UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
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.)
572 Whitehead Road, Bldg.#1
Trenton, New Jersey 08619
(Address of principal executive offices, including zip code)
(609) 528-8500
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). ( ) Yes (X) No
As of February 9, 2005, there were outstanding 7,380,498 shares of the
registrant's common stock.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2004
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
December 31, 2004 (Unaudited) and March 31, 2004.....................................................1-2
Consolidated Statements of Operations
Three and nine months ended December 31, 2004 (Unaudited)
and 2003 (Unaudited) ..................................................................................3
Consolidated Statements of Cash Flows
Nine months ended December 31, 2004 (Unaudited)
and 2003 (Unaudited) ..................................................................................4
Notes to Consolidated Financial Statements (Unaudited) ..............................................5-9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations ..............................................................10-25
Item 3 - Quantitative and Qualitative Information About Market Risk ...........................................26
Item 4 - Controls and Procedures ..............................................................................27
PART II - OTHER INFORMATION
Item 6 - Exhibits..............................................................................................28
SIGNATURES ...................................................................................................29
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2004
----------- --------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 385,507 $ 4,792
Receivables:
Trade, net 16,138,064 15,206,972
Others 1,865,795 289,445
Inventories 5,727,382 1,599,166
Prepaid expenses 348,039 396,313
Deferred tax assets 186,368 186,368
---------- ----------
Total Current Assets 24,651,155 17,683,056
Property and equipment, net 313,935 387,073
Investment in geothermal power unit 542,129 569,960
Deferred tax assets 103,813 103,813
Intangible assets 106,191 118,198
Other assets 65,755 46,512
----------- -----------
Total Assets $25,782,978 $18,908,612
=========== ===========
1
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2004
------------ ------------
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 4,738,746 $ 2,308,416
Accounts payable 12,265,465 9,295,882
Deposits 531,790 332,667
Income Tax Payable 663,945 279,397
Accrued liabilities 2,315,055 2,529,885
Deferred revenues 689,721 853,393
---------- ----------
Total Current Liabilities 21,204,722 15,599,640
Deferred revenue 682,735 714,573
Deferred tax liability 25,924 25,924
---------- ----------
Total Liabilities 21,913,381 16,340,137
---------- ----------
Shareholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized; 7,380,498 shares issued
and outstanding 73,805 73,805
Additional paid-in capital 2,294,805 2,294,805
Accumulated earnings 1,500,987 199,865
----------- -----------
Total Shareholders' Equity 3,869,597 2,568,475
----------- -----------
Total Liabilities and
Shareholders' Equity $25,782,978 $18,908,612
=========== ===========
2
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ------------------------
2004 2003 2004 2003
-------- --------- -------- ---------
Revenues:
Procurement services $21,208,639 $19,648,683 $71,355,830 $65,286,512
Service and consulting 3,751,018 4,969,881 11,251,763 13,533,973
Geothermal 47,886 47,900 139,921 140,873
---------- ---------- ----------- ----------
Total Revenues 25,007,543 24,666,464 82,747,514 78,961,358
---------- ---------- ----------- ----------
Cost of Revenues:
Procurement services 18,701,165 17,686,595 63,402,197 59,127,426
Service and consulting 2,571,789 3,094,958 7,706,300 8,917,374
Geothermal 20,741 61,167 54,817 91,249
---------- ---------- ----------- ----------
Total Cost of Revenues 21,293,695 20,842,720 71,163,314 68,136,049
---------- ---------- ----------- ----------
Gross Profit:
Procurement services 2,507,474 1,962,088 7,953,633 6,159,086
Service and consulting 1,179,229 1,874,923 3,545,463 4,616,599
Geothermal 27,145 (13,267) 85,104 49,624
---------- ----------- ----------- ----------
Total Gross Profit 3,713,848 3,823,744 11,584,200 10,825,309
---------- ---------- ----------- ----------
Operating Expenses:
Selling, general and
administrative 3,517,096 3,350,077 9,355,359 9,934,891
Interest 47,686 75,333 145,243 247,885
---------- ---------- ----------- ---------
Total Operating Expenses 3,564,782 3,425,410 9,500,602 10,182,776
---------- ---------- ----------- ----------
Income Before Income Tax Expense 149,066 398,334 2,083,598 642,533
Income tax expense 67,476 78,008 782,476 103,264
---------- ----------- ----------- -----------
Net Income $ 81,590 $ 320,326 $ 1,301,122 $ 539,269
========== =========== =========== ===========
Net Income Per Share -
Basic $ .01 $ .04 $ .18 $ .08
Diluted $ .01 $ .04 $ .17 $ .07
Weighted Average Number Of
Shares Outstanding {Basic} 7,380,498 7,194,628 7,380,498 7,118,680
Weighted Average Number Of
Shares Outstanding {Diluted} 7,659,171 7,504,498 7,588,946 7,470,137
3
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended:
-----------------------
December 31, December 31,
2004 2003
---------- -----------
Cash Flows From Operating Activities
Net income for the nine months $ 1,301,122 $ 539,269
Adjustments to Reconcile Net Income To Net
Cash Used In Operating Activities
Depreciation and amortization 274,799 504,071
Impairment charges - 223,858
Deferred income tax - 106,876
Issuance of stock compensation - 87,000
Changes In Operating Assets and Liabilities
Increase in receivables (2,507,443) (4,505,974)
(Increase) Decrease in inventories (4,128,216) 1,106,455
Decrease (Increase) in prepaid expenses 48,274 (11,426)
(Increase) Decrease in other assets (19,243) 2,313
Increase in accounts payable 2,969,581 5,956,235
Increase (Decrease)in deposits 199,123 (298,127)
Increase in income tax payable 384,548 -
Decrease in accrued liabilities (215,220) (32,373)
Decrease in deferred revenue (195,509) (413,067)
---------- ----------
Net Cash (Used In) Provided By
Operating Activities (1,888,184) 3,265,110
---------- ----------
Cash Flows From Investing Activities
Purchases of equipment (161,432) (82,369)
---------- ----------
Net Cash Used In Investing Activities (161,432) (82,369)
---------- ----------
Cash Flows From Financing Activities
Net Increase (Decrease) in line of credit 2,430,330 (4,783,935)
---------- ------------
Net Cash Provided By (Used In)
Financing Activities 2,430,330 (4,783,935)
---------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents 380,715 (1,601,194)
Beginning Cash and Cash Equivalents 4,792 1,792,101
---------- ------------
Ending Cash and Cash Equivalents $ 385,507 $ 190,907
========== ============
4
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles in the United States. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Quarterly results are not necessarily indicative of results for the full year.
For further information, refer to the annual financial statements and notes
thereto included in the Company's Form 10-K for the year ended March 31, 2004.
2. Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No.
123. Compensation expense for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant over
the amount the employee must pay to acquire the stock. No compensation cost has
been recognized for any option grants in the accompanying consolidated
statements of operations since the price of the options was set at the quoted
market price of Company stock at dates of grant. The weighted average fair value
of all of the employee options was estimated on the date of grant using the
Black-Scholes model.
The Company did not elect to change to the fair value based method of accounting
for stock-based employees' compensation during the quarter ended December 31,
2004. Accordingly, the adoption of SFAS No. 148 did not affect the Company's
financial condition or results of operations. However, SFAS No. 148 requires
that information be provided as if the Company had accounted for employee stock
options under the fair value method of this statement, including disclosing pro
forma information regarding net income (loss) and earnings (loss) per share.
Had the Company applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation, the Company's net income (loss) and basic and diluted
earnings (loss) per share would have been changed from the "as reported" amounts
to the "pro forma" amounts as follows:
5
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ---------------------------
Pro Forma:
2004 2003 2004 2003
--------- ---------- ------------ ----------
Net Income as reported $ 81,590 $ 320,326 $ 1,301,122 $ 539,269
Less: Stock-based compensation
under SFAS 123 (24,288) (900) (24,288) ( 2,703)
------- ------- ------- -------
Pro Forma Net Income $ 57,302 $ 319,426 $ 1,276,834 $ 536,566
--------- ---------- ------------ ----------
Pro Forma:
Net Income Per Share Basic $ .01 $ .04 $ .17 $ .08
--------------------------------------------------------
Net Income Per Share Diluted $ .01 $ .04 $ .17 $ .07
--------------------------------------------------------
Option activity is summarized in the following table:
Options outstanding - October 1, 2004 405,228
Activity for the three months ended December 31, 2004:
Options granted 60,000
Options exercised -
Options forfeited or expired (17,106)
-------
Options outstanding - December 31, 2004 448,122
=======
3. Line of Credit
On December 10, 2004, the Company entered into an amendment to the Loan and
Security Agreement with Bank of America Business Capital Corporation(successor
by merger to Fleet Capital Corporation) ("BOA") extending its credit facility
through November 21, 2006. The amendment increased the Company's credit facility
from $10 million to $12 million. The Company can borrow up to a lesser of $12
million minus outstanding letter of credits or 85% of eligible accounts
receivable minus the outstanding letter of credit obligations. Interest on
outstanding loans under the revolving credit facility with BOA is charged
monthly at a fluctuating rate per annum equal to 0.25% above the Prime Rate and,
at the Company's option, interest on the outstanding loans may be charged at
LIBOR plus 2.75%. The BOA 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, BOA, GE Access and Ingram Micro have entered into
intercreditor agreements, which provide that as regards to these vendors, debt
obligations to BOA are accorded priority.
As of December 31, 2004, the Company was in compliance with all its financial
covenants and had a $4.74 million outstanding balance under the credit facility
and an unused availability of $6.26 million and the Company had $1 million in
outstanding letter of credit obligations.
4. Trade Receivables
6
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. Trade accounts receivable consists of the
following:
--------------------------------------------------------------------------------------
December 31, 2004 March 31, 2004
--------------------------------------------------------------------------------------
Trade Receivable $ 16,698,606 $15,570,374
--------------------------------------------------------------------------------------
Allowance for doubtful accounts (560,542) (363,402)
--------- ---------
--------------------------------------------------------------------------------------
Trade Receivable, net $ 16,138,064 $15,206,972
------------ -----------
--------------------------------------------------------------------------------------
5. Inventory
Inventories are stated at lower of cost (first-in, first-out) or market. Cost is
based on standard costs generated principally by the most recent purchase price.
The Company provides an inventory reserve for obsolescence and deterioration
based on management's review of product sales. Inventory is recorded on the
balance sheet net of allowances for inventory valuation of $595,928 and $722,551
at December 31, 2004 and March 31, 2004, respectively. The Company disposed of
$159,000 of old and obsolete inventory during this quarter of which $143,000 was
charged against the inventory reserve and the remaining $16,000 was charged to
the cost of revenues.
6. Major Customers
Five major customers in the aggregate accounted for approximately 87% and 62% of
the Company's net sales for the three months ended December 31, 2004 and 2003,
respectively. The same five major customers accounted for in the aggregate
approximately 67% and 65% of the Company's net sales for the nine months ended
December 31, 2004 and 2003, respectively.
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.
7. Related Party Transactions
The Company moved its 2990 Gateway Drive, Norcross, GA office and warehouse
location to 500 Satellite Blvd., Suwanee, GA on December 1, 2004. The Company is
occupying approximately 21,000 square feet of office and warehouse space out of
a total of approximately 70,000 square feet. This space is leased from GS&T
Properties, LLC, in which Messrs. John Howlett and Ronald Seitz, each an
executive officer and director of the Company, are passive investors, each
owning an approximately 10% equity interest. The lease term is for 5 years with
monthly base rent of $12,500.
8. Office Consolidation
7
At December 31, 2004, the Company completed the final phase of its office
consolidation plan by entering into an agreement to sub-lease its office space
at 880 3rd Avenue in New York City. The June 2008 term of the sublease coincides
with the term of the Company's underlying lease. The sublease is expected to
generate approximately $15,000 in monthly rental receipts to the Company to
partially offset approximately $25,000 in monthly rent payments to be made by
the Company pursuant to its underlying lease commitment through June 2008.
The Company has recorded a one-time charge of $470,000 to sales, general and
administrative expenses for the three months ended December 31, 2004. This
charge was computed based upon the net present value of the Company's remaining
lease obligation in excess of the present value of expected rental receipts
under the sub-lease.
The company has moved its New York City office to a much smaller shared office
space located at 116 West 23rd Street, New York. The term of this lease is for
fourteen months at monthly base rent of $1300.
9. Segment Information
The Company has adopted Statements 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.
Summarized financial information relating to the Company's operating segments
are as follows:
For the three months ended December 31: 2004 2003
------------------------------------------------------------------------
Revenues
Information Technology $ 24,959,657 $ 24,618,564
Geothermal 47,886 47,900
------ ------
Total Revenues $ 25,007,543 $ 24,666,464
============ ============
Operating Profit/(Loss)
Information Technology $ 133,408 $ 426,641
Geothermal 15,658 (28,307)
------ -------
Net Segment Operating
Income $ 149,066 $ 398,334
Income Tax Expense 67,476 78,008
------------ ------
Net Income $ 81,590 $ 320,326
============ ============
8
For the nine months ended December 31: 2004 2003
------------------------------------------------------------------------
Revenues
Information Technology $ 82,607,593 $ 78,820,485
Geothermal 139,921 140,873
------- -------
Total Revenues $ 82,747,514 $ 78,961,358
============ ============
Operating Profit/(Loss)
Information Technology $ 2,033,369 $ 635,717
Geothermal 50,229 6,816
------ -----
Net Segment Operating
Income $ 2,083,598 $ 642,533
Income Tax Expense 782,476 103,264
------------ -------
Net Income $ 1,301,122 $ 539,269
============ ============
9
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 on
Form 10-Q.
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 when the earning 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. Procurement
services revenue represents sales of computer hardware and pre-packaged
software. These arrangements often include software installations,
configurations, and imaging, along with delivery and set-up of hardware. We
follow the criteria contained in EITF 00-21 and SAB 104 in recognizing revenue
associated with these transactions. We perform all software installations,
configurations and imaging services at our locations prior to the delivery of
the product. Some customer arrangements include "set-up" services performed at
customer locations where our personnel perform the routine tasks of removing the
equipment from boxes, and setting up the equipment at customer workstations by
plugging in all necessary connections, etc. This service is usually done on the
same day as delivery. Revenue is recognized at date of delivery, except as
follows:
o In some instances, the "set-up" service is performed after date of
delivery. We recognize revenue for the "hardware" component at date
of delivery when the amount of revenue allocable to this component
is not contingent upon the completion of "set-up" services and
therefore, our customer has agreed that the transaction is complete
as to the "hardware" component. In instances where our customer does
not accept delivery until "set-up" services are completed, we defer
all revenue in the transaction until customer acceptance occurs.
10
o There are occasions when a customer requests a transaction on a
"bill & hold" basis. We follow the SAB 104 criteria and recognize
revenue prior to date of physical delivery only when all the
criteria are met as follows:
o Risks of ownership have passed to our customer
o The customer has made a fixed commitment, in writing.
o A fixed delivery schedule is established
o We have not retained any specific performance obligations.
o We segregate the customer's ordered goods from our general
inventory and the order is complete and ready for shipment.
We do not modify our normal billing and credit terms for such customers.
Our customer is invoiced at the date of revenue recognition when all of the
above criteria have been met.
We have experienced minimal customer returns. Since all eligible products
must be returned to us within 30 days from the date of the invoice, we reduce
the procurement services revenue and cost of procurement services in each
accounting period based on the actual returns that occurred in the next 30 days
after the close of the accounting period
Service and consulting contracts include time billings based upon billable
hours charged to the customers, fixed price short-term projects, hardware
maintenance contracts, and manufacturer support service contracts. These
contracts generally are task specific and do not involve multiple deliverables.
Revenues from time billings are recognized as services are delivered. Revenues
from short-term fixed price projects are recognized using the percentage of
completion method, whenever reliable estimates of progress toward completion are
available. Revenues from hardware maintenance contracts are recognized ratably
over the contract period. Net 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 sale
date. Manufacturer support service contracts contain cancellation privileges
that allow our customers' 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 we 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.
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. Allowance for doubtful accounts was $560,542 and $363,402 as
of December 31, 2004 and March 31, 2004, respectively.
11
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. At December 31, 2004, and March 31, 2004, inventory
reserve was $595,928 and $722,551, respectively. We disposed of $159,000 of old
and obsolete inventory during this quarter of which $143,000 was charged against
the inventory reserve and the remaining $16,000 was charged to the cost of
revenues.
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 accelerated, resulting in the recognition of
increased depreciation and amortization expense in future periods. We evaluate
the recoverability of our 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. Property and equipment
along with their components are as follows:
Original Cost Estimated Life
------------- --------------
Dec. 2004 March 2004 (Years)
--------- ---------- -------
Computer equipment $ 3,799,176 $ 3,643,052 3
Furniture and fixtures 360,205 357,845 5
Leasehold improvements 244,847 244,847 5
Vehicles 80,984 80,984 2
----------- -----------
Total Property and Equipment $ 4,485,212 $ 4,326,728
Less: accumulated depreciation
and amortization (4,171,277) (3,939,655)
----------- -----------
Net book value $ 313,935 $ 387,073
=========== ===========
12
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. Based on the impairment tests
performed during the fiscal year ended March 31, 2004 , we found no impairment
of the remaining goodwill. The next annual impairment test shall be performed
during the fourth quarter of the fiscal year 2005.
We were 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 was expensed based upon then contract term scheduled to end
in May 2004. The contract, which is subject to annual renewal by mutual
agreement, was instead extended by the State of New Jersey through June 2005.
The net carrying value for this contract amounted to $0 and $9,091 at December
31, 2004 and March 31, 2004, respectively.
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 our
financial statements or tax returns. In estimating future tax consequences, we
generally consider 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. Income tax expense, as a percentage of
income before taxes, increased for the nine months ended December 31, 2004, as
compared to the nine months ended December 31, 2003. This increase is a result
of the utilization of approximately $850,000 of federal tax loss carryforwards
during the year ended March 31, 2004. The Company had previously recorded
significant valuation allowances for deferred tax assets, which effectively
reduced the income tax expense percentage during the year ended March 31, 2004.
13
Results of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of our Results of
Operations for the three months ended December 31, 2004, and 2003.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
2004 2003 Change %
-----------------------------------------------------------------------------------------------------
Revenues
Procurement services $ 21,208,639 $ 19,648,683 $ 1,559,956 7.9%
Service and consulting 3,751,018 4,969,881 $ (1,218,863) -24.5%
Geothermal 47,886 47,900 $ (14) 0.0%
------------ ------------
Total Revenues 25,007,543 24,666,464 $ 341,079 1.4%
------------ ------------
Cost of Revenues
Procurement services 18,701,165 17,686,595 $ 1,014,570 5.7%
Service and consulting 2,571,789 3,094,958 $ (523,169) -16.9%
Geothermal 20,741 61,167 $ (40,426) -66.1%
------------ ------------
Total Cost of Revenues 21,293,695 20,842,720 $ 450,975 2.2%
------------ ------------
Percent of revenues 85.1% 84.5%
Gross Profit
Procurement services 2,507,474 1,962,088 $ 545,386 27.8%
Service and consulting 1,179,229 1,874,923 $ (695,694) -37.1%
Geothermal 27,145 (13,267) $ 40,412 304.6%
------------ ------------
Total Gross Profit 3,713,848 3,823,744 $ (109,896) -2.9%
------------ ------------
Percent of revenue 14.9% 15.5%
Operating Expenses
Sales, General & Administrative Expenses 3,517,096 3,350,077 $ 167,019 5.0%
Interest Expense 47,686 75,333 $ (27,647) -36.7%
------------ ------------
Total Operating Expenses 3,564,782 3,425,410 $ 139,372 4.1%
------------ ------------
Percent of revenue 14.3% 13.9%
Income Before Income Tax 149,066 398,334 $ (249,268) -62.6%
Income Tax Expense 67,476 78,008 $ (10,532) -13.5%
------------ ------------
Net Income $ 81,590 $ 320,326 $ (238,736) -74.5%
============ ============ ============ =====
Income Per Share Basic $ 0.01 $ 0.04
============ ============
Income Per Share Diluted $ 0.01 $ 0.04
============ ============
14
Three Months Ended December 31, 2004 Compared to Three Months Ended
December 31, 2003.
Total Revenues
Total revenues for our IT business, which includes services and
consulting revenue, and procurement revenues, increased by 1.4% or $341,093, to
$24.96 million for the quarter ended December 31, 2004, compared to $24.62
million for the quarter ended December 31, 2003. This increase is primarily
attributable to a growth in our commercial customers' IT spending. Total IT
revenue associated with our commercial customers increased by approximately $2.8
million as compared with the prior quarter; this increase was partially off-set
by approximately $2.4 million decrease in computer roll-out projects for the
various state agencies in the State of New Jersey.
Procurement revenues increased by 7.9%, or $1.56 million, to $21.21
million for the quarter ended December 31, 2004, as compared to $19.65 million
for the quarter ended December 31, 2003. This change is primarily attributable
to reasons discussed above.
Services and consulting revenue decreased by 24.5%, or $1.22 million,
to $3.75 million for the quarter ended December 31, 2004 compared to $4.97
million for the quarter ended December 31, 2003. This decrease in services and
consulting revenue is mainly due to overall decrease in our installation
services associated with computer roll-out projects for the various state
agencies in the State of New Jersey, and decrease in our manufacturers' support
service contract revenue. The decrease in manufacturers' support service
contract is mainly due to the non-renewal of an annual maintenance contract by
one of our major commercial customers. Net revenue associated with this sale was
approximately $800,000 recognized in the quarter ended December 31, 2003.
During the fourth quarter of our fiscal year ending March 31, 2005, our
contract with the State of New Jersey was extended through June 30, 2005, and we
expect our revenues from commercial customer base will continue to grow, and to
roll-out over 1200 computers to a school district in GA. Our inventory at
December 31, 2004 was increased by approximately 350% as compared with the
inventory at March 31, 2004. This increase was mainly due to our receipt of
products from our distributors that were ordered by a customer for computer
roll-out projects starting in January 2005 for a school district in GA.
Five major customers accounted in the aggregate for approximately 87.0%
and 62.0% of our revenues for the quarter ended December 31, 2004 and 2003,
respectively. These top five customers are Gwinnett County Schools, Duval County
Schools, General Electric, Cox Communications and the State of New Jersey. We
anticipate that these customer concentrations will continue for the foreseeable
future. The loss of any of these customers may cause results of operations to
vary materially from those anticipated.
Geothermal revenues of $47,886 for the quarter ended December 31, 2004
are consistent with prior quarter. Our average geothermal revenue is
approximately $45,000 a quarter. We do not expect any significant change in the
average revenue in the future quarters.
15
Gross Profit
Aggregate gross profit for our IT business decreased by 3.9%, or
$150,308, to $3.69 million for the quarter ended December 31, 2004. Measured as
a percentage of total revenues for our IT business, our overall gross profit
margin decreased to 14.8% of total revenues for the quarter ended December 31,
2004 from 15.6% for the quarter ended December 31, 2003. The reasons for these
decreases are discussed in the two paragraphs below.
Gross profit for product sales increased by 27.8%, or $545,386, to
$2.51 million for the quarter ended December 31, 2004 as compared with $1.96
million for the quarter ended December 31, 2003. This increase is primarily
attributable to a growth in our commercial customers' IT spending and our
greater selling efforts. Measured as a percentage of procurement revenues, our
gross profit margin increased to 11.8% of procurement revenue for the quarter
ended December 31, 2004 from 10.0% for the quarter ended December 31, 2003. This
percentage increase is primarily attributable to greater selling efforts and
favorable price drops and other incentives offered by manufacturers. We can not
predict that price drops like these are going to repeat in the future.
Gross profit for service and consulting revenues decreased by 37.1%, or
$695,694, to $1.18 million for the quarter ended December 31, 2004 as compared
with $1.87 million for the quarter ended December 31, 2003. Also, measured as a
percentage of services and consulting revenues, our gross margin attributable to
services and consulting revenue decreased to 31.4% of services and consulting
revenue for the quarter ended December 31, 2004 from 37.7% for the quarter ended
December 31, 2003. Even though our billing rates (total revenue generated
divided by total billable hours available during the period) and utilization
rates (billable hours divided by paid hours) of engineers were higher during
this quarter, both of these decreases were mainly due to the non-renewal of a
manufacturers' support service contract sold to one customer in the prior
quarter as discussed in the revenue section.
We must continue to manage billing rates and utilization rates
effectively to remain competitive.
The geothermal gross profit increased by 304.6%, or $40,412, to $27,415
for the quarter ended December 31, 2004 compared with $(13,267) for the quarter
ended December 31, 2003. This is mainly due to approximately $40,000 higher
operating and maintenance expense associated with the geothermal unit in the
quarter ended December 31, 2003 that was unusual in nature. We have not seen
such a high operating and maintenance expense in the last four quarters nor do
we expect to see such an expense in the foreseeable future.
Sales, General, and Administrative Expenses
Sales, general and administrative expenses increased by 5.0%, or
$167,019, to $2.51 million for the quarter ended December 31, 2004. This
increase is mainly due to a one-time charge of $470,000 associated with the
sub-lease of our New York office located at 880 3rd Avenue. This charge is a
present value of the difference between obligations to the landlord at 880 3rd
Avenue minus the expected future rental income to be received from the
sub-tenant
16
through June 30, 2008. Without this one time charge of $470,000, our sales,
general and administrative expenses would have decreased by 9.0%, or $302,981,
to $3.05 million for the quarter ended December 31, 2004 as compared with $3.35
million for the quarter ended December 31, 2003. This decrease is primarily
attributable to our continuous focus on cost containment measures and the
following:
o Consolidation of our operations, administrative and inventory
warehousing functions from Mt. Laurel, NJ and Cranford, NJ to Trenton,
NJ.
o No bonus charges in connection with the earning share agreements with
prior three owners of Acentra Technologies, Inc. and Turnkey Computer
Systems, Inc. These earning share agreements expired on August 31,
2004.
o Much lower depreciation expense due to write-down of Network Operation
Center and Help Desk assets during fiscal 2004.
We estimate starting January 2005, our cash flow will be improved by
approximately $165,000 annually, and our net rent expense will be reduced by
approximately $300,000 annually attributable to the sub-lease of our former NYC
office.
In spite of vigorous cost containment efforts, various factors, such as
retention of employees, costs associated with marketing and selling activities,
compliance costs associated with new Securities and Exchange Commission rules,
and insurance markets may increase our sales, general and administrative
expenses and this could have a negative impact on fiscal year 2005.
Interest expense
Interest expense decreased by 36.7%, or $27,647, to $47,686 for the
quarter ended December 31, 2004 as compared with $75,333 for the quarter ended
December 31, 2003. This decrease is primarily attributable to a lower balance on
our line of credit, lower days sales outstanding, and lower interest charged by
our lender starting this quarter than prior quarters.
Income Taxes
Income tax expense, as a percentage of income before income taxes,
increased for the quarter ended December 31, 2004 as compared to the quarter
ended December 31, 2003. This increase is a result of the utilization of federal
tax loss carryforwards during the year ended March 31, 2004. The Company had
previously recorded significant valuation allowances for deferred tax assets,
which effectively reduced the income tax expense percentage during the year
ended March 31, 2004.
Net Income
For the three months ended December 31, 2004, net income was $81,590
compared to net income of $320,326 for the comparable period in 2003, a decrease
of 74.5%.
17
As discussed, the decrease in net income is mainly due to the loss
of a manufacturers' support service contract sold to one customer in the prior
quarter and an increase in SG&A expenses due to a one-time charge of $470,000
associated with the sub-lease of our New York office. Without this one-time
charge, net of income tax, our net income for the quarter ended December 31,
2004 would have been approximately $400,000 for the quarter ended December 31,
2004.
Nine Months Ended December 31, 2004 Compared to Nine Months Ended
December 31, 2004.
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of our Results of
Operations for the nine months ended December 31, 2004, and 2003.
18
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended December 31,
2004 2003 Change %
--------------------------------------------------------------------------------------------------------------------
Revenues
Procurement services $ 71,355,830 $ 65,286,512 $ 6,069,318 9.3%
Service and consulting 11,251,763 13,533,973 $(2,282,210) -16.9%
Geothermal 139,921 140,873 $ (952) -0.7%
------------ ------------
Total Revenues 82,747,514 78,961,358 $ 3,786,156 4.8%
------------ ------------
Cost of Revenues
Procurement services 63,402,197 59,127,426 $ 4,274,771 7.2%
Service and consulting 7,706,300 8,917,374 $(1,211,074) -13.6%
Geothermal 54,817 91,249 $ (36,432) -39.9%
------------ ------------
Total Cost of Revenues 71,163,314 68,136,049 $ 3,027,265 4.4%
------------ ------------
Percent of revenues 86.0% 86.3%
Gross Profit
Procurement services 7,953,633 6,159,086 $ 1,794,547 29.1%
Service and consulting 3,545,463 4,616,599 $(1,071,136) -23.2%
Geothermal 85,104 49,624 $ 35,480 71.5%
------------ ------------
Total Gross Profit 11,584,200 10,825,309 $ 758,891 7.0%
------------ ------------
Percent of revenue 14.0% 13.7%
Operating Expenses
Sales, General & Administrative Expenses 9,355,359 9,934,891 $ (579,532) -5.8%
Interest Expense 145,243 247,885 $ (102,642) -41.4%
------------ ------------
Total Operating Expenses 9,500,602 10,182,776 $ (682,174) -6.7%
------------ ------------
Percent of revenue 11.5% 12.9%
Income Before Income Tax 2,083,598 642,533 $1,441,065 224.3%
Income Tax Expense 782,476 103,264 $ 679,212 657.7%
------------ ------------
Net Income $ 1,301,122 $ 539,269 $ 761,853 141.3%
============ ============ ==========
Income Per Share Basic $ 0.18 $ 0.08
============ ============
Income Per Share Diluted $ 0.17 $ 0.07
============ ============
Total Revenues
Total revenues for our IT business, which includes services and consulting
revenue, and procurement revenues, increased by 4.8% or $3.79 million, to $82.61
million for the nine months ended December 31, 2004, compared to $78.82 million
for the nine months ended December 31, 2003. This increase is primarily
attributable to computer roll-out projects for various school districts in
Georgia, and Florida as well as recent sales growth in our commercial customer
base. Total IT revenue associated with our commercial customers and revenue
associated with computer roll-out projects increased by approximately $15.0
million as compared with the prior
19
period, this increase was off-set partially by approximately $11.3 million
decrease in computer roll-out projects for the various state agencies in the
State of New Jersey.
Procurement revenues increased by 9.3%, or $6.07 million, to $71.36
million for the nine months ended December 31, 2004. This change is primarily
attributable to reasons discussed above.
Services and consulting revenue decreased by 16.9%, or $2.28 million,
to $11.25 million for the nine months ended December 31, 2004 compared to $13.53
million for the nine months ended December 31, 2003. This decrease in services
and consulting revenue is mainly due to overall decrease in our installation
services associated with computer roll-out projects for the various state
agencies in the State of New Jersey, and decrease in our manufacturers' support
service contract revenue. The decrease in manufacturers' support service
contract is mainly due to the non-renewal of an annual maintenance contract by
one of our major commercial customers.
Five major customers accounted in the aggregate for approximately 67%
and 65% of our revenues for the nine months ended December 31, 2004 and 2003,
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.
Geothermal revenues of $139,921 for the nine months ended December 31,
2004 is consistent with comparable prior period.
Gross Profit
Aggregate gross profit for our IT business increased by 6.7%, or
$723,411, to $11.50 million for the nine months ended December 31, 2004. This
increase is mainly attributable to computer roll-out projects for various school
districts in Georgia and Florida, and sales growth in our commercial customer
base. Measured as a percentage of total revenues for our IT business, our
overall gross profit margin increased to 13.9% of total revenues for the nine
months ended December 31, 2004 from 13.7% for the nine months ended December 31,
2003. The reasons for this increase are discussed in the two paragraphs below.
Gross profit for product sales increased by 29.1%, or $1.79 million,
to $7.95 million for the nine months ended December 31, 2004 as compared with
$6.16 million for the nine months ended December 31, 2003. This increase is
primarily attributable to computer roll-out projects for various school
districts in Georgia, and Florida as well as recent sales growth in our
commercial customer base as discussed in the revenue section above and increase
in the gross profit margin. Measured as a percentage of procurement revenues,
our gross profit margin increased to 11.1% of procurement revenue for the nine
months ended December 31, 2004 from 9.4% for the nine months ended December 31,
2003. This percentage increase is primarily attributable to greater selling
efforts and favorable price drops and other incentives offered by manufacturers.
We can not predict that price drops like these are going to repeat in the
future.
Gross profit for service and consulting revenue decreased by 23.2%, or
$1.07 million, to $3.55 million for the nine months ended December 31, 2004 as
compared with $4.62 million for the nine months ended December 31, 2003. This
decrease is mainly due to an over-all decrease
20
in IT spending particularly with various state agencies in the State of New
Jersey, a non-renewal of manufacturers' support service contract sold to one
customer in the prior period as discussed in the revenue section and our
inability to attract new major customers. Measured as a percentage of service
and consulting revenue, our gross margin attributable to service and consulting
revenue decreased to 31.5% of service and consulting revenue for the nine months
ended December 31, 2004 from 34.1% for the nine months ended December 31, 2003.
This decrease in services and consulting gross margin was mainly due to the
non-renewal of manufacturers' support service contract sold to one customer
during the nine months ended December 31, 2003.
The geothermal gross profit increased by 71.5%, or $35,480, to $85,104
for the nine months ended December 31, 2004 compared with $49,624 for the nine
months ended December 31, 2003. This is mainly due to approximately $40,000
higher operating and maintenance expense associated with the geothermal unit in
the quarter ended December 31, 2003 that was unusual in nature. We have not seen
such a high operating and maintenance expense in the last four quarters nor do
we expect to see such an expense in the foreseeable future periods.
Sales, General, and Administrative Expenses
Sales, general and administrative expenses decreased by 5.8%, or
$579,532, to $9.36 million for the nine months ended December 31, 2004. This
decrease includes a one-time charge of $470,000 associated with the sub-lease of
our New York office located at 880 3rd Avenue. This charge is a present value of
the difference between obligations to the landlord minus the expected future
rental income to be received from the sub-tenant through June 30, 2008. Without
this one time charge of $470,000, our sales, general and administrative expenses
would have decreased by 10.6%, or $1.05 million, to $8.89 million for the nine
months ended December 31, 2004 as compared with $9.93 million for the nine
months ended December 31, 2003. This decrease is primarily attributable to our
continuous focus on cost containment measures and the following:
o Elimination of non-productive sales staff;
o Eliminated duplication of non-essential administrative support
services.
o Consolidation of our operations, administrative and inventory
warehousing functions from Mt. Laurel, NJ and Cranford, NJ to
Trenton, NJ.
o Lower bonus accrual charged to sales expense due to lower earning
share in connection with the earning share agreements with prior
three owners of Acentra Technologies, Inc. and Turnkey Computer
Systems, Inc. These earning share agreements expired on August
31, 2004.
o Much lower depreciation expense in the current fiscal year due to
write-down of NOC and Help Desk assets during fiscal 2004.
21
We estimate starting January 2005, our cash flow will be improved by
approximately $165,000 annually, and our net rent expense will be reduced by
approximately $300,000 annually attributable to the sub-lease of our former NYC
office.
In spite of our vigorous cost containment efforts, various factors,
such as retention of employees, costs associated with marketing and selling
activities, compliance costs associated with new Securities and Exchange
Commission rules, and insurance markets may increase our sales, general and
administrative expenses and this could have a negative impact on fiscal year
2005.
Interest expense
Interest expense decreased by 41.4%, or $102,642, to $145,243 for the
nine months ended December 31, 2004 as compared with $247,885 for the nine
months ended December 31, 2003. This decrease is primarily attributable to a
lower balance on our line of credit, lower days sales outstanding, and lower
interest charged by the lender during the period than prior period.
Income Taxes
Income tax expense, as a percentage of income before income taxes,
increased for the nine months ended December 31, 2004 to $785,476, as compared
to $103,264 for the nine months ended December 31, 2003. This increase is
primarily a result the $1.44 million increase in net income before income taxes
for the nine months ended December 31, 2004 compared to the nine months ended
December 31, 2003 and the utilization of federal tax loss carryforwards during
the year ended March 31, 2004. The Company had previously recorded significant
valuation allowances for deferred tax assets, which effectively reduced the
income tax expense percentage during the year ended March 31, 2004.
Net Income
For the nine months ended December 31, 2004, net income was $1.30
million compared to net income of $539,269 for the comparable period in 2003, an
increase of 141.3%.
As discussed, the increase in net income is mainly attributable to
computer roll-out projects for various school districts in Georgia and Florida,
and revenue growth in our commercial customer base as well as continuous cost
containment efforts undertaken by the Company. The reported net income for the
nine months ended December 31, 2004 includes a one-time charge of $470,000
associated with the sub-lease of our New York office. Without this one-time
charge, net of income tax, our net income for the nine months ended December 31,
2004 would have been approximately $1.61 million for the nine months ended
December 31, 2004.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Quarterly 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,"
22
"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, 2004 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.
Factors That May Affect Future Results
Our future operating results may be affected by a number of factors,
including uncertainties relative to national economic conditions, especially as
such factors affect interest rates, business insurance industry factors, our
ability to successfully increase business, and effectively manage expense
margins.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. We are in compliance with the covenants
contained in our loan and security agreement at December 31, 2004. Although we
expect to remain in compliance with the financial covenants, no assurance can be
given.
At December 31, 2004, credit facilities with our primary trade vendors,
GE Access, Ingram Micro, and Tech Data were as follows: $6.6 million, $5.0
million and $1.5 million, respectively. Under these credit lines, we are
obligated to pay each invoice within 30 days from the date of such invoice.
These credit lines could be reduced or eliminated without a notice, and this
action could have a material adverse affect our business, result of operations,
and financial condition.
We must continue to effectively manage expenses in relation to revenues
by directing new business development towards markets that complement or improve
our existing service lines. Management must also continue to emphasize operating
efficiencies through cost containment strategies, reengineering efforts, and
improved service delivery techniques. 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 increased personnel costs. This intense competition has caused our
billing margins to be lower
23
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.
Emtec 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 enterprise computing, data communications, data access, network
design, enterprise backup and storage consolidation, managed services and staff
augmentation. While we have offered IT services to our customers since 1983, our
major emphasis on IT consulting and services began in 1995. We have limited
experience in developing, marketing, or providing these services. We cannot
assure 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
This industry has been characterized by rapid technological advances that have
resulted in frequent introductions of new products, product enhancements and
aggressive pricing practices, which also impacts pricing of service activities.
Our operating results could be adversely affected by industry-wide pricing
pressures, the ability to recruit, train and retain personnel integral to our
operations and the presence of competitors with greater financial and other
resources. Also, our operating results could also be adversely impacted should
our company be unable to effectively achieve the revenue growth necessary to
provide profitable operating margins in various operations. Our plan for growth
includes marketing efforts, acquisitions that expand market share. There can be
no assurances these efforts will be successful, or if successful the timing
thereof.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2004 of $385,507 represented
an increase of $380,715 from $4,792 at March 31, 2004. 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. At December 31, 2004,
our working capital was increased to $3.45 million from $2.08 as of March 31,
2004. This increase in working capital was primarily attributable to net
earnings for the nine months ended December 31, 2004.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. On December 10, 2004, we entered into an
amendment to the Loan and Security Agreement with Bank of America Business
Capital Corporation (successor by merger to Fleet Capital Corporation) ("BOA")
extending our credit facility through November 21, 2006. This amendment
increased our credit facility from $10 million to $12 million. We can borrow up
to a lesser of $12 million minus the outstanding letter of credit obligations or
85% of eligible accounts receivable minus the outstanding letter of credit
obligations. Interest on outstanding loans under our revolving credit facility
with BOA is charged monthly at a fluctuating rate per annum equal to 0.25% above
the Prime Rate and, at our option, interest on the outstanding loans may be
charged at LIBOR plus 2.75%. The BOA revolving credit facility is collateralized
by a lien upon and security interest in substantially all of our assets. Since
current credit facilities with two of our primary trade vendors (GE Access and
Ingram Micro.) were also collateralized by substantially all of our assets,
Fleet, GE Access and Ingram Micro have entered into
24
intercreditor agreements, which provide that as regards to these vendors, debt
obligations to BOA are accorded priority.
As of December 31, 2004, we were in compliance with all of our
financial covenants and we had a $4.74 million outstanding balance under the
credit facility and an unused availability of $6.26 million and we had $1
million in outstanding letter of credit obligations.
At December 31, 2004, our credit facilities with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data were as follows:
o Our credit line with GE Access was $6.6 million, with an
outstanding principal balance of $6.6 million.
o Our credit line with Ingram Micro was $5.0 million, with an
outstanding principal balance of $2.6 million.
o Our credit line with Tech Data was $1.5 million, with an
outstanding balance of $519,000.
Under these credit lines, we are obligated to pay each invoice within
30 days from the date of such invoice.
Capital expenditures of $161,432 during nine months ended December 31,
2004 were primarily for the purchase of computer equipment for internal use, and
furniture and fixtures. We anticipate our capital expenditures for fiscal year
ending March 31, 2005 will be approximately $250.000.
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 funds generated from operations and bank borrowings
should be sufficient to meet our current operating cash requirements through the
next twelve months, although there can be no assurance that all of the
aforementioned sources of cash can be realized.
25
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 balance on
the line of credit at December 31, 2004 was approximately $3.3 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 $33,000
annually.
26
Item 4. Controls and Procedures
Our management carried out an evaluation, with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as of December 31, 2004. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
27
PART II - OTHER INFORMATION
Item 6. Exhibits
Exhibit 10.1 - Amendment to Loan and Security Agreement dated as of
November 11, 2004, by and between Bank of America Business Capital
Corporation (successor by merger to Fleet Capital Corporation) and
Emtec, Inc.
Exhibit 31.1 - Rule 13a-14(a)/15 d-14(a) Certification of John P.
Howlett, Principal Executive Officer, of Emtec, Inc. dated November 15,
2004.
Exhibit 31.2 - Rule 13a-14(a)/15 d-14(a) Certification of Sam Bhatt,
Principal Financial Officer, of Emtec, Inc. dated November 15, 2004.
Exhibit 32.1 - Section 1350 Certificate of John P. Howlett, Principal
Executive Officer, of Emtec, Inc. dated November 15, 2004.
Exhibit 32.2 - Section 1350 Certificate of Sam Bhatt, Principal
Financial Officer, of Emtec, Inc. dated November 15, 2004.
28
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, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
---------------------------------
Sam Bhatt
Vice President - Finance
(Principal Financial and
Accounting Officer)
Date: February 14, 2005
29
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as.............................. 'SS'