UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2004
Commission file number: 0-32789
EMTEC, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0273300
(State of incorporation or organization) (I.R.S. Employer Identification No.)
572 Whitehead Road, Bldg.# 1
Trenton, New Jersey 08619
(Address of principal executive offices, including zip code)
(609) 528-8500
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). ( ) Yes (X) No
As of July 31, 2004, there were outstanding 7,380,498 shares of the
registrant's common stock.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 2004 (Unaudited) and March 31, 2004.....................................1-2
Consolidated Statements of Operations
Three months ended June 30, 2004 (Unaudited) and 2003 (Unaudited) .................3
Consolidated Statements of Cash Flows
Three months ended June 30, 2004 (Unaudited) and 2003 (Unaudited) .................4
Notes to Consolidated Financial Statements
Three months ended June 30, 2004 and 2003 (Unaudited) ...........................5-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations .............................................9-18
Item 3 - Quantitative and Qualitative Information About Market Risk .........................19
Item 4 - Controls and Procedures ............................................................20
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ...................................................21
SIGNATURES .................................................................................22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2004 2004
-------- ---------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 802,549 $ 4,792
Receivables:
Trade, net 18,789,437 15,206,972
Others 485,378 289,445
Inventories 1,797,479 1,599,166
Prepaid expenses 380,690 396,313
Deferred tax assets 186,368 186,368
---------- ----------
Total Current Assets 22,441,901 17,683,056
Property and equipment, net 337,339 387,073
Investment in geothermal power unit, net 562,909 569,960
Deferred tax assets 103,813 103,813
Intangible assets 108,135 118,198
Other assets 37,065 46,512
---------- ----------
Total Assets $23,591,162 $18,908,612
========== ==========
1
The accompanying notes are integral parts of these consolidated financial
statements.
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2004 2004
-------- --------
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 2,685,860 $ 2,308,416
Accounts payable 12,851,227 9,295,882
Customer deposits 391,030 332,667
Income tax payable 344,758 279,397
Accrued liabilities 2,353,434 2,529,885
Deferred revenues 1,063,355 853,393
---------- ----------
Total Current Liabilities 19,689,664 15,599,640
Deferred revenue 703,960 714,573
Deferred tax liability 25,924 25,924
---------- ----------
Total Liabilities 20,419,548 16,340,137
---------- ----------
Shareholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized; 7,380,498 shares issued
and outstanding 73,805 73,805
Additional paid-in capital 2,294,805 2,294,805
Retained earnings 803,004 199,865
---------- ----------
Total Shareholders' Equity 3,171,614 2,568,475
---------- ----------
Total Liabilities and
Shareholders' Equity $ 23,591,162 $ 18,908,612
========== ==========
2
The accompanying notes are integral parts of these consolidated financial
statements.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended:
-------------------------
June 30, June 30,
2004 2003
-------- ----------
Revenues:
Procurement services $ 24,760,466 $ 23,730,729
Service and consulting 3,803,741 4,702,026
Geothermal 42,628 47,585
---------- ----------
Total Revenues 28,606,835 28,480,340
---------- ----------
Cost of Revenues:
Procurement services 21,968,266 21,691,493
Service and consulting 2,653,471 3,067,780
Geothermal 17,785 17,484
---------- ----------
Total Cost of Revenues 24,639,522 24,776,757
---------- ----------
Gross Profit:
Procurement services 2,792,200 2,039,236
Service and consulting 1,150,270 1,634,246
Geothermal 24,843 30,101
---------- ----------
Total Gross Profit 3,967,313 3,703,583
---------- ----------
Operating Expenses:
Selling, general and
administrative 2,980,344 3,205,245
Interest 38,830 99,166
--------- ---------
Total Operating Expenses 3,019,174 3,304,411
---------- ----------
Income Before Income Tax Expense 948,139 399,172
Income tax expense 345,000 41,281
---------- ---------
Net Income $ 603,139 $ 357,891
========== =========
Net Income Per Share - Basic and Diluted $ 0.08 $ 0.05
Weighted Average Number Of Shares
Outstanding {Basic} 7,380,498 7,080,498
Weighted Average Number Of Shares
Outstanding {Diluted} 7,538,255 7,396,983
3
The accompanying notes are integral parts of these consolidated financial
statements.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended:
----------------------
June 30, June 30,
2004 2003
----------- ----------
Cash Flows From Operating Activities
Net income for the three months $ 603,139 $ 357,891
Adjustments to Reconcile Net Income To Net
Cash Used In Operating Activities
Depreciation and amortization 97,660 192,448
Deferred income tax - 47,901
Changes In Operating Assets and Liabilities
Increase in receivables ( 3,778,398) ( 2,664,794)
Increase in inventories ( 198,313) ( 72,627)
Decrease (Increase) in prepaid expenses 15,623 ( 152,349)
Decrease in other assets 9,448 413
Increase in accounts payable 3,555,345 2,130,810
Increase (Decrease) in customer deposits 58,363 ( 298,127)
Increase in income tax payable 65,361 -
Decrease in accrued liabilities ( 176,451) ( 41,449)
Increase (Decrease) in deferred revenue 199,349 ( 49,415)
---------- ----------
Net Cash Provided By (Used In)
Operating Activities 451,126 ( 549,298)
Cash Flows From Investing Activities
Purchases of equipment ( 30,813) ( 37,426)
Cash Flows From Financing Activities
Net increase (decrease) in line of credit 377,444 ( 155,045)
---------- -----------
Net Increase(Decrease)
in Cash and Cash Equivalents 797,757 ( 741,769)
Beginning Cash and Cash Equivalents 4,792 1,792,101
--------- ---------
Ending Cash and Cash Equivalents $ 802,549 $ 1,050,332
========= =========
4
The accompanying notes are integral parts of these consolidated financial
statements.
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(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 for the year ended March 31,
2004.
2. Stock-Based Compensation
The Company did not change to the fair value based method of accounting
for stock-based employees' compensation. Accordingly, the adoption of SFAS No.
148 did not affect the Company's financial condition or results of operations.
However, SFAS No. 148 requires that information be provided as if the Company
had accounted for employee stock options under the fair value method of this
statement, including disclosing pro forma information regarding net income
(loss) and earnings (loss) per share. The Company accounts for stock-based
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," as permitted by SFAS No. 123. Compensation expense for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount the employee must pay
to acquire the stock. No compensation cost has been recognized for any option
grants in the accompanying consolidated statements of operations since the price
of the options was set at the quoted market price of Company stock at dates of
grant. The weighted average fair value of all of the employee options was
estimated on the date of grant using the Black-Scholes model. The Company did
not make any stock option grants during the three months ended June 30, 2004 and
2003. Therefore, had the Company applied the fair value recognition provisions
of SFAS No. 123 to stock-based compensation, the Company's net income (loss) and
basic and diluted earnings (loss) per share would have been the same as reported
amounts as follows:
Three Months Ended
June 30,
Pro Forma: ----------------------
2004 2003
---- ----
Net Income $603,139 $357,891
Net Income Per Share - Basic and Diluted $ .08 $ .05
-------- --------
5
Option activity is summarized in the following table:
Options outstanding - April 1, 2004 415,228
Activity for the three months ended June 30, 2004:
Options granted -
Options exercised -
Options forfeited or expired -
Options outstanding - June 30, 2004 415,228
=======
3. Financing Arrangements
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 was charged monthly at a fluctuating rate
per annum equal to 0.25% above the prime rate and, at the Company's 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. On November 21, 2001, the Company 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 the Company up to a like amount of credit to purchase products floored
by IBM Global Financing. On January 9, 2002, Fleet issued a $250,000 letter of
credit in favor of the Company's landlord for the Company's New York City
office, as a security deposit for the building lease. On July 1, 2003, Fleet
also issued a $250,000 letter of credit in favor of Selective Insurance
Corporation, as collateral for the performance bond issued to The City of
Philadelphia, one of the Company's customers. The maximum credit facility is
reduced by the outstanding letters of credit.
On October 17, 2003, the Company and Fleet executed an amendment to
loan and security agreement under which the Company may borrow on 80% of its
eligible trade receivables up to $10 million through November 20, 2004. Interest
on outstanding loans was charged monthly at a fluctuating rate per annum equal
to 2.00% above the prime rate. The lending agreement contains financial
covenants that require the Company to maintain a maximum leverage ratio, a
minimum debt ratio, and a minimum EBITDA (earnings before interest, taxes,
depreciation and amortization expense).
On April 16, 2004, the Company and Fleet executed another amendment to
the loan and security agreement which permits the Company
6
to obtain up to a $1.0 million in surety bonding capacity from an insurance
company. This amendment reduced the interest rate from 2.00% above the prime
rate to 1.00% above the prime rate.
As of June 30, 2004, the Company was in compliance with all its
financial covenants and had a $2,685,860 outstanding balance under the credit
facility and an unused availability of $6,064,140.
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:
----------------------------------------------------------------------------------------------------------------------
June 30, 2004 March 31, 2004
----------------------------------------------------------------------------------------------------------------------
Trade Receivable $ 19,148,833 $15,570,374
----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts (359,396) (363,402)
--------- ---------
----------------------------------------------------------------------------------------------------------------------
Trade Receivable, net $ 18,789,437 $15,206,972
------------ -----------
----------------------------------------------------------------------------------------------------------------------
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
$712,625 and $722,551 at June 30, 2004 and March 31, 2004, respectively.
6. Major Customers
Three major customers accounted for approximated 65%, and 67% of the
Company's net sales in the quarter ended June 30, 2004 and 2003, respectively.
While the Company believes its relationship with these customers will
continue, there can be no assurance that sales to these customers will continue
at all or at the same level.
7. Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,". The
Company's business activities are
7
considered to be in two business segments, our Information Technology Division
and our Geothermal Division.
Summarized financial information relating to the Company's operating
segments are as follows:
For the three months ended June 30: 2004 2003
Revenues
--------
Information Technology $28,564,207 $28,432,755
Geothermal 42,628 47,585
----------- -----------
Total Revenues $28,606,835 $28,480,340
-------------- =========== ===========
Operating Profit/(Loss)
----------------------
Information Technology $ 935,185 $ 382,149
Geothermal 12,954 17,023
----------- -----------
Net Segment Operating
Income/(Loss) $ 948,139 $ 399,172
Income Tax Expense 345,000 41,281
----------- -----------
Net Income $ 603,139 $ 357,891
=========== ============
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.
Critical Accounting Policies
Emtec's financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. The methods,
estimates, and judgments we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements. The Securities and Exchange Commission has defined critical
accounting policies as policies that involve critical accounting estimates that
require (i) management to make assumptions that are highly uncertain at the time
the estimate is made, and (ii) different estimates that could have been
reasonably used for the current period, or changes in the estimates that are
reasonably likely to occur from period to period, which would have a material
impact on the presentation of our financial condition, changes in financial
condition or in result of operations. Based on this definition, our most
critical policies include: revenue recognition, allowance for doubtful accounts,
inventory valuation reserve, the assessment of recoverability of long-lived
assets, the assessment of recoverability of goodwill and intangible assets, and
valuation of deferred tax assets.
o Revenue Recognition
We recognize 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 us 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. 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 on their contract sale date. These
contracts contain cancellation privileges that allow our customer to terminate a
contract with 90 days written notice. In this event, the customer is entitled to
a pro-rated refund based on the remaining term of the contract and we would owe
the manufacturer a pro-rated refund of the cost of the contract. However, we
have experienced no customer cancellations of any significance during our most
recent 3-year history and do not expect cancellations of any significance in the
future. We believe that net revenue reporting for manufacturer support service
contracts is more appropriate.
o Trade Receivables
We maintain allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We base
our estimates on the aging of our accounts receivable balances and our
historical write-off experience, net of recoveries. If the
9
financial condition of our customers were to deteriorate, additional allowances
may be required. We believe the accounting estimate related to the allowance for
doubtful accounts is a "critical accounting estimate" because changes in it can
significantly affect net income. Allowance for doubtful accounts was $359,396
and $363, 402 as of June 30, 2004 and March 31, 2004, respectively.
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. We provide 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. At June 30, 2004, and March 31, 2004, inventory
reserve was $712,625, and $722,551, respectively.
o Property and Equipment
We estimate the useful lives of property and equipment in order to
determine the amount of depreciation and amortization expense to be recorded
during any reporting period. The majority of our equipment is depreciated over
three years. The estimated useful lives are based on the historical experience
with similar assets as well as taking into account anticipated technological or
other changes. If technological changes were to occur more rapidly than
anticipated or in a different form than anticipated, the useful lives assigned
to these assets may need to be accelerated, resulting in the recognition of
increased depreciation and amortization expense in future periods. We evaluate
the recoverability of our long-lived assets (other than intangibles and deferred
tax assets) in accordance with Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"(SFAS No.
144). Long-lived assets are reviewed for impairment under SFAS No. 144 whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS No. 144 requires recognition of impairment of
long-lived assets in the event that the net book value of such assets exceeds
the future undiscounted net cash flows attributable to such assets. Impairment,
if any, is recognized in the period of identification to the extent the carrying
amount of an asset exceeds the fair value of such asset. Property and equipment
along with their components are as follows:
Original Cost Estimated Life
------------- --------------
June 2004 March 2004 (Years)
--------- ---------- -------
Computer equipment $ 3,668,165 $ 3,643,052 3
Furniture and fixtures 360,205 357,845 5
Leasehold improvements 244,847 244,847 5
Vehicles 80,984 80,984 2
----------- -----------
Total Property and Equipment $ 4,354,201 $ 4,326,728
Less: accumulated depreciation
and amortization (4,016,862) (3,939,655)
----------- -----------
Net book value $ 337,339 $ 387,073
=========== ===========
10
o Goodwill and Intangible Assets
We have adopted Statement of Financial Accounting Standards No. 141
"Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". As a
result, amortization of goodwill was discontinued. Based on the impairment tests
performed during the fiscal year ended March 31, 2004 , we found no impairment
of the remaining goodwill. The next annual impairment test shall be performed
during the fourth quarter of the fiscal year 2005.
We were assigned a contract to supply computer hardware and services to
the State of New Jersey in the August 12, 2002 acquisition of Acentra
Technologies, Inc. This contract was valued at $100,000 in the acquisition.
Amortization expense of $9,091, and $54,545 was expensed in the three months
ended June 30, 2004 and the fiscal year ended March 31, 2004, respectively,
based upon then contract term scheduled to end in May 2004. The contract, which
is subject to annual renewal by mutual agreement, was instead extended by the
State of New Jersey through December 2004. The net carrying value for this
contract amounted to $0 and $9,091 at June 30, 2004 and March 31, 2004,
respectively.
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 Emtec's
financial statements or tax returns. In estimating future tax consequences,
Emtec 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. Income tax expense, as a percentage of
income before taxes, increased for the three months ended June 30, 2004, as
compared to the three months ended June 30, 2003. This increase is a result of
the utilization of approximately $850,000 of federal tax loss carryforwards
during the year ended March 31, 2004. The Company had previously recorded
significant valuation allowances for deferred tax assets, which effectively
reduced the income tax expense percentage during the year ended March 31, 2004.
11
Results of Operations
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of our
Results of Operations for the three months ended June 30, 2004, and 2003.
Three Months Ended June 30,
2004 2003 Change %
----------------------------------------------------------------------------------------------
Revenues
Procurement services $24,760,466 $23,730,729 $1,029,737 4.34%
Service and consulting 3,803,741 4,702,026 $ (898,285) -19.10%
Geothermal 42,628 47,585 $ (4,957) -10.42%
----------- -----------
Total Revenues 28,606,835 28,480,340 $ 126,495 0.44%
----------- -----------
Cost of Revenues
Procurement services 21,968,266 21,691,493 $ 276,773 1.28%
Service and consulting 2,653,471 3,067,780 $ (414,309) -13.51%
Geothermal 17,785 17,484 $ 301 1.72%
----------- -----------
Total Cost of Revenues 24,639,522 24,776,757 $ (137,235) -0.55%
----------- -----------
Percent of revenues 86.13% 87.00%
Gross Profit
Procurement services 2,792,200 2,039,236 $ 752,964 36.92%
Service and consulting 1,150,270 1,634,246 $ (483,976) -29.61%
Geothermal 24,843 30,101 $ (5,258) -17.47%
----------- -----------
Total Gross Profit 3,967,313 3,703,583 $ 263,730 7.12%
----------- -----------
Percent of revenue 13.87% 13.00%
Operating Expenses
Sales, General & Administrative Expenses 2,980,344 3,205,245 $ (224,901) -7.02%
Interest Expense 38,830 99,166 $ (60,336) -60.84%
----------- -----------
Total Operating Expenses 3,019,174 3,304,411 $ (285,237) -8.63%
----------- -----------
Percent of revenue 10.55% 11.60%
Income (Loss) Before Income Tax 948,139 399,172 $ 548,967 137.53%
Income Tax Expense (Benefit) 345,000 41,281 $ 303,719 735.74%
----------- -----------
Net Income (Loss) $ 603,139 $ 357,891 $ 245,248 68.53%
=========== ============ =========== =====
Income (Loss) Per Share {Basic And Diluted} $ 0.08 $ 0.05
=========== ===========
12
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003.
Total Revenues
Total revenues for our IT business, which includes services and
consulting revenue, and procurement revenues, increased by 0.5% or $131,452, to
$28.56 million for the quarter ended June 30, 2004, compared to $28.43 million
for the quarter ended June 30, 2003. This increase is primarily attributable to
computer roll-out projects for the school districts in Georgia and Florida.
Total IT revenue associated with these computer roll-out projects for the school
districts in Georgia and Florida increased by $5.39 million, to $15.40 million
for the quarter ended June 30, 2004, as compared with $10.01 million for the
quarter ended June 30, 2003. Without these computer roll-out projects, total IT
revenue would have decreased by 18.5%, or $5.26 million, to $23.22 million for
the quarter ended June 30, 2004. This decrease is mainly due to an over-all
decrease in our customer's IT spending particularly in various state agencies
with the State of New Jersey, and our inability to attract new major customers.
Procurement revenues increased by 4.3%, or $1.03 million, to $24.76
million for the quarter ended June 30, 2004. This increase is also attributable
to computer roll-out projects for the various school districts in Georgia and
Florida.
Services and consulting revenue decreased by 19.1%, or $898,285, to
$3.80 million for the quarter ended June 30, 2004 compared to $4.70 million for
the quarter ended June 30, 2003. This decrease is mainly due to an over-all
decrease in our customer's IT spending particularly with various state agencies
in the State of New Jersey, and our inability to attract new major customers.
Three major customers accounted for in the aggregate approximately 65%
and 67% of our revenues for the quarter ended June 30, 2004 and 2003,
respectively. We anticipate that these customer concentrations will continue for
the foreseeable future. The loss of any of these customers may cause results of
operations to vary materially from those anticipated.
Geothermal revenues decreased by 10.4%, or $4,957, to $42,628 for the
quarter ended June 30, 2004. This decrease is mainly due to lower production of
steam.
Gross Profit
Aggregate gross profit for our IT business increased by 7.3%, or
$268,988, to $3.94 million for the quarter ended June 30, 2004. This increase is
mainly attributable to computer roll-out projects for the school districts in
Georgia and Florida. Measured as a percentage of total revenues for our IT
business, our overall gross profit margin increased to 13.8% of total revenues
for the quarter ended June 30, 2004 from 12.9% for the quarter ended June 30,
2003.
Gross profit for product sales increased by 36.9%, or $752,964, to
$2.79 million for the quarter ended June 30, 2004 as compared with $2.04 million
for the quarter ended June 30, 2003. This increase is mainly attributable to
$5.39 million increase in computer roll-out projects for the school districts in
Georgia and Florida. Measured as a percentage of procurement revenues, our gross
profit margin increased to 11.3% of procurement revenue for the quarter ended
June 30,
13
2004 from 8.6% for the quarter ended June 30, 2003. This percentage
increase is primarily attributable to greater selling efforts and favorable
price drops by manufacturers. We can not predict that price drops like these are
going to repeat in the future.
Gross profit for service and consulting decreased by 29.6%, or
$483,976, to $1.15 million for the quarter ended June 30, 2004 as compared with
$1.63 million for the quarter ended June 30, 2003. This decrease is due to an
over-all decrease in our customer's IT spending particularly with various state
agencies in the State of New Jersey, and our inability to attract new major
customers. Measured as a percentage of service and consulting revenue, our gross
margin attributable to service and consulting revenue decreased to 30.2% of
service and consulting revenue for the quarter ended June 30, 2004 from 34.8%
for the quarter ended June 30, 2003. This decrease in services and consulting
gross margin was mainly due to lower billing rates (total revenue generated
divided by total billable hours available during the period) and utilization
rates (billable hours divided by paid hours) of engineers during this quarter.
We must continue to manage billing rates and utilization rates
effectively to remain competitive. During July 2004, we outsourced our NOC
(Network Operation Center) and Help Desk operations to a third party. By
outsourcing this part of our business, we are able to continue to offer these
strategic services while allowing us to change the high fixed cost structure of
the business to a variable cost structure. We expect that this transition will
have a positive impact on our gross profit for service and consulting starting
July 2004. Our NOC and Help Desk revenues were approximately $29,000, and
$108,000 for the quarter ended June 30, 2004, and 2003, respectively.
The geothermal gross profit of $24,843 for the quarter ended June 30,
2004 decreased by 17.5%, or $5,258, as compared with $30,101 for the quarter
ended June 30, 2003. This decrease is mainly due to lower production of steam
during this quarter.
Sales, General, and Administrative Expenses
Sales, general and administrative expenses decreased by 7.0%, or
$224,901, to $2.98 million for the quarter ended June 30, 2004. This decrease is
primarily attributable to continuous cost containment measures taken by us
including the following:
o Elimination of non-productive sales staff;
o Eliminated duplication of non-essential administrative
support services.
Also, during the quarter ended June 30, 2004, we consolidated all of
our operations, administrative and inventory warehousing functions from Mt.
Laurel, NJ and Cranford, NJ to Trenton, NJ. We anticipate this consolidation
will result in an approximate cost savings of $380,000 annually.
In spite of vigorous cost containment efforts, various factors, such as
retention of employees, costs associated with marketing and selling activities,
costs associated with new Securities and Exchange Commission rules, and
insurance markets may increase our sales, general and administrative expenses
and this could have a negative impact on fiscal year 2005.
14
Interest expense
Interest expense decreased by 60.8%, or $60,336, to $38,830 the quarter
ended June 30, 2004 as compared with $99,166 for the quarter ended June 30,
2003. This decrease is primarily attributable to a lower balance on our line of
credit, and lower days sales outstanding during the period.
Income Taxes
Income tax expense, as a percentage of income before income taxes,
increased for the quarter ended June 30, 2004 to $345,000, as compared to
$41,281 for the quarter ended June 30, 2003. This increase is a result of the
utilization of approximately $850,000 of federal tax loss carryforwards during
the year ended March 31, 2004. We had previously recorded significant valuation
allowances for deferred tax assets, which effectively reduced the income tax
expense percentage during the year ended March 31, 2004.
Net Income
For the three months ended June 30, 2004, net income was $603,139
compared to net income of $357,891 for the comparable period in 2003, an
increase of 68.5%.
As discussed, the increase in net income is mainly attributable to
computer roll-out projects for the school districts in Georgia and Florida as
well as continuous cost containment efforts undertaken by the Company.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Quarterly Report, we
state our beliefs of future events and of our future financial performance. In
some cases, you can identify those so-called "forward-looking statements" by
words such as "may," "will," "should," expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of those words and other comparable words. You should be aware that those
statements are only our predictions. Actual events or results may differ
materially. In evaluating those statements, you should specifically consider
various factors, including the risks discussed in this Annual Report for the
year ended March 31, 2004 and other reports or documents that we file from time
to time with the SEC. Those factors may cause our actual results to differ
materially from any of our forward-looking statements. All forward-looking
statements attributable to us or a person acting on our behalf are expressly
qualified in their entirety by this cautionary statement.
Assumptions relating to budgeting, marketing, and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our marketing, capital
expenditure, or other budgets, which may in turn affect our business, financial
position, results of operations, and cash flows.
15
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
such factors 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 in compliance with the covenants
contained in our loan and security agreement at June 30, 2004. Although we
expect to remain in compliance with the financial covenants, no assurance can be
given.
Our credit facilities as of the current date with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data are $5.0 million, $9.0 million
and $3.0 million, respectively. Under these credit lines, we are obligated to
pay each invoice within 30 days from the date of such invoice. These credit
lines could be reduced or eliminated without a notice, and this action could
have a material adverse affect our business, result of operations, and financial
condition.
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 systems integrator focused on providing technology solutions
that enable its customers to effectively use and manage their data to grow their
businesses. Our areas of specialization in information technology ("IT")
services include enterprise computing, data communications, data access, network
design, enterprise backup and storage consolidation, managed services and staff
augmentation. While we have offered IT services to our customers since 1983, our
major emphasis on IT consulting and services began in 1995. 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, product enhancements and
aggressive pricing practices, which also impacts pricing of service activities.
Our operating results could be
16
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 also 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.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2004 of $802,549 represented an
increase of $797,757 from $4,792 at March 31, 2004. 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. At June 30, 2004, our
working capital was increased to $2.75 million from $2.08 as of March 31, 2004.
This increase in working capital was primarily attributable to net earnings for
the quarter ended June 30, 2004.
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"), under which we may borrow on 85%
of our eligible trade receivables. Interest on outstanding loans under the
revolving credit facility with Fleet was 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 our assets. Since current credit facilities with two of
our primary trade vendors (GE Access and Ingram Micro.) were also collateralized
by substantially all of our 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. 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
products floored by IBM Global Financing. On January 9, 2002, Fleet issued a
$250,000 letter of credit in favor of our landlord for our New York City office,
as a security deposit for the building lease. On July 1, 2003, Fleet also issued
a $250,000 letter of credit in favor of Selective Insurance Corporation, as
collateral for the performance bond issued to The City of Philadelphia, one of
our customers. The maximum credit facility is reduced by the outstanding letters
of credit.
On October 17, 2003, Emtec and Fleet executed an amendment to the loan
and security agreement under which we may borrow on 80% of our eligible trade
receivables up to $10 million through November 20, 2004. Interest on outstanding
loans was charged monthly at a fluctuating rate per annum equal to 2.00% above
the prime rate. Prior to October 17, 2003, we were charged monthly at a
fluctuating rate per annum equal to 0.25% above the prime rate.
On April 16, 2004, Emtec and Fleet executed another amendment to the
loan and security agreement which permits us to obtain up to a $1.0 million in
surety bonding capacity from an
17
insurance company. This amendment reduced our interest rate from 2.00% above the
prime rate to 1.00% above the prime rate.
As of June 30, 2004, we were in compliance with all of our financial
covenants and we had a $2,685,860 outstanding balance under the credit facility
and unused availability of $6,064,140.
At June 30, 2004, our credit facilities with our primary trade vendors,
GE Access, Ingram Micro, and Tech Data were as follows:
o Our credit line with GE Access was $4.0 million, with an
outstanding principal balance of $3.5 million.
o Our credit line with Ingram Micro was $9.0 million, with an
outstanding principal balance of $4.6 million.
o Our credit line with Tech Data was $3.0 million, with an
outstanding balance of $2.7 million.
Under these credit lines, we are obligated to pay each invoice within
30 days from the date of such invoice.
Capital expenditures of $30,811 during three months ended June 30, 2004
were primarily for the purchase of computer equipment for internal use, and
furniture and fixtures. We anticipate our capital expenditures for fiscal year
ending March 31, 2005 will be approximately $400,000.
Emtec 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 funds generated from operations and bank borrowings
should be sufficient to meet our current operating cash requirements through the
next twelve months, although there can be no assurance that all of the
aforementioned sources of cash can be realized.
18
Item 3. Quantitative and Qualitative Information 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 balance on
the line of credit at June 30, 2004 was approximately $2.6 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 $26,000
annually.
19
Item 4. Controls and Procedures
Our management carried out an evaluation, with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of June 30, 2004. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1 - Rule 13a-14(a)/15 d-14(a) Certification of John P.
Howlett, Principal Executive Officer, of Emtec, Inc. dated August 13,
2004.
Exhibit 31.2 - Rule 13a-14(a)/15 d-14(a) Certification of Sam Bhatt,
Principal Financial Officer, of Emtec, Inc. dated August 13, 2004.
Exhibit 32.1 - Section 1350 Certificate of John P. Howlett, Principal
Executive Officer, of Emtec, Inc. dated August 13, 2004.
Exhibit 32.2 - Section 1350 Certificate of Sam Bhatt, Principal
Financial Officer, of Emtec, Inc. dated August 13, 2004
(b) Reports on Form 8-K filed during the quarter ended June 30, 2004:
Form 8-K filed on April 1, 2004, reported under Item 5 of the Form 8-K,
Other Events and Required FD Disclosure, the relocation of our
corporate operations and administrative functions.
Form 8-K filed on June 28, 2004, reported under Item 12 of the Form
8-K, Result of Operations and Financial Condition, the issuance of a
press release announcing our financial results for the year ended March
31, 2004.
21
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, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
-----------------------------------
Sam Bhatt
Vice President - Finance
(Principal Financial and
Accounting Officer)
Date: August 13, 2004
22
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as.............................. 'SS'