
increase is primarily due to the sales, general and administrative expenses
associated with new business from our Jacksonville, Florida location and the
acquisitions of Devise Associates, Inc., Acentra Technologies, Inc., and Turnkey
Computer Systems, Inc. Sales, general and administrative expenses associated
with these added businesses equaled $1.06 million for the three months ended
December 31, 2002. Measured as a percentage of our total revenues, our sales,
general and administrative expense decreased to 12.11% of total revenues for the
three months ended December 31, 2002, from 12.49% for the three months ended
December 31, 2001. This decrease is mainly due to our continued efforts to
streamline many of our sales and operational functions.
Interest expense
Interest expense for the three months ended December 31, 2002 increased
by 63.31%, or $23,012, to $59,359 for the three months ended December 31, 2002,
as compared with $36,347 for the three months ended December 31, 2001. This
increase is mainly due to an increase in day's sales outstanding compared with
the prior period and pre-payment terms with vendors, such as IBM and Dell.
e-Business Costs
e-Business costs for the three months ended December 31, 2002 was $0,
as compared with $145,248 for the three months ended December 31, 2001. As of
January 2002 we discontinued our e-Business division, which was started in
January 2000. That cost had mainly consisted of costs associated with
maintaining a sales and consulting team of approximately 8 employees and
training, certifying, marketing, and advertising expenses.
Nine months ended December 31, 2002 Compared to Nine months ended December 31,
2001.
Total Revenues
Total revenues for the IT business which includes procurement services,
and service and consulting, increased by 29.90% or $17.16 million, to $74.53
million for the nine months ended December 31, 2002, compared to $57.37 million
for the nine months ended December 31, 2001. This increase is primarily
attributable to our new business, which commenced in March 2002,
12
with a school district in Jacksonville, Florida, and our acquisitions of Devise
Associates, Inc. in January 2002, Acentra Technologies, Inc. in August 2002 and
Turnkey Computer Systems, Inc. in August 2002 as well. IT revenue associated
with this added business equaled $18.70 million for the nine months ended
December 31, 2002.
Services and consulting revenue increased by 33.84%, or $4.88 million,
to $19.29 million for the nine months ended December 31, 2002 compared to $14.41
million for the nine months ended December 31, 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
from the acquired businesses mentioned above. Manufacturers support services
contracts revenue increased by 47.10%, or $3.27 million, to $10.20 million for
the nine months ended December 31, 2002 compared to $6.93 million for the nine
months ended December 31, 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 with this added business and
acquisitions equaled to $4.59 million for the nine months ended December 31,
2002. Without these acquisitions, services and consulting revenue would only be
increased by 2.01%, or $290,000 for the nine months ended December 31, 2002.
Procurement revenues also increased by 28.58%, or $12.28 million, to
$55.23 million for the nine months ended December 31, 2002. This increase is the
net result of the additional revenues of Jacksonville, Florida location and the
acquisitions of Devise Associates, Inc., Acentra Technologies, Inc. and Turnkey
Computer Systems, Inc. of approximately $17.19 recorded in the nine months ended
December 31, 2002 and a reduction of revenues from the existing business of
$4.91 million for the same period. This reduction of revenues from the existing
business is primarily due to a slow-down in the economy, especially in the IT
industry.
Geothermal Revenues of $127,705 for the nine months ended December 31,
2002 are consistent with the revenues for comparable previous periods.
Gross Profit
Our aggregate gross profit for IT business increased by 8.51%, or
$669,062, to $8.53 million for the nine months ended December 31, 2002. This
increase is mainly attributable to a 29.90% increase in our IT revenues.
Measured as a percentage of our total revenues for IT business, our overall
gross profit margin decreased to 11.45% of total revenues for the nine months
ended December 31, 2002 from 13.71% for the nine months ended December 31, 2001.
This decrease is mainly due to lower gross profit margin from our services and
consulting revenues.
Gross profit for product sales increased by 28.23%, or $1.36 million,
to $6.17 million for the nine months ended December 31, 2002 as compared with
$4.81 million for the nine months ended December 31, 2001. This increase is
mainly attributable to a 28.58% increase in product revenue. Measured as a
percentage of procurement revenues, our gross profit margin attributable to
procurement revenue is consistent with comparable previous period.
Gross profit for service and consulting decreased by 22.54%, or
$688,603 , to $2.37 million for the nine months ended December 31, 2002 as
compared with $3.06 million for the nine months ended December 31, 2001. This
decrease is the result of lower effective billing rates
13
due to poor 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 12.27% of services
and consulting revenue for the nine months ended December 31, 2002 from 21.20%
for the nine months ended December 31, 2001. This decrease is also due to lower
utilization rates of engineers during this period.
The geothermal gross profit of $73,922 for the nine months ended
December 31, 2002 is consistent with the gross profit for comparable previous
periods.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 33.02%, or
$2.24, to $9.02 million for the nine months ended December 31, 2002 as compared
with $6.78 million for the nine months ended December 31, 2001. This increase is
primarily a result of the following: 1) $2.24 million increase due 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. This includes expenses such as sales and administrative personnel
costs, sales commissions, benefit expense, rent, insurance, depreciation,
building maintenance, and other fixed costs, 2) $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 nine months ended December 31, 2002 decreased
by 47.61%, or $97,167, to $106,926 the nine months ended December 31, 2002 as
compared with $204,093 for the nine months ended December 31, 2001. This
decrease is mainly attributable to lower interest rates, lower balance on our
line of credit, and improved accounts receivable collection performance during
the period.
e-Business Costs
e-Business costs for the nine months ended December 31, 2002 was $0, as
compared with $502,605 for the nine months ended December 31, 2001. As of
January 2002 we discontinued our e-Business division, which was started in
January 2000. This cost had mainly consisted of costs associated with
maintaining 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 nine months ended December 31, 2002 was
$9,870, as compared with $6,200 for the nine months ended December 31, 2001.
14
Factors That May Affect Future Results
Our future operating results may be affected by a number of factors
including uncertainties relative to national economic conditions, especially as
they affect interest rates, business insurance industry factors, our ability to
successfully increase business, and effectively manage expense margins.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. We are currently in default under our
credit facility, which could result in a demand for immediate repayment. Revised
terms of our indebtedness could materially limit our financial and operating
flexibility.
We must continue to effectively manage expenses in relation to revenues
by directing new business development towards markets that complement or improve
our existing service lines. Management must also continue to emphasize operating
efficiencies through cost containment strategies, reengineering efforts, and
improved service delivery techniques. The most significant cost relating to the
services component of our business is personnel expense, which consists of
salaries, benefits, and payroll related expenses. Thus, the financial
performance of our service business is based primarily upon billing margins
(billable hourly rates less the costs to us of service personnel on an hourly
basis) and utilization rates (billable hours divided by paid hours). The future
success of the services component of our business will depend in large part upon
our ability to maintain high utilization rates at profitable billing margins.
The competition for quality technical personnel has continued to intensify,
resulting in increased personnel costs. This intense competition has caused our
billing margins to be lower than they might otherwise have been. Our utilization
rates for service personnel likely will also be adversely affected during
periods of rapid and concentrated hiring.
Emtec is a system integrator focused on providing technology
solutions that enables our customers to effectively use and manage their data to
grow their business. Our areas of specialization in IT services include remote
network monitoring, help desk, network design, enterprise backup and storage
consolidation, and network security. While we have offered IT services to our
customers since 1983, our major emphasis on IT consulting and services began in
1995 and we started focusing on our new managed services and network security
during the fiscal year 2002. We have invested approximately $710,000 for the
purchase of computer hardware, software, and consulting services for our Network
Operations Center to enhance our offerings in Managed Services. We anticipate
our new network operations center to be in operation and fully functional by end
of February 2003. The grand opening event for our customers to visit the network
operation center in New York City Office is scheduled for February 21, 2003.
Currently our recurring managed services revenues equal approximately $16,000 a
month. We have limited experience in developing, marketing, or providing these
services. We cannot assure that we will be able to successfully market such
services to either new or existing customers, that our services will achieve
market acceptance, or that we will be able to effectively hire, integrate, and
manage additional technical personnel to enable us to perform these services to
our customers' expectations This industry has been characterized by rapid
technological advances that have resulted in frequent introductions of new
products,
15
product enhancements and aggressive pricing practices, which also impacts
pricing of service activities. Our operating results could be adversely affected
by industry-wide pricing pressures, the ability to recruit, train and retain
personnel integral to our operations and the presence of competitors with
greater financial and other resources. Also, our operating results could be
adversely impacted should our Company be unable to effectively achieve the
revenue growth necessary to provide profitable operating margins in various
operations. Our plan for growth includes marketing efforts, acquisitions that
expand market share. There can be no assurances these efforts will be
successful, or if successful the timing thereof.
16
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2002 of $290,053 represented
a decrease of $1,262,613 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 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 from IBM Global Financing. On January
9, 2002, Fleet also issued a $250,000 letter of credit in favor of Vandergrand
Properties Co., L.P., our landlord for our New York City office, as a security
deposit for the building lease. At December 31, 2002, we had a $326,483
outstanding loan balance under the credit facility.
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
December 31, 2002 the Company was not in compliance with any of its covenants.
The following table quantifies the Company's non-compliance with its financial
covenants with Fleet.
- ----------------------------------------------------------------------------------------------------
Covenants Required Actual As of 12/31/02
- ----------------------------------------------------------------------------------------------------
Leverage Ratio Not to exceed 11.0 : 1.0 14.33 : 1.0
- ----------------------------------------------------------------------------------------------------
Debt Service Coverage Ratio Not to be less than 1.20 : 1.0 (4.27) : 1.0
- ----------------------------------------------------------------------------------------------------
Tangible Net Worth Not to be less than $1,842,000 $1,350,888
- ----------------------------------------------------------------------------------------------------
Prohibition on Losses No Quarterly Losses Allowed Loss ($767,026)
- ----------------------------------------------------------------------------------------------------
Fleet is currently reviewing our financial performance for the nine
months ended December 31, 2002. We cannot state with any certainty upon what
terms, if any, that Fleet will
17
waive our non-compliance, upon what terms, if any, that the credit facility will
be continued and if it is continued, its duration. Our non-compliance could
result in a demand for immediate repayment or the revised terms of the facility
that could materially limit our financial and operating flexibility. If Fleet
does not waive our non-compliance and demand for immediate repayment, we will be
forced to find a substitute lender. We cannot state with certainty how
successful we will be in finding a substitute lender.
At December 31, 2002, our credit facilities with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data were as follows: 1) Our credit
Line with GE Access was $7.50 million, no interest charged, with an outstanding
principal balance of $6.11 million. 2) Our credit line with Ingram Micro was
$4.0 million, at an 18% APR interest rate, with an outstanding principal balance
of $3.72 million. 3) Our credit line with Tech Data was $2.5 million, no
interest charged, with an outstanding balance of $2.04 million. Under these
credit lines, we are obligated to pay each invoice within 30 days from the date
of such invoice
Our capital expenditures of approximately $1 million during the nine
months ended December 31, 2002 are as follows; 1) approximately $710,000 for the
purchase of computer hardware, software, and consulting services for our Network
Operations Center to enhance our offerings in Managed Services, 2) approximately
$210,000 for the purchase of vehicles, furniture and fixtures, and computer
hardware and software for internal use mainly due to the acquisitions of Acentra
Technologies, Inc. and Turnkey Computer Systems, Inc. 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 $100,000 in 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 will be in
operation and fully functional by the end of February 2003. The grand opening
event for our customers to visit the network operation center in New York City
Office is scheduled for February 21, 2003..
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 cannot state with any certainty that our available funds, will be
adequate to satisfy our current and planned operations for at least the next 12
months.
Recent Accounting Pronouncement
In June 2001 the FASB issued SFAS No. 143 "Accounting for Asset
Retirement obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company does not believe the adoption of SFAS
143 will have any material impact upon the Company's financial statements.
18
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of
SFAS 121 for (i) recognition/measurement of impairment of long-lived assets to
be held and used, and (ii) measurement of long-lived assists to be disposed of
by sale. SFAS 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board's No. 30 ("APB 30"), "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
segments of a business to be disposed of, but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company adopted the provisions of SFAS 144
effective April 1, 2002. The adoption of this standard did not have any impact
on the Company's financial statements.
In April 2002, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This Statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirement." This Statement also rescinds FASB
Statement No. 44 "Accounting for Intangible Assets for Motor Carriers." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions; and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions. SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption
of this Statement is not expected to have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
included in restructurings. This Statement eliminates the definition and
requirement for recognition of exit costs as defined in EITF Issue 94-3, and
requires that liabilities for exit activities be recognized when incurred
instead of at the exit activity commitment date. This Statement is effective for
exit or disposal activities initiated after December 31, 2002. The adoption of
this Statement is not expected to have a material impact on the Company's
financial position or results of operations.
19
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 nine months has been approximately
$2.10 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 $21,000 annually.
20
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.
21
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote by Securities Holders
The Annual Meeting of Shareholders of the Company (the "Meeting")
was held on October 30, 2002. There were present at the Meeting in
person or by proxy shareholders holding an aggregate of 5,867,340 shares of
Common Stock of a total number of 7,080,498 shares of Common Stock issued,
outstanding and entitled to vote at the Meeting. The results of the vote taken
at the Meeting with respect to the nominee for director were as follows:
- ---------------------------------------------------------------------------------------------
Nominee For Withhold
- ---------------------------------------------------------------------------------------------
George F. Raymond (one year term) 5,855,540 11,800
- ---------------------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K filed during the quarter ended December 31, 2002:
Form 8-K/A filed on December 12, 2002, required by Item 7(b) of the
Form 8-K filed on August 26, 2002 and September 13, 2002 disclosing the
acquisitions of Acentra Technologies, Inc. on August 12, 2002 and Turnkey
Computer Systems, Inc. on August 31, 2002. The Form 8-K/A included , under Item
7, audited Financial Statements of Business Acquired, and Pro Forma Financial
Information.
Form 8-K filed on November 14, 2002, under Item 9, Regulation FD
Disclosure.
22
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
(Principal Financial and
Accounting Officer)
Date: February 14, 2003
23
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: February 14, 2003
/s/ JOHN P. HOWLETT
------------------------------
John P. Howlett
Chairman, President, and Chief
Executive Officer
(Principal Executive Officer)
24
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: February 14, 2003
/s/ SAM BHAT
---------------------------------------
Sam Bhatt
Vice President - Finance and Operations
(Principal Financial and
Accounting Officer)
25