SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended
December 31, 2001
Commission file number: 0-32789
EMTEC, INC.
(Exact name of Registrant as specified in charter)
Delaware 87-0273300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
817 East Gate Drive
Mt. Laurel, New Jersey 08054
(Address of principal executive offices)
(856) 235-2121
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock outstanding as of February 6, 2002 was
7,080,498.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2001
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
December 31, 2001 (Unaudited) and March 31, 2001.....................................1-2
Consolidated Statements of Operations
for the Three and Nine months ended December 31, 2001 (Unaudited) and
2000 (Unaudited) ......................................................................3
Consolidated Statements of Cash Flows
for the Nine months ended December 31, 2001 (Unaudited) and 2000 (Unaudited) ..........4
Notes to Consolidated Financial Statements
(Unaudited) .........................................................................5-6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations .................................................7-10
Item 3 - Quantitative and Qualitative Information About Market Risk .............................10
PART II - OTHER INFORMATION
Item 3 - Exhibits and Reports on Form 8-K .......................................................11
SIGNATURES ......................................................................................12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2001 2001
------------ ----------
(unaudited)
Assets
------
Current Assets
--------------
Cash and cash equivalents $ 143,300 $ 2,098,198
Marketable securities 4,090 292,346
Receivables:
Trade, less allowance
for doubtful accounts 10,055,478 12,828,456
Others 323,339 433,580
Inventories, net of reserve 773,928 1,019,715
Prepaid expenses 213,716 296,939
----------- -----------
Total Current Assets 11,513,851 16,969,234
--------------------
Net property and equipment 661,458 919,110
Investment in geothermal power unit 531,508 549,626
Deferred tax asset 16,796 22,996
Other assets 182,249 175,711
----------- -----------
Total Assets $12,905,862 $18,636,677
------------ =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
1
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2001 2001
------------ ---------
(unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
-------------------
Line of credit $ -- $ 6,535,405
Due to related party 19,000 19,000
Accounts payable 7,423,262 7,284,625
Income taxes payable 2,087 2,087
Customer deposits -- 203,202
Accrued liabilities 1,195,660 1,023,556
Deferred revenue 1,162,051 899,352
----------- -----------
Total Current Liabilities 9,802,060 15,967,227
-------------------------
Deferred revenue 810,085 841,922
----------- -----------
Total Liabilities 10,612,145 16,809,149
----------------- ----------- -----------
Shareholders' Equity
--------------------
Common stock, $.01 par value; 25,000,000
shares authorized; 7,080,498 shares issued
and outstanding 70,805 70,805
Additional paid-in capital 2,210,805 2,210,805
Accumulated other comprehensive income (loss) 3,010 (5,458)
Accumulated deficit 9,097 (448,624)
----------- -----------
Total Shareholders' Equity 2,293,717 1,827,528
-------------------------- ----------- -----------
Total Liabilities and
Shareholders' Equity $12,905,862 $18,636,677
---------------------- =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
2
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ----------------------
2001 2000 2001 2000
-------- --------- -------- --------
Revenues:
Procurement services $14,255,967 $16,448,293 $42,959,628 $60,104,527
Service and consulting 6,228,978 4,755,475 14,414,918 10,984,204
Geothermal 45,256 - 134,654 -
----------- ----------- ----------- -----------
Total Revenues 20,530,201 21,203,768 57,509,200 71,088,731
-------------- ----------- ----------- ----------- -----------
Cost of Revenues:
Procurement services 12,783,001 14,634,844 38,150,746 53,795,325
Service and consulting 4,958,895 3,949,715 11,359,382 8,768,527
Geothermal 13,262 - 46,769 -
----------- ----------- ----------- -----------
Total Cost of Revenues 17,755,158 18,584,559 49,556,897 62,563,852
---------------------- ----------- ----------- ----------- -----------
Gross Profit:
Procurement services 1,472,966 1,813,449 4,808,882 6,309,202
Service and consulting 1,270,083 805,760 3,055,536 2,215,677
Geothermal 31,994 - 87,885 -
----------- ----------- ----------- -----------
Total Gross Profit 2,775,043 2,619,209 7,952,303 8,524,879
------------------ ----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and
administrative 2,564,068 2,530,717 6,781,684 7,569,970
Termination costs - 239,285 - 291,285
Interest 36,347 206,217 204,093 540,986
Startup costs, E-Business 145,248 368,477 502,605 909,308
----------- ----------- ----------- -----------
Total Operating Expenses 2,745,663 3,344,696 7,488,382 9,311,549
------------------------ ----------- ----------- ----------- -----------
Income (Loss) From Continuing
Operations Before Litigation
Settlements And Income Tax Expense 29,380 (725,487) 463,921 (786,670)
Litigation settlements - (18,801) - 175,110
Income tax expense - - 6,200 -
----------- ----------- ----------- -----------
Income (Loss) From Continuing
Operations, Net of Income Taxes 29,380 (744,288) 457,721 (611,560)
Loss from discontinued operations,
net of income taxes - (15,812) - (63,916)
----------- ----------- ----------- -----------
Net Income (Loss) $ 29,380 $ (760,100) $ 457,721 $ (675,476)
=========== =========== =========== ===========
Income (Loss) Per Share From Continuing
Operations (Basic And Diluted) $.00 $(.14) $.06 $(.11)
Net Income (Loss) Per Share (Basic
And Diluted) $.00 $(.14) $.06 $(.13)
Weighted Average Number Of
Shares Outstanding (Basic
And Diluted) 7,080,498 5,329,501 7,080,498 5,329,501
The accompanying notes are an integral part of
these consolidated financial statements.
3
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended December 31,
------------------------------
2001 2000
---- ----
Cash Flows From Operating Activities
------------------------------------
Net income (loss) for the nine months $ 457,721 $ (675,475)
Adjustments to Reconcile Net Income To Net
Cash Provided By (Used In) Operating
Activities:
Depreciation and amortization 386,075 297,080
Deferred income taxes 6,200
Unrealized gain on marketable securities 8,476
Changes In Operating Assets and Liabilities
Decrease (increase) in marketable securities 288,256 (6,063)
Decrease in receivables 2,883,219 1,816,307
Decrease (increase) in inventories 245,787 (418,390)
Decrease in prepaid expenses 83,223 144,301
Decrease (increase) in other assets 2,364 (3,413)
Increase (decrease) in accounts payable 138,637 (2,333,802)
Decrease in customer deposits (203,206) (358,000)
Increase (decrease) in accrued liabilities 172,104 (67,658)
Increase (decrease) in deferred revenue 230,862 (76,784)
----------- -----------
Net Cash Provided By (Used In)
Operating Activities 4,699,718 (1,681,897)
------------------------------ ----------- -----------
Cash Flows Used In Investing Activities
---------------------------------------
Purchases of equipment (99,211) (170,099)
Additional security deposit (20,000) --
----------- -----------
(119,211) (170,099)
----------- -----------
Cash Flows Used In Financing Activities
---------------------------------------
Net decrease in line of credit (6,535,405) (1,664,525)
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,954,898) (3,516,521)
-----------------------------------------
Beginning Cash and Cash Equivalents 2,098,198 686,413
----------------------------------- ----------- -----------
Ending Cash and Cash Equivalents $ 143,300 $(2,830,108)
-------------------------------- =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
4
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and note disclosures required by generally accepted
accounting principles in the United States. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Quarterly results
are not necessarily indicative of results for the full year. For further
information, refer to the annual financial statements and notes thereto
included in the Company's Form 10-K.
2. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has adopted Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). APB No. 25 provides that the compensation
expense relative to the Company's employee stock options is measured
based on the intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a pro forma
disclosure of the impact of applying the fair value method of SFAS No.
123.
All stock options granted for the nine months ended December 31, 2001 and
2000 were determined to have a fair value of zero. The exercise price of
these options were set at amounts in excess of 150% of the fair value of
the underlying stock. Therefore, no options granted have been exercised
during the nine months ended December 31, 2001 and 2000. A pro forma
presentation of compensation cost and earnings per share is not required
due to the zero fair value determination. Option activity is summarized
in the following table:
Options outstanding - April 1, 2001 465,259
Activity for the nine months ended December 31, 2001:
Options granted 82,746
Options exercised 0
Options forfeited or expired (166,677)
-------
Options outstanding - December 31, 2001 381,328
=======
5
3. Net Income (Loss) per Share
Computations of net income (loss) per share and the income (loss) per
share from continuing operations have been made in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS No. 128). These per share computations use the weighted average
number of shares outstanding during the period. SFAS No. 128 requires a
separate presentation of diluted income per share from continuing
operations and diluted net income per share for the potential dilutive
effect of securities such as stock options. The Company maintains a stock
option plan as discussed in Note 2. The pricing of the options were in
excess of the underlying value of the Company stock during the Nine
months ended December 31, 2001 and 2000, therefore, the stock options are
antidilutive.
4. Line of Credit
On November 21, 2001, the Company entered into a $10.0 million revolving
credit facility with Fleet Capital Corporation, formerly Summit Business
Capital Corporation ("Fleet") whereas the Company may borrow on 85% of
its eligible trade receivables. The Company simultaneously terminated its
prior financing agreement with IBM Credit Corporation ("IBM") by paying
IBM an aggregate of $2,270,636. 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 Company 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
credit facility agreement with Fleet contains financial covenants. At
December 31, 2001, the Company was in compliance with all of its
covenants and had no outstanding balance under the credit facility with
Fleet.
5. Subsequent Events
On 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 price of $355,051 in cash to be allocated as follows:
$200,000 Goodwill
152,220 Equipment
2,831 Prepaid Expenses
--------
$355,051 Aggregate purchase price
========
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with, and is qualified in its entirety by, the unaudited financial statements,
including the notes thereto, appearing elsewhere in this quarterly report, 10-Q.
A. Results of Operations
a) Three Months Ended December 31, 2001 Compared to Three
Months Ended December 31, 2000.
(1) Total Revenues
Total revenues from the IT business decreased by 3.39%, or $718,823, to
$20.48 million for the three months ended December 31, 2001. Services and
consulting revenue increased by 30.99%, or $1.47 million, to $6.23 million for
the three months ended December 31, 2001 compared to $4.76 million for the three
months ended December 31, 2000. This increase is attributable to $1.50 million
increase in our third party service contract revenues. Product procurement
revenues decreased by 13.33%, or $2.19 million, to $14.25 million for the three
months ended December 31, 2001. This decline in product procurement revenues is
mainly due to our greater emphasis on our services and consulting organization
as well as a slow-down in the economy.
Geothermal revenues of $45,256 for the three months ended December 31,
2001 are consistent with the previous period's revenues for a comparable period.
(2) Gross Profit
Our aggregate gross profit from the IT business increased by 4.73%, or
$123,840, to $2.74 million for the three months ended December 31, 2001. This
increase is mainly attributable to 30.99% increase in our service and consulting
revenues. Also, measured as a percentage of net sales, our overall gross profit
margin increased to 13.39% for the three months ended December 31, 2001 from
12.35% for the three months ended December 31, 2000. This increase is also due
to higher services and consulting revenues.
Gross profit margin attributable to product sales decreased to 10.33%
for the three months ended December 31, 2001 from 11.03% for the three months
ended December 31, 2000. This decrease in product procurement gross margin is
because of the higher competition in the marketplace and a slow-down in the
economy. Gross margin attributable to services and consulting revenue increased
to 20.39% for the three months ended December 31, 2001 from 16.94% for the three
months ended December 31, 2000. Again, this increase is mainly due to higher
services and consulting revenues.
The geothermal gross profit of $31,994 for the three months ended
December 31, 2001 is consistent with the gross profit for comparable previous
periods.
(3) Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 1.32%, or
$33,351, to $2.56 million for the three months ended December 31, 2001 from
$2.53 million for the three months ended December 31, 2000. This increase is
primarily due to higher sales commission expenses for service and consulting
revenues for the three months ended December 31, 2001.
7
(4) Interest Expense
Interest expense decreased by 82.37%, or $169,870 to $36,347 for the
three months ended December 31, 2001 from $206,217 for the three months ended
December 31, 2000. This decrease is primarily a result of lower sales volume and
lower interest rates as well as our continued efforts to streamline our accounts
receivable credit policies and collection functions.
(5) Startup Costs; e-Business
Startup Costs; e-Business for the three months ended December 31, 2001
was $145,248, compared to $368,477 for the three months ended December 31, 2000.
This decrease is primarily due to: 1) lower head count within the group; and 2)
generation of $42,663 revenue from e-Business activities during three months
ended December 31, 2001 as compared to $8,750 from three months ended December
31, 2000.
(6) Income Taxes
Income Tax expense was $0, and $0 for the three months ended December
31, 2001 and 2000, respectively, because of the loss carry forward.
b) Nine months Ended December 31, 2001 Compared to Nine months
Ended December 31, 2000.
(1) Total Revenues
Total revenues from the IT business decreased by 19.29%, or $13.71
million, to $57.37 million for the nine months ended December 31, 2001. Services
and consulting revenue increased by 31.23%, or $3.43 million, to $14.14 million
for the nine months ended December 31, 2001 compared to $10.98 million for the
nine months ended December 31, 2000. This increase is attributable to $3.43
million increase in our third party service contract revenues. Product
procurement revenues decreased by 28.53%, or $17.14 million, to $42.96 million
for the nine months ended December 31, 2001. This decline in product procurement
revenues is mainly due to the continued focus on our services and consulting
organization as well as a slow-down in the economy.
Geothermal Revenues of $134,654 for the nine months ended December 31,
2001 are consistent with the previous period's revenues for a comparable period.
(2) Gross Profit
Our aggregate gross profit from the IT business declined by 7.75%, or
$660,461, to $7.86 million for the nine months ended December 31, 2001. This
decrease is mainly due to lower product procurement revenues. Measured as a
percentage of net sales, our overall gross profit margin increased to 13.71% for
the nine months ended December 31, 2001 from 11.99% for the nine months ended
December 31, 2000.
Gross profit margin attributable to product sales increased to 11.19%
for the nine months ended December 31, 2001 from 10.50% for the nine months
ended December 31, 2000. This increase in product procurement gross margin is
attributable to lower cost of products obtained from our vendors as well as
lower inventory write-offs during this period. Gross margin attributable to
services and consulting revenue increased to 21.20% of services and consulting
revenue for the nine months ended December 31, 2001 from 20.17% for the nine
months ended December 31, 2000. This increase is mainly due to higher services
and consulting revenues
8
The geothermal gross profit of $87,885 for the nine months ended
December 31, 2001 is consistent with the gross profit for comparable previous
periods.
(3) Sales, General, and Administrative Expenses
Sales, general, and administrative expenses decreased by 10.41%, or
$788,286, to $6.78 million for the nine months ended December 31, 2001 from
$7.57 million for the nine months ended December 31, 2000. This decrease is
primarily a result of lower sales commission expenses as well as our continued
efforts to streamline many of our sales and operational functions.
(4) Interest Expense
Interest expense decreased by 62.27%, or $336,893 to $204,093 for the
nine months ended December 31, 2001 from $540,986 for the nine months ended
December 31, 2000. This decrease is primarily a result of lower sales volume and
lower interest rates as well as our continued efforts to streamline our accounts
receivable credit policies and collection functions.
(5) Startup Costs; e-Business
Startup Costs; e-Business for the nine months ended December 31, 2001
was $502,605, compared to $909,308 for the nine months ended December 31, 2000.
This decrease is primarily due to: 1) lower head count within the group; 2)
generation of $155,782 revenue from e-Business activities during nine months
ended December 31, 2001 as compared to $8,750 from nine months ended December
31, 2000.
(6) Income Taxes
Income Tax expense was $6200 and $0 for the nine months ended December
31, 2001 and 2000, respectively, because of the loss carry forward.
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Adoption of SAB No. 101 did not have a material effect on the
Company's results of operations.
In July 2001, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations," which supersedes Accounting Principles Board (APB) Opinion No.
16. SFAS No. 141 requires all business combinations initiated after June 30,
2001 be accounted for under the purchase method. In addition, SFAS No. 141
establishes criteria for the recognition of intangible assets separately from
goodwill. The Company does not expect the adoption of SFAS No. 141 will have a
material effect on the Company's results of operations, financial position or
cash flow.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment at least annually. In addition, the
amortization period of intangible assets with finite lives will no longer be
limited to 40 years. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001, which for the Company means the standard will be adopted on
April 1, 2002. The Company is currently assessing the impact of SFAS No. 142 on
its results of operations.
9
B. Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2001 of $143,300 decreased by
$1,954,898, from $2,098,198 at March 31, 2001. We are a net borrower;
consequently, we believe our cash and cash equivalents balance must be viewed
along with available balance on our line of credit.
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"). We simultaneously terminated our
prior financing agreement with IBM Credit Corporation ("IBM") by paying IBM an
aggregate of $2,270,636. 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. At December 31, 2001,
we had no outstanding balance under the credit facility with Fleet.
At December 31, our credit facilities with primary trade vendors such
as GE Access, Ingram Micro, and Tech Data were as follows: 1) Credit Line with
GE Access was $4.5 million, no interest charged, and an outstanding balance of
$4.48 million. 2) Credit line with Ingram Micro was $1.5 million, an 18% APR
interest rate and an outstanding balance of $398,791. 3) Credit line with Tech
Data was $1.5 million, no interest charged and an outstanding balance of
$737,645. Under these credit lines we are obligated to pay each invoice within
30 days from the date of such invoice.
Capital expenditures of $99,000 during nine months ended December 31,
2001, were primarily for the purchase of computer equipment for internal use.
We believe that our available funds, together with existing and
anticipated credit facilities, will be adequate to satisfy our current and
planned operations for at least the next 12 months.
Item 3. Quantitative and Qualitative Information About Market Risk
We do not engage in trading market risk sensitive instruments and do
not purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We have issued no debt
instruments, entered into no forward or future contracts, purchased no options
and entered into no swaps. Our primary market risk exposures are those of
interest rate fluctuations. A change in interest rates would affect the rate at
which we could borrow funds under our revolving credit facility. Our average
balance on the line of credit for the last nine months has been approximately
$3.40 million. Assuming no material increase or decrease in such balance, a one
percent change in the interest rate would change our interest expense by
approximately $34,000 annually.
10
PART II- OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
Reports on Form 8-K
On December 20, 2001, the Company filed with the Commission a
current report on Form 8-K reporting an event under Item 2 - Acquisition or
Disposition of Assets.
On November 27, 2001, the Company filed with the Commission a
current report on Form 8-K reporting an event under Item 5-Other
Events.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
EMTEC, INC.
By: /s/ JOHN P. HOWLETT
-------------------------------------------
John P. Howlett
Chairman, President, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
-------------------------------------------
Sam Bhatt
Vice President - Finance and Operations
(Principal Financial and
Accounting Officer)
Date: February 13, 2002
12