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, 2002
Commission file number: 0-32789
EMTEC, INC.
(Exact name of Registrant as specified in charter)
Delaware 87-0273300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
817 East Gate Drive
Mt. Laurel, New Jersey 08054
(Address of principal executive offices)
(856) 235-2121
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock outstanding as of August 10, 2002 was
7,080,498.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and March 31, 2002...................................1-2
Consolidated Statements of Operations
Three months ended June 30, 2002 (Unaudited) and 2001 (Unaudited) ...............3
Consolidated Statements of Cash Flows
Three months ended June 30, 2002 (Unaudited) and 2001 (Unaudited) ...............4
Notes to Consolidated Financial Statements
Three months ended June 30, 2002 and 2001 (Unaudited) ...........................5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations .........................................6-11
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,
2002 2002
-------- ---------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 235,330 $ 1,552,666
Receivables:
Trade, less allowance
for doubtful accounts 11,107,835 6,288,425
Others 635,906 296,529
Inventories, net of reserve 2,095,336 1,089,950
Deferred Tax Asset 26,491 26,491
Prepaid expenses 399,692 388,307
----------- -----------
Total Current Assets 14,500,590 9,642,638
Net property and equipment 1,003,638 703,940
Investment in geothermal power unit 573,543 581,612
Deferred tax asset 42,936 42,936
Other assets 416,530 417,617
----------- -----------
Total Assets $16,537,237 $11,388,473
=========== ===========
1
The accompanying notes are integral parts of these
consolidated financial statements.
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
-------- ----------
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 1,330,382 $ -
Due to related party 19,000 19,000
Accounts payable 9,536,917 6,609,837
Customer deposits - 245,387
Accrued liabilities 1,516,716 764,282
Deferred revenues 1,121,026 840,413
----------- -----------
Total Current Liabilities 13,524,041 8,478,919
Deferred revenue 788,860 799,472
Deferred tax liability 60,124 60,124
----------- -----------
Total Liabilities 14,373,025 9,338,515
----------- -----------
Shareholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized; 7,080,498 shares issued
and outstanding 70,805 70,805
Additional paid-in capital 2,210,805 2,210,805
Accumulated deficit (117,398) (231,652)
----------- -----------
Total Shareholders' Equity 2,164,212 2,049,958
----------- -----------
Total Liabilities and
Shareholders' Equity $16,537,237 $11,388,473
=========== ===========
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,
2002 2001
-------- --------
Revenues:
Procurement services $ 15,980,546 $ 14,545,543
Service and consulting 8,328,479 4,958,242
Geothermal 45,349 44,342
------------ ------------
Total Revenues 24,354,374 19,548,127
------------ ------------
Cost of Revenues:
Procurement services 14,061,661 12,847,215
Service and consulting 7,159,810 3,933,413
Geothermal 17,598 12,911
------------ ------------
Total Cost of Revenues 21,239,069 16,793,539
------------ ------------
Gross Profit:
Procurement services 1,918,885 1,698,328
Service and consulting 1,168,669 1,024,829
Geothermal 27,751 31,431
------------ ------------
Total Gross Profit 3,115,305 2,754,588
------------ ------------
Operating Expenses:
Selling, general and
administrative 2,973,917 2,154,416
Interest 27,136 92,258
E-Business costs - 233,416
------------ ------------
Total Operating Expenses 3,001,050 2,480,090
------------ ------------
Income Before Income Tax Expense 114,255 274,498
Income tax expense - 3,180
------------ ------------
Net Income $ 114,255 $ 271,318
============ ============
Net Income Per Share {Basic And Diluted} $ 0.02 $ 0.04
Weighted Average Number Of Shares
Outstanding {Basic And Diluted} 7,080,498 7,080,498
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,
2002 2001
-------- --------
Cash Flows From Operating Activities
Net income for the three months $ 114,255 $ 271,318
Adjustments to Reconcile Net Income To Net
Cash Used In Operating Activities
Depreciation and amortization 132,085 116,822
Changes In Operating Assets and Liabilities
Decrease in marketable securities - 295,062
(Increase) Decrease in receivables (5,158,788) 1,487,732
(Increase) Decrease in inventories (1,005,386) 23,244
Increase in prepaid expenses (11,385) (56,853)
Decrease in deferred tax asset - 3,180
Decrease in other assets 1,087 -
Increase (Decrease) in accounts payable 2,927,080 (2,351,641)
Decrease in customer deposits (245,387) (203,202)
Increase in accrued liabilities 752,434 23,461
Increase in deferred revenue 270,001 276,266
----------- -----------
Net Cash Used In Operating Activities (2,224,004) (114,611)
Cash Flows From Investing Activities
Purchases of equipment (423,714) (18,356)
Cash Flows From Financing Activities
Net increase (decrease) in line of credit 1,330,382 (1,807,483)
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,317,336) (1,940,450)
Beginning Cash and Cash Equivalents 1,552,666 2,098,198
----------- -----------
Ending Cash and Cash Equivalents $ 235,000 $ 157,748
=========== ===========
4
The accompanying notes are integral parts of these
consolidated financial statements.
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and note disclosures required by generally accepted accounting
principles in the United States. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Quarterly results are not
necessarily indicative of results for the full year. For further
information, refer to the annual financial statements and notes thereto
included in the Company's Form 10-K.
2. Net Income (Loss) per Share
Computations of net income (loss) per share 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 diluted
net income per share for the potential dilutive effect of securities such
as stock options.
3. Line of Credit
On November 21, 2001, the Company entered into a $10.0 million revolving
credit facility with Fleet Capital Corporation, formerly Summit Business
Capital Corporation ("Fleet") under which the Company may borrow on 85% of
its eligible trade receivables. Interest on outstanding loans under the
revolving credit facility with Fleet is charged monthly at a fluctuating
rate per annum equal to 0.25% above the prime rate and, at our option,
interest on up to 50% of the outstanding loans may be charged at libor plus
2.75%. The Fleet revolving credit facility is collateralized by a lien upon
and security interest in substantially all of the Company assets. Since
current credit facilities with two of the Company's primary trade vendors,
(GE Access, and Ingram Micro.,) were also collateralized by substantially
all of the Company's assets, Fleet, GE Access and Ingram Micro, have
entered into intercreditor agreements, which provide that as regards to
these vendors, debt obligations to Fleet are accorded priority. The lending
agreement contains financial covenants that require the Company to maintain
a maximum leverage ratio, a minimum debt ratio, a minimum tangible net
worth ratio, and a minimum result of operations. As of June 30, 2002, the
Company was in compliance with all of its financial covenants. The Company
has two letters of credit totaling to $1 million assigned as security
deposits issued against their line of credit. At June 30, 2002, the Company
had a $1.33 million outstanding balance and an unused line of credit
available of $7.67 million under the credit facility.
5
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Management believes the following critical accounting policies affect the
more significant judgment and estimates used in the preparation of the
consolidated financial statements. On an on-going basis, management evaluates
its estimates and judgments, including those related to the allowance for
doubtful accounts, inventories, intangible assets, income taxes, and litigation.
Management bases its estimates and judgments on historical experiences. These
estimates form the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ from these estimates under
different assumptions and conditions.
Critical Accounting Policies
o Revenue Recognition
The Company recognizes revenues based upon Staff Accounting Bulletin #101
(SAB 101). SAB 101 states that revenue recognition cannot occur until the
earnings process is complete (evidenced), by an agreement between the company
and the customer, there has been delivery and acceptance, collectibility is
probable, and pricing is fixed and determinable. If significant obligations
remain after delivery, revenue is deferred until such obligations are fulfilled.
The Company had followed these principles of revenue recognition prior to the
implementation of SAB 101. Therefore, SAB 101 has had no impact on revenue
reporting. Procurement services represent sales of computer hardware and
prepackaged software. Revenue from consulting and support service contracts are
recognized ratably over the contract or service period. Revenues from
manufacturer support service contracts where the manufacturer is responsible for
fulfilling the service requirements of the customer are recognized immediately
at their contract date.
o Trade Receivables
The Company provides an allowance for losses on trade receivables based on
a review of the current status of existing receivables, its age, and
management's evaluation of periodic aging of the accounts.
6
o Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is based on standard costs generated principally by the most recent
purchase prices. The Company provides an inventory reserve for obsolescence and
deterioration based on management's review of the current status of the excess
inventory, its age, and net realizable value based upon assumptions about future
demand and market condition.
o Income Taxes
Income taxes are accounted for under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than the enactment
of changes in tax laws or rates. A valuation allowance is recognized if, on
weight of available evidence, it is more likely than not that some portion or
all the deferred tax assets will not be realized. At June 30, 2002, the Company
has reported 90% valuation allowance.
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001.
Total Revenues
Total revenues for the IT business which includes procurement services, and
service and consulting, increased by 24.64% or $4.80 million, to $24.31 million
for the three months ended June 30, 2002, compared to $19.50 million for the
three months ended June 30, 2001. Services and consulting revenue increased by
67.97%, or $3.37 million, to $8.33 million for the three months ended June 30,
2002 compared to $4.96 million for the three months ended June 30, 2001. This
increase is mainly attributable to an increase in our manufacturers support
services contracts revenues. Manufacturers support services contracts revenue
increased by 149.77%, or $3.42 million, to $5.71 million for the three months
ended June 30, 2002 compared to $2.29 million for the three months ended June
30, 2001. This increase in manufacturers support services contracts revenue is
mainly attributable to a $3.8 million sale to one customer. Procurement revenues
also increased by 9.87%, or $1.43 million, to $15.98 million for the three
months ended June 30, 2002. This increase in product procurement revenue is
mainly attributable to our winning new business with a school district in
Jacksonville, Florida. Procurement revenue associated with this business equaled
almost $2.0 million for three months ended June 30, 2002.
Geothermal Revenues of $45,349 for the three months ended June 30, 2002 are
consistent with the revenues for comparable previous periods.
7
Gross Profit
Our aggregate gross profit for IT business increased by 13.38%, or
$364,397, to $3.09 million for the three months ended June 30, 2002. This
increase is mainly attributable to a 24.64% increase in our IT revenues.
Measured as a percentage of out total revenues for IT business, our overall
gross profit margin decreased to 12.70% of total revenues for the three months
ended June 30, 2002 from 13.93% for the three months ended June 30, 2001. This
decrease is mainly due to lower gross profit margin from our services and
consulting revenues.
Gross profit for product sales increased by 12.99%, or $220,557, to $1.92
million for the three months ended June 30, 2002 as compared with $1.70 million
for the three months ended June 30, 2001. This increase is mainly attributable
to a 9.87% increase in product revenue. Measured as a percentage of procurement
revenues, our gross profit margin attributable to procurement revenues increased
to 12.01% for the three months ended June 30, 2002 from 11.68% for the three
months ended June 30, 2001. This increase is mainly attributable to better sales
activities during this period and our ability to obtain better pricing from our
distributors in some cases.
Gross profit for service and consulting increased by 14.04%, or $143,840 ,
to $1.17 million for the three months ended June 30, 2002 as compared with $1.02
million for the three months ended June 30, 2001. This increase is attributable
to an increase in the gross margin of manufacturers support services contracts
revenues. Manufacturers support services contracts gross margin increased by
118.85%, or $516,560, to $951,186 for the three months ended June 30, 2002 as
compared with $434,626 for the three months ended June 30, 2001. This increase
in manufacturers support service contracts gross margin is mainly attributable
to gross margin of approximately $580,000 associated with a $3.8 million sale to
one customer. Also, measured as a percentage of our gross margin attributable to
services and consulting revenue decreased to 14.03% of services and consulting
revenue for the three months ended June 30, 2002 from 20.67% for the three
months ended June 30, 2001. This decrease is due to lower utilization rates of
engineers during this quarter.
The geothermal gross profit of $27,751 for the three months ended June 30,
2002 is consistent with the gross profit for comparable previous periods.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 38.03%, or
$819,501, to $2.97 million for the three months ended June 30, 2002 as compared
with $2.15 million for the three months ended June 30, 2001. This increase is
primarily a result of the following: 1) $450,000 increase in sales department
expenses due to additional sales personnel salaries, commissions, recruiting,
travel, telephone, and other related expenses, 2) $100,000 increase is due to
marketing related expenses, 3) $150,000 increase is due to the addition of New
York City and Jacksonville locations and related expenses, including rent,
insurance, depreciation, building maintenance and others, and 4) $60,000
increase is due to a change in the allowance for bad-debt account.
8
Interest expense
Interest expense for the three months ended June 30, 2002 decreased by
70.59%, or $65,122, to $27,136 the three months ended June 30, 2002 as compared
with $92,258 for the three months ended June 30, 2001. This decrease is mainly
attributable to lower interest rates, lower balance on line of credit, and
improved accounts receivable collection performance.
e-Business Costs
e-Business costs for the three months ended June 30, 2002 was $0, as
compared with $233,416 for the three months ended June 30, 2001. As of January
2002 we have discontinued our e-Business division which was started in January
2000. This cost mainly included the building of a sales and consulting team of
approximately 8 employees, including training, certifying, marketing, and
advertising expenses.
Income Taxes
Income tax expense for the three months ended June 30, 2002 was $0, as
compared with $3,180 for the three months ended June 30, 2001.
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 that the 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.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. The Company has adopted SFAS
No. 144 effective at April 1, 2002 and is currently evaluating the impact the
adoption of the new accounting standards will have on its financial condition
and results of operations.
9
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2002 of $235,330 decreased by
$1,317,336, from $1,552,666 at March 31, 2002. We are a net borrower;
consequently, we believe our cash and cash equivalents balance must be viewed
along with available balance on our line of credit.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. On November 21, 2001, we entered into a
$10.0 million revolving credit facility with Fleet Capital Corporation, formerly
Summit Business Capital Corporation ("Fleet"). Interest on outstanding loans
under our revolving credit facility with Fleet is charged monthly at a
fluctuating rate per annum equal to 0.25% above the Prime Rate and, at our
option, interest on up to 50% of the outstanding loans may be charged at LIBOR
plus 2.75%. Our Fleet revolving credit facility is collateralized by a lien upon
and security interest in substantially all of our assets. As our current credit
facilities with two of our primary trade vendors, GE Access, and Ingram Micro,
were also collateralized by substantially all of our assets, we, Fleet, GE
Access and Ingram Micro, have entered into intercreditor agreements, which
provide that as regards to these vendors, our obligations to Fleet are accorded
priority. On November 21, 2001, we also entered into a Wholesale Financing
Security Agreement with IBM. This credit facility, which is collateralized by a
$750,000 letter of credit from Fleet in favor of IBM, affords us up to a like
amount of credit to purchase IBM products. On January 9, 2002, Fleet has also
issued $250,000 letter of credit in favor of Vandergrand Properties Co., L.P.,
and our landlord for New York City office as a security deposit for the building
lease. At June 30, 2002, we had $1.33 million outstanding balance under the
credit facility and the unused line of credit available is $7.67 million with
Fleet.
Our lending agreement with Fleet contains financial covenants that require
us to maintain a minimum leverage ratio, minimum debt service coverage ratio,
minimum tangible net worth, and prohibits quarterly losses. As of June 30, 2002
the Company was in compliance with all of its covenants.
At June 30 2002, our credit facilities with our primary trade vendors, GE
Access, Ingram Micro, and Tech Data were as follows: 1) Credit Line with GE
Access was $7.70 million, no interest charged, and an outstanding balance of
$6.0 million. 2) Credit line with Ingram Micro was $1.75 million, at an 18% APR
interest rate and an outstanding balance of $716,890. 3) Credit line with Tech
Data was $2.5 million, no interest charged and an outstanding balance of $1.5
million. Under these credit lines we are obligated to pay each invoice within 30
days from the date of such invoice
Capital expenditures of $423,000 during three months ended June 30, 2001
are divided into following categories; 1) Approximately $368,000 is for the
purchase of computer hardware and software for our Network Operations Center to
enhance our offerings in Managed Services, 2) Approximately $55,000 is for the
purchase of vehicle, furniture and fixture, and equipment for internal use. We
anticipate additional $400,000 of capital expenditures to upgrade our network
operation center, and to purchase equipment for internal use for the fiscal year
ending March 31, 2003.
10
The Company has no arrangements or other relationships with unconsolidated
entities or other persons that are reasonably likely to materially affect
liquidity or the availability of or requirements for capital resources.
We believe that our available funds, together with existing and anticipated
credit facilities, will be adequate to satisfy our current and planned
operations for at least the next 12 months.
11
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 $4.10 million.
Assuming no material increase or decrease in such balance, a one percent change
in the interest rate would change our interest expense by approximately $41,000
annually.
12
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, 2002
13
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................. 'SS'