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 Quarter Ended
June 30, 2001
Commission file number: 0-32789
EMTEC, INC.
(Exact name of Registrant as specified in charter)
Delaware 87-0273300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
817 East Gate Drive
Mt. Laurel, New Jersey 08054
(Address of principal executive offices)
(856) 235-2121
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes | | No |X|
The number of shares of Common Stock outstanding as of August 10, 2001 was
7,080,498.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 2001 (Unaudited) and March 31, 2001.........................................................1-2
Consolidated Statements of Operations
Three months ended June 30, 2001 (Unaudited) and 2000 (Unaudited) .....................................3
Consolidated Statements of Cash Flows
Three months ended June 30, 2001 (Unaudited) and 2000 (Unaudited) .....................................4
Notes to Consolidated Financial Statements
Three months ended June 30, 2001 and 2000 (Unaudited) ...............................................5-9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations ................................................................10-12
Item 3 - Quantitative and Qualitative Information About Market Risk .............................................12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 157,748 $ 2,098,198
Marketable securities 5,825 292,346
Receivables:
Trade, less allowance
for doubtful accounts 11,444,183 12,828,456
Others 330,121 433,580
Inventories, net of reserve 996,471 1,019,715
Prepaid expenses 353,792 296,939
Total Current Assets 13,288,140 16,969,234
Net property and equipment 831,204 919,110
Investment in geothermal power unit 543,588 549,626
Deferred tax asset 19,816 22,996
Other assets 171,190 175,711
Total Assets $ 14,853,938 $ 18,636,677
The accompanying notes are an integral part of these consolidated financial
statements.
1
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 4,727,922 $ 6,535,405
Due to related party 19,000 19,000
Accounts payable 4,932,985 7,284,625
Income taxes payable 2,087 2,087
Customer deposits - 203,202
Accrued liabilities 1,047,017 1,023,556
Deferred revenues 1,186,230 899,352
Total Current Liabilities 11,915,240 15,967,227
Deferred revenue 831,310 841,922
Total Liabilities 12,746,550 16,809,149
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
Accumulated other comprehensive income (loss) 3,083 ( 5,458)
Accumulated deficit ( 177,306) ( 448,624)
Total Shareholders' Equity 2,107,388 1,827,528
Total Liabilities and
Shareholders' Equity $ 14,853,938 $ 18,636,677
The accompanying notes are an integral part of these consolidated financial
statements.
2
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended:
June 30, June 30,
2001 2000
Revenues:
Procurement services $ 14,545,543 $ 23,814,231
Service and consulting 4,958,242 3,616,074
Geothermal 44,342 -
Total Revenues 19,548,127 27,430,305
Cost of Revenues:
Procurement services 12,847,215 21,506,446
Service and consulting 3,933,413 2,843,366
Geothermal 12,911 -
Total Cost of Revenues 16,793,539 24,349,812
Gross Profit:
Procurement services 1,698,328 2,307,785
Service and consulting 1,024,829 772,708
Geothermal 31,431 -
Total Gross Profit 2,754,588 3,080,493
Operating Expenses:
Selling, general and
administrative 2,154,416 2,604,090
Termination costs - 39,000
Interest 92,258 157,167
Startup costs, E-Business 233,416 338,506
Total Operating Expenses 2,480,090 3,138,763
Income (Loss) From Continuing Operations
Before Other Income And Income Tax Expense 274,498 ( 58,270)
Other income- litigation settlement - 373,911
Income tax expense 3,180 -
Income From Continuing Operations,
Net of Income Taxes 271,318 315,641
Loss from discontinued operations,
net of income taxes - ( 44,583)
Net Income $ 271,318 $ 271,058
Income Per Share From Continuing Operations
{Basic And Diluted} $ 0.04 $ 0.06
Net Income Per Share {Basic And Diluted} $ 0.04 $ 0.05
Weighted Average Number Of Shares
Outstanding {Basic And Diluted} 7,080,498 5,329,501
The accompanying notes are an integral part of these consolidated financial
statements.
3
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended:
June 30, June 30,
2001 2000
Cash Flows From Operating Activities
Net income for the three months $ 271,318 $ 271,061
Adjustments to Reconcile Net Income To Net
Cash Used In Operating Activities
Depreciation and amortization 116,822 80,895
Changes In Operating Assets and Liabilities
Decrease (increase) in marketable securities 295,062 ( 174,149)
Decrease in receivables 1,487,732 65,035
Decrease (increase) in inventories 23,244 (1,090,833)
(Increase) decrease in prepaid expenses ( 56,853) 157,330
Decrease in deferred tax asset 3,180 -
Decrease in accounts payable (2,351,641) ( 143,000)
Decrease in customer deposits ( 203,202) ( 358,000)
Increase in accrued liabilities 23,461 3,497
Increase (decrease) in deferred revenue 276,266 ( 155,188)
Net Cash Used In Operating Activities ( 114,611) (1,343,352)
Cash Flows From Investing Activities
Purchases of equipment ( 18,356) ( 413)
Cash Flows From Financing Activities
Net (decrease) increase in line of credit (1,807,483) 745,553
Net Decrease in Cash and Cash Equivalents (1,940,450) ( 598,212)
Beginning Cash and Cash Equivalents 2,098,198 686,413
Ending Cash and Cash Equivalents $ 157,748 $ 88,201
The accompanying notes are an integral part of these consolidated financial
statements.
4
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(unaudited)
1. Basis of Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended June 30, 2001 are not necessarily indicative
of the results that may be expected for the year ending March 31, 2002. For
further information, refer to the annual financial statements and footnotes
thereto included in Form 10-K.
2. Reverse Acquisition
On January 17, 2001, Emtec, Inc., a New Jersey corporation (the Company) was
acquired by American Geological Enterprises, Inc. (AGE) through an exchange of
stock at a ratio of .9753 shares of AGE stock for 1 share of Company stock
whereas AGE issued stock to the shareholders of the Company in exchange for
stock representing 100% of the outstanding shares of the Company. Pursuant
to the acquisition agreement, AGE changed its name to Emtec, Inc. and a majority
of the directors and officers of the former AGE resigned in favor of the
directors and officers of the Company. In addition, Emtec, Inc. (formerly
AGE) increased its authorized capitalizaton from 2,500,000 to 25,000,000 shares
of common stock. Emtec, Inc. intends to seek a listing of its common stock on
NASDAQ's Over-The-Counter Bulletin Board. Immediately after the transaction,
the stock ownership of Emtec, Inc. {formerly AGE} was as follows:
Shares Percent
Former shareholders of the Company 5,329,501 75.3
Original shareholders of AGE 1,380,997 19.5
(including public owners)
Transaction brokers 370,000 5.2
Total 7,080,498 100.0
Because the former shareholders of the Company acquired control of Emtec,
Inc. {formerly AGE}, the transaction is considered a "reverse acquisition" by
the Company for accounting purposes. The Company is treated as the accounting
acquirer of Emtec, Inc. {formerly AGE}, the legal acquirer. For accounting
purposes, the acquisition has been treated as an acquisition of Emtec, Inc.
(formerly AGE) by Emtec. Inc., a New Jersey Corporation (the Company) and as a
recapitalization of the Company. The historical financial statements of the
Company are those of Emtec, Inc., a New Jersey corporation.
The historical shareholders' equity of the Company prior to the reverse
acquisition has been retroactively restated for the equivalent number of shares
received in the transaction after giving effect to the difference in par value
5
between the issuer's and acquirer's stock. Income per share amounts have also
been restated to reflect the number of equivalent shares received by the former
shareholders of Emtec, Inc. a New Jersey corporation.
3. Financing Agreements
The Company was in default of the financial covenants under its line of credit
at March 31, 2001. Although, a commitment has been obtained from the lender to
waive the defaults and amend the existing financing agreement as outlined in
Form 10-K for the year ended March 31, 2001, the Company is seeking alternative
financing. Management believes that the Company can obtain financing at a lower
cost than the new terms outlined in the proposed amended agreement. On August 9,
2001, the Company signed a letter of intent with a new lender under more
favorable terms. The Company expects that the new lender will complete their due
diligence by August 30, 2001 and issue a commitment letter shortly thereafter.
4. 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. SFAS No. 123
requires companies that continue to follow APB No. 25 to provide a pro forma
disclosure of the impact of applying the fair value method of SFAS No. 123.
All stock options granted for the three months ended June 30, 2001 and 2000 were
determined to have a fair value of zero. The exercise price of these options was
set at $ 1 per share, an amount in excess of 150% of the fair value of the
underlying stock. Therefore, no options granted during the three month periods
have been exercised as of June 30, 2001. A pro forma presentation of
compensation cost and earnings per share is not required due to the zero fair
value determination. At September 23, 1996, options to purchase 372,895 shares
were issued primarily to the founders of the Company at an exercise price of
$ .48 per share. At June 30, 2001, 166,227 of these founder options were
outstanding. Option activity is summarized in the following table.
Options outstanding - April 1, 2001 465,259
For the three months ended June 30, 2001:
Options granted 49,186
Options exercised 0
Options forfeited or expired ( 450)
Options outstanding - June 30, 2001 513,995
5. Net Income (Loss) per Share
The net income (loss) per share and the income per share from continuing
operations computations have been made in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). These per
6
share computations use the weighted average number of shares outstanding during
the period. SFAS No. 128 requires a separate presentation of diluted income per
share from continuing operations and diluted net income per share for the
potential dilutive effect of securities such as stock options. The Company
maintains a stock option plan as discussed in Note 3. However, based upon the
pricing of the options in excess of the underlying value of the Company stock
during the three months ended June 30, 2001 and 2000, the stock options are
antidilutive. Therefore, there is no separate presentation of diluted net income
per share.
6. Litigation
At June 2000, the Company settled the litigation against two companies
(defendants) that were in discussions with Emtec about a possible merger. The
complaint in the action charged the two companies for breach of contract,
interference with business relationships and misappropriation of trade secrets.
Under terms of the settlement, the Company received a $350,000 cash payment and
333,116 shares of the defendant's common stock. The Company recorded income of
$373,911 from this settlement for the three months ended June 30, 2000.
Additional costs related to the litigation and realized losses on disposition of
the defendant's common stock recorded in the second half of fiscal 2001 reduced
net income from the litigation settlement to $24,108 for the year ended March
31, 2001.
In 1999 Emtec, Inc. instituted litigation against a company (defendant) for
breach of contract action in an amount approximating $50,000. The defendant has
stated a counter claim in excess of $8 million for damages resulting from
Emtec's alleged negligence, causing the defendant's computer system to become
corrupted and unavailable. Damages will be contested by Emtec, as will
liability. At June 30, 2001, the case is in the discovery phase.
7. Income Taxes
Income tax expense consisted of the following for the three months ended June
30, 2001 and 2000:
2001 2000
Continuing Operations
Current taxes
Federal $ - $ -
State - -
- -
Deferred taxes
State 3,180 -
3,180 -
Discontinued Operations
Current benefit
Federal - -
State - -
$ - $ -
Net Income Tax Expense $ 3,180 $ -
7
8. Discontinued Operations
During fiscal 2000, the Company completed the sale of assets of its two South
Carolina locations (Greenville and Charleston) to a company formed by some of
its prior employees. The Company recorded an additional loss from discontinued
operations of $ 44,583 for the three months ended June 30, 2000. The loss is
primarily due to bad debt charges in excess of recorded allowances related to
trade receivables.
9. Segment Information
The following is financial information relating to the operating
segments:
Three months ended June 30: 2001 2000
External Sales
Mt. Laurel, NJ $ 2,705,294 $ 3,513,027
Cranford, NJ 8,108,140 14,619,515
Atlanta, GA 4,420,820 5,326,956
Norwalk, CT 752,190 935,943
Education-Atlanta 3,517,345 3,034,867
Geothermal 44,342 -
Total External Sales $ 19,548,127 $ 27,430,308
Interest Expense
Mt. Laurel, NJ $ 11,828 $ 21,589
Cranford, NJ 43,184 70,744
Atlanta, GA 22,627 35,903
Norwalk, CT 4,571 6,517
Education-Atlanta 10,206 19,912
e-Business 65 -
Geothermal - -
Allocated Interest Expense 92,481 154,665
(Over) under allocation ( 223) 2,502
Total Interest Expense $ 92,258 $ 157,167
8
Depreciation and Amortization
Mt. Laurel, NJ $ 9,000 $ 15,900
Cranford, NJ 22,461 30,760
Atlanta, GA 28,152 14,312
Norwalk, CT 2,850 2,000
Education-Atlanta 150 1,400
e-Business 3,000 -
Geothermal 6,039 -
Allocated Depreciation
and Amortization 71,652 64,372
Unallocated amounts 45,170 16,523
Total Depreciation
and Amortization $ 116,822 $ 80,895
Three months ended June 30: 2001 2000
Operating Profit/(Loss)
Mt. Laurel, NJ $( 65,994) $( 181,464)
Cranford, NJ 310,446 233,786
Atlanta, GA ( 63,349) 62,647
Norwalk, CT ( 46,820) ( 5,086)
Education-Atlanta 355,448 170,363
e-Business ( 233,416) ( 338,506)
Geothermal 18,191 -
Net Segment Operating
Profit (Loss) 274,506 ( 58,260)
Under Allocated Corporate Expenses ( 3,188) ( 7)
Income (Loss) from Continuing
Operations before Other Income
and Income Tax Expense $ 271,318 $( 58,267)
Identifiable Assets:
June 30, March 31,
2001 2001
Mt. Laurel, NJ $ 1,496,528 $ 2,691,963
Cranford, NJ 3,933,175 7,690,440
Atlanta, GA 3,067,044 2,239,838
Norwalk, CT 535,308 433,860
Education-Atlanta 3,658,663 1,401,107
e-Business 34,000 -
Geothermal 578,588 549,626
Total Identifiable Assets 13,303,306 15,006,834
Corporate And Other Assets 1,550,632 3,629,843
Total Assets $ 14,853,938 $ 18,636,677
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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, 10-Q.
A. Results of Operations
a) Three Months Ended June 30, 2001 Compared to Three Months
Ended June 30, 2000.
(1) Total Revenues
Total revenues from the IT business decreased by 28.90%, or $7.92
million, to $19.50 million for three months ended June 30, 2001. Product
procurement revenues decreased by 38.92%, or $9.27 million, to $14.55 million
for three months ended June 30, 2001. This decline in product procurement
revenue is mainly due to the continued focus on our services and consulting
organization as well as a slow-down in the economy. Services and consulting
revenue increased by 37.12%, or $1.34 million, to $4.96 million for three months
ended June 30, 2001 compared to $3.62 million for three months ended June 30,
2000.
Geothermal Revenues of $44,342 for three months ended June 30, 2001 are
consistent with the previous period's revenues for a comparable period.
(2) Gross Profit
Our aggregate gross profit from the IT business declined by 11.60%, or
$357,336, to $2.72 million for three months ended June 30, 2001. This decrease
is mainly due to lower product procurement revenues. Measured as a percentage of
net sales, our overall gross profit margin increased to 13.96% for three months
ended June 30, 2001 from 11.23% for three months ended June 30, 2000.
Gross profit margin attributable to product sales increased to 11.68%
for three months ended June 30, 2001 from 9.69% for three months ended June 30,
2000. This increase in product procurement gross margin is attributable to lower
cost of sales for products obtained from our vendors as well as lower inventory
write-offs during this period. Gross margin attributable to services and
consulting revenue decreased slightly to 20.67% of services and consulting
revenue for three months ended June 30, 2001 from 21.37% for three months ended
June 30, 2000. This decrease is mainly due to slightly lower utilization rates
within the service and consulting group.
The geothermal gross profit of $31,431 for three months ended June 30,
2001 is consistent with the gross profit for comparable previous periods.
(3) Sales, General, and Administrative Expenses
Sales, general, and administrative expenses decreased by 17.27%, or
$449,674, to $2.15 million for three months ended June 30, 2001 from $2.60
million for three months ended June 30, 2000. This decrease is primarily a
result of lower sales commission expenses as well as our continued efforts to
streamline many of our sales and operational functions.
10
(4) Interest Expense
Interest expense decreased by 41.30%, or $65,000 to $92,000 for three
months ended June 30, 2001 from $157,000 for three months ended June 30, 2000.
This decrease is primarily a result of lower sales volume as well as our
continued efforts to streamline our accounts receivable credit policies and
collection functions.
(5) Startup Costs; e-Business
Startup Costs; e-Business for three months ended June 30, 2001 was
$233K, or 9.41% of total operating expenses compared to $338K, or 10.78% of
total operating expense for three months ended June 30, 2000. This decrease is
due to mainly two reasons; 1) lower head count within the group, 2) generation
of $40,000 revenue from e-Business activities during three months ended June 30,
2001 as compared to $0 from three months ended June 30, 2000.
(6) Income Taxes
Income tax expense of $3,180 was recorded for three months ended June
30, 2001.
B. Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2001 of $157,748 decreased by
$1,940,450, from $2,098,198 at March 31, 2001. We are a net borrower, so our
cash and cash equivalents balance must be analyzed along with the balance on our
line of credit. Working capital at June 30, 2001, and March 31, 2001, was
$1,372,900 and $1,002,007, respectively.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. On September 24, 1999, the Company and IBM
Credit Corporation ("IBM") executed an Inventory and Working Capital Financing
Agreement whereby IBM expanded the Company's credit facility to enable the
Company to borrow up to $15 million. Interest on the borrowings is charged
monthly at one half point above the current prime rate. The loan is secured by
substantially all of our assets. At June 30, 2001, we had $4.73 million
outstanding under the credit facility.
Our lending agreement with IBM contains financial covenants that
require us to maintain a minimum current ratio, minimum total liabilities to net
tangible worth ratio, and minimum results of assets to current liabilities
ratio, and total liabilities to net tangible worth ratio. The Company and IBM
have been unable to reach an agreement on the revised terms of the credit
facility so we are seeking an alternate lender. We cannot state with any
certainty how successful the Company will be in finding an appropriate
replacement lender. The lending agreement with IBM may be renewed on September
23, 2001 for an additional one-year term, or terminated on that date, at the
option of either party.
On August 9, 2001 the Company signed a letter of intent with Summit
Business Capital Corporation whereby SBCC will offer the Company a revolving
credit facility up to $11 million based on 85% of eligible accounts receivable.
The Company expects that SBCC will complete their due diligence and audit by
August 30, 2001 and will issue a commitment letter soon after that.
We have open credit lines with our primary trade vendors such as Ingram
Micro and Tech Data. As of June 30, 2001, the credit line with Ingram Micro was
$4.5 million, an 18% APR interest rate and an outstanding balance of $1.30
million. As of June 30, 2001, the credit line with Tech Data was $1.5 million,
no interest charged and an outstanding balance of $1.13 million. Under both
credit lines we
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are obligated to pay each invoice within 30 days from the date of such invoice.
We do not have written agreements with either Ingram Micro or Tech Data.
Capital expenditures of $18,356 during three months ended June 30,
2001, were primarily for the purchase of computer equipment for internal use.
We believe that our available funds, together with existing and
anticipated credit facilities, will be adequate to satisfy our current and
planned operations for at least the next 12 months.
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 average
balance on the line of credit for the past two years has been approximately
$7.40 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 $74,000 annually.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
EMTEC, INC.
By: /s/ JOHN P. HOWLETT
------------------------
John P. Howlett
Chairman, President, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
----------------------
Sam Bhatt
Vice President - Finance and Operations
(Principal Financial and
Accounting Officer)
Date: August 14, 2001