UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from..........to...............
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.)
817 East Gate Drive
Mount Laurel, New Jersey 08054
(Address of principal executive offices, including zip code)
(856) 235-2121
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-------------------------------
Title of class
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). ( ) Yes (X) No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of September 30, 2002 was approximately
$1,415,606 computed by reference to the closing price of the common stock for
that date.
As of July 1, 2003, there were outstanding 7,080,498 shares of the registrant's
common stock.
EMTEC, INC.
2003 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
Item 1. Business...............................................................................................1
Item 2. Properties.............................................................................................9
Item 3. Legal Proceedings.....................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders...................................................10
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters................................11
Item 6. Selected Financial Data...............................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................12
Item 7A. Quantitative and Qualitative Information About Market Risk............................................26
Item 8. Financial Statements and Supplementary Data...........................................................26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................26
PART III
Item 10. Directors and Executive Officers......................................................................27
Item 11. Executive Compensation................................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........31
Item 13. Certain Relationships and Related Transactions........................................................33
Item 14. Controls and Procedures................................................................................33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................34
Signatures............................................................................................37
Certifications........................................................................................38
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References in this Annual Report to "we," "us," or "our" are to Emtec,
Inc. and its subsidiaries, unless the context specifies or requires otherwise.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual 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,
2003 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.
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PART I
Item 1. Business
Introduction
Emtec (OTC: ETEC) 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 remote network monitoring, help desk, network
design, enterprise backup and storage server consolidation, life-cycle
management, and network security. Emtec's solutions are crafted to enable our
customers to become more efficient and effective, thereby giving them a
competitive advantage. To date, the most significant portion of our revenues has
been derived from our activities as a reseller of IT products, such as
workstations, servers, microcomputers, application software and networking and
communications equipment. However, we are actively endeavoring to increase the
portion of our revenues that are derived from managed services (remote network
monitoring and our help desk) and IT consulting and professional services. We
anticipate that an increasing percentage of our future revenues will be derived
from such business.
Named to the VARBusiness 500 list of top network integrators, value
added resellers, and consultants in the U.S. every year since 1995, we combine
extensive experience in systems integration with premier technology elements to
provide our customers with sophisticated, streamlined, truly comprehensive
solutions.
Over the past two decades, we have built strong relationships with
leading manufacturers, such as Cisco, HP, IBM, Microsoft, Sun Microsystems,
Dell, and Veritas, thereby enabling us to provide cutting-edge, scalable,
reliable and secure solutions. This, along with our background in information
technology, positions us as a premier, single-source provider of information
systems, and network solutions.
Our customers are primarily Fortune 2000 companies, state and local
government, local school districts, and other large and mid-sized companies
located principally in the New York/New Jersey Metropolitan area and the
Southeastern United States. Our commercial business is generally with customers
with annual revenues ranging from $50 million to $500 million. We service our
customer base from leased facilities in New Jersey, Connecticut, New York,
Georgia, and Florida.
Prior to January 17, 2001, we were engaged in the oil and gas
exploration and development business under the name American Geological
Enterprises, Inc. At that time our principal asset, other than cash, was a 5.49%
working interest in a geothermal power unit. On January 17, 2001, we completed a
merger with Emtec, Inc., a privately held New Jersey corporation ("Emtec-NJ"),
which since 1980 had been engaged in the business of providing IT products and
services to the computer industry. Upon the merger we retained all of our
assets, subject to liabilities, and assumed all of the assets and liabilities of
Emtec-NJ. Although we have retained the lease in the geothermal power unit, our
current intent is not to seek other opportunities in the gas and oil field.
Our executive offices are located at 817 East Gate Drive, Mount Laurel,
New Jersey; telephone: (856) 235-2121. Our website is located at
www.emtecinc.com. We have made
available free of charge through our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material was electronically filed with, or furnished to, the Securities and
Exchange Commission. The information on our website is not part of this Annual
Report.
Industry Background
The broad market in which we compete is the provision of IT services.
This marketplace consists of traditional IT services such as hardware and
software procurement, life-cycle services, and network consulting, as well as
new and innovative Internet services such as web enablement, remote network
monitoring, help desk services, and information security.
As the market for IT products has matured over the past several years,
price competition has intensified. That factor, combined with abbreviated
product lifecycles, has forced IT product manufacturers to pursue lower cost
manufacturing and distribution strategies. Resellers who were able to serve the
needs of corporate end users requiring diverse brands of products and related IT
services were initial beneficiaries of this heightened competition. More
recently, however, continuing competition and manufacturers' renewed efforts to
improve their cost structures have led to both consolidations and business
failures among resellers. Manufacturers have shifted from exclusive distribution
partners to "open sourcing" and some have begun direct selling efforts with a
view to capturing market share from resellers.
At the same time that the market for IT products is consolidating, the
market for IT services and, in particular, managed services, is expanding. Many
companies have become increasingly dependent on the use of IT as a competitive
tool in today's business environment. The need to distribute and access data on
a real-time basis throughout an organization and between organizations has led
to the rapid growth in network computing infrastructures that connect numerous
and geographically dispersed end users through local and wide area networks.
This growth has been driven by the emergence of industry standard hardware,
software, and communications tools, as well as the significant improvement in
the performance, capacity, and utility of such network-based equipment and
applications.
The decision-making process that confronts companies when planning,
selecting, and implementing IT infrastructure and services continues to grow
more complex. Organizations are continually faced with technology obsolescence
and must design new networks, upgrade, and migrate to new systems. As a result
of the rapid changes in IT products and the risks associated with the commitment
of large capital expenditures for products and services whose features and
perceived benefits are not within the day-to-day expertise of operating
management, many businesses increasingly are outsourcing some or all of their
network management and support functions and are seeking the expertise of
independent providers of IT products and services.
Our Strategy
Our primary business objective is to become a leading single-source
provider of high quality and innovative IT products, services, and support. We
believe that by working with a single-source provider, business organizations
will be able to adapt more quickly to technological changes and reduce their
overall IT costs. To this end, we are pursuing the following strategies:
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Expand Solution Offerings
In order to make our services more valuable to customers and potential
customers, we acquired an established remote network operations center (NOC) and
help desk in January 2002. During the fiscal year 2003 we invested approximately
$710,000 for the purchase of computer hardware, software, and consulting
services for our Network Operations Center to enhance our offerings in Managed
Services. Together with our existing project management offerings, these
comprise a set of managed services that enable customers to manage their IT
infrastructure more effectively.
For the year ended March 31, 2003, our managed services revenue amounted to
approximately $558,000.
Pursuing Strategic Acquisitions
We are seeking to expand our service offerings, to add to or enhance our
base of technical or sales personnel, and to nurture and expand client
relationships by means of acquisitions of companies whose businesses complement
our businesses and, in particular, our IT consulting services. We intend to
focus on companies with management teams who are willing to commit to long-term
participation in our organization and who share our vision of continued growth.
As of the filing date of this report, there was no material pending acquisition.
On August 31, 2002, we acquired all of the customer contracts and certain
assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The purchase price is
being paid over a two-year period commencing on the date of the acquisition and
is based on a share of earnings derived from the customer contracts transferred
from Turnkey to Emtec.
On August 12, 2002, we acquired certain assets of Acentra Technologies,
Inc., including the assumption of the State of New Jersey computer supply and
services contract, for a net purchase price of $165,607 in cash.
On January 9, 2002, we acquired substantially all of the assets of Devise
Associates, Inc., an information technology consulting and managed services
subsidiary of McLeodUSA, Inc. located in New York City.
Capitalizing on Existing Relationships
We have invested in training and committed resources to obtain company
certifications from key industry manufacturers, and have entered into written
agreements with most of these manufacturers, such as Sun, IBM, HP, Dell, CISCO,
Microsoft, Novell and Citrix. These agreements grant us a nonexclusive right to
purchase the manufacturer's hardware and license its software for our internal
business use and for commercial integration and resale. Typically, our
agreements with such manufacturers, such as those with Sun, IBM, CISCO,
Microsoft, Novell and Citrix, provide for a one-year term, renewable by the
parties for successive one-year terms and are terminable by either party on
prior written notice ranging from 30 to 45 days. They generally do not contain
financial terms for resale of the manufacturer's products, which terms are
separately governed by purchase orders.
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Moreover, we believe that our history of satisfying the IT product
requirements of our larger customers is facilitating the marketing of our broad
range of managed services to this important segment of our clientele.
Our Business
o IT Services
Enterprise Infrastructure Solutions: We offer a full spectrum of IT
product acquisition and support services needed to support client/server
environments, including product sourcing, network design and implementation,
technical support, server consolidation, and clustering and load balancing for
high availability.
Managed Services: We manage customers' networks through the utilization
of outsourced help desk and network monitoring services, which allows
organizations to focus the majority of their efforts on their businesses - not
on managing their IT infrastructures.
Data Management Solutions: We manage the business-critical data of our
customers through the implementation of storage and backup solutions that
enhance the reliability and performance of their networks.
Network Security Solutions: We ensure that customers' infrastructure
and data are protected through the implementation of firewall, VPN, remote
access authentication, and virus detection technologies.
Innovation Centers: Among our most important customer resources are our
Innovation Centers established at Norcross, Georgia and Cranford, New Jersey.
These centers give our customers the ability to test the scalability and
suitability of a hardware and software configuration before investing in the
technology. Staffed by high-level certified engineers, the Innovation Centers
can simulate up to a 2,000-user load. The Centers are equipped with high-end Sun
Microsystems'TM' servers, Sun Ray'TM' thin clients, Sun'TM' storage arrays, and
NT servers, as well as a wide array of software applications, including Lotus
Notes/Domino, IBM's DB2 product family, Oracle, Veritas backup and storage
products.
Lifecycle Management Services: Our lifecycle management services are
designed to provide customers with continuous availability of service and
support throughout the lifecycle of their IT investments, including the full
spectrum of IT product acquisition and support services needed to support server
environments. Our services include:
o Evaluation and prioritization of business objectives to determine
the best course of action for our customers;
o Consultation with customers to identify the right IT products and
services for their needs;
o Leveraging our vendor relationships to quickly source the right
combination of products;
o Providing logistical support needed to deploy a major technology
roll out;
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o Offering assistance to reduce the overall operating cost of
maintaining current technology through a private label lease
program; and
o Providing continuous support to enable a client to improve
end-user satisfaction, minimize downtime, and lower the total
cost of ownership.
K-12 Specialized Services for Student and Faculty Needs: We integrate
top-quality curriculum software and computer products into the classroom. We
have significant experience in building local area networks that link many
campuses together. We also provide district-wide support and sustain Internet
access to educational resources worldwide. We tailor our array of services to
make the best use of limited funds.
Manufacturers Support Services Contracts: We offer manufacturer support
service contracts that provide our clients with extended technical support,
onsite hardware service and access to new software releases at a fixed price.
Most of the revenue from this portion of our business comes from selling Sun
Microsystems contracts.
Our IT services activities accounted for approximately 17.50%, 18.60%
and 12.17% of our total revenues for fiscal years 2003, 2002 and 2001,
respectively.
o IT Reseller
IT Reseller: We are an authorized reseller of the products of many
leading IT manufacturers, such as 3Com, CISCO, Compaq, HP, IBM, Intel,
Microsoft, NEC, Veritas, Novell, Dell, and Sun. Such products include
workstations, servers, networking and communications equipment, enterprise
computing products, and application software. Our business depends in large part
upon our ongoing access to well established aggregators, in particular GE
Access, Ingram Micro, Inc. and Tech Data Corp. as well as directly with Dell
Computers to enable us to acquire IT products at competitive prices and on
reasonable terms for resale to our customers.
Through our alliances with GE Access, Ingram, Tech Data and Dell
Computers, we provide our customers with competitive pricing and value-added
services such as electronic product ordering, product configuration, testing,
warehousing, and delivery. Our relationships with our aggregators and Dell
Computers allow us to minimize inventory risk by ordering products primarily on
an as-needed basis. We believe that in most cases our ability to acquire
products on a cost-plus basis affords us the opportunity to avail ourselves of
prices lower than those that could be obtained independently from manufacturers
or other vendors. We utilize electronic ordering and pricing systems that
provide real-time status checks on the aggregators' inventories and maintain
electronic data interchange links to other suppliers. Our sales team is thereby
able to schedule shipments more accurately and to provide electronically-
generated client price lists.
We have not entered into any long-term supply contracts with any of our
suppliers, as we purchase computers, computer systems, components, and parts on
a purchase order basis. Our agreements with GE Access, Ingram, Tech Data and
Dell, who collectively supplied approximately 85%, 79% and 80% of our resale
products in the fiscal years 2003, 2002 and 2001, respectively, may be
terminated by such companies at any time upon 30 days' prior written notice.
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We receive manufacturer rebates resulting from certain equipment sales.
In addition, we receive volume discounts and other incentives from various
suppliers. Except for products in transit or products awaiting configuration at
our facility, we generally do not maintain large inventory balances. Our primary
vendors limit price protection to that provided by the manufacturer (generally
less than 30 days) and they restrict product returns, other than defective
returns, to a percentage (the percentage varies depending on the vendor and when
the return is made) of products purchased. Those returns must occur during a
defined period, at the lower of the invoiced price or the current price, subject
to the specific manufacturer's requirements and restrictions.
Our IT reseller activities accounted for approximately for 82.31%,
81.10%, and 87.79% of our total revenues for the fiscal years ended March 31,
2003, 2002 and 2001, respectively.
Marketing
Our marketing efforts are focused on:
o Broadening our public image as a Managed Services and IT service
provider;
o Promoting our new Managed Services offerings to current
customers, prospects, partners, and investors;
o Maintaining a constant flow of marketing communications to
increase and maintain our market presence;
o Driving prospects to our web site; and
o Increasing overall inquiries and sales from all sources.
Our business development center is charged with sales lead generation.
We have developed a computer-based process by which a series of letters or
e-mails are sent to a prospective customer to provide initial information about
us before a sales call is made. The system executes strategies automatically and
prompts the sales representative when action is required. We expect that
creating multiple and frequent "touches" of our prospective customers through
letters, faxes, e-mails, and phone calls, become the basis of our marketing
efforts. We will continue to utilize the business development center software
package as a part of our marketing strategy, and are also marketing the software
package to our customers. We anticipate supplementing our marketing efforts with
seminars and consulting- and services-oriented direct mail.
Customers
Our targeted customers are primarily Fortune 2000 companies, state and
local governments, local school districts, and other large and mid-sized
companies located principally in the New York/New Jersey Metropolitan area and
the Southeastern United States. Our commercial business is generally with
customers with annual revenues ranging from $50 million to $500 million.
Although we have over 150 customers, our two largest customers, Gwinnett County
School System (Georgia) and State of New Jersey, accounted, respectively, for
approximately 19.71% and 15.06% of our revenues for the year ended March 31,
2003. These same two customers accounted, respectively, for approximately 13.85%
and 0.00% of our
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revenues in fiscal year 2002 and approximately 10.23% and 0% of our revenues in
fiscal year 2001. The State of New Jersey computer supply and service contract
was acquired in the August 12, 2002 asset acquisition from Acentra Technologies.
An additional eight customers, Duval County School System, Cingular Wireless,
Tiffany & Co., Bally's Park Place Casinos, Forsythe Solutions Group, BellSouth
Corporation, Mizuho Securities USA, and Cox Communications, collectively
accounted for 33.85%, 23.37% and 17.76% of our revenues for the years ended
March 31, 2003, 2002 and 2001, respectively. We anticipate that these customer
concentrations will continue for the foreseeable future. The loss of any one of
these customers may cause results of operations to vary materially from those
anticipated.
Intellectual Property
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect our
proprietary rights and the proprietary rights of third parties from whom we
license intellectual property. We enter into confidentiality agreements with our
employees and limit distribution of proprietary information.
Our business also includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to our client.
Competition
The IT services industry is highly competitive. Our competitors
include:
o established computer product manufacturers (some of which supply
products to us);
o distributors;
o computer resellers;
o systems integrators; and
o other IT service providers.
Many computer product manufacturers also sell to customers through
their direct sales organizations and certain of them have announced their
intention to enhance such direct sales efforts. Many of our current and
potential competitors have longer operating histories and financial, sales,
marketing, technical, and other resources substantially greater than we do. As a
result, our competitors may be able to adapt more quickly to changes in client
needs or to devote greater resources than we can to the sales of IT products and
the provision of IT services. Such competitors could also attempt to increase
their presence in our markets by forming strategic alliances with our other
competitors or with our customers, offering new or improved products and
services to our customers or increasing their efforts to gain and retain market
share through competitive pricing. Although, we have contracts with the State of
New Jersey, Gwinnett County School System, Duval County School System and
Tiffany & Co., we have no ongoing written commitments from any customers to
purchase products, and all product sales are made on a purchase-order basis.
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We are also in direct competition with local, regional, and national
distributors of microcomputer products and related services as well as with
various IT consulting companies. These competitors run the gamut from new dot
com consulting companies to the established consulting arms of nationwide
accounting and auditing firms. Several of these competitors offer most of the
same basic products as we do. We also encounter competition from microcomputer
suppliers that sell their products through direct sales forces, rather than
through resellers such as ourselves, and from manufacturers and distributors
that emphasize mail order and telemarketing sales.
The tri-state metropolitan Connecticut, New Jersey, and New York area
and parts of New England, which, on a revenue basis, accounted for 52.19%, 58.3%
and 67.7% of our revenues during the fiscal years 2003, 2002 and 2001,
respectively, are particularly characterized by highly discounted pricing on
microcomputer products from various sources.
Depending on the customer, the principal areas of competition may
include price, pre-sale and post-sale technical support and service,
availability of inventory, and breadth of product line. We have an insignificant
market share of sales in the microcomputer industry and of the service markets
that we serve. Most of our competitors at the regional and national levels are
substantially larger, have more personnel, have materially greater financial and
marketing resources, and operate within a larger geographic area than we do.
Employees
As of June 28, 2003, we employed 200 individuals, including 36 sales,
marketing and related support personnel, 125 service and support employees, 29
operations and administration personnel, and 10 employees in accounting,
finance, and human resources. We believe that our ability to recruit and retain
highly skilled technical and other management personnel will be critical to our
ability to execute our business model and growth strategy. We have 6 employees
in our Cabling Department who are covered by a collective bargaining agreement
with the International Brotherhood of Electrical Workers (IBEW). We believe that
our relations with our employees are good.
-8-
Item 2. Properties
We lease space in seven locations. Our corporate headquarters and
principal operational facilities are currently located in Mount Laurel, New
Jersey. The following table contains certain information about each of our
leased facilities:
Size
Address (in square feet) Monthly Rent Expiration Date
------- --------------- ------------ ---------------
817 East Gate Drive 15,596 $20,493 March 31, 2004
Mount Laurel, NJ 08054
70 Jackson Drive 13,360 $12,918 June 30, 2004
Cranford, NJ 07016
2990 Gateway Drive, Suite 500 17,102 $13,460 August 14, 2004
Norcross, GA 06855
7843 Bayberry Road 3,340 $2,218 February 28, 2005
Jacksonville, FL 32256
880 Third Avenue, 12th floor 7,635 $24,777 June 30, 2008(1)
New York, NY 10022
422 Highland Avenue 1,500 $950 July 31, 2005
Cheshire, CT 06410
572 Whitehead Road, Bldg. #5 9,582 $4,432 November 14, 2003(2)
Trenton, NJ 08619
------------------
(1) We assumed this lease on January 9, 2002 in connection with our acquisition
of Devise Associates, Inc.
(2) This space is strictly a warehouse facility.
We believe these facilities will satisfy our anticipated needs for the
foreseeable future.
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Item 3. Legal Proceedings
In March 2002, Logical Business Solutions, Inc., one of our
competitors, instituted an action in the Circuit Court, Fourth Judicial Circuit,
in Duval County, Florida, against us and Cheryl Pullen, one of our employees,
alleging that we wrongfully interfered with its contractual relationship with
one of its customers. The amount of damages was not specified. The litigation is
currently in the discovery stage. We believe that the claim is without merit and
intend to vigorously defend against the claim.
In addition we are subject to legal proceedings that arise in the
ordinary course of business, but we do not believe these claims will have a
material impact on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for Emtec's Common Equity and Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ETEC." The following table sets forth the high and low closing prices of our
common stock for the periods indicated:
Three Months Ended High Low
------------------ ---- ---
March 31, 2003 $0.36 $0.24
December 31, 2002 0.53 0.25
September 30, 2002 0.60 0.29
June 30, 2002 0.70 0.35
March 31, 2002 1.03 0.60
December 31, 2001 0.70 0.40
September 30, 2001 0.54 0.35
June 30,2001 0.47 0.28
The above quotations represent prices between dealers and do not
include retail mark-ups, markdowns or commissions. They do not necessarily
represent actual transactions.
As of July 1, 2003, there were 705 record holders of our common stock,
although we believe that beneficial holders approximate 800.
We have never declared any dividends on our common stock and we have no
intention to do so in the foreseeable future.
Item 6. Selected Financial Data
The following selected consolidated financial data below should be read
in conjunction with our consolidated financial statements including the
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations, both elsewhere in this Report. The data as
of March 31, 2003 and 2002 and for each of the three years ended March 31, 2003
have been derived from, and should be read in conjunction with, our audited
consolidated financial statements and accompanying notes, which are contained
elsewhere in this Report. The data as of March 31, 2001, 2000, and 1999 and for
each of the two years ended March 31, 2000 have been derived from our audited
financial statements, which are not contained in this Report.
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YEAR ENDED MARCH 31,
--------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Net revenues $92,260,028 $62,656,199 $88,313,598 $99,543,353 $91,089,980
Income (loss) from continuing
operations $ (211,471) $ 216,972 $(1,257,825) $ 316,004 $ 971,468
Income (loss) per common share
from continuing operations
(basic and diluted) $ (0.03) $ 0.03 $ (0.22) $ 0.06 $ 0.18
Total assets $22,334,584 $11,388,473 $18,699,032 $21,401,172 $26,910,725
Emtec had no long-term debt obligations or outstanding preferred stock
during the five years ended March 31, 2003. In addition, no dividends were paid
to common stockholders during the same period.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reference is made to the "Risk Factors" below for a discussion of
important factors that could cause actual results to differ from expectations
and any of our forward-looking statements contained herein. In addition, the
following discussion should be read in conjunction with our audited consolidated
financial statements as of and for the fiscal years ended March 31, 2003,and
2002.
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
-12-
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 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 the Company
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. Thus starting the
current fiscal year, we have adopted net revenue reporting for manufacturer
support service contracts and to conform to the current presentation, have
reclassified contract costs from prior periods as an offset to revenue.
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 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.
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.
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 shortened, resulting in the recognition of
increased depreciation and amortization in future periods. We review for
impairment when events or circumstances indicate that the carrying amounts may
not be recoverable over the remaining lives of the assets. In assessing
impairments, we follow the provisions of Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," utilizing cash flows which takes into account management's estimates of
future operations.
-13-
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. We performed the initial
goodwill impairment test as of April 1, 2002 and another impairment test as of
March 31, 2003. Based on the impairment test performed as of March 31, 2003, the
goodwill of $254,894 associated with the acquisition of Devise Associates, Inc.,
was determined to be fully impaired and charged to earnings. This determination
was based upon the operating and cash flow losses of this business unit since
the January 9, 2002 acquisition date and budgeted fiscal 2004 operating and cash
flow losses for this business unit. The Company found no impairment of its
remaining goodwill of $112,996.
The Company was 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 $36,364 was expensed in 2003 based upon the
current contract term that ends at May 2004. The contract is subject to annual
renewals. The Company was successful in renewing the May 2003 contract during
fiscal 2003. The net carrying value for this contract amounted to $ 63,636 at
March 31, 2003.
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. For the year ended March 31, 2003, the
Company has recognized a deferred income tax benefit of $78,907 as disclosed in
Note 6 of the financial statements. This benefit was recorded due to the
expected utilization of net operating loss carry-forwards held by the Company at
March 31, 2003 in fiscal 2004. The Company continues to be conservative in
accounting for income taxes by recording significant valuation allowances for
deferred tax assets due to the high degree of uncertainty that exists regarding
future operating results.
Results of Operations
Comparison of Years Ended March 31, 2003 and 2002
Total Revenues
Total revenues for our IT business, which includes services and
consulting revenue, and procurement revenues, increased by 47.41% or $29.61
million, to $92.08 million for the year ended March 31, 2003, compared to $62.47
million for the year ended March 31, 2002. This increase is primarily
attributable to our new business, which commenced in March 2002, with a school
district in Jacksonville, Florida, and our acquisitions of Devise Associates,
Inc. in January 2002, Acentra Technologies, Inc. in August 2002 and Turnkey
Computer Systems, Inc. in August 2002. IT revenue associated with this added
business and acquisitions equaled $31.59 million for the year ended March 31,
2003.
-14-
Services and consulting revenue increased by 38.49%, or $4.48 million,
to $16.14 million for the year ended March 31, 2003 compared to $11.65 million
for the year ended March 31, 2002. This increase is attributable to an increase
in our manufacturers support services contracts revenues and new business with a
school district in Jacksonville, Florida, and from the acquired businesses
mentioned above. Net revenues associated with manufacturers support services
contracts revenue increased by 81.64%, or $1.22 million, to $2.71 million for
the year ended March 31, 2003 compared to $1.49 million for the year ended March
31, 2002. This increase in manufacturers support services contracts revenue is
mainly attributable to a $1.37 million sale to one customer. Services and
consulting revenue associated with this added business and acquisitions amounted
to $6.74 million for the year ended March 31, 2003. Without these acquisitions,
services and consulting revenue, exclusive of manufacturer support service
contracts, decreased by 34.15%, or $3.47 million for the year ended March 31,
2003.This decrease is mainly due to a slow-down in the economy.
Procurement revenues also increased by 49.46%, or $25.13 million, to
$75.94 million for the year ended March 31, 2003. This increase is the net
result of the additional revenues of Jacksonville, Florida location and the
acquisitions of Devise Associates, Inc., Acentra Technologies, Inc. and Turnkey
Computer Systems, Inc. of approximately $24.29 million recorded in the year
ended March 31, 2003. Without these acquisitions, procurement revenue would only
have increased by 1.65%, or $836,655 for the year ended March 31, 2003.
Geothermal Revenues of $175,902 for the year ended March 31, 2003
decreased by 6.42%, or $12,076 due to lower production of
steam.
Gross Profit
Our aggregate gross profit for IT business increased by 27.16%, or $2.7
million, to $12.64 million for the year ended March 31, 2003. This increase is
mainly attributable to a 47.41% increase in our IT revenues. Measured as a
percentage of our total revenues for IT business, our overall gross profit
margin decreased to 13.73% of total revenues for the year ended March 31, 2003
from 15.92% for the year ended March 31, 2002. This decrease is mainly due to
lower gross profit margin from our services and consulting revenues.
Gross profit for product sales increased by 40.75%, or $2.44 million,
to $8.42 million for the year ended March 31, 2003 as compared with $5.98
million for the year ended March 31, 2002. This increase is mainly attributable
to a 49.46% increase in product revenue. Measured as a percentage of procurement
revenues, our gross profit margin decreased to 11.08% of procurement revenue for
the year ended March 31, 2003 from 11.77% for the year ended March 31, 2002.
This decrease is mainly due to continued downward pricing pressure on product
sales.
Gross profit for service and consulting increased by 6.65%, or
$263,534, to $4.22 million for the year ended March 31, 2003 as compared with
$3.96 million for the year ended March 31, 2002. This increase is mainly
attributable to a 38.49% increase in services and consulting revenues. Measured
as a percentage of services and consulting revenues, our gross margin
attributable to services and consulting revenue decreased to 26.18% of services
and consulting revenue for the year ended March 31, 2003 from 33.99% for the
year ended March 31, 2002. This decrease is due to lower billing rates (total
revenue generated divided by total billable hours available during the period)
due to poor utilization rates (billable hours divided by paid hours) of
engineers during this year.
-15-
The geothermal gross profit of $103,426 for the year ended March 31,
2003 decreased by 17.19%, or $21,469 due to lower production of steam coupled
with higher operating expenses for the year.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 39.79%, or
$3.58, to $12.57 million for the year ended March 31, 2003 as compared with
$8.99 million for the year ended March 31, 2002. This increase is primarily a
result of the following: 1) a $3.74 million increase due to our new business
with a school district in Jacksonville, Florida and the acquisitions of Devise
Associates, Inc., Acentra Technologies, Inc., and Turnkey Computer Systems, Inc.
(including expenses such as sales and administrative personnel costs, sales
commissions, benefit expense, rent, insurance, depreciation, building
maintenance, and other fixed costs) and 2) a $87,000 Sales and Use tax payment
including interest to the State of New York as a result a of sales and use tax
audit covering the last five years.
Interest expense
Interest expense for the year ended March 31, 2003 decreased by 23.54%,
or $49,502, to $160,803 the year ended March 31, 2003 as compared with $210,305
for the year ended March 31, 2002. This decrease is mainly attributable to lower
interest rates, a lower balance on our line of credit, and improved accounts
receivable collection performance during the period.
Loss on impairment, Goodwill
The Company implemented Statement of Financial Accounting Standard No.
142 "Goodwill and Other Intangible Assets" which required that goodwill no
longer be amortized against earnings, but instead be reviewed periodically for
impairment. Based on the impairment test performed on March 31, 2003 the
goodwill of $254,894 associated with the acquisition of Devise Associates, Inc.
was impaired.
e-Business Costs
e-Business costs for the year ended March 31, 2003 was $0, as compared
with $617,220 for the year ended March 31, 2002. As of January 2002 we
discontinued our e-Business division, which was started in January 2000. This
cost had mainly consisted of costs associated with maintaining a sales and
consulting team of approximately 8 employees, as well as training, certifying,
marketing, and advertising expenses.
Income Taxes
Income tax benefit for the year ended March 31, 2003 was $32,615, as
compared with expense of $5,632 for the year ended March 31, 2002. For the year
ended March 31, 2003, the Company recognized a deferred income tax benefit of
$78,907 that is partially offset by a current income tax expense of $46,292.
-16-
Comparison of Years Ended March 31, 2002 and 2001
Total Revenues
Total revenues for the IT business which includes services and
consulting revenue, and procurement revenues, decreased by 29.24% or $25.81
million, to $62.47 million for the year ended March 31, 2002, compared to $88.28
million for the year ended March 31, 2001. This decrease is mainly due to the
slow-down in the economy. Services and consulting revenue increased by 8.47%, or
$909,618, to $11.65 million for the year ended March 31, 2002 compared to $10.74
million for the year ended March 31, 2001. This increase is mainly attributable
to an increase in our manufacturers support services contracts revenues. Net
revenues associated with manufacturers support services contracts revenue
increased by 117%, or $805,383, to $1.49 million for the year ended March 31,
2002 compared to $684,966 for the year ended March 31, 2001. Product procurement
revenues decreased by 34.46%, or $26.72 million, to $50.81 million for the year
ended March 31, 2002. This decline in product procurement revenue is also mainly
due to the slow-down in the economy. In addition, some of our customers were
choosing to procure their IT products directly from manufacturers and our
continued focus on growing our IT consulting and professional services have had
a negative impact on product revenues.
Geothermal Revenues of $187,978 for the year ended March 31, 2002 are
consistent with the previous year's revenues.
Gross Profit
Our aggregate gross profit for IT business declined by 9.18%, or $1.00
million, to $9.94 million for the year ended March 31, 2002. This decrease is
mainly attributable to a 25.01% decrease in our IT revenue due to the slow-down
in the economy. Measured as a percentage of net sales, our overall gross profit
margin increased to 15.92% of net sales for the year ended March 31, 2002 from
12.40% for the year ended March 31, 2001. This increase is mainly due to
increase in our services and consulting revenues.
Gross profit for product sales declined by 26.79%, or $2.19 million,
to $5.98 million for the year ended March 31, 2002 as compared with $8.17
million for the year ended March 31, 2001. This decrease is mainly attributable
to a 34.46% decrease in product revenue. Measured as a percentage of net product
sales, our gross profit margin attributable to product sales increased to 11.77%
for the year ended March 31, 2002 from 10.54% for the year ended March 31, 2001.
Gross profit for service and consulting increased by 42.57%, or $1.18
million, to $3.96 million for the year ended March 31, 2002 as compared with
$2.78 million for the year ended March 31, 2001. This increase is mainly
attributable to higher utilization rates for our engineers. Also, measured as a
percentage of our gross margin attributable to services and consulting revenue
increased to 33.99% of services and consulting revenue for the year ended March
31, 2002 from 25.86% for the year ended March 31, 2001.
The geothermal gross profit of $124,895 for the year ended March 31,
2002 is consistent with the gross profit for comparable previous periods.
-17-
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses decreased by 12.16%, or
$1.24 million, to $8.99 million for the year ended March 31, 2002. This decrease
is primarily a result of lower sales commission expenses due to a decline in the
aggregate gross margin from IT business, termination of the management bonus
plan beginning January 2001, and lower bad-debt expense due to improved accounts
receivable collection performance.
e-Business Costs
e-Business costs for the year ended March 31, 2002 was $617,220, or
6.27% of total operating expenses, as compared with $1.30 million, or 10.58% of
total operating expenses for the year ended March 31, 2001. As of January 2002
we have discontinued our e-Business division that we 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.
Other Income (Expense)
Total other income (expense) for the year ended March 31, 2002 equaled
to $0, as compared to $24,108 for the year ended March 31, 2001. This relates
primarily to legal settlement income, net of costs, as well as a loss from the
disposition of marketable securities. Legal settlement income net of cost is
$170,993. This includes approximately $355,000 in cash and marketable securities
worth $176,000, less legal and other operating expenses equal to approximately
$355,000. Loss from the disposition of marketable securities received in legal
settlement equaled $146,885.
Income Taxes
Income tax expense of $ 5,632 was recorded for the year ended March 31,
2002. This amount included a deferred tax expense of $ 13,693 netted against a
current income tax benefit of $ 8,061. An income tax benefit of $ 75,029 was
recorded for the year ended March 31, 2001. This amount included a deferred tax
benefit of $ 86,765 netted against a current income tax expense of $ 11,736. The
$ 75,029 income tax benefit amount was allocated as a $ 73,059 benefit from
continuing operations and a $ 1,970 benefit from discontinued operations. A
valuation allowance of 90% of the amount of deferred tax assets was recorded at
March 31, 2002 and 2001.
Loss from Discontinued Operations
Loss from discontinued South Carolina operations, net of income taxes,
for the year ended March 31, 2001 equaled $63,649. The loss from discontinued
operations for the year ended March 31, 2001 was primarily due to lease
payments, contracted advertising expenses, and additional reserve for bad debt.
-18-
Recently Issued Accounting Standards
In June 2001, the FASB issued two new statements: SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other intangible
Assets."
Effective April 1, 2002, Emtec adopted SFAS No. 141 that requires
business combinations entered into after June 30, 2001 to be accounted for using
the purchase method of accounting. Specifically identifiable intangible assets,
other than goodwill, are to be amortized over their estimated useful economic
life.
SFAS No. 142 requires that goodwill not be amortized, but should be
tested for impairment at least annually. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001 and applies to goodwill and other
intangible assets, regardless of when those assets were initially recognized.
Effective April 1, 2002, Emtec adopted SFAS No. 142 and in connection with its
adoption, discontinued the amortization of goodwill and reviewed the estimated
useful lives of previously recorded identifiable intangible assets. Emtec
follows the two-step process prescribed in SFAS 142 to test its goodwill for
impairment. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. Under the guidelines
of SFAS No. 142, Emtec is required to perform an impairment test at least on an
annual basis. Emtec performed its initial goodwill impairment test as of April
1, 2002 and another impairment test as of March 31, 2003. Based on the
impairment test performed on March 31, 2003 the goodwill of $254,894 associated
with the acquisitions of Devise Associates, Inc. was impaired.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of
SFAS 121 for (I) recognition/measurement of impairment of long-lived assets to
be held and used and (II) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board's No. 30 ("APB 30"). "Reporting the Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, "for
segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. Emtec adopted the provisions of SFAS 144 effective
April 1, 2002. The adoption of this standard did not have any material impact on
Emtec's financial statements at March 31, 2003.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2003 of $1,792,101 represented
an increase of $239,435 from $1,552,666 at March 31, 2002. We are a net
borrower; consequently, we believe our cash and cash equivalents balance must be
viewed along with the available balance on our line of credit.
-19-
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. On November 21, 2001, we entered into a
$10.0 million revolving credit facility with Fleet Capital Corporation, formerly
Summit Business Capital Corporation ("Fleet"). Interest on outstanding loans
under our revolving credit facility with Fleet is charged monthly at a
fluctuating rate per annum equal to 0.25% above the Prime Rate and, at our
option, interest on up to 50% of the outstanding loans may be charged at LIBOR
plus 2.75%. Our Fleet revolving credit facility is collateralized by a lien upon
and security interest in substantially all of our assets. As our current credit
facilities with two of our primary trade vendors, GE Access, and Ingram Micro,
were also collateralized by substantially all of our assets, we, Fleet, GE
Access and Ingram Micro, have entered into intercreditor agreements, which
provide that as regards to these vendors, our obligations to Fleet are accorded
priority. On November 21, 2001, we also entered into a Wholesale Financing
Security Agreement with IBM. This credit facility, which is collateralized by a
$750,000 letter of credit from Fleet in favor of IBM, affords us up to a like
amount of credit to purchase IBM products from IBM Global Financing. On January
9, 2002, Fleet also issued a $250,000 letter of credit in favor of Vandergrand
Properties Co., L.P., our landlord for our New York City office, as a security
deposit for the building lease. At March 31, 2003, we had an $8.2 million
outstanding loan balance under the credit facility.
Our lending agreement with Fleet contains financial covenants that
require us to maintain a minimum leverage ratio, minimum debt service coverage
ratio, minimum tangible net worth, and prohibits quarterly losses. As of March
31, 2003 Emtec was not in compliance with any of its covenants. The following
table quantifies Emtec's non-compliance with its financial covenants with Fleet.
-----------------------------------------------------------------------------------------------------------
Covenants Required Actual As of
--------- -------- ------------
3/31/03
-------
-----------------------------------------------------------------------------------------------------------
Leverage Ratio Not to exceed 11.0 : 1.0 12.33 : 1.0
-----------------------------------------------------------------------------------------------------------
Debt Service Coverage Ratio Not to be less than 1.20 : 1.0 (2.94) : 1.0
-----------------------------------------------------------------------------------------------------------
Tangible Net Worth Not to be less than $1,842,000 $1,661,855
-----------------------------------------------------------------------------------------------------------
Prohibition on Losses No Quarterly Losses Allowed in Quarterly Loss of
excess of $150,000 $(767,026) as of
December 31, 2002.
-----------------------------------------------------------------------------------------------------------
On June 11, 2003 Fleet offered to waive such non-compliance and
increase our credit facility permanently to $12.50 million through November 21,
2005 in consideration of a cash payment to Fleet of $50,000 and increased
interest rate of one percent above prime. Emtec is currently reviewing and
negotiating the amended terms of its facility but cannot state with any
certainty the terms upon which the credit facility will be continued or its
duration. Emtec and Fleet expect to finalize the amended terms within the next
30 days. . If we are unsuccessful in reaching an agreement with Fleet, Fleet may
immediately call for a repayment of the outstanding borrowings under the Credit
Facility. This action of Fleet could force us to find a substitute lender at a
higher cost and/or could adversely affect our day to day business.
-20-
On June 17, 2003 Fleet temporarily increased our current credit
facility from $10.0 million to $11.50 million. This increase expires on July 18,
2003.
At March 31, 2003, our credit facilities with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data were as follows: 1) Our credit
Line with GE Access was $4.0 million, no interest charged, with an outstanding
principal balance of $3.36 million. 2) Our credit line with Ingram Micro was
$2.50 million, at an 18% APR interest rate after 30 days from the date of the
invoice, with an outstanding principal balance of $2.51 million. 3) Our credit
line with Tech Data was $1.5 million, no interest charged, with an outstanding
balance of $1.49 million. Under these credit lines, we are obligated to pay each
invoice within 30 days from the date of such invoice.
Our capital expenditures of approximately $1.07 million during the year
ended March 31, 2003 are as follows; 1) approximately $710,000 for the purchase
of computer hardware, software, and consulting services for our Network
Operations Center to enhance our offerings in Managed Services, 2) approximately
$236,000 for the purchase of vehicles, furniture and fixtures, and computer
hardware and software for internal use mainly due to the acquisitions of Acentra
Technologies, Inc. and Turnkey Computer Systems, Inc. 3) approximately $59,000
for the purchase of computer equipment to upgrade our innovation center, and 4)
approximately $65,000 for the capital improvements for the geothermal well. We
anticipate our capital expenditures for fiscal year ending March 31, 2004 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 our available funds, together with existing and
anticipated credit facilities, as discussed above, will be adequate to satisfy
our current and planned operations for at least the next 12 months. If we are
unsuccessful in reaching an agreement with Fleet, Fleet may immediately call for
a repayment of the outstanding borrowings under the Credit Facility. This action
of Fleet could force us to find a substitute lender at a higher cost and/or
could adversely affect our day to day business.
The following are our contractual obligations associated with lease
commitments. The Company leases warehouse and office facilities, vehicles and
certain office equipment under noncancellable operating leases. Future minimum
lease payments under such leases are as follows:
Fiscal Years
------------
2004 $ 994,482
2005 485,006
2006 336,139
2007 330,208
Thereafter 403,188
----------
Total $2,549,023
==========
The Company has no other long-term commitments.
-21-
Risk Factors
We cannot assure you that we can successfully increase the portion of
our revenues derived from IT services. If we are unsuccessful our future results
may be adversely affected.
Our transition from an emphasis on reselling IT products to an emphasis
on providing IT services has placed significant demands on our managerial,
administrative, and operational resources. Our ability to manage this transition
effectively is dependent upon our ability to develop and improve operational,
financial, and other internal systems, as well as our business development
capabilities, and to attract, train, retain, motivate, and manage our employees.
If we are unable to do so, our ability to effectively deliver and support our
services may be adversely affected. Further, our transitional efforts to access
higher-margin services and consulting revenues have resulted in reduced IT
product sales. If we successfully expand our IT services offerings, periods of
variability in utilization may continue to occur. In addition, we are likely to
incur greater technical training costs during such periods. Historically, our IT
reseller activities accounted for 82.31%, or $75.94 million, of our total
revenue of $92.26 million for the fiscal year ended March 31, 2003, 81.10%, or
$50.81 million, of our total revenue of $62.66 million for the fiscal year ended
March 31, 2002, and 87.79%, or $77.53 million, of our total revenue of $88.31
million for the fiscal year ended March 31, 2001. In contrast, our IT services
activities accounted for approximately 17.50%, or $16.14 million, 18.60%, or
$11.65 million, and 12.17%, or $10.75 million, of our total revenue for the
fiscal years ended March 31, 2003, 2002 and 2001, respectively
Our new services have not achieved widespread client acceptance. If
they do not achieve market acceptance, our profit potential may be adversely
affected.
While we have offered IT services to our customers since 1983, our
major emphasis on IT consulting and services began in 1995 and we started
focusing on our new managed services and network security during fiscal year
2002.
We have limited experience in developing, marketing, or providing these
services. We cannot assure you 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.
Currently our recurring managed services revenues equal approximately
$30,000 a month.
Our inability to maintain high personnel utilization rates may
adversely impact our profit potentiality.
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
-22-
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.
Our revenues and expenses are unpredictable. A decrease in revenues or
increase in expenses could materially adversely affect our operating results.
Our operating results have been, and will continue to be, impacted by
changes in technical personnel billing and utilization rates. Moreover, we
expect that downward pricing pressure on certain of our products will persist
due to the continued commoditization of computer products. These products
include computer equipment such as desktops, laptops, printers and monitors
which currently comprise approximately 40% of our total product sales.
Our operating results have been, and will continue to be, impacted by
changes in technical personnel billing and utilization rates. Further, there are
numerous other factors, which are not within our control that can contribute to
fluctuations in our operating results, including the following:
o patterns of capital spending by customers;
o the timing, size, and mix of product and service orders and
deliveries;
o the timing and size of new projects, including projects for new
customers; and
o changes in trends affecting outsourcing of IT services;
We also believe that, to a limited degree, our business is seasonal
with a greater proportion of our product sales occurring in the second and third
quarter of our fiscal year due to the capital budgeting and spending patterns of
some of our larger customers. Operating results have been, and may in the future
also be, affected by the cost, timing, and other effects of acquisitions,
including the mix of product and service revenues of acquired companies.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. We are currently in default under our
credit facility, which could result in a demand for immediate repayment. Revised
terms of our indebtedness could materially limit our financial and operating
flexibility.
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 of more than
$150,000. As of March 31, 2003, we were not in compliance with its financial
covenants and, therefore, were in technical default of the Facility. Fleet has
offered to waive such non-compliance and increase our credit facility
permanently to $12.50 million through November 21, 2005 in consideration of a
cash payment to Fleet of $50,000 and increased interest rate of one percent
above prime. We are currently reviewing and negotiating the amended terms of its
facility but cannot state with any certainty the terms upon which the credit
facility will be continued or its duration. However, there can be no assurance
that Fleet will not immediately call for repayment of the outstanding borrowings
($8.20 million as of 3/31/03) under the Credit Facility
-23-
We do not have long-term commitments from any of our customers and our
product sales are on a purchase order basis. Our revenues are concentrated and a
loss of either one of our two top customers could materially affect our
operations and business.
In general, there are no ongoing written commitments by customers to
purchase products from us. All product sales we make are on a purchase order
basis. Moreover, our client base is highly concentrated, with our two largest
customers, Gwinnett County School System (Georgia) and State of New Jersey,
accounted, respectively, for approximately 19.71% and 15.06% of our revenues for
the year ended March 31, 2003. These same two customers accounted for,
respectively, approximately 13.85% and 0.00% of our revenues in fiscal year 2002
and for approximately 10.23% and 0% of our revenues in fiscal year 2001. The
state of New Jersey computer supply and services contract was acquired in the
August 12, 2002 asset acquisition from Acentra Technologies, Inc. An additional
eight customers, Duval County School System, Cingular Wireless, Tiffany & Co.,
Bally's Park Place Casinos, Forsythe Solutions Group, BellSouth Corporation,
Mizuho Securities USA, and Cox Communications, collectively accounted for
33.85%, 23.37% and 17.76% of our revenues for the years ended March 31, 2003,
2002 and 2001, respectively. We anticipate that these customer concentrations
will continue for the foreseeable future. The loss of any one of these customers
may cause results of operations to vary materially from those anticipated.
We may not be able to compete effectively in the highly competitive IT
services industry.
The IT services business is highly competitive. Our competitors
include:
o established computer product manufacturers, some of which supply
products to us;
o distributors;
o computer resellers;
o systems integrators; and
o other IT service providers.
Many computer product manufacturers also sell to customers through
their direct sales organizations and certain of them have announced their
intentions to enhance such direct sales efforts. Many of our current and
potential competitors have longer operating histories and financial, sales,
marketing, technical, and other resources substantially greater than we do. As a
result, our competitors may be able to adapt more quickly to changes in client
needs or to devote greater resources than we can to the sales of IT products and
the provision of IT services and we may not have the resources to compete
effectively.
We must maintain our status as an authorized reseller/service of IT
products. The loss on any one of such authorizations could have a material
adverse effect on our business and operations.
We are materially dependent on our continued status as an approved
reseller of IT products and our continued authorization as an IT service
provider. Without such authorizations, we would be unable to provide the range
of products and services we currently offer, including
-24-
warranty services, and manufacturers support services contracts. Our resale
agreements with manufacturers generally are terminable by manufacturers upon 30
days' prior written notice. The loss of one or more of such authorizations could
have a material adverse effect on our business and results of operations.
We have no long-term sales commitments from any of our suppliers. A
loss of any of our four principal suppliers would material adversely affect our
IT reseller business.
Our IT reseller business depends on large part upon our access to
aggregators and manufacturers, in particular GE Access, Ingram, Tech Data, and
Dell to supply us with products at competitive prices and on reasonable terms
for resale by us to our customers. Our agreements with Ingram, Tech Data and
Dell may be terminated by such companies upon 30 days prior written notice. Our
agreement with GE Access is effective until February 28, 2004. After February
28, 2004, our agreement with GE Access can be renewed or terminated by either
party. We cannot assure you that we will be able to continue to obtain products
from GE Access, Ingram, Tech Data, and Dell or our other vendors at prices or on
terms acceptable to us, if at all
Our client engagements entail significant risks; a failure to meet a
client's expectations could materially adversely affect our reputation and
business.
Many of our engagements involve projects that are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. Our failure or inability to meet a client's expectations
in the performance of our services could result in a material adverse change to
the client's operations and therefore could give rise to claims against us or
damage our reputation, adversely affecting our business, results of operations,
and financial condition.
Our ability to protect our intellectual property rights is
questionable. If we are unable to protect such rights, our financial condition
could be materially adversely affected.
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect our
proprietary rights and the proprietary rights of third parties from whom we
license intellectual property. We enter into confidentiality agreements with our
employees and limit distribution of proprietary information. However, we cannot
assure you that the steps taken by us in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights. We are subject to the risk of litigation alleging infringement of
third-party intellectual property rights. Any such claims could require us to
spend significant sums in litigation, pay damages, develop non-infringing
intellectual property, or acquire licenses to the intellectual property that is
the subject of the alleged infringement. Our inability or failure to establish
rights or to protect our rights may have a material adverse effect on our
business, results of operations, and financial condition.
We intend to expand our business through acquisitions of complementary
businesses. There is no certainty, however, that we will be successful in
acquiring any new businesses or that any such acquisitions will help us achieve
our strategic objectives.
As a part of our business development strategy, we intend to pursue
acquisitions of IT product and service businesses in order to expand our service
offerings, to add to or enhance our
-25-
base of technical or sales personnel, or to provide desirable client
relationships. The success of this strategy depends not only upon our ability to
acquire complementary businesses on a cost-effective basis, but also upon our
ability to integrate acquired operations into our organization effectively, to
retain and motivate key personnel, and to retain customers of acquired firms. We
cannot assure you that we will be able to acquire or integrate such businesses
successfully. Furthermore, we cannot assure you that financing for any such
acquisitions will be available on satisfactory terms, or that we will be able to
accomplish our strategic objectives as a result of any such transaction or
transactions. In addition, we expect to compete for attractive acquisition
candidates with other companies or investors in the IT industry, which could
have the effect of increasing the cost of pursuing our acquisition strategy, or
it could reduce the number of attractive candidates to be acquired. Acquisitions
also may involve a number of specific risks, including:
o possible adverse short-term effects on our operating results;
o dependence on retaining key customers and personnel;
o diversion of management's attention;
o amortization or impairment of acquired intangible assets; and
o risks associated with unanticipated problems, liabilities, or
contingencies.
Item 7A. 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 March 31, 2003 was approximately $8.20 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 $82,000
annually.
Item 8. Financial Statements and Supplementary Data
Reference is made to Item 15(a)(i) herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
-26-
PART III
Item 10. Directors and Executive Officers
The following table sets forth certain information as to each of our
executive officers and directors:
Positions and
Name Age Offices Presently Held
------------------------------- --- ------------------------------------------
John P. Howlett 59 Chairman of the Board and Chief Executive
Officer
Ronald A. Seitz 56 President and Chief Operating Officer and
Director
R. Frank Jerd 61 Director
George F. Raymond 66 Director
Sam Bhatt 35 Vice President Finance and Treasurer
Guy Fessenden 46 Executive Vice President
John P. Howlett has been our Chairman of the Board and Chief Executive
Officer since January 17, 2001 and Chief Executive Officer of Emtec-NJ since
August, 1997 and Chairman of Emtec-NJ since August, 1998. He has been a director
of Emtec-NJ since October, 1996. Mr. Howlett was the founder (in 1983) of
Cranford, New Jersey-based Comprehensive Business Systems, Inc. (CBSI). CBSI
primarily provided microcomputer systems, network integration, training, and
data communications to mid-size and Fortune 1000 corporations. In October 1996,
CBSI merged into Emtec-NJ. Prior to founding CBSI, Mr. Howlett was with the AT&T
Long Lines Division for twelve years. He earned a Bachelor of Science degree in
Electrical Engineering from Rose Hulman Institute of Technology in Terre Haute,
Indiana, and a Master of Business Administration degree from Fairleigh Dickinson
University in New Jersey. A Vietnam veteran, Mr. Howlett served in the U.S. Army
for four years.
Ronald A. Seitz has been our President and Chief Operating Officer
since February 2003 and Executive Vice-President and a director since January
17, 2001 and Executive Vice President of Emtec-NJ since March, 1996. Prior to
that he was the Chief Operating Officer of Emtec-NJ. He has been a director of
Emtec-NJ since April, 1995. Mr. Seitz was the founder (in 1980) of Charleston,
South Carolina-based Computer Source, Inc. (CSI). CSI primarily provided
microcomputer systems, network integration, and data communications to mid-size
and Fortune 1000 corporations. In April 1995, CSI merged with Landress
Information Systems of Mt. Laurel, New Jersey to become Emtec-NJ. Prior to
founding CSI, Mr. Seitz was employed for six years as an engineer with the U.S.
government in Washington, DC. He graduated from North Carolina State University
with a Bachelor of Science degree and from George Washington University with an
MBA in computer science. Mr. Seitz also holds a DMD degree from the Dental
School at the Medical University of South Carolina.
-27-
R. Frank Jerd was appointed as a director upon the consummation of our
merger with Emtec-NJ. Mr. Jerd is, and has been, a securities analyst for
Montauk Capital in New York since 1994. From 1992 to 1993, he was chief
executive officer of Benesys, Inc., a medical software company. He was also CEO
of Gandalf Systems Corporation from 1993 to 1994. Mr. Jerd earned a Bachelor of
Science Degree in Mathematics at Marshall University.
George F. Raymond was elected as a director in August 2001. Mr. Raymond
has been retired from active employment since 1989. Since his retirement, he has
worked as a consultant to the information technology industry. In 1972, Mr.
Raymond founded Automatic Business Centers, Inc., a payroll process service
company and served as its president until its sale to Automatic Data Processing
in 1989. In 1965 he co-founded Computer Services Inc, a general purpose data
processing service company, which was purchased by Management Data Corp. in
1969. Mr. Raymond served as the president of Computer Services Inc. until 1972.
Prior thereto, Mr. Raymond was a management consultant with Touche Ross & Co.
from 1961 to 1965. Currently Mr. Raymond serves on the Board of directors of
five companies, four of which are publicly traded.
Sam Bhatt has been Vice President - Finance and Treasurer of Emtec
since January 17, 2001 and of Emtec-NJ since July 2000. Prior to that and from
July, 1997, he was Director of Accounting for Emtec-NJ. He also held the
positions at Emtec-NJ of Accounting Manager (from 1994 to July, 1997) and of
Senior Accountant (from 1992 to 1994). Mr. Bhatt holds a Bachelor of Science
Degree in business administration from Drexel University in Pennsylvania and a
Diploma in Hotel Management from the Institute of Hotel Management and Catering
Technology in Bombay, India.
Guy Fessenden has been Executive Vice President of Emtec since January
2002. Mr. Fessenden joined Emtec from DIS Research, Ltd., which he founded in
1984 and where he was a Chief Executive Officer. Prior to founding DIS, Mr.
Fessenden was assistant to the CEO of WR Grace & Co., an international
conglomerate with holdings in number of industries, including shipping, food,
publishing and others. Mr. Fessenden earned a Bachelor of Science Degree in
Accounting and Master of Business Administration Degree at St. John's
University.
During 2003, the Board of Directors met eight times. Each director
attended all of the meetings of the Board of Directors. The Board of Directors
has no audit committee or compensation committee. The Board of Directors as a
whole makes all such determinations and any director who as is an "interested"
party in a specific matter abstains from voting on such matter.
Compliance With Section 16(a) of The Securities Exchange Act Of 1934
Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own beneficially more than 10% of our common stock to
file reports of ownership and changes in ownership of such common stock with the
Securities and Exchange Commission, and to file copies of such reports with us.
Based solely upon a review of the copies of such reports filed with Emtec, Emtec
believes that during the fiscal year ended March 31, 2003, such reporting
persons complied with the filing requirements of said Section 16(a), except that
Mr. Guy Fessenden was not timely in the filing of his Initial Statement of
Beneficial Ownership of Securities and Mr. James Fishkin was not timely in the
filing on one monthly report indicating that he was no longer subject to Section
16.
-28-
Item 11. Executive Compensation
The following table sets forth the aggregate compensation that we paid
for services rendered to us in all capacities during our fiscal years ended
March 31, 2003, 2002 and 2001 by our chief executive officer and by our other
executive officers whose cash compensation exceeded $100,000 per year in any
such year.
Summary Compensation Table
Long Term Compensation
--------------------------------------------------
Annual Compensation Awards Payouts
-------------------- ------------------------ --------
Long
Restricted Term
Name and Fiscal Other Annual Stock Number of Incentive All Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
------------------ ------ ------ ----- ------------ ------ ------- ------- ------------
John P. Howlett 2003 $ 212,000 -- __ __ __ __ $18,553(1)
Chief Executive 2002 $ 204,000 -- __ __ __ __ $16,750(1)
Officer 2001 $ 200,000 $54,000 __ __ __ __ $13,724(1)
Ronald A. Seitz
Chief Operating 2003 $ 212,000 -- __ __ __ __ $6,642(2)
Officer 2002 $ 204,000 -- __ __ __ __ $6,704(2)
and President 2001 $ 200,000 $54,000 __ __ __ __ $6,944(2)
Sam Bhatt 2003 $120,000 -- __ __ __ __ __
Vice President 2002 $114,545 -- __ __ __ __ __
Finance 2001 $ 95,983 $ 9,826 __ __ __ __ __
Guy Fessenden
Executive Vice-
President 2003 $150,000 -- $83,330(3) __ __ __ __
------------------
(1) Reflects employer contributions for life insurance premiums and for
disability insurance premiums.
(2) Reflects employer contribution for life insurance premiums.
(3) Reflects recoverable commission draw paid during fiscal 2003.
Stock Options
None of the named executive officers listed in the Summary Compensation
Table were granted stock options during the fiscal year ended March 31, 2003.
Set forth below is information with respect to unexercised options held
by our named executive officers to purchase our common stock.
Aggregated Option Exercises in Fiscal Year 2003
and Fiscal Year End Option Values
Number of Unexercised
Number of Securities Underlying Options Value of Unexercised
Shares at March 31, 2003 In-the-Money Options
Acquired on Value ----------------------------- ----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------------ ----------- -------- ----------- ------------- ----------- -------------
John P. Howlett......... -- $ 0 0 0 $ 0 $ 0
Ronald A. Seitz........ -- $ 0 0 0 $ 0 $ 0
Sam Bhatt............... -- $ 0 14,450 5,250 $ 0 $ 0
Guy Fessenden -- $ 0 0 0 $ 0 $ 0
-29-
Compensation of Directors
Non-employee directors receive annual compensation of $10,000.
Directors also receive stock options at the discretion of the Board.
Non-employee directors receive reimbursement of out-of-pocket expenses incurred
for each board meeting or committee meeting attended.
Compensation Committee Interlocks and Insider Participation
Currently, there is no compensation committee. The members of the
entire board deliberate and decide compensation. Neither Mr. Jerd nor Mr.
Raymond is or has been an employee or an officer of our company. Mr. Howlett is
our Chairman, and Chief Executive Officer, and Mr. Seitz is our President and
Chief Operating Officer.
-30-
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 30, 2003, based on
information obtained from the persons named below, with respect to the
beneficial ownership of our common stock held by:
o each person known by us to be the owner of more than 5% of our
outstanding shares;
o each director;
o each executive officer named in the Summary Compensation Table; and
o all executive officers and directors as a group.
Name and Address of Amount and Percentage of Beneficial
Beneficial Owner(1) Ownership(2)
------------------------------------------------ -----------------------------------
John P. and Rosemary A. Howlett 1,400,910 19.79%
Ronald A. Seitz 829,519(3) 11.72%
Sam Bhatt 37,204 .52%
Guy Fessenden 0 0
R. Frank Jerd 60,000 .84%
George F. Raymond 30,000 .42%
Tom Dresser 1,029,774 14.54%
3505 S. Ocean Boulevard
Hollywood, FL 33019
Richard Landon 1,029,774 14.54%
142 York Road
Delran, NJ 08075
Carla Seitz 782,707(4) 11.05%
P.O. Box 2243
Mt. Pleasant, SC 29465
All executive officers and directors as a group (6 3,140,340 43.71%
persons)
------------------
(1) Each stockholder's address is c/o Emtec, 817 East Gate Drive, Mount Laurel,
New Jersey, unless otherwise indicated.
(2) As used herein, beneficial ownership means the sole or shared power to
vote, or direct the voting of, a security, or the sole or shared power to
invest or dispose, or direct the investment or disposition, of a security.
Except as otherwise indicated, all persons named herein have (i) sole
voting power and investment power with respect to their shares, except to
the extent that authority is shared by spouses under applicable law and
(ii) record and beneficial ownership with respect to their shares; also
includes any shares issuable upon exercise of options or warrants that are
currently exercisable or will become exercisable within 60 days of after
the date of this proxy statement.
-31-
(3) Excludes 782,707 shares owned by Carla Seitz, Mr. Seitz's spouse. Mr. Seitz
disclaims any beneficial interest in these shares.
(4) Excludes 829,519 shares owned by Ronald A. Seitz, Mrs. Seitz's spouse. Mrs.
Seitz disclaims any beneficial ownership in these shares.
Equity Compensation Plan Information
---------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to Weighted-average Number of securites remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
in column(a))
(a) (b) (c)
---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders
---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 461,428 $0.72 538,572
approved by security holders (1)
---------------------------------------------------------------------------------------------------------------------
Total 461,428 $0.72 538,572
---------------------------------------------------------------------------------------------------------------------
(1) The Company's 1996 Stock Option Plan (the Plan) (amended in 1999)
authorizes the granting of stock options to directors and eligible
employees. The Company has reserved 1,000,000 shares of its common stock
for issuance under the Plan at prices not less than 100% of the fair value
of the Company's common stock on the date of grant (110% in the case of
shareholders owning more than 10% of the Company's common stock). The
Company used the minimum value option pricing model as prescribed by SFAS
No. 123 to determine the impact of applying the fair value method required
by SFAS No. 123 prior to going public at January 17, 2001. The
Black-Scholes option pricing model has been used to determine the fair
value of options granted subsequent to January 17, 2001.
-32-
Item 13. Certain Relationships and Related Transactions
At March 31, 2002 Emtec owed $19,000 to a Company officer's relative.
This loan was paid in full during the fiscal year ended March 31, 2003. Except
for quarterly interest payments there was no other loan activity during the
period. Interest paid on the loan was $1,710, $2,280 and $2,280 for the years
ended March 31, 2003, 2002 and 2001, respectively.
There are no other relationships or related party transactions of a
nature required to be disclosed hereunder.
Item 14. Controls and Procedures
Quarterly evaluation of Emtec's Disclosure Controls and Internal
Controls. Within the 90 days prior to the date of this Annual Report on Form
10-K, Emtec evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures"("Disclosure Controls") pursuant to Rule
13a-14 under the Securities Exchange Act of 1934. This evaluation ("Controls
Evaluation") was performed under the supervision and the participation of
management, including the Chief Executive Officer ("CEO") and Principal
Financial Officer.
Limitation on the Effectiveness of Controls. Control systems, no matter
how well conceived and operated, are designed to provide a reasonable, but not
an absolute, level of assurance that the objectives of the control systems are
met. Further, the design of a controls system must reflect a fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Emtec have been detected. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Emtec conducts periodic evaluation
of its internal controls to enhance, where necessary, its procedures and
controls.
Conclusions. Based upon the Controls Evaluation, the CEO and Principal
Financial Officer have concluded that, the Disclosure Controls are effective in
reaching a reasonable level of assurance that management is alerted on a timely
basis to material information relating to Emtec during the period when its
periodic reports are being prepared.
Since the date of the Controls Evaluation to the date this Annual
Report, there have been no significant changes in the Internal Controls or in
other factors that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
-33-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports and Reports of
Form 8-K
(a) Documents filed as part of this report:
(i) Financial Statements
Report of Independent Public Accountants..................................................................
Consolidated Balance Sheets as of March 31, 2003 and 2002.................................................
Consolidated Statements of Operations for the Fiscal Years Ended March 2003, 2002 and 2001................
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 2003, 2002
and 2001.............................................................................................
Consolidated Statements of Cash Flows for the Years Ended March 2003, 2002 and 2001.......................
Notes to Consolidated Financial Statements................................................................
(ii) Financial Statement Schedules
None
(iii) Exhibits:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger and Reorganization dated as of December 14, 2000 between Registrant,
then known as American Geological Enterprises, Inc., and Emtec, Inc.(1)
3.1 Certificate of Incorporation, as amended(2)
3.2 Amended and Restated Bylaws(2)
4.1 Certificate evidencing shares of common stock(2)
10.1 Resale Agreement dated September 29, 1997 between Registrant and Ingram Micro, Inc.(2)
10.2 Volume Purchase Agreement dated January 28, 1998 between Registrant and Tech Data Corporation(2)
10.3 Agreement of Lease dated April 1, 1992 between Registrant and Bell Atlantic Properties, Inc., as
amended, for Mt. Laurel, New Jersey facility(2)
10.4 Lease Agreement dated May 5, 1993 between registrant and Central Cranford Associates, for
Cranford, New Jersey facility(2)
10.5 Lease Agreement dated July 7, 1994 between Registrant and Connecticut General Life Insurance
Company, as amended, for Norcross, Georgia facility(2)
10.6 Lease Agreement dated August 8, 1995 between Registrant and Charleston Rivergate Associates I, as
amended, for Charleston, South Carolina facility(2)
10.7 Lease Agreement dated July 21, 2000 between Registrant and Strawberry Hill Associates, for
Norwalk, Connecticut facility(2)
-34-
Exhibit No. Description
----------- -----------
10.8 Microsoft Certified Partner Agreement, dated December 20,2000, between Microsoft and Registrant(3)
10.9 IBM Business Partner Agreement, dated May 31, 2000, between International Business Machines
Corporation and Registrant(3)
10.10 Letter Agreement, dated April 24, 2001, between Novell Inc. and Registrant(3)
10.11 Citrix Solutions Network Gold Renewal Membership Agreement, dated April 30, 2001, between Citrix
Systems, Inc. and Registrant(3)
10.12 U.S. Systems Integrator Agreement, dated December 22, 1999, between Cisco System, Inc. and
Registrant.(3)
10.13 Sun Microsystem, Inc. Channel Agreement, dated February 1, 2000, between Sun Microsystems, Inc.
and Emtec, Inc. .(6)
10.14 Loan and Security Agreement, dated November 21, 2001, by and between Fleet Capital Corporation
and Registrant.(4)
10.15 Agreement for Wholesale Financing, dated November 21, 2001, by and between IBM Credit Corporation
and Registrant.(4)
10.16 Subordination Agreement, dated as of the 21st day of November, 2001, among Registrant, MRA
Systems, Inc. dba GE Access and Fleet Capital Corporation.(4)
10.17 Intercreditor Agreement, dated as of November 21, 2001, between Fleet Capital Corporation and
Ingram Micro Inc. and accepted by Registrant.(4)
10.18 Asset Acquisition Agreement dated December 5, 2001 by and between Devise Associates, Inc. and
Registrant.(5)
10.19 Lease Agreement dated January 9, 2002 between Registrant and Vandergrand Properties Co., L.P.,
for New York, New York facility.(9)
10.20 Lease Agreement dated March 1, 2002 between Registrant and G.F. Florida Operating Alpha, Inc.,
for Jacksonville, Florida facility.(9)
10.21 Lease Agreement dated August 1, 2002 between Registrant and Fazzone and Zima, for Cheshire, CT
facility.
10.22 Lease Agreement dated November 15, 2002 between Registrant and Hamilton Transit Corporate Center,
for warehouse facility in Trenton, New Jersey.
10.23 Asset Acquisition Agreement dated August 12, 2002 by and between Acentra Technologies, Inc. and
Registrant.(7)
10.24 Asset Acquisition Agreement dated August 31, 2002 by and between Turnkey Computer Systems, Inc.
and Registrant.(8)
10.25 Assignment of State of New Jersey Contract from Acentra Technologies, Inc. to the Registrant.(7)
10.26 Remarketer/Integrator Agreement dated August 15, 2002 between Dell Marketing L.P. and the
Registrant.(7)
10.27 1996 Stock Option Plan, as amended in 1999(2)
99.1 Certification of John P. Howlett, Principal Executive Officer, of Emtec, Inc. dated July 15, 2003
pursuant to 18 US.C. Section 1350.
-35-
Exhibit No. Description
----------- -----------
99.2 Certification of Sam Bhatt , Principal Financial Officer, of Emtec, Inc. dated July 15, 2003
pursuant to 18 US.C. Section 1350.
21 Subsidiaries(2)
(1) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated January 17, 2001, filed on January 31, 2001, and incorporated herein
by reference.
(2) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed on May 21, 2001, and incorporated herein by reference.
(3) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
on Form 10, filed on July 12, and incorporated herein by reference.
(4) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated November 21, 2001, filed on November 26, 2001, and incorporated
herein by reference.
(5) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated December 5, 2001, filed on December 20, 2001, and incorporated herein
by reference.
(6) Previously filed as an exhibit to Registrant's Form 10-K dated March 31,
2001, filed on July 12, 2001, and incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated August 12, 2002 filed on August 26, 2002, and incorporated herein by
reference.
(8) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated August 31, 2002 filed on September 13, 2002, and incorporated herein
by reference.
(9) Previously filed as an exhibit to Registrant's Form 10-K dated March 31,
2002, filed on June 30, 2002, and incorporated herein by reference.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2003:
Form 8-K filed on February 14, 2003, required by Item 9 of the Form
8-K, Regulation FD Disclosure.
-36-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: July 15, 2003
EMTEC, INC.
By: /s/ John P. Howlett
---------------------------------------
John P. Howlett
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John P. Howlett Chairman and July 15, 2003
------------------------------------ Chief Executive Officer
John P. Howlett (Principal Executive Officer)
/s/ Sam Bhatt Vice President-Finance July 15, 2003
------------------------------------ (Principal Financial Officer)
Sam Bhatt (Principal Accounting Officer)
/s/ Ronald A. Seitz President, Chief Operating Officer, July 15, 2003
------------------------------------ and Director
Ronald A. Seitz
/s/ Frank Jerd Director July 15, 2003
------------------------------------
Frank Jerd
/s/ George F. Raymond Director July 15, 2003
------------------------------------
George F. Raymond
-37-
I, John P. Howlett, certify that:
1. I have reviewed this Annual report on Form 10-K of Emtec, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ JOHN P. HOWLETT
-----------------------------
John P. Howlett
Chairman, and Chief
Executive Officer
(Principal Executive Officer)
-38-
I, Sam Bhatt, certify that:
1. I have reviewed this Annual report on Form 10-K of Emtec, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ Sam Bhatt
-----------------------------
Sam Bhatt
Vice President - Finance
(Principal Financial and
Accounting Officer)
-39-
EMTEC, INC.
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
CONTENTS
Page(s)
-------
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2 & 3
Statements of Operations 4
Statements of Shareholders' Equity 5
Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Emtec, Inc.
817 East Gate Drive
Mount Laurel, New Jersey 08054
We have audited the accompanying consolidated balance sheets of Emtec, Inc. as
of March 31, 2003 and 2002 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended March 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Emtec, Inc. at
March 31, 2003 and 2002, and the consolidated results of its operations and its
cash flows for each of the years in the three-year period ended March 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 1 to the consolidated financial statements, effective April
1, 2002, the Company changed its method for accounting for goodwill and other
intangible assets by adopting Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."
/s/ Baratz & Associates, P.A.
Marlton, New Jersey
June 6, 2003
1
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
---- ----
Assets
------
Current Assets
--------------
Cash and cash equivalents $ 1,792,101 $ 1,552,666
Receivables:
Trade, net 14,553,124 6,288,425
Others 476,682 296,529
Inventories 2,881,868 1,089,950
Prepaid expenses 462,827 388,307
Deferred tax assets 34,954 26,491
---------- ----------
Total Current Assets 20,201,556 9,642,368
--------------------
Property and equipment, net 1,190,851 703,940
Investment in geothermal power unit,
less accumulated amortization
of $337,478 and $302,407 611,519 581,612
Deferred tax assets 105,201 42,936
Intangible assets 176,632 371,777
Other assets 48,825 45,840
---------- ----------
Total Assets $22,334,584 $11,388,473
------------ =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
2
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
---- ----
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
-------------------
Line of credit $ 8,203,290 $ -
Due to related party - 19,000
Accounts payable 8,199,792 6,609,837
Customer deposits 488,127 245,387
Accrued liabilities 1,474,907 764,282
Deferred revenues 1,321,013 840,413
----------- ----------
Total Current Liabilities 19,687,129 8,478,919
-------------------------
Deferred revenue 757,023 799,472
Deferred tax liability 51,945 60,124
----------- -----------
Total Liabilities 20,496,097 9,338,515
----------------- ----------- -----------
Shareholders' Equity
--------------------
Common stock, $.01 par value; 25,000,000
shares authorized; 7,080,498 shares issued
and outstanding at March 31, 2003 and 2002 70,805 70,805
Additional paid-in capital 2,210,805 2,210,805
Accumulated deficit (443,123) (231,652)
----------- -----------
Total Shareholders' Equity 1,838,487 2,049,958
-------------------------- ----------- -----------
Total Liabilities and
Shareholders' Equity $22,334,584 $11,388,473
---------------------- =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
3
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Revenues:
Procurement services $75,943,230 $50,813,243 $77,533,872
Service and consulting 16,140,896 11,654,978 10,745,360
Geothermal 175,902 187,978 34,366
----------- ----------- -----------
Total Revenues 92,260,028 62,656,199 88,313,598
-------------- ----------- ----------- -----------
Cost of Revenues:
Procurement services 67,525,430 44,832,526 69,365,115
Service and consulting 11,915,844 7,693,460 7,966,648
Geothermal 72,476 63,083 10,264
----------- ----------- -----------
Total Cost of Revenues 79,513,750 52,589,069 77,342,027
---------------------- ----------- ----------- -----------
Gross Profit:
Procurement services 8,417,800 5,980,717 8,168,757
Service and consulting 4,225,052 3,961,518 2,778,712
Geothermal 103,426 124,895 24,102
----------- ----------- -----------
Total Gross Profit 12,746,278 10,067,130 10,971,571
------------------ ----------- ----------- -----------
Operating Expenses:
Selling, general and
administrative 12,574,667 8,995,255 10,240,596
Termination costs - 21,746 90,000
Interest 160,803 210,305 692,227
Loss on impairment, Goodwill 254,894 - -
E-Business costs - 617,220 1,303,740
----------- ----------- -----------
Total Operating Expenses 12,990,364 9,844,526 12,326,563
------------------------ ----------- ----------- -----------
(Loss) Income From Continuing Operations
Before Other Income And Income
Tax Benefit (expense) (244,086) 222,604 (1,354,992)
Other income- litigation settlement - - 24,108
Income tax benefit(expense) 32,615 (5,632) 73,059
----------- ----------- -----------
(Loss) Income From Continuing Operations,
net of income taxes (211,471) 216,972 (1,257,825)
Loss from discontinued operations,
net of income taxes - - (63,649)
----------- ----------- -----------
Net (Loss) Income $ (211,471) $ 216,972 $(1,321,474)
=========== =========== ===========
(Loss) Income Per Share From Continuing
Operations (Basic And Diluted) $ (0.03) $ 0.03 $ (0.22)
Net (Loss) Income Per Share
(Basic And Diluted) $ (0.03) $ 0.03 $ (0.23)
Weighted Average Number Of Shares
Outstanding:
Basic 7,080,498 7,080,498 5,679,700
Diluted 7,123,831 7,081,398 5,679,700
The accompanying notes are an integral part
of these consolidated financial statements.
4
EMTEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(Accumulated
Additional Deficit) Accumulated Total
Common Stock Paid-In Retained Comprehensive Shareholders'
Shares Amount Capital Earnings (Loss) Income Equity
------ ------ --------- ------------ ------------- -------------
Balance, March 31, 2000 5,329,501 53,295 1,314,876 872,850 1,776 2,242,797
---------
Stock issued in
reverse acquisition 1,750,997 17,510 895,929 913,439
---------
Net loss for the year (1,321,474) (1,321,474)
Unrealized loss on
marketable securities (7,234) (7,234)
--------- ------- --------- --------- ----- ---------
Total Comprehensive
Loss (1,328,708)
---------
Balance, March 31, 2001 7,080,498 70,805 2,210,805 (448,624) (5,458) 1,827,528
---------
Net income for the year 216,972 216,972
Unrealized gain on
marketable securities 5,458 5,458
--------- ------- --------- --------- ------ ---------
Total Comprehensive
Income 222,430
---------
Balance, March 31, 2002 7,080,498 $70,805 $ 2,210,805 $(231,652) $ - $2,049,958
Net loss for the year (211,471) (211,471)
--------- ------- --------- ---------- -------- ----------
Balance, March 31, 2003 7,080,498 $70,805 $ 2,210,805 $ (443,123) $ - $1,838,487
========= ======= =========== ========== ======== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
5
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Cash Flows From Operating Activities
------------------------------------
Net (loss) income for the year $ (211,471) $ 216,972 $(1,321,474)
Adjustments to Reconcile Net Income
(Loss) To Net Cash Provided By (Used
In) Operating Activities
--------------------------------------
Depreciation and amortization 590,293 548,007 422,256
Goodwill Impairment 254,894 - -
Deferred income tax (benefit) expense (78,907) 13,693 (83,975)
Loss on sale of discontinued operations - - -
Changes In Operating Assets and
Liabilities
-------------------------------
Decrease in marketable securities - 292,346 7,189
(Increase) decrease in receivables (8,444,852) 6,677,082 4,775,110
(Increase) decrease in inventories (1,791,919) (70,235) 71,748
(Increase) decrease in prepaid expenses (74,520) (88,537) 162,819
(Increase) decrease in other assets (903) 5,289 (2,313)
Increase in deferred tax assets - - (2,790)
Increase (decrease) in accounts payable 1,589,955 (674,788) (958,818)
Increase (decrease) in customer deposits 242,740 42,185 (154,798)
Increase (decrease)in accrued liabilities 710,625 (261,361) (123,469)
Increase (decrease)in deferred revenues 438,150 (101,389) (251,871)
----------- ----------- -----------
Net Cash (Used In) Provided By
Operating Activities (6,775,915) 6,599,264 2,539,614
------------------------------ ----------- ----------- -----------
Cash Flows From Investing Activities
------------------------------------
Purchases of equipment (1,003,962) (142,624) (338,045)
Additional investment in geothermal unit (64,978) (56,822) -
Acquisition of a business segment (100,000) (409,945) -
----------- ----------- -----------
Net Cash Used In Investing Activities (1,168,940) (609,391) (338,045)
------------------------------------- ----------- ----------- -----------
Cash Flows From Financing Activities
------------------------------------
Net increase (decrease) in line of credit 8,203,290 (6,535,405) (1,775,336)
Cash acquired in reverse acquisition - - 985,552
Payment of related party debt (19,000) - -
----------- ----------- -----------
Net Cash Provided By (Used In)
Financing Activities 8,184,290 (6,535,405) (789,784)
------------------------------ ----------- ----------- -----------
Net Increase (Decrease) in
Cash and Cash Equivalents 239,435 (545,532) 1,411,785
--------------------------
Beginning Cash and Cash Equivalents 1,552,666 2,098,198 686,413
----------------------------------- ----------- ----------- -----------
Ending Cash and Cash Equivalents $ 1,792,101 $ 1,552,666 $ 2,098,198
-------------------------------- =========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
6
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
1. Organization and Summary of Significant Accounting Policies
Emtec (OTC: ETEC) is a systems integrator focused on providing
technology solutions that enable our customers to effectively use and manage
their data to grow their businesses. Our areas of specialization in IT services
include remote network monitoring, help desk, network design, enterprise backup
and storage server consolidation, and network security. Emtec's solutions are
crafted to enable our customers to become more efficient and effective, thereby
giving them a competitive advantage. Our customers are primarily Fortune 2000
companies, state and local government, local school districts, and other large
and mid-sized companies located principally in the New York/New Jersey
Metropolitan area and the Southeastern United States. Our commercial business is
generally with customers with annual revenues ranging from $50 million to $500
million. We service our customer base from leased facilities in New Jersey,
Connecticut, New York, Georgia, and Florida.
The Company, was formed on April 1, 1995, as a result of the 1995 and
1996 mergers of three information technology companies that were originally
founded between 1980 and 1983.
Principles of Consolidation
The consolidated financial statements include the accounts of the
issuer and its wholly owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Use of Estimates
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States (US GAAP).
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments we make about
the carrying values of assets and liabilities that are not readily apparent from
other sources. We base our estimates and judgments on historical experience and
on various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and the best
estimates and judgments routinely require adjustment. US GAAP requires us to
make estimates and judgments in several areas, including those related to
impairment of goodwill and equity investments, revenue recognition,
recoverability of inventory and receivables, the useful lives of long lived
assets such as property and equipment, the future realization of deferred income
tax benefits and the recording of various accruals.
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
7
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 at their contract date. The Company believes that net
revenue reporting for manufacturer support service contracts is more
appropriate. Thus the Company has adopted net revenue reporting for
manufacturer support service contracts starting this fiscal year and has
reclassified contract costs from prior periods as an offset to revenue to
conform to the current presentation.
Cash Equivalents
Cash equivalents include items almost as liquid as cash with maturity
periods of three months or less when purchased. The carrying amount of cash and
cash equivalents approximates fair value.
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.
Other Receivables
Other receivables represent rebates, price protection receivables and
amounts due from vendors for purchase returns made in the ordinary course of
business.
Concentration of Credit Risk
The Company provides its services to a wide variety of commercial,
governmental and institutional customers. Financial instruments which
potentially subject the Company to concentrations of credit risk are cash (and
cash equivalents) and trade receivables. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, does not
require collateral from its customers. The Company has not experienced
significant credit losses. The Company maintains deposit accounts with reputable
financial institutions; at times, such deposits may exceed Federal Depository
Insurance Limits.
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 products and sales.
Property and Equipment
Property and equipment are stated at original cost. Depreciation and
amortization for financial accounting purposes are computed using the straight
line method over the estimated lives of the respective assets. Accelerated
methods of depreciation are used for tax purposes. Property and equipment along
with their components are as follows:
8
Original Cost Estimated Life
------------- --------------
March 2003 March 2002 (Years)
---------- ---------- -------
Computer equipment $ 3,115,071 $ 2,510,613 3
Capitalized Leases 444,114 143,432 5
Furniture and fixtures 321,670 292,355 5
Leasehold improvements 200,435 147,248 5
Vehicles 80,984 66,745 2
--------- ---------
Total Property and Equipment $ 4,162,274 $ 3,160,393
Less: accumulated depreciation
and amortization (2,971,423) (2,456,453)
--------- ---------
Net book value $ 1,190,851 $ 703,940
========= =========
Maintenance and repair costs are charged to expense as incurred. The
cost and accumulated depreciation relating to property and equipment retired or
otherwise disposed of are eliminated from the accounts and any resulting gains
or losses are credited or charged to income.
Valuation of Long Lived Assets
The Company evaluates the recoverability of its 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.
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of the
net assets acquired in a business combination accounted for under the purchase
method. Beginning April 1, 2002, in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS
142), goodwill and indefinite-lived assets are no longer amortized, but instead
tested for impairment at least annually (see Note 5). Intangible assets that
have finite useful lives are amortized over their useful lives.
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.
9
Advertising Costs
Advertising and marketing costs are charged to expense as incurred.
Advertising and marketing expenses for the years ended March 31, 2003, 2002 and
2001 were $492,481, $306,271, and $617,265, respectively.
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 chosen to continue to account for employer
stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). Accordingly, compensation cost for stock options issued
to employees is measured as the excess, if any, of the quoted market price of
the Company stock at the date of grant over the amount an employee must pay to
acquire the stock. 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. (See Note 11)
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net earnings
(loss) by the weighted average shares outstanding during the reporting period.
Diluted earnings (loss) per share are computed similar to basic earnings (loss)
per share except that the weighted average shares outstanding are increased to
include additional shares from the assumed exercise of stock options, if
dilutive.
Reclassifications
Certain reclassifications have been made to prior years balances in
order to conform to current presentations.
Recent Accounting Pronouncements
In June 2001, the FASB issued two new statements: SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other intangible
Assets."
Effective April 1, 2002, the Company adopted SFAS No. 141 that requires
business combinations entered into after June 30, 2001 to be accounted for using
the purchase method of accounting. Specifically identifiable intangible assets,
other than goodwill, are to be amortized over their estimated useful economic
life.
SFAS No. 142 requires that goodwill not be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001 and applies to goodwill and other
intangible assets, regardless of when those assets were initially recognized.
Effective April 1, 2002, the Company adopted SFAS No. 142 and in connection with
its adoption, discontinued the amortization of goodwill. The Company follows the
two-step process prescribed in SFAS 142 to test its goodwill for impairment .
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if
10
any. Under the guidelines of SFAS No. 142, the Company is required to perform an
impairment test at least on an annual basis. The Company performed its initial
goodwill impairment test as of April 1, 2002 and another impairment test as of
March 31, 2003 (see Note 5).
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of
SFAS 121 for (I) recognition/measurement of impairment of long-lived assets to
be held and used and (II) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board's No. 30 ("APB 30"). "Reporting the Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, "for
segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company adopted the provisions of SFAS 144
effective April 1, 2002. The adoption of this standard did not have any material
impact on the Company's financial statements for the year ended March 31, 2003.
2. Acquisitions
------------
On August 31, 2002, the Company acquired all of the customer contracts
and certain assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The
purchase price will be paid over a two-year period and will be based on an
earning share derived from the customer contracts transferred from Turnkey to
Emtec. Earnings share for a given period shall mean 50% of earnings for that
period, provided, that, if for that period earnings is less than $120,000, then
the earnings share for that period shall be the earnings in excess of $60,000.
The first earning share will be calculated at the end of twelve months ended on
August 31, 2003.
On August 12, 2002, the Company acquired certain assets of Acentra
Technologies, Inc., including the assignment of the State of New Jersey computer
supply and services contract. The Company paid a net purchase price of $165,607
in cash to be allocated under the purchase method as follows:
Assignment of State of NJ Contract $ 100,000
Inventory 326,798
Equipment 22,715
Advance payment amount from customers ( 283,906)
---------
Net Purchase Price $ 165,607
=========
Below is the supplemental information on a pro forma basis as if the
Company acquired Turnkey Computer Systems, Inc. and Acentra Technologies, Inc.
at the beginning of the each period ending March 31, 2003 and 2002,
respectively.
11
2003 2002
---- ----
Net revenues $97,140,834 $97,327,991
Net (loss) income ( 2,099,744) 963,864
Net (loss) income
per share $ (0.30) $ 0.14
At January 9, 2002, the Company acquired substantially all of the assets
of Devise Associates, Inc., an information technology consulting and managed
services organization located in New York City. The Company paid an aggregate
purchase price to the seller of $355,051 in cash and incurred other direct
acquisition costs of $54,894. The total acquisition cost of $409,945 has been
allocated under the purchase method as follows:
Goodwill $ 254,894
Equipment 152,220
Prepaid Expenses 2,831
-------
Aggregate Purchase Price $ 409,945
=======
3. Inventories
-----------
The components of inventories at March 31, are as follows:
2003 2002
---- ----
Hardware, software and
accessories $ 3,221,904 $ 1,390,790
Service parts 131,167 150,875
--------- ---------
3,353,071 1,541,665
Less inventory reserve 471,203 451,715
--------- ---------
$ 2,881,868 $ 1,089,950
========= =========
Appropriate consideration has been given to deterioration, obsolescence
and other factors in evaluating net realizable value.
4. 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 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 March 31, 2003, the
Company was not in compliance with any of its financial covenants. 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
12
credit from Fleet in favor of IBM, affords us up to a like amount of credit to
purchase IBM products from IBM Global Financing. On January 9, 2002, Fleet also
issued a $250,000 letter of credit in favor of its landlord for our New York
City office, as a security deposit for the building lease.
At March 31, 2003, the Company had a $8,203,290 outstanding balance under
the credit facility.
On June 11, 2003 Fleet offered to waive such non-compliance and increase
our credit facility permanently to $12.50 million through November 21, 2005 in
consideration of a cash payment of service fees to Fleet of $50,000 and an
increased interest rate of one percent above prime. The Company is currently
reviewing and negotiating the amended terms of its facility but cannot state
with any certainty the terms upon which the credit facility will be continued or
its duration. The Company and Fleet expect to finalize the amended terms within
the next 30 days.
On June 17, 2003 Fleet temporarily increased our current credit facility
from $10.0 million to $11.50 million. This increase expires on July 18, 2003.
5. Intangible Assets
The Company adopted SFAS No. 142, effective April 1, 2002. As a result,
amortization of goodwill was discontinued in 2003. Amortization expense for the
years ended March 31, 2002 and 2001 amounted to $13,158 for each year.
The Company performed its initial goodwill impairment test as of April 1,
2002 and another impairment test as of March 31, 2003. Based on the impairment
test performed as of March 31, 2003, the goodwill of $254,894 associated with
the acquisition of Devise Associates, Inc. was determined to be fully impaired
and charged to earnings. This determination was based upon the operating and
cash flow losses of this business unit since the January 9, 2002 acquisition
date and budgeted fiscal 2004 operating and cash flow losses for this business
unit. The Company found no impairment of its remaining goodwill of $112,996.
The Company was 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 $36,364 was expensed in 2003 based upon the
current contract term that ends at May 2004. The contract is subject to annual
renewals. The Company was successful in renewing the May 2003 contract during
fiscal 2003. The net carrying value for this contract amounted to $ 63,636 at
March 31, 2003.
6. Income Tax Benefit (Expense)
Deferred income taxes reflect the net tax effects of (a) temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b) net
operating loss carryforwards (when available). Income tax benefit (expense)
consisted of the following for the years ended March 31:
13
2003 2002 2001
---- ---- ----
Continuing Operations
---------------------
Current taxes
-------------
Federal $( 9,883) $ 21,143 $( 9,627)
State and local (36,409) ( 13,082) ( 1,289)
------ ------- -------
(46,292) 8,061 ( 10,916)
Deferred taxes
--------------
Federal 61,616 ( 10,827) 68,035
State and local 17,291 ( 2,866) 15,940
------ ------- -------
78,907 ( 13,693) 83,975
------ -------- -------
Total- Continuing Operations 32,615 ( 5,632) 73,059
------ --------- -------
Discontinued Operations
-----------------------
Total- Discontinued Operations - - 1,970
------ ------- -------
Net Income Tax Benefit(Expense) $ 32,615 $( 5,632) $ 75,029
====== ====== =======
Reconciliation of the U.S. statutory income tax rate to our effective tax
rate is as follows:
2003 2002 2001
---- ---- ----
Expected tax benefit(expense) at
statutory rates $ 82,989 $( 73,225) $ 474,811
Effect of state taxes, net ( 19,118) ( 15,883) 14,362
Valuation allowances ( 23,927) 92,158 (397,878)
Permanent differences ( 7,329) ( 8,682) ( 16,266)
------ -------- -------
Actual Income Tax Benefit/(Expense) $ 32,615 $( 5,632) $ 75,029
======= ====== =======
Significant items comprising the Company's deferred tax assets and liability
at March 31, are as follows:
2003 2002
---- ----
Deferred Tax Assets
-------------------
Differences between book and tax basis:
Trade receivables $ 96,195 $ 60,950
Inventories 198,088 190,305
Property and equipment - 17,140
Accrued liabilities 55,259 13,655
Goodwill 93,604 -
Net Operating loss carryforwards 372,590 412,222
------- -------
815,736 694,272
Less Valuation Allowance (675,581) (624,845)
------------------------ ------- -------
Net Deferred Tax Assets $ 140,155 $ 69,427
----------------------- ======= =======
Deferred Tax Liability
----------------------
Differences between book and tax basis:
Investment in geothermal
power unit $ 45,617 $(60,124)
Property and equipment 6,328 -
------- -------
Total Deferred Tax Liability $ 51,945 $(60,124)
---------------------------- ======= =======
14
At March 31, 2003 and 2002 the Company recorded a valuation allowance
against its deferred tax assets, as stated in the above table, reducing those
assets to amounts which, conservatively, are more likely than not to be
realized. Federal and state net operating loss carryforwards approximated
$850,000 and $1,050,000 respectively at March 31, 2003. Federal net operating
loss carryforwrds expire in 2021; state net operating loss carryforwards expire
at various years through 2008.
7. Related Party Transactions
At March 31, 2002 the Company owed $19,000 to a Company officer's
relative. This loan was paid in full during the fiscal year ended March 31,
2003. Except for quarterly interest payments there was no other loan activity
during the period. Interest paid on the loan was $1,710, $2,280 and $2,280 for
the years ended March 31, 2003, 2002 and 2001, respectively.
8. Major Customers
Two major customers approximated 23%, 17% and 34% of the Company's net
sales in the years 2003, 2002 and 2001 respectively. Major customer sales by
locations are as follows:
% Of Total Revenues Locations
------------------- ---------
20% Education - Atlanta, GA
15% Government, NJ
---
2003 35%
---- ===
14% Education - Atlanta, GA
9% Cranford, NJ
---
2002 23%
---- ===
10% Education - Atlanta, GA
7% Atlanta, GA
---
2001 17%
---- ===
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.
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of
financial instruments at balance sheet date:
Short-term financial instruments (cash equivalents, receivables,
payables, customer deposit and accrued liabilities) - cost approximates fair
value because of the short maturity period.
Line of credit - cost approximates fair value because of the short
interest-reset period.
10. 401(k) Plan
The Company sponsors a 401(k) plan for all employees with at least 6
months of service and who are at least 20 years of age. Eligible employees may
contribute 2% to 15% of their annual compensation to the plan. The
15
Company matches 25% of the first 6% of employee plan contributions and may
contribute additional amounts at the Company's discretion. Participants are
vested 20% for each year of service and are fully vested after 6 years. Company
contributions to the plan were $119,911, $84,707, and $95,374 for the years
ended March 31, 2003, 2002, and 2001, respectively.
11. Stock Option Plan
The Company's 1996 Stock Option Plan (the Plan) (amended in 1999)
authorizes the granting of stock options to directors and eligible employees.
The Company has reserved 1,000,000 shares of its common stock for issuance under
the Plan at prices not less than 100% of the fair value of the Company's common
stock on the date of grant (110% in the case of shareholders owning more than
10% of the Company's common stock). The Company used the minimum value option
pricing model as prescribed by SFAS No. 123 to determine the impact of applying
the fair value method required by SFAS No. 123 prior to going public at January
17, 2001. The Black-Scholes option pricing model has been used to determine the
fair value of options granted subsequent to January 17, 2001.
Option activity is summarized as follows:
For the year ended March 31, 2001:
Options granted 226,907
Options exercised -
Options forfeited or expired (185,730)
-------
Options outstanding - March 31, 2001 465,259
For the year ended March 31, 2002:
Options granted 82,746
Options exercised -
Options forfeited or expired (166,677)
-------
Options outstanding - March 31, 2002 381,328
For the year ended March 31, 2003:
Options granted 180,000
Options exercised -
Options forfeited or expired (99,900)
-------
Options outstanding- March 31, 2003 461,428
=======
Information with respect to stock options outstanding and
exercisable at March 31, 2003 is as follows:
Options Outstanding and Exercisable
Outstanding Weighted Avg. Remaining
as of 3/31/03 Life in Years Exercise Price
------------- ------------- --------------
261,428 2.0 $1.00
30,000 3.7 $0.55
140,000 4.5 $0.29
30,000 4.7 $0.44
16
SFAS No. 123 requires pro forma disclosure under the fair value method of
net (loss) income and (loss) income per share when stock options are granted to
employees and directors. The fair value for options was estimated at the date of
grant using the Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. The weighted average
fair value of options granted in 2003 and 2002 and the assumptions used in
estimating fair value under the Black-Scholes model are as follows:
2003 2002
---- ----
Estimated fair value of options granted $13,744 $42,436
======= =======
Principal assumptions in applying the Black-Scholes valuation model:
Expected life, in years 2.50 2.50
Risk-free interest rate 3.01% 2.96%
Expected volatility 1.54 1.72
Expected dividend yield 0.00% 0.00%
For purposes of pro forma disclosures, the estimated fair value of
options granted to employees and directors is amortized to expense over the
options' vesting period and the pro forma expense is adjusted for the effect of
income taxes. Had the Company adopted FASB Statement No. 123 in lieu of APB No.
25, the Company's net (loss) income and (loss) income per share would have been
the pro forma amounts indicated below:
2003 2002
---- ----
Pro forma net (loss) income $(232,944) $ 208,039
Pro forma (loss) income per share
basic and diluted $(0.03) $ 0.03
12. Termination Costs
Termination costs of $0 (2003), $21,746 (2002) and $90,000 (2001) were
paid to former Company executives.
17
13. Commitments and Contingencies
Leases:
The Company leases offices, warehouse facilities, vehicles and office
equipment under noncancellable operating leases. Future minimum lease payments
under such leases are as follows:
Fiscal Years
------------
2004 $ 994,482
2005 485,006
2006 336,139
2007 330,208
Thereafter 403,188
----------
Total $2,549,023
==========
Aggregate rent expense for offices and warehouse facilities amounted to
$920,893, $590,347, and $521,602 for the years ended March 31, 2003, 2002, and
2001, respectively. Aggregate rent expense for vehicles and office equipment
amounted to $118,026, $243,444, and $333,591 for the years ended March 31, 2003,
2002, and 2001, respectively.
Litigation:
In March 2002,a lawsuit was filed against the Company by a competitor
seeking damages of an unspecified amount. The competitor is alleging that the
Company illegally interfered with customer relationships of the competitor. At
this time, the outcome of this litigation cannot be determined. There has been
no change to this litigation matter in last twelve months. The lawsuit is still
in the discovery phase.
In a previous year Emtec Inc. instituted 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.
The parties settled the litigation in June 2000. Under terms of the settlement,
the Company received a $350,000 cash payment and 333,116 shares of the
defendant's common stock. Costs related to the litigation and realized losses on
disposition of the common stock reduced net income from the litigation
settlement to $24,108.
14. Supplemental Cash Flow Information
Cash paid for interest and income taxes were as follows:
2003 2002 2001
---- ---- ----
Interest $160,803 $246,287 $705,473
Income Taxes $ 17,128 $ 13,082 $ 11,231
18
15. Discontinued Operations
During fiscal 2000, the Company completed the sale of assets of it's
two South Carolina locations (Greenville and Charleston) to a company formed by
some of it's prior employees. The Company incurred a loss of $971, net of an
income tax benefit of $613 on the disposition of the assets. Financial
information with respect to the discontinued operations is summarized as
follows:
2003 2002 2001
---- ---- ----
Net revenues $ - $ - $ 7,017
Cost of revenues - - 10,014
------ ------ --------
Gross (loss) profit - - (2,997)
Operating expenses - - 62,622
------ ------ --------
Loss before income taxes - - (65,619)
Income tax benefit - - 1,970
------ ------ --------
Net Loss from
Discontinued Operations $ - $ - $(63,649)
====== ====== ========
16. 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 considered to be in two business segments,
our Information Technology Division and our Geothermal Division. Our Information
Technology division provides a comprehensive range of information technology
products, services and solutions to a broad base of commercial and governmental
customers. Our Geothermal division is engaged in activities designed to identify
and acquire geothermal oil and gas leases in the Western United States.
Geothermal revenues are primarily derived from royalty payments from these
leases as well as the applicable portion of geothermal steam revenues sold to
PacifiCorp on a prepayment basis.
For the year ended March 31, 2003 the company has aggregated its
information technology operating locations into one information technology
segment due to their similar economic and business characteristics as permitted
under SFAS No. 131 and prior period segment information has been reclassified in
aggregate form to conform with the current presentation.
19
The following is financial information relating to the operating
segments:
Years Ended March 31:
----------------------------------
2003 2002 2001
---- ---- ----
Revenues
--------
Information Technology $ 92,084,126 $ 62,468,221 $ 88,279,232
Geothermal 175,902 187,978 34,366
------------ ------------- -------------
Total Revenues $ 92,260,028 $ 62,656,199 $ 88,313,598
-------------- ============ ============= =============
Interest Expense
----------------
Information Technology 160,803 210,305 692,227
Geothermal - - -
------------ ------------- -------------
Total Interest Expense $ 160,803 $ 210,305 $ 692,227
---------------------- ============ ============= =============
Depreciation and Amortization
-----------------------------
Information Technology 555,223 523,174 417,320
Geothermal 35,070 24,833 4,936
------------ ------------- -------------
Total Depreciation
and Amortization $ 590,293 $ 548,007 $ 422,256
------------------ ============ ============= =============
Operating Income/(Loss)
-----------------------
Information Technology (306,750) 138,802 (1,337,692)
Geothermal 62,664 83,802 6,808
------------ ------------- -------------
Net Segment Operating
Income/(Loss) (244,086) 222,604 (1,330,884)
Income/(Loss) From Continuing
Operations Before Income
Tax (Expense) Benefit $ (244,086) $ 222,604 $ (1,330,884)
----------------------------
Income Tax (Expense) Benefit-
Continuing Operations 32,615 (5,632) 73,059
------------ ------------- -------------
Income (Loss) From Continuing
Operations, net of income taxes $ (211,471) $ 216,972 $ (1,257,825)
--------------------------------- ============ ============= =============
Identifiable Assets:
--------------------
As of March 31: 2003 2002
---- ----
Information Technology 21,723,065 10,806,861
Geothermal 611,519 581,612
----------- -----------
Identifiable Assets From
Continuing Operations 22,334,584 11,388,473
Discontinued Operations - -
----------- -----------
Total Assets $22,334,584 $11,388,473
=========== ===========
20
17. Investment in Geothermal Power Unit
The investment in Geothermal Power Unit (Unit) represents a 5.49% working
interest in the Roosevelt Hot Springs geothermal power unit. An agreement is in
place to sell all of the steam from the Unit through 2023 to PacifiCorp, which
has constructed the Blundell power plant to utilize the steam. This agreement,
entered into in 1993, included an advance payment. The remaining unamortized
deferred revenue attributable to the 1993 advance payment in the amount of
$757,023 is reported as a non-current liability at March 31, 2003 and will be
recognized into income ratably through 2023. PacifiCorp pays the Company for
operating and maintenance services and a reimbursement of royalties for one
lease that is included in the Unit. The Company pays its proportionate share of
operating and maintenance expenses to the operator of the Unit.
18. Quarterly Financial Information - (Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
2003
Revenues $19,537,220 $24,466,189 $22,676,453 $25,580,166 $92,260,028
Gross Profit 3,115,305 3,183,756 2,308,341 4,102,240 12,709,642
Net Income (Loss) $ 114,255 $ 122,456 $ (767,026) $ 318,844 $ (211,471)
Per share:
(Basic and Diluted) $ .02 $ .02 $ (0.11) $ .04 $ (.03)
2002
Revenues $17,572,446 $16,779,919 $17,368,489 $10,935,345 $62,656,199
Gross Profit 2,754,588 2,422,672 2,775,043 2,114,827 10,067,130
Net Income (Loss) $ 271,318 $ 157,023 $ 29,380 $ (240,749) $ 216,972
Per share:
(Basic and Diluted) $ .04 $ .02 $ .00 $ (.03) $ .03
19. Accounts Receivable and Inventory Allowances
The following table provides information regarding accounts receivable
and inventory valuation allowance activity for the three years ended March 31,
2003.
Allowances
---------------------------------
Accounts Receivable Inventory
------------------- ---------
Balance, March 31, 2000 368,057 175,487
Charged to costs and expenses 276,198 344,918
Write-offs (211,365) (129,222)
--------- ---------
Balance, March 31, 2001 $ 432,890 $ 391,183
Charged to costs and expenses 55,917 76,062
Write-offs (336,205) (15,530)
--------- ---------
Balance, March 31, 2002 $ 152,602 $ 451,715
Charged to costs and expenses 88,245 23,536
Write-offs ( - ) (4,048)
--------- ---------
Balance, March 31, 2003 $ 240,847 $ 471,203
========= =========
21
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as.................................'TM'