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
September 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 | X | No ||
The number of shares of Common Stock outstanding as of November 10, 2001 was
7,080,498.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2001 (Unaudited) and March 31, 2001....................................................1-2
Consolidated Statements of Operations
for the Three and Six months ended September 30, 2001 (Unaudited) and
2000 (Unaudited) ......................................................................................3
Consolidated Statements of Cash Flows
for the Six months ended September 30, 2001 (Unaudited) and 2000 (Unaudited) ..........................4
Notes to Consolidated Financial Statements
(Unaudited) ........................................................................................5-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations ................................................................11-15
Item 3 - Quantitative and Qualitative Information About Market Risk .............................................15
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a vote by Securities Holders ..................................................16
SIGNATURES.......................................................................................................17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2001 2001
------------- ------------
(unaudited)
Assets
------
Current Assets
--------------
Cash and cash equivalents $ 819,239 $ 2,098,198
Marketable securities 2,820 292,346
Receivables:
Trade, less allowance
for doubtful accounts 10,471,249 12,828,456
Others 326,504 433,580
Inventories, net of reserve 2,175,409 1,019,715
Prepaid expenses 264,517 296,939
---------- ----------
Total Current Assets 14,059,738 16,969,234
--------------------
Net property and equipment 761,167 919,110
Investment in geothermal power unit 537,548 549,626
Deferred tax asset 16,796 22,996
Other assets 184,309 175,711
---------- ----------
Total Assets $ 15,559,558 $ 18,636,677
------------ ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
1
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2001 2001
------------- ------------
(unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
-------------------
Line of credit $ 4,374,369 $ 6,535,405
Due to related party 19,000 19,000
Accounts payable 5,899,279 7,284,625
Income taxes payable 2,087 2,087
Customer deposits - 203,202
Accrued liabilities 811,042 1,023,556
Deferred revenue 1,370,014 899,352
---------- ----------
Total Current Liabilities 12,475,791 15,967,227
-------------------------
Deferred revenue 820,692 841,922
---------- ----------
Total Liabilities 13,296,483 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) 1,748 (5,458)
Accumulated deficit (20,283) (448,624)
---------- ----------
Total Shareholders' Equity 2,263,075 1,827,528
-------------------------- ---------- ----------
Total Liabilities and
Shareholders' Equity $ 15,559,558 $ 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 Six Months Ended
September 30, September 30,
---------------------------- ----------------------------------
2001 2000 2001 2000
-------- --------- -------- -----------
Revenues:
Procurement services $ 14,158,118 $ 19,842,003 $ 28,703,661 $ 43,656,234
Service and consulting 3,227,698 2,612,655 8,185,940 6,228,729
Geothermal 45,056 - 89,398 -
---------- ---------- ---------- ----------
Total Revenues 17,430,872 22,454,658 36,978,999 49,884,963
-------------- ---------- ---------- ---------- ----------
Cost of Revenues:
Procurement services 12,520,530 17,654,035 25,367,745 39,160,481
Service and consulting 2,467,074 1,975,446 6,400,487 4,818,812
Geothermal 20,596 - 33,507 -
---------- ---------- ---------- ----------
Total Cost of Revenues 15,008,200 19,629,481 31,801,739 43,979,293
---------------------- ---------- ---------- ---------- ----------
Gross Profit:
Procurement services 1,637,588 2,187,968 3,335,916 4,495,753
Service and consulting 760,624 637,209 1,785,453 1,409,917
Geothermal 24,460 - 55,891 -
---------- ---------- ---------- ----------
Total Gross Profit 2,422,672 2,825,177 5,177,260 5,905,670
------------------ ---------- ---------- ---------- ----------
Operating Expenses:
Selling, general and
administrative 2,063,200 2,435,163 4,217,616 5,039,253
Termination costs - 13,000 - 52,000
Interest 75,488 177,602 167,746 334,769
Startup costs, E-Business 123,941 202,325 357,357 540,831
---------- ---------- ---------- ----------
Total Operating Expenses 2,262,629 2,828,090 4,742,719 5,966,853
------------------------ ---------- ---------- ---------- ----------
Income (Loss) From Continuing
Operations Before Litigation
Settlements And Income Tax Expense 160,043 (2,913) 434,541 (61,183)
Litigation settlements - (180,000) - 193,911
Income tax expense 3,020 - 6,200 -
---------- ---------- ---------- ----------
Income From Continuing Operations,
Net of Income Taxes 157,023 (182,913) 428,341 132,728
Loss from discontinued operations,
net of income taxes - (3,521) - (48,104)
---------- ---------- ---------- ----------
Net Income $ 157,023 $ (186,434) $ 428,341 $ 84,624
========== ========== ========== ==========
Income Per Share From Continuing
Operations {Basic And Diluted} $ .02 $ (.03) $ .06 $ .02
Net Income Per Share {Basic
And Diluted} $ .02 $ (.03) $ .06 $ .02
Weighted Average Number Of
Shares Outstanding {Basic
And Diluted} 7,080,498 5,329,501 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
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(unaudited)
September 30, September 30,
2001 2000
------------- -------------
Cash Flows From Operating Activities
------------------------------------
Net income for the six months $ 428,341 $ 84,624
Adjustments to Reconcile Net Income To Net
Cash Provided By (Used In) Operating
Activities:
Depreciation and amortization 224,569 195,149
Deferred income tax 6,200
Unrealized loss (gain) on marketable
securities 7,200 (72,604)
Changes In Operating Assets and Liabilities
Decrease (increase) in marketable securities 289,526 (101,545)
Decrease in receivables 2,464,283 3,925,032
Increase in inventories (1,155,694) (320,669)
Decrease in prepaid expenses 32,422 100,394
Decrease in accounts payable (1,385,346) (3,578,002)
Decrease in customer deposits (203,202) (358,000)
Decrease in accrued liabilities (212,514) (215,933)
Increase (decrease) in deferred revenue 449,432 (125,043)
--------- ---------
Net Cash Provided By (Used In)
Operating Activities 945,223 (466,597)
----------------------------- --------- ---------
Cash Flows From Investing Activities
------------------------------------
Purchases of equipment (43,146) (138,243)
Additional security deposit (20,000) -
Purchase other asset - (2,401)
-------- ---------
(63,146) (140,644)
--------- ---------
Cash Flows From Financing Activities
------------------------------------
Net (decrease) increase in line of credit (2,161,036) 593,540
--------- ---------
Net Decrease in Cash and Cash Equivalents (1,278,959) (13,701)
-----------------------------------------
Beginning Cash and Cash Equivalents 2,098,198 686,413
----------------------------------- --------- ---------
Ending Cash and Cash Equivalents $ 819,239 $ 672,712
-------------------------------- ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
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. 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 one 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
5
received in the transaction after giving effect to the difference in par value
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. 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 six months ended September 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 have been exercised
during the six months ended September 30, 2001 and 2000. 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 September 30, 2001, 166,227 of these
founder options expired. Option activity is summarized in the following table:
Options outstanding - April 1, 2001 465,259
Activity for the six months ended September 30, 2001:
Options granted 49,186
Options exercised 0
Options forfeited or expired (166,677)
Options outstanding - September 30, 2001 347,768
=======
4. Net Income (Loss) per Share
Computations of net income (loss) per share and the income (loss) per share from
continuing operations have been made in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). These per
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. The pricing of the options
were in excess of the underlying value of the Company stock during the six
months ended September 30, 2001 and 2000, therefore, the stock options are
antidilutive.
6
5. Litigation
In a previous year the Company instituted litigation against two
companies (defendants) that were in discussions with the Company about a
possible merger. The complaint in the action charged the two defendants for
breach of contract, interference with business relationships and
misappropriation of trade secrets. The parties settled the litigation in June
2000, pursuant to which the Company received a $350,000 cash payment and 333,116
shares of the one of defendant's common stock. Costs related to the litigation
and realized losses on disposition of the defendant's common stock during the
year ended March 31, 2001 reduced net income from the litigation settlement to
$24,108.
In 1999 the Company instituted litigation against a company (defendant)
for breach of contract action in an amount approximating $50,000. The defendant
stated a counterclaim in excess of $8 million for damages resulting from the
Company's alleged negligence, which purportedly caused the defendant's computer
system to become corrupted and unavailable. In a recent development, the Company
offered an attempt to restore data to the defendant's computer disc. In
consideration of the Company's effort to restore the data, the defendant agreed
to seek resolutions of the claims through arbitration. If the restoration effort
is successful, the arbitrator will decide whether the Company is entitled to be
paid and whether the Company is liable for any loss incurred by the defendant
during the period the data was lost. If the effort to restore the data fails,
the arbitrator will decide the entire issue of whether the defendant is entitled
to recover for the loss of its data.
6. Segment Information
Summarized financial information relating to the Company's operating
segments are as follows:
For the six months ended September 30: 2001 2000
External Sales
Mt. Laurel, NJ $ 5,586,222 $ 8,434,583
Cranford, NJ 14,038,508 23,280,229
Atlanta, GA 7,997,653 9,746,023
Norwalk, CT 1,499,373 1,270,687
Education-Atlanta 7,767,845 7,153,441
Geothermal 89,398 -
Total External Sales $ 36,978,999 $ 49,884,963
=========== ===========
Interest Expense
Mt. Laurel, NJ $ 23,087 $ 60,311
Cranford, NJ 69,730 147,023
Atlanta, GA 40,253 63,462
Norwalk, CT 9,691 12,535
Education-Atlanta 25,292 46,436
e-Business 65 -
Geothermal - -
Allocated Interest Expense 168,118 329,767
Unallocated (372) 5,002
Total Interest Expense $ 167,746 $ 334,769
=========== ===========
7
2001 2000
Depreciation and Amortization
Mt. Laurel, NJ $ 16,662 $ 33,450
Cranford, NJ 33,866 64,537
Atlanta, GA 55,775 30,080
Norwalk, CT 6,264 5,000
Education-Atlanta 300 2,900
e-Business 6,000 -
Geothermal 12,080 -
Allocated Depreciation
and Amortization 130,947 135,967
Unallocated 93,622 59,182
Total Depreciation
and Amortization $ 224,569 $ 195,149
=========== ==========
Operating Profit/(Loss)
Mt. Laurel, NJ $ (239,859) $ (215,999)
Cranford, NJ 589,740 399,017
Atlanta, GA (284,223) (118,176)
Norwalk, CT (179,055) (212,714)
Education-Atlanta 873,383 627,520
e-Business (357,357) (540,831)
Geothermal 31,912 -
Income (Loss) from Continuing
Operations before Litigation
Settlements and Income Tax Expense $ 434,541 $ (61,183)
=========== ==========
For the three months ended September 30:
External Sales
Mt. Laurel, NJ $ 2,880,932 $ 4,921,556
Cranford, NJ 5,930,368 8,660,714
Atlanta, GA 3,576,833 4,419,067
Norwalk, CT 747,183 334,744
Education-Atlanta 4,250,500 4,118,577
Geothermal 45,056 -
Total External Sales $ 17,430,872 $ 22,454,658
=========== ===========
8
2001 2000
Interest Expense
Mt. Laurel, NJ $ 11,259 $ 38,722
Cranford, NJ 26,546 76,279
Atlanta, GA 17,626 27,559
Norwalk, CT 5,120 6,018
Education-Atlanta 15,086 26,524
e-Business - -
Geothermal - -
Allocated Interest Expense 75,637 175,102
Unallocated (149) 2,500
Total Interest Expense $ 75,488 $ 177,602
=========== ===========
Depreciation and Amortization
Mt. Laurel, NJ $ 7,662 $ 17,550
Cranford, NJ 11,405 33,777
Atlanta, GA 27,623 15,768
Norwalk, CT 3,414 3,000
Education-Atlanta 150 1,500
e-Business 3,000 -
Geothermal 6,041 -
Allocated Depreciation
and Amortization 59,295 71,595
Unallocated 48,452 42,659
Total Depreciation
and Amortization $ 107,747 $ 114,254
=========== ==========
Operating Profit/(Loss)
Mt. Laurel, NJ $ (173,857) $ (34,533)
Cranford, NJ 279,294 165,231
Atlanta, GA (220,874) (180,823)
Norwalk, CT (132,235) (207,620)
Education-Atlanta 517,935 457,157
e-Business (123,941) (202,325)
Geothermal 13,721 -
Income (Loss) from Continuing
Operations before Litigation
Settlements and Income Tax Expense $ 160,043 $ (2,913)
=========== ==========
9
Identifiable Assets:
September 30, March 31,
2001 2001
Mt. Laurel, NJ $ 1,986,789 $ 2,691,963
Cranford, NJ 6,605,974 7,690,440
Atlanta, GA 2,464,659 2,239,838
Norwalk, CT 529,476 433,860
Education-Atlanta 1,234,968 1,401,107
e-Business 20,190 -
Geothermal 537,548 549,626
Total Identifiable Assets 13,379,604 15,006,834
Corporate And Other Assets 2,179,954 3,629,843
Total Assets $ 15,559,558 $ 18,636,677
========== ==========
10
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 September 30, 2001 Compared to Three
Months Ended September 30, 2000.
(1) Total Revenues
Total revenues from the IT business decreased by 22.57%, or $5.06
million, to $17.39 million for the three months ended September 30, 2001.
Services and consulting revenue increased by 23.54%, or $0.62 million, to $3.23
million for the three months ended September 30, 2001 compared to $2.61 million
for the three months ended September 30, 2000. Product procurement revenues
decreased by 28.65%, or $5.68 million, to $14.16 million for the three months
ended September 30, 2001. This decline in product procurement revenue is mainly
due to our greater emphasis on our services and consulting organization as well
as a slow-down in the economy
Geothermal Revenues of $45,056 for the three months ended September 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 15.11%, or
$426,965, to $2.40 million for the three months ended September 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 13.79% for
the three months ended September 30, 2001 from 12.58% for the three months ended
September 30, 2000. This increase is mainly due to higher services and
consulting revenues.
Gross profit margin attributable to product sales increased to 11.57%
for the three months ended September 30, 2001 from 11.03% for the three months
ended September 30, 2000. This increase in product procurement gross margin is
attributable to lower cost of 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 23.57% for the three
months ended September 30, 2001 from 24.39% for the three months ended September
30, 2000. This decrease is mainly due to slightly lower utilization rates within
the service and consulting group.
The geothermal gross profit of $24,460 for the three months ended
September 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 15.27%, or
$371,963, to $2.06 million for the three months ended September 30, 2001 from
$2.44 million for the three months ended September
11
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.
(4) Interest Expense
Interest expense decreased by 57.50%, or $102,114 to $75,488 for the
three months ended September 30, 2001 from $177,602 for the three months ended
September 30, 2000. This decrease is primarily a result of lower sales volume
and lower interest rates 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 the three months ended September 30, 2001
was $123,941, or 5.48% of total operating expenses compared to $202,325, or
7.15% of total operating expense for the three months ended September 30, 2000.
This decrease is primarily due to: 1) lower head count within the group; and 2)
generation of $72,806 revenue from e-Business activities during three months
ended September 30, 2001 as compared to $0 from three months ended September 30,
2000.
(6) Income Taxes
Income Tax expense was $3,020 and $0 for the three months ended
September 30, 2001 and 2000, respectively.
b) Six Months Ended September 30, 2001 Compared to Six Months
Ended September 30, 2000.
(1) Total Revenues
Total revenues from the IT business decreased by 26.05%, or $12.99
million, to $36.89 million for the six months ended September 30, 2001. Services
and consulting revenue increased by 31.42%, or $1.96 million, to $8.19 million
for the six months ended September 30, 2001 compared to $6.23 million for the
six months ended September 30, 2000. Product procurement revenues decreased by
34.25%, or $14.95 million, to $28.70 million for the six months ended September
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.
Geothermal Revenues of $89,398 for the six months ended September 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 13.28%, or
$784,301, to $5.12 million for the six months ended September 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 13.88% for
the six months ended September 30, 2001 from 11.84% for the six months ended
September 30, 2000.
12
Gross profit margin attributable to product sales increased to 11.62%
for the six months ended September 30, 2001 from 10.30% for the six months ended
September 30, 2000. This increase in product procurement gross margin is
attributable to lower cost of 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 21.81% of services and
consulting revenue for the six months ended September 30, 2001 from 22.64% for
the six months ended September 30, 2000. This decrease is mainly due to slightly
lower utilization rates within the service and consulting group.
The geothermal gross profit of $55,891 for the six months ended
September 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 16.30%, or
$821,637, to $4.22 million for the six months ended September 30, 2001 from
$5.04 million for the six months ended September 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.
(4) Interest Expense
Interest expense decreased by 49.89%, or $167,023 to $167,746 for the
six months ended September 30, 2001 from $334,769 for the six months ended
September 30, 2000. This decrease is primarily a result of lower sales volume
and lower interest rates 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 the six months ended September 30, 2001
was $357,357, compared to $540,831 for the six months ended September 30, 2000.
This decrease is primarily due to: 1) lower head count within the group; 2)
generation of $113,119 revenue from e-Business activities during six months
ended September 30, 2001 as compared to $0 from six months ended September 30,
2000.
(6) Income Taxes
Income Tax expense was $6,200 and $0 for the six months ended September
30, 2001 and 2000, respectively.
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Adoption of SAB No. 101 did not have a material effect on the
Company's results of operations.
In July 2001, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations," which supersedes Accounting Principles Board (APB) Opinion No.
16. SFAS No. 141 requires all business combinations initiated after June 30,
2001 be accounted for under the purchase method. In addition, SFAS No. 141
establishes criteria for the recognition of intangible assets separately
from goodwill. The Company does not expect the
13
adoption of SFAS No. 141 will have a material effect on the Company's results
of operations, financial position or cash flow.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized,
but rather will be tested for impairment at least annually. In addition,
the amortization period of intangible assets with finite lives will no longer
be limited to 40 years. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001, which for the Company means the standard will be
adopted on April 1, 2002. The Company is currently assessing the impact of
SFAS No. 142 on its results of operations.
B. Liquidity and Capital Resources
Cash and cash equivalents at September 30, 2001 of $819,239 decreased
by $1,278,959, from $2,098,198 at March 31, 2001. We are a net borrower;
consequently, we believe our cash and cash equivalents balance must be viewed
along with available balance on our line of credit. Working capital at September
30, 2001, June 30, 2001 and March 31, 2001 was $1,583,947, $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 lender's current prime rate. The loan is
secured by substantially all company assets. At September 30, 2001, we had $4.37
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 operations. As of September 30,
2001 the Company was not in compliance with its financial covenants. The Company
and IBM have been unable to reach an agreement on the revised terms of the
credit facility.
Consequently, the Company has received a verbal commitment from Fleet
Capital {Fleet}, formerly Summit Business Capital Corporation {SBCC}, whereby
Fleet will provide the Company a revolving credit facility up to $10 million
based on 85% of eligible accounts receivable. The Company and Fleet expect to
finalize this credit facility agreement on or about November 20, 2001. Pending
closing with Fleet, IBM has agreed to continue to fund the Company up to $4.5
million through November 19, 2001. The Company believes that the credit line of
$4.5 million will be sufficient to pay its current obligations until we close
the credit facility agreement with Fleet.
We have open credit lines with our primary trade vendors such as Ingram
Micro, and Tech Data. As of September 30, 2001, the credit line with Ingram
Micro was $1.5 million, an 18% APR interest rate and an outstanding balance of
$181,314. As of September 30, 2001, the credit line with Tech Data was $1.5
million, no interest charged and an outstanding balance of $1.06 million. Under
credit lines with Ingram Micro and Tech Data we 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.
During August 2001 we transitioned our Sun Microsystems products
supplier from Ingram Micro to MRA Systems, Inc, dba GE Access. This resulted in
a decrease in our Ingram Micro credit line from $4.5 million to $1.5 million. We
now have an open credit line with GE Access of $4.0 million, no interest
14
charge, and an outstanding balance of $3.67 million. Under this credit line
we are obligated to pay each invoice within 30 days from the date of such
invoice.
Capital expenditures of $43,146 during six months ended September 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 last six months has been approximately
$3.80 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 $38,000 annually.
15
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 August 22, 2001. There were present at the Meeting in person or by proxy
shareholders holding an aggregate of 6,774,935 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 each nominee for director were as follows:
Nominees For Abstain
-------- --- -------
R. Frank Jerd 6,774,435 500
George F. Raymond 5,991,728 783,207
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
EMTEC, INC.
By: /s/ JOHN P. HOWLETT
------------------------
John P. Howlett
Chairman, President, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
----------------------
Sam Bhatt
Vice President - Finance and Operations
(Principal Financial and
Accounting Officer)
Date: November 19, 2001