UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004
OR
For the transition period from to
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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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
Title of class
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [_] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of September 30, 2003 was approximately
$3,235,670 computed by reference to the closing price of the common stock for
that date.
As of July 1, 2004, there were outstanding 7,380,498 shares of the
registrant's common stock.
EMTEC, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business............................................................1
Item 2. Properties..........................................................7
Item 3. Legal Proceedings...................................................8
Item 4. Submission of Matters to a Vote of Security Holders.................8
PART II
Item 5. Market for the Company's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................9
Item 6. Selected Financial Data.............................................9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................10
Item 7A. Quantitative and Qualitative Information About Market Risk.........25
Item 8. Financial Statements and Supplementary Data........................26
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................26
Item 9A. Controls and Procedures............................................26
PART III
Item 10. Directors and Executive Officers...................................27
Item 11. Executive Compensation.............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................31
Item 13. Certain Relationships and Related Transactions.....................33
Item 14. Principal Accountant Fees and Services.............................33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.............................................................35
Signatures.........................................................59
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References in this Annual Report to "we," "us," or "our" are to Emtec,
Inc. and its subsidiaries, unless the context specifies or requires otherwise.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report for the year ended March 31,
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.
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PART I
Item 1. Business
Introduction
Emtec (OTC: ETEC) is a systems integrator focused on providing
technology solutions that enable its customers to effectively use and manage
their data to grow their businesses. Our areas of specialization in information
technology ("IT") services include enterprise computing, data communications,
data access, network design, enterprise backup and storage consolidation,
managed services and staff augmentation. Emtec's solutions are crafted to enable
our customers to become more efficient and effective, thereby giving them a
competitive advantage. To date, the most significant portion of our revenues has
been derived from our activities as a reseller of IT products, such as
workstations, servers, microcomputers, application software and networking and
communications equipment. However, we are actively endeavoring to increase the
portion of our revenues that are derived from IT services. We anticipate that an
increasing percentage of our future revenues will be derived from such business.
Named to the VARBusiness 500 list of top network integrators, value
added resellers, and consultants in the U.S. every year since 1995, we combine
extensive experience in systems integration with premier technology elements to
provide our customers with sophisticated, streamlined, truly comprehensive
solutions.
Over the past two decades, we have built strong relationships with
leading manufacturers, such as Cisco, HP, IBM, Microsoft, Sun Microsystems,
Dell, and Veritas, thereby enabling us to provide cutting-edge, scalable,
reliable and secure solutions. This, along with our background in information
technology, positions us as a premier, single-source provider of information
systems, and network solutions.
Our customers are primarily Fortune 2000 companies, state and local
government, local school districts, and other large and mid-sized companies
located principally in the New York/New Jersey Metropolitan area and the
Southeastern United States. Our commercial business is generally with customers
with annual revenues ranging from $50 million to $500 million. We service our
customer base from leased facilities in New Jersey, New York, Georgia, and
Florida.
Our executive offices are located at 572 Whitehead Road, Building#1,
Trenton, New Jersey, 08619; telephone: (609) 528-8500. Our website is located at
www.emtecinc.com. We make available free of charge through our website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the Securities and Exchange Commission. The information on our website is not
part of this Annual Report.
Industry Background
The broad market in which we compete is the provision of IT services.
This marketplace consists of traditional IT services such as hardware and
software procurement, life-cycle
services, and network consulting, as well as new and innovative Internet
services such as web enablement, remote network monitoring, help desk services,
and information security.
As the market for IT products has matured over the past several years,
price competition has intensified. That factor, combined with abbreviated
product lifecycles, has forced IT product manufacturers to pursue lower cost
manufacturing and distribution strategies. Resellers who were able to serve the
needs of corporate end users requiring diverse brands of products and related IT
services were initial beneficiaries of this heightened competition. More
recently, however, continuing competition and manufacturers' renewed efforts to
improve their cost structures have led to both consolidations and business
failures among resellers. Manufacturers have shifted from exclusive distribution
partners to "open sourcing" and some have begun direct selling efforts with a
view to capturing market share from resellers.
At the same time that the market for IT products is consolidating, the
market for IT services is expanding. Many companies have become increasingly
dependent on the use of IT as a competitive tool in today's business
environment. The need to distribute and access data on a real-time basis
throughout an organization and between organizations has led to the rapid growth
in network computing infrastructures that connect numerous and geographically
dispersed end users through local and wide area networks. This growth has been
driven by the emergence of industry standard hardware, software, and
communications tools, as well as the significant improvement in the performance,
capacity, and utility of such network-based equipment and applications.
The decision-making process that confronts companies when planning,
selecting, and implementing IT infrastructure and services continues to grow
more complex. Organizations are continually faced with technology obsolescence
and must design new networks, upgrade, and migrate to new systems. As a result
of the rapid changes in IT products and the risks associated with the commitment
of large capital expenditures for products and services whose features and
perceived benefits are not within the day-to-day expertise of operating
management, many businesses increasingly are outsourcing some or all of their
network management and support functions and are seeking the expertise of
independent providers of IT products and services.
Our Strategy
Our primary business objective is to become a leading single-source
provider of high quality and innovative IT products, services, and support. We
believe that by working with a single-source provider, business organizations
will be able to adapt more quickly to technological changes and reduce their
overall IT costs. To this end, we are pursuing the following strategies:
Pursuing Strategic Acquisitions
We are seeking to expand our service offerings, to add to or enhance
our base of technical or sales personnel, and to nurture and expand client
relationships by means of acquisitions of companies whose businesses complement
our businesses and, in particular, our IT consulting services. We intend to
focus on companies with management teams who are willing to commit to long-term
participation in our organization and who share our vision of continued growth.
As of the filing date of this report, there was no material pending acquisition.
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On January 9, 2002, we acquired substantially all of the assets of Devise
Associates, Inc., an information technology consulting and managed services
subsidiary of McLeodUSA, Inc. located in New York City.
On August 12, 2002, we acquired certain assets of Acentra Technologies,
Inc., including the assumption of the State of New Jersey computer supply and
services contract, for a net purchase price of $165,607 in cash.
On August 31, 2002, we acquired all of the customer contracts and certain
assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The purchase price is
being paid over a two-year period commencing on the date of the acquisition and
is based on a share of earnings derived from the customer contracts transferred
from Turnkey to Emtec.
Capitalizing on Existing Relationships
We have invested in training and committed resources to obtain company
certifications from key industry manufacturers, and have entered into written
agreements with most of these manufacturers, such as Sun, IBM, HP, Dell, CISCO,
Microsoft, Novell and Citrix. These agreements grant us a nonexclusive right to
purchase the manufacturer's hardware and license its software for our internal
business use and for commercial integration and resale. Typically, our
agreements with such manufacturers, such as those with Sun, IBM, CISCO,
Microsoft, Novell, Dell and Citrix, provide for a one-year term, renewable by
the parties for successive one-year terms and are terminable by either party on
prior written notice ranging from 30 to 45 days. They generally do not contain
financial terms for resale of the manufacturer's products, which terms are
separately governed by purchase orders.
Moreover, we believe that our history of satisfying the IT product
requirements of our larger customers is facilitating the marketing of our broad
range of services to this important segment of our clientele.
Our Business
o IT Services
Enterprise Computing Solutions: We offer a full spectrum of IT product
acquisition and support services needed to support client/server environments,
including product sourcing, network design and implementation, technical
support, server consolidation, and clustering and load balancing for high
availability.
Managed Services and Staff Augmentation Solutions: We manage and
support customers' networks through the utilization of outsourced help desk and
network monitoring services as well as through our own on-site engineering
resources. This allows organizations to focus the majority of their efforts on
their businesses - not on managing their IT infrastructures.
Data Communications Solutions: We offer Local Area Network/ Wide Area
Network and data wireless connectivity, voice over IP and structured cabling
solutions that are designed to enhance communication capabilities, while
decreasing costs.
Data Access Solutions: We enable on-demand access to information from
anywhere over any network. Our mobility, messaging, and management solutions can
provide secure data access, increased business productivity, and reduced IT
costs for any organization.
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Innovation Center: Among our most important customer resources is our
Innovation Center established at Norcross, Georgia. This center gives our
customers the ability to test the scalability and suitability of a hardware and
software configuration before investing in the technology. Staffed by high-level
certified engineers, the Innovation Center can simulate up to a 2,000-user load.
The Center is equipped with high-end Sun Microsystems'TM' servers, Sun Ray'TM'
thin clients, Sun'TM' storage arrays, and NT servers, as well as a wide array of
software applications, including Lotus Notes/Domino, IBM's DB2 product family,
Oracle, Veritas backup and storage products.
Lifecycle Management Services: Our lifecycle management services are
designed to provide customers with continuous availability of service and
support throughout the lifecycle of their IT investments, including the full
spectrum of IT product acquisition and support services needed to support server
environments. Our services include:
o Evaluation and prioritization of business objectives to
determine the best course of action for our customers;
o Consultation with customers to identify the right IT
products and services for their needs;
o Leveraging our vendor relationships to quickly source the
right combination of products;
o Providing logistical support needed to deploy a major
technology roll out; and
o Providing continuous support to enable a client to improve
end-user satisfaction, minimize downtime, and lower the
total cost of ownership.
K-12 Specialized Services for Student and Faculty Needs: We integrate
top-quality curriculum software and computer products into the classroom. We
have significant experience in building local area networks that link many
campuses together. We also provide school district-wide support and sustain
Internet access to educational resources worldwide. We tailor our array of
services to make the best use of limited funds.
Manufacturers Support Services Contracts: We offer manufacturer
support service contracts that provide our clients with extended technical
support, onsite hardware service and access to new software releases at a fixed
price. Most of the revenue from this portion of our business comes from selling
Sun Microsystems contracts.
Our IT services activities accounted for approximately 18%, 17%, and
19% of our total revenues for fiscal years 2004, 2003 and 2002, respectively.
o IT Reseller
IT Reseller: We are an authorized reseller of the products of many
leading IT manufacturers, such as 3Com, CISCO, HP, IBM, Intel, Microsoft, NEC,
Veritas, Novell, Dell, Lexmark, and Sun. Such products include workstations,
servers, networking and communications equipment, enterprise computing products,
and application software. Our business depends in large part upon our ongoing
access to well established aggregators, in particular GE Access, Ingram Micro,
Inc. and Tech Data Corp. as well as directly with Dell
-4-
Computers to enable us to acquire IT products at competitive prices and on
reasonable terms for resale to our customers.
Through our alliances with GE Access, Ingram, Tech Data and Dell
Computers, we provide our customers with competitive pricing and value-added
services such as electronic product ordering, product configuration, testing,
warehousing, and delivery. Our relationships with our aggregators and Dell
Computers allow us to minimize inventory risk by ordering products primarily on
an as-needed basis. We believe that in most cases our ability to acquire
products on a cost-plus basis affords us the opportunity to avail ourselves of
prices lower than those that could be obtained independently from manufacturers
or other vendors. We utilize electronic ordering and pricing systems that
provide real-time status checks on the aggregators' inventories and maintain
electronic data interchange links to other suppliers. Our sales team is thereby
able to schedule shipments more accurately and to provide
electronically-generated client price lists.
We have not entered into any long-term supply contracts with any of
our suppliers, as we purchase computers, computer systems, components, and parts
on a purchase order basis. Our agreements with GE Access, Ingram, Tech Data and
Dell, who collectively supplied approximately 93%, 85%, and 79% of our resale
products in the fiscal years 2004, 2003, and 2002, respectively, may be
terminated by such companies at any time upon 30 days' prior written notice.
We receive manufacturer rebates resulting from certain equipment
sales. In addition, we receive volume discounts and other incentives from
various suppliers. Except for products in transit or products awaiting
configuration at our facility, we generally do not maintain large inventory
balances. Our primary vendors limit price protection to that provided by the
manufacturer (generally less than 30 days) and they restrict product returns,
other than defective returns, to a percentage (the percentage varies depending
on the vendor and when the return is made) of products purchased. Those returns
must occur during a defined period, at the lower of the invoiced price or the
current price, subject to the specific manufacturer's requirements and
restrictions.
Our IT reseller activities accounted for approximately for 82%, 82%,
and 81% of our total revenues for the fiscal years ended March 31, 2004, 2003,
and 2002, respectively.
Marketing
Our marketing efforts are focused on:
o Broadening our public image an IT service provider;
o Promoting our offerings to current customers, prospects,
partners, and investors;
o Maintaining a constant flow of marketing communications to
increase and maintain our market presence;
o Driving prospects to our web site; and
o Increasing overall inquiries and sales from all sources.
-5-
Our marketing division is charged with sales lead generation. Through
diverse efforts that include seminars, tradeshows, direct mail, telemarketing, a
bi-monthly newsletter, and through our website we create multiple and frequent
"touches" of our prospective customers. The primary goal - to increase the
number of face to face meeting opportunities between our account team and
prospective clients, and to drive additional opportunities through our sales
pipeline. Our business development center is charged with sales lead generation.
Customers
Our targeted customers are primarily Fortune 2000 companies, state and
local governments, local school districts, and other large and mid-sized
companies located principally in the New York/New Jersey Metropolitan area and
the Southeastern United States. Our commercial business is generally with
customers with annual revenues ranging from $50 million to $500 million.
Although we have over 150 customers, our two largest customers, State of New
Jersey, and Gwinnett County School System (Georgia), accounted, respectively,
for approximately 31% and 16% of our revenues for the year ended March 31, 2004.
These same two customers accounted, respectively, for approximately 15% and 20%
of our revenues in fiscal year 2003 and approximately 0% and 14% of our revenues
in fiscal year 2002. The State of New Jersey computer supply and service
contract was acquired in the August 12, 2002 asset acquisition from Acentra
Technologies. The State of New Jersey contract is subject to annual renewals. In
May 2004, the State of New Jersey extended the contract terms through December
2004. An additional eight customers, Duval County School System, Cingular
Wireless, Tiffany & Co., Bally's Park Place Casinos, ING Financial Services,
BellSouth Corporation, GE, and Cox Communications, collectively accounted for
37%, 31%, and 22% of our revenues for the years ended March 31, 2004, 2003 and
2002, respectively. We anticipate that these customer concentrations will
continue for the foreseeable future. The loss of any one of these customers may
cause results of operations to vary materially from those anticipated.
Intellectual Property
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect our
proprietary rights and the proprietary rights of third parties from whom we
license intellectual property. We enter into confidentiality agreements with our
employees and limit distribution of proprietary information.
Our business also includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to our client.
Competition
The IT services industry is highly competitive. Our competitors
include:
o established computer product manufacturers (some of which
supply products to us);
o distributors;
o computer resellers;
o systems integrators; and
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o other IT service providers.
Many computer product manufacturers also sell to customers through
their direct sales organizations and certain of them have announced their
intention to enhance such direct sales efforts. Many of our current and
potential competitors have longer operating histories and financial, sales,
marketing, technical, and other resources substantially greater than we do. As a
result, our competitors may be able to adapt more quickly to changes in client
needs or to devote greater resources than we can to the sales of IT products and
the provision of IT services. Such competitors could also attempt to increase
their presence in our markets by forming strategic alliances with our other
competitors or with our customers, offering new or improved products and
services to our customers or increasing their efforts to gain and retain market
share through competitive pricing. Although, we have contracts with the State of
New Jersey, Gwinnett County School System, Duval County School System and
Tiffany & Co., we have no ongoing written commitments from any customers to
purchase products, and all product sales are made on a purchase-order basis.
We are also in direct competition with local, regional, and national
distributors of microcomputer products and related services as well as with
various IT consulting companies. These competitors run the gamut from new dot
com consulting companies to the established consulting firms and former
consulting arms of nationwide accounting and auditing firms. Several of these
competitors offer most of the same basic products as we do. We also encounter
competition from microcomputer suppliers that sell their products through direct
sales forces, rather than through resellers such as ourselves, and from
manufacturers and distributors that emphasize mail order and telemarketing
sales.
Depending on the customer, the principal areas of competition may
include price, pre-sale and post-sale technical support and service,
availability of inventory, and breadth of product line. We have an insignificant
market share of sales in the microcomputer industry and of the service markets
that we serve. Most of our competitors at the regional and national levels are
substantially larger, have more personnel, have materially greater financial and
marketing resources, and operate within a larger geographic area than we do.
Employees
As of June 23, 2004, we employed 169 individuals, including 38 sales,
marketing and related support personnel, 108 service and support employees, 13
operations and administration personnel, and 10 employees in accounting,
finance, and human resources. We believe that our ability to recruit and retain
highly skilled technical and other management personnel will be critical to our
ability to execute our business model and growth strategy. We have 4 employees
in our Cabling Department who are covered by a collective bargaining agreement
with the International Brotherhood of Electrical Workers (IBEW). We believe that
our relations with our employees are good.
Item 2. Properties
We lease space in six locations. Our corporate headquarters and
principal operational facilities are currently located in Trenton, New Jersey.
The following table contains certain information about each of our leased
facilities:
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Size
Address (in square feet) Monthly Rent Expiration Date
------- ---------------- ------------ -----------------
572 Whitehead Road, Bldg. #1
Trenton, NJ 08619 16,000 $11,600 May 31, 2006
354 North Avenue East
Cranford, NJ 07016 1,500 $ 2,900 May 31, 2005
2990 Gateway Drive, Suite 500
Norcross, GA 06855 17,102 $13,460 August 14, 2004
7843 Bayberry Road
Jacksonville, FL 32256 3,340 $ 2,218 February 28, 2005
880 Third Avenue, 12th floor
New York, NY 10022 7,635 $24,777 June 30, 2008(1)
572 Whitehead Road, Bldg. #5
Trenton, NJ 08619 9,582 $ 4,432 Monthly Terms(2)
----------
(1) We assumed this lease on January 9, 2002 in connection with our acquisition
of Devise Associates, Inc.
(2) This space is strictly a warehouse facility, currently on a month to month
lease term.
We believe these facilities will satisfy our anticipated needs for the
foreseeable future.
Item 3. Legal Proceedings
In March 2002, Logical Business Solutions, Inc., one of our
competitors, instituted an action in the Circuit Court, Fourth Judicial Circuit,
in Duval County, Florida, against us and Cheryl Pullen, one of our employees,
alleging that we wrongfully interfered with its contractual relationship with
one of its customers. The amount of damages was not specified. The litigation is
currently in the discovery stage. We believe that the claim is without merit and
intend to vigorously defend against the claim.
In addition we are subject to legal proceedings that arise in the
ordinary course of business, but we do not believe these claims will have a
material impact on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for Emtec's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ETEC." The following table sets forth the high and low closing prices of our
common stock for the periods indicated:
Three Months Ended High Low
------------------ ----- -----
March 31, 2004 $1.45 $0.80
December 31, 2003 1.20 0.80
September 30, 2003 0.96 0.37
June 30, 2003 0.52 0.22
March 31, 2003 0.36 0.24
December 31, 2002 0.53 0.25
September 30, 2002 0.60 0.29
June 30, 2002 0.70 0.35
The above quotations represent prices between dealers and do not
include retail mark-ups, markdowns or commissions. They do not necessarily
represent actual transactions.
As of June 28, 2004, there were 705 record holders of our common
stock, although we believe that beneficial holders approximate 800.
On November 24, 2003, as part of the employment agreement and
consulting agreements dated August 12, 2002 with prior three owners of Acentra
Technologies, Inc., we issued 300,000 shares of common stock at $0.29 per share.
These shares, which were not registered under the Securities Act of 1933 or any
applicable state securities laws, were issued pursuant to an exemption from
registration afforded by Rule 506 of Regulation D of the rules and regulation
of the SEC.
We have never declared any dividends on our common stock and we have
no intention to do so in the foreseeable future.
Item 6. Selected Financial Data
The following selected consolidated financial data below should be
read in conjunction with our consolidated financial statements including the
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations, both elsewhere in this Report. The data as
of March 31, 2004 and 2003 and for each of the three years ended March 31, 2004
have been derived from, and should be read in conjunction with, our audited
consolidated financial statements and accompanying notes, which are contained
elsewhere in this Report. The data as of March 31, 2002, 2001, and 2000 and for
each of the two years ended March 31, 2001 have been derived from our audited
financial statements, which are not contained in this Report.
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YEAR ENDED MARCH 31,
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2004 2003 2002 2001 2000
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Net revenues $100,361,654 $92,260,028 $62,656,199 $88,313,598 $99,543,353
Income (loss) from continuing
operations $ 642,988 $ (211,471) $ 216,972 $(1,257,825) $ 316,004
Income (loss) per common share
from continuing operations
(basic and diluted) $ 0.09 $ (0.03) $ 0.03 $ (0.22) $ 0.06
Total assets $ 18,908,612 $22,334,584 $11,388,473 $18,699,032 $21,401,172
Emtec had no long-term debt obligations or outstanding preferred stock
during the five years ended March 31, 2004. In addition, no dividends were paid
to common stockholders during the same period.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reference is made to the "Risk Factors" below for a discussion of
important factors that could cause actual results to differ from expectations
and any of our forward-looking statements contained herein. In addition, the
following discussion should be read in conjunction with our audited consolidated
financial statements as of and for the fiscal years ended March 31, 2004, and
2003.
Critical Accounting Policies
Emtec's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
methods, estimates, and judgments we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The Securities and Exchange Commission has defined
critical accounting policies as policies that involve critical accounting
estimates that require (i) management to make assumptions that are highly
uncertain at the time the estimate is made, and (ii) different estimates that
could have been reasonably used for the current period, or changes in the
estimates that are reasonably likely to occur from period to period, which would
have a material impact on the presentation of our financial condition, changes
in financial condition or in result of operations. Based on this definition, our
most critical policies include: revenue recognition, allowance for doubtful
accounts, inventory valuation reserve, the assessment of recoverability of
long-lived assets, the assessment of recoverability of goodwill and intangible
assets, and valuation of deferred tax assets.
o Revenue Recognition
We recognize revenues based upon Staff Accounting Bulletin #101 (SAB
101). SAB 101 states that revenue recognition cannot occur until the earnings
process is complete, evidenced by an agreement between us and the customer,
there has been delivery and acceptance, collectibility is probable, and pricing
is fixed and determinable. If significant obligations remain after delivery,
revenue is deferred until such obligations are fulfilled. Procurement services
represent
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sales of computer hardware and prepackaged software. Revenue from consulting and
support service contracts are recognized ratably over the contract or service
period. Revenues from manufacturer support service contracts where the
manufacturer is responsible for fulfilling the service requirements of the
customer are recognized immediately on their contract sale date. These contracts
contain cancellation privileges that allow our customer to terminate a contract
with 90 days written notice. In this event, the customer is entitled to a
pro-rated refund based on the remaining term of the contract and 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. We believe that net revenue reporting for manufacturer support service
contracts is more appropriate. Thus we have adopted net revenue reporting for
manufacturer support service contracts starting with the fiscal year ended March
31, 2002 as an offset to revenue to conform to the current presentation.
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 were $363,402, and $240,847
as of March 31, 2004, and 2003, respectively.
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 March 31, 2004, and 2003, inventory reserve was
$722,551, and $471,203, respectively.
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
-11-
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.
We invested $687,000 for the purchase of computer hardware, software
and consulting services for our Network Operations Center to enhance our
offerings in Managed Services during fiscal year ended March 31, 2003. We
originally intended to depreciate these assets over 36 months based on the
original projections of the future undiscounted net cash flows. To date we have
only seen a modest sales success in our managed services offerings. We performed
an impairment test of these assets as of December 31, 2003, and March 31, 2004.
We compared our original projections of the future undiscounted cash flows with
actual performance, and reviewed our current sales pipeline. Based on these
impairment tests, we recorded impairment charges of $223,858, and $239,057 for
the three months ended December 31, 2003 and March 31, 2004, respectively. Total
impairment charges of $462,915 were classified as general and administrative
expense during the twelve months ended March 31, 2004. The net book value of
these assets after the impairment charge was $0.
o Goodwill and Intangible Assets
We have adopted Statement of Financial Accounting Standards No. 141
"Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". As a
result, amortization of goodwill was discontinued. We performed the initial
goodwill impairment test as of April 1, 2002 and another impairment test as of
March 31, 2003. Based on the impairment test performed as of March 31, 2003, the
goodwill of $254,894 associated with the acquisition of Devise Associates, Inc.,
was determined to be fully impaired and charged to earnings. This determination
was based upon the operating and cash flow losses of this business unit since
the January 9, 2002 acquisition date and budgeted fiscal 2004 operating and cash
flow losses for this business unit. We found no impairment of the remaining
goodwill of $109,107 for the year ended March 31, 2004.
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 of $54,545, and $36,364 was expensed in fiscal years ended
March 31, 2004, and 2003, respectively, 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 December
2004. The net carrying value for this contract amounted to $9,091 and $63,636 at
March 31, 2004 and 2003, 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 Emtec's
financial statements or tax returns. In estimating future tax consequences,
Emtec generally considers all expected future events other than the enactment of
changes in tax laws or rates. A valuation allowance is recognized if, on weight
of available evidence, it is more likely than not that some portion or all the
deferred tax assets will not be realized. For the year ended March 31, 2004, we
have recognized a deferred income tax benefit of $176,047 as disclosed in Note 8
of our financial statements. This benefit was recorded due to the utilization of
tax loss carry-forwards in fiscal 2004 and expected realization of other
deferred tax assets in fiscal 2005. We continue to be conservative in accounting
for income taxes
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by recording significant valuation allowances for deferred tax assets due to the
high degree of uncertainty that exists regarding future operating results.
Results of Operations
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of our
Results of Operations for the fiscal years ended March 31, 2004, 2003, and 2002
and financial condition as of March 31, 2004 and 2003.
Years Ended March 31,
--------------------------------------------------
2004 2003 Change %
--------------------------------------------------
Revenues
Procurement services $ 82,184,744 $ 75,943,230 $6,241,514 8.22%
Service and consulting 17,986,564 16,140,896 $1,845,668 11.43%
Geothermal 190,346 175,902 $ 14,444 8.21%
------------ ------------
Total Revenues 100,361,654 92,260,028 $8,101,626 8.78%
------------ ------------
Cost of Revenues
Procurement services 74,282,388 67,525,430 $6,756,958 10.01%
Service and consulting 11,497,465 11,915,844 $ (418,379) -3.51%
Geothermal 108,782 72,476 $ 36,306 50.09%
------------ ------------
Total Cost of Revenues 85,888,635 79,513,750 $6,374,885 8.02%
------------ ------------
Percent of revenues 85.58% 86.18%
Gross Profit
Procurement services 7,902,356 8,417,800 $ (515,444) -6.12%
Service and consulting 6,489,099 4,225,052 $2,264,047 53.59%
Geothermal 81,564 103,426 $ (21,862) -21.14%
------------ ------------
Total Gross Profit 14,473,019 12,746,278 $1,726,741 13.55%
------------ ------------
Percent of revenue 14.42% 13.82%
Operating Expenses
Sales, General & Administrative Expenses 13,376,048 12,574,667 $ 801,381 6.37%
Termination costs -- --
Interest Expense 328,296 160,803 $ 167,493 104.16%
Loss on impairment, Goodwill -- 254,894 $ (254,894) N/M
E-Business costs -- --
------------ ------------
Total Operating Expenses 13,704,344 12,990,364 $ 713,980 5.50%
------------ ------------
Percent of revenue 13.65% 14.08%
Income (Loss) Before Income Tax 768,675 (244,086) $1,012,761 414.92%
Income Tax Expense (Benefit) 125,687 (32,615) $ 158,302 485.37%
------------ ------------
Net Income (Loss) $ 642,988 $ (211,471) $ 854,459 404.05%
============ ============ ========== =======
Income (Loss) Per Share {Basic And Diluted} $ 0.09 $ (0.03)
============ ============
N/M = not meaningful
Years Ended March 31,
-------------------------------------------------
2003 2002 Change %
-------------------------------------------------
Revenues
Procurement services $75,943,230 $50,813,243 $25,129,987 49.46%
Service and consulting 16,140,896 11,654,978 $ 4,485,918 38.49%
Geothermal 175,902 187,978 $ (12,076) -6.42%
----------- -----------
Total Revenues 92,260,028 62,656,199 $29,603,829 47.25%
----------- -----------
Cost of Revenues
Procurement services 67,525,430 44,832,526 $22,692,904 50.62%
Service and consulting 11,915,844 7,693,460 $ 4,222,384 54.88%
Geothermal 72,476 63,083 $ 9,393 14.89%
----------- -----------
Total Cost of Revenues 79,513,750 52,589,069 $26,924,681 51.20%
----------- -----------
Percent of revenues 86.18% 83.93%
Gross Profit
Procurement services 8,417,800 5,980,717 $ 2,437,083 40.75%
Service and consulting 4,225,052 3,961,518 $ 263,534 6.65%
Geothermal 103,426 124,895 $ (21,469) -17.19%
----------- -----------
Total Gross Profit 12,746,278 10,067,130 $ 2,679,148 26.61%
----------- -----------
Percent of revenue 13.82% 16.07%
Operating Expenses
Sales, General & Administrative Expenses 12,574,667 8,995,255 $ 3,579,412 39.79%
Termination costs -- 21,746 $ (21,746) N/M
Interest Expense 160,803 210,305 $ (49,502) -23.54%
Loss on impairment, Goodwill 254,894 -- $ 254,894 N/M
E-Business costs -- 617,220 $ (617,220) N/M
----------- -----------
Total Operating Expenses 12,990,364 9,844,526 $ 3,145,838 31.96%
----------- -----------
Percent of revenue 14.08% 15.71%
Income (Loss) Before Income Tax (244,086) 222,604 $ (466,690) -209.65%
Income Tax Expense (Benefit) (32,615) 5,632 $ (38,247) -679.10%
----------- -----------
Net Income (Loss) $ (211,471) $ 216,972 $ (428,443) -197.46%
=========== =========== =========== =======
Income (Loss) Per Share {Basic And Diluted} $ (0.03) $ 0.03
=========== ===========
-13-
Comparison of Years Ended March 31, 2004 and 2003
Total Revenues
Total revenues for our IT business, which includes services and
consulting revenue, and procurement revenues, increased by 8.78% or $8.09
million, to $100.17 million for the year ended March 31, 2004, compared to
$92.08 million for the year ended March 31, 2003. This increase is primarily
attributable to our acquisition of Acentra Technologies, Inc. and Turnkey
Computer Systems, Inc. in August 2002. IT revenues associated with these
acquisitions increased by $12.93 million because in the fiscal year ended March
31, 2004, we recognized a full twelve months of revenue versus eight months in
the fiscal year ended March 31, 2003. Without these acquisitions, revenues
associated with our IT business would have decreased by 5.26% or $4.84 million
for the year ended March 31, 2004. This decrease is mainly due to an over-all
decrease in our customers' IT spending, a slow-down in the economy and our
inability to attract new major customers.
Services and consulting revenue increased by 11.43%, or $1.84 million,
to $17.99 million for the year ended March 31, 2004 compared to $16.14 million
for the year ended March 31, 2003. This increase is also attributable to our
acquisition of Acentra Technologies Inc. and Turnkey Computer Systems, Inc.
Services and consulting revenues associated with these acquisitions increased by
$2.65 million due to the same reasons discussed in the above paragraph. Without
these acquisitions, services and consulting revenue would have decreased by
4.99% or $806,060, to $15.33 million for the year ended March 31, 2004. This
decrease is mainly due to an overall decrease in the economy and our inability
to attract new major customers.
Procurement revenues increased by 8.22%, or $6.24 million, to $82.18
million for the year ended March 31, 2004. This increase is also attributable to
the acquisitions discussed in the above paragraph. Without these acquisitions,
procurement revenue would have decreased by 5.32%, or $4.04 million, for the
year ended March 31, 2004. This decrease is mainly due to reasons mentioned
above regarding total IT revenues.
Three major customers accounted for in the aggregate approximately 57%
and 44% of our revenues in the fiscal years 2004 and 2003, respectively. Another
major customer purchased manufacturer support service contracts. The net
revenues associated with these contracts accounted for approximately 6.22% and
10.78% of our gross profit for the year ended March 31, 2004 and 2003,
respectively. 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 increased by 8.21%, or $14,444, to $190,346 for
the year ended March 31, 2004. This increase is mainly attributable to higher
production of steam.
Gross Profit
Aggregate gross profit for our IT business increased by 13.83%, or
$1.75 million, to $14.39 million for the year ended March 31, 2004. This
increase is mainly attributable to a 11.43% increase in our services and
consulting revenues, and a 3.51% decrease in our cost of revenues for services
and consulting. Measured as a percentage of total revenues for our IT business,
our overall gross profit margin increased to 14.37% of total revenues for the
year ended
-14-
March 31, 2004 from 13.73% for the year ended March 31, 2003. This increase is
also mainly attributable to increase in our services and consulting revenues.
Gross profit for product sales decreased by 6.12%, or $515,444, to
$7.90 million for the year ended March 31, 2004 as compared with $8.42 million
for the year ended March 31, 2003. Measured as a percentage of procurement
revenues, our gross profit margin decreased to 9.62% of procurement revenue for
the year ended March 31, 2004 from 11.08% for the year ended March 31, 2003.
This decrease is mainly due to continued downward pricing pressure on product
sales from our customers. We expect this pricing pressure will continue in the
future.
Gross profit for service and consulting increased by 53.59%, or $2.26
million, to $6.49 million for the year ended March 31, 2004 as compared with
$4.22 million for the year ended March 31, 2003. Measured as a percentage of
service and consulting revenue, our gross margin attributable to service and
consulting revenue increased to 36.08% of service and consulting revenue for the
year ended March 31, 2004 from 26.18% for the year ended March 31, 2003. This
increase in services and consulting gross profit and margin was mainly
attributable to installation services associated with computer roll-out projects
for the various state agencies in the State of New Jersey, and school districts
in Georgia and Florida as well as our ability to manage 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 more
effectively.
We must continue to manage billing rates and utilization rates
effectively to remain competitive. During the second quarter of our fiscal year
ending March 31, 2005, we will begin outsourcing our NOC (Network Operation
Center) and Help Desk operations to a third party. By outsourcing this part of
our business, we will be able to continue to offer these strategic services
while allowing us to change the high fixed cost structure of the business to a
variable cost structure due to our failure to achieve budgeted revenues. We
expect that this transition will have a positive impact on our gross profit for
service and consulting starting July 2004. Our NOC and Help Desk revenues were
approximately $414,000, and $559,000 for the fiscal years ended March 31, 2004,
and 2003, respectively.
The geothermal gross profit of $81,564 for the year ended March 31,
2004 decreased by 21.14%, or $21,862, as compared with $103,426 for the year
ended March 31, 2003. This decrease is mainly due to approximately $40,000
higher operating and maintenance expense associated with the geothermal unit
during the third quarter ended December 31, 2003. We do not expect to see such a
high operating and maintenance expense in future periods.
Sales, General, and Administrative Expenses
Sales, general and administrative expenses increased by 6.37%, or
$801,381, to $13.38 million for the year ended March 31, 2004. This increase is
mainly due to our acquisition of Acentra Technologies, Inc. and Turnkey Computer
Systems, Inc., and an impairment charge of $462,915 associated with our
investment in Network Operation Center (see Note 6 of our Financial Statements).
Sales, general and administrative expenses associated with these acquisitions
increased by $1.46 million because in the fiscal year ended March 31, 2004, we
recorded a full twelve months of expenses versus eight months in the fiscal year
ended March 31, 2003. Without these acquisitions and impairment charge, our
sales, general and administrative expenses would have decreased by approximately
8.93%, or $1.12 million, for the year ended March 31, 2004. This decrease is
mainly attributable to the following:
-15-
o Elimination of non-productive sales staff;
o Reduction in sales commission compensation plans; and
o Eliminated duplication of non-essential administrative
support services.
During the first quarter of the fiscal year 2005, we consolidated all
of our operations, administrative and inventory warehousing functions from Mt.
Laurel, NJ and Cranford, NJ to Trenton, NJ. We anticipate this consolidation
will result in an approximate cost savings of $380,000 annually.
In spite of vigorous cost containment efforts, various factors, such
as retention of employees, costs associated with marketing and selling
activities, 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 increased by 104.16%, or $167,493, to $328,296 for
the year ended March 31, 2004 as compared with $160,803 for the year ended March
31, 2003. This increase is mainly due to increased borrowings activities, higher
day's sales outstanding as well as higher interest rate charged by our lender
starting October 2003.
Starting April 2004, interest charged on the outstanding borrowings
was reduced to 1% above prime per annum.
Income Taxes
Income tax expense for the year ended March 31, 2004 was $125,687, as
compared with benefit of $32,615 for the year ended March 31, 2003. For the year
ended March 31, 2004, we recognized a deferred income tax benefit of $176,047
which was netted against the income tax expense of $301,734.
Net Income
Net income increased by 404.05%, or $854,459, to $642,988 or $0.09 per
share for the year ended March 31, 2004 as compared with net loss of $(211,471)
or $(0.03) per share for the year ended March 31, 2003.
As discussed, the increase in net income is mainly attributable to
increased installation services associated with computer roll-out projects for
the various state agencies in the State of New Jersey, and school districts in
Georgia and Florida as well as our ability to manage utilization rates of
engineers more effectively.
Comparison of Years Ended March 31, 2003 and 2002
Total Revenues
Total revenues for our IT business, which includes services and
consulting revenue, and procurement revenues, increased by 47.41% or $29.61
million, to $92.08 million for the year ended March 31, 2003, compared to $62.47
million for the year ended March 31, 2002. This
-16-
increase is primarily attributable to our new business, which commenced in March
2002, with a school district in Jacksonville, Florida, and our acquisitions of
Devise Associates, Inc. in January 2002, Acentra Technologies, Inc. in August
2002 and Turnkey Computer Systems, Inc. in August 2002. IT revenue associated
with this added business and acquisitions equaled $31.59 million for the year
ended March 31, 2003.
Services and consulting revenue increased by 38.49%, or $4.48 million,
to $16.14 million for the year ended March 31, 2003 compared to $11.65 million
for the year ended March 31, 2002. This increase is attributable to an increase
in our manufacturers support services contracts revenues and new business with a
school district in Jacksonville, Florida, and from the acquired businesses
mentioned above. Net revenues associated with manufacturers support services
contracts revenue increased by 81.64%, or $1.22 million, to $2.71 million for
the year ended March 31, 2003 compared to $1.49 million for the year ended March
31, 2002. This increase in manufacturers support services contracts revenue is
mainly attributable to a $1.37 million sale to one customer. Services and
consulting revenue associated with this added business and acquisitions amounted
to $6.74 million for the year ended March 31, 2003. Without these acquisitions,
services and consulting revenue, exclusive of manufacturer support service
contracts, decreased by 34.15%, or $3.47 million for the year ended March 31,
2003.This decrease is mainly due to a slow-down in the economy.
Procurement revenues also increased by 49.46%, or $25.13 million, to
$75.94 million for the year ended March 31, 2003. This increase is the net
result of the additional revenues of Jacksonville, Florida location and the
acquisitions of Devise Associates, Inc., Acentra Technologies, Inc. and Turnkey
Computer Systems, Inc. of approximately $24.29 million recorded in the year
ended March 31, 2003. Without these acquisitions, procurement revenue would only
have increased by 1.65%, or $836,655 for the year ended March 31, 2003.
Geothermal Revenues of $175,902 for the year ended March 31, 2003
decreased by 6.42%, or $12,076 due to lower production of steam.
Gross Profit
Our aggregate gross profit for IT business increased by 27.16%, or
$2.7 million, to $12.64 million for the year ended March 31, 2003. This increase
is mainly attributable to a 47.41% increase in our IT revenues. Measured as a
percentage of our total revenues for IT business, our overall gross profit
margin decreased to 13.73% of total revenues for the year ended March 31, 2003
from 15.92% for the year ended March 31, 2002. This decrease is mainly due to
lower gross profit margin from our services and consulting revenues.
Gross profit for product sales increased by 40.75%, or $2.44 million,
to $8.42 million for the year ended March 31, 2003 as compared with $5.98
million for the year ended March 31, 2002. This increase is mainly attributable
to a 49.46% increase in product revenue. Measured as a percentage of procurement
revenues, our gross profit margin decreased to 11.08% of procurement revenue for
the year ended March 31, 2003 from 11.77% for the year ended March 31, 2002.
This decrease is mainly due to continued downward pricing pressure on product
sales.
Gross profit for service and consulting increased by 6.65%, or
$263,534, to $4.22 million for the year ended March 31, 2003 as compared with
$3.96 million for the year ended March 31, 2002. This increase is mainly
attributable to a 38.49% increase in services and consulting revenues. Measured
as a percentage of services and consulting revenues, our gross margin
-17-
attributable to services and consulting revenue decreased to 26.18% of services
and consulting revenue for the year ended March 31, 2003 from 33.99% for the
year ended March 31, 2002. This decrease is due to lower billing rates (total
revenue generated divided by total billable hours available during the period)
due to poor utilization rates (billable hours divided by paid hours) of
engineers during this year.
The geothermal gross profit of $103,426 for the year ended March 31,
2003 decreased by 17.19%, or $21,469 due to lower production of steam coupled
with higher operating expenses for the year.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 39.79%, or
$3.58, to $12.57 million for the year ended March 31, 2003 as compared with
$8.99 million for the year ended March 31, 2002. This increase is primarily a
result of the following: 1) a $3.74 million increase due to our new business
with a school district in Jacksonville, Florida and the acquisitions of Devise
Associates, Inc., Acentra Technologies, Inc., and Turnkey Computer Systems, Inc.
(including expenses such as sales and administrative personnel costs, sales
commissions, benefit expense, rent, insurance, depreciation, building
maintenance, and other fixed costs) and 2) a $87,000 Sales and Use tax payment
including interest to the State of New York as a result a of sales and use tax
audit covering the last five years.
Interest expense
Interest expense for the year ended March 31, 2003 decreased by
23.54%, or $49,502, to $160,803 the year ended March 31, 2003 as compared with
$210,305 for the year ended March 31, 2002. This decrease is mainly attributable
to lower interest rates, a lower balance on our line of credit, and improved
accounts receivable collection performance during the period.
Loss on impairment, Goodwill
We implemented Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets" which required that goodwill no longer be
amortized against earnings, but instead be reviewed periodically for impairment.
Based on the impairment test performed on March 31, 2003 the goodwill of
$254,894 associated with the acquisition of Devise Associates, Inc. was
impaired.
e-Business Costs
e-Business costs for the year ended March 31, 2003 was $0, as compared
with $617,220 for the year ended March 31, 2002. As of January 2002 we
discontinued our e-Business division, which was started in January 2000. This
cost had mainly consisted of costs associated with maintaining a sales and
consulting team of approximately 8 employees, as well as training, certifying,
marketing, and advertising expenses.
Income Taxes
Income tax benefit for the year ended March 31, 2003 was $32,615, as
compared with expense of $5,632 for the year ended March 31, 2002. For the year
ended March 31, 2003, we recognized a deferred income tax benefit of $78,907
that is partially offset by a current income tax expense of $46,292.
-18-
Recently Issued Accounting Standards
In June 2001, the FASB issued two new statements: SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other intangible
Assets."
Effective April 1, 2002, Emtec adopted SFAS No. 141 that requires
business combinations entered into after June 30, 2001 to be accounted for using
the purchase method of accounting. Specifically identifiable intangible assets,
other than goodwill, are to be amortized over their estimated useful economic
life.
SFAS No. 142 requires that goodwill not be amortized, but should be
tested for impairment at least annually. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001 and applies to goodwill and other
intangible assets, regardless of when those assets were initially recognized.
Effective April 1, 2002, Emtec adopted SFAS No. 142 and in connection with its
adoption, discontinued the amortization of goodwill and reviewed the estimated
useful lives of previously recorded identifiable intangible assets. Emtec
follows the two-step process prescribed in SFAS 142 to test its goodwill for
impairment. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. Under the guidelines
of SFAS No. 142, Emtec is required to perform an impairment test at least on an
annual basis. (see note#6 on the financial statements)
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of
SFAS 121 for (I) recognition/measurement of impairment of long-lived assets to
be held and used and (II) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board's No. 30 ("APB 30"). "Reporting the Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, "for
segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. Emtec adopted the provisions of SFAS 144 effective
April 1, 2002. (see note#7 on the financial statements)
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2004 of $4,792 represented a
decrease of $1,787,309 from $1,792,101 at March 31, 2003. 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 March 31, 2004, our
working capital was increased to $2.08 million from $514,427. This increase in
working capital was attributable to net earnings for the year ended March 31,
2004.
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"), under which we may borrow on 85%
of our eligible trade receivables. Interest on outstanding loans
-19-
under the revolving credit facility with Fleet was 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 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 intercreditor agreements, which provide that
as regards to these vendors, debt obligations to Fleet are accorded priority. On
November 21, 2001, we also entered into a Wholesale Financing Security Agreement
with IBM. This credit facility, which is collateralized by a $750,000 letter of
credit from Fleet in favor of IBM, affords us up to a like amount of credit to
purchase products floored by IBM Global Financing. On January 9, 2002, Fleet
issued a $250,000 letter of credit in favor of our landlord for our New York
City office, as a security deposit for the building lease. On July 1, 2003,
Fleet also issued a $250,000 letter of credit in favor of Selective Insurance
Corporation, as collateral for the performance bond issued to The City of
Philadelphia, one of our customers. The maximum credit facility is reduced by
the outstanding letters of credit.
On October 17, 2003, Emtec and Fleet executed an amendment to the loan
and security agreement under which we may borrow on 80% of our eligible trade
receivables up to $10 million through November 20, 2004. Interest on outstanding
loans was charged monthly at a fluctuating rate per annum equal to 2.00% above
the prime rate. Prior to October 17, 2003, we were charged monthly at a
fluctuating rate per annum equal to 0.25% above the prime rate. We also paid an
amendment fee of $50,000. This amended loan and security agreement waived all
existing events of defaults through June 30, 2003. The lending agreement
contains financial covenants that require us to maintain a maximum leverage
ratio, a minimum debt ratio, and a minimum EBITDA (earnings before interest,
taxes, depreciation and amortization expense).
As of March 31, 2004, we were in compliance with all of our financial
covenants and we had a $2,308,416 outstanding balance under the credit facility
and unused availability of $6,441,584.
On April 16, 2004, Emtec and Fleet executed another amendment to the
loan and security agreement which permits us to obtain up to a $1.0 million in
surety bonding capacity from an insurance company. This amendment reduced our
interest rate from 2.00% above the prime rate to 1.00% above the prime rate.
At March 31, 2004, our credit facilities with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data were as follows: 1) Our credit
Line with GE Access was $5.0 million, no interest charged, with an outstanding
principal balance of $4.80 million. 2) Our credit line with Ingram Micro was
$3.0 million, at an 18% APR interest rate after 30 days from the date of the
invoice, with an outstanding principal balance of $2.36 million. 3) Our credit
line with Tech Data was $2.0 million, no interest charged, with an outstanding
balance of $462,000. Under these credit lines, we are obligated to pay each
invoice within 30 days from the date of such invoice.
Capital expenditures of $164,456 during twelve months ended March 31,
2004, were primarily for the purchase of computer equipment for internal use,
furniture and fixtures, and leasehold improvements. We anticipate our capital
expenditures for fiscal year ending March 31, 2005 will be approximately
$400,000.
-20-
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.
The following are our contractual obligations associated with lease
commitments. We lease warehouse and office facilities, vehicles and certain
office equipment under noncancellable operating leases. Future minimum lease
payments under such leases are as follows:
Fiscal Years
------------
2005 $ 538,543
2006 445,744
2007 323,811
2008 293,536
Thereafter 72,657
----------
Total $1,674,291
==========
We have no other long-term commitments.
Risk Factors
We cannot assure you that we can successfully increase the portion of
our revenues derived from IT services. If we are unsuccessful our future results
may be adversely affected.
Our transition from an emphasis on reselling IT products to an
emphasis on providing IT services has placed significant demands on our
managerial, administrative, and operational resources. Our ability to manage
this transition effectively is dependent upon our ability to develop and improve
operational, financial, and other internal systems, as well as our business
development capabilities, and to attract, train, retain, motivate, and manage
our employees. If we are unable to do so, our ability to effectively deliver and
support our services may be adversely affected. Further, our transitional
efforts to access higher-margin services and consulting revenues have resulted
in reduced IT product sales. If we successfully expand our IT services
offerings, periods of variability in utilization may continue to occur. In
addition, we are likely to incur greater technical training costs during such
periods. Historically, our IT reseller activities accounted for 82%, or $82.18
million, of our total revenue of $100.36 million for the fiscal year ended March
31, 2004, 82%, or $75.94 million, of our total revenue of $92.26 million for the
fiscal year ended March 31, 2003, and 81%, or $50.81 million, of our total
revenue of $62.66 million for the fiscal year ended March 31, 2002. In contrast,
our IT services activities accounted for approximately 18%, or $17.99 million,
17%, or $16.14 million, and 19%, or $11.65 million, of our total revenue for the
fiscal years ended March 31, 2004, 2003 and 2002, respectively.
-21-
Our new services have not achieved widespread client acceptance. If
they do not achieve market acceptance, our profit potential may be adversely
affected.
While we have offered IT services to our customers since 1983, our
major emphasis on IT consulting and services began in 1995.
We have limited experience in developing, marketing, or providing
these services. We cannot assure you that we will be able to successfully market
such services to either new or existing customers, that our services will
achieve market acceptance, or that we will be able to effectively hire,
integrate, and manage additional technical personnel to enable us to perform
these services to our customers' expectations.
Our inability to maintain high personnel utilization rates may
adversely impact our profit potentiality.
The most significant cost relating to the services component of our
business is personnel expense, which consists of salaries, benefits, and payroll
related expenses. Thus, the financial performance of our service business is
based primarily upon billing margins (billable hourly rates less the costs to us
of service personnel on an hourly basis) and utilization rates (billable hours
divided by paid hours). The future success of the services component of our
business will depend in large part upon our ability to maintain high utilization
rates at profitable billing margins. The competition for quality technical
personnel has continued to intensify, resulting in increased personnel costs.
This intense competition has caused our billing margins to be lower than they
might otherwise have been. Our utilization rates for service personnel likely
will also be adversely affected during periods of rapid and concentrated hiring.
Our revenues and expenses are unpredictable. A decrease in revenues or
increase in expenses could materially adversely affect our operating results.
Our operating results have been, and will continue to be, impacted by
changes in technical personnel billing and utilization rates. Moreover, we
expect that downward pricing pressure will persist due to the continued
commoditization of computer products.
Our operating results have been, and will continue to be, impacted by
changes in technical personnel billing and utilization rates. Further, there are
numerous other factors, which are not within our control that can contribute to
fluctuations in our operating results, including the following:
o patterns of capital spending by customers;
o the timing, size, and mix of product and service orders and
deliveries;
o the timing and size of new projects, including projects for new
customers; and
o changes in trends affecting outsourcing of IT services;
We also believe that, to a limited degree, our business is seasonal
with a greater proportion of our product sales occurring in the second and third
quarter of our fiscal year due to the capital budgeting and spending patterns of
some of our larger customers. Operating results have been, and may in the future
also be, affected by the cost, timing, and other effects of acquisitions,
including the mix of product and service revenues of acquired companies.
-22-
Since our inception, we have funded our operations primarily from
borrowings under our credit facility.
Our lending agreement with Fleet contains financial covenants that
require us to maintain a maximum leverage ratio, and a minimum debt ratio on a
quarterly basis starting April 1, 2004. As of March 31, 2004 the Company was in
compliance with all its financial covenants and the Company had a $2,308,416
outstanding balance under the credit facility and an unused line of $6,441,584.
However, there can be no assurance that we will be in compliance will all of our
financial covenants through November 2004 and Fleet will not immediately call
for repayment of the outstanding borrowings under the credit facility. Our
credit facility with Fleet expires on November 20, 2004. We will start
negotiating new terms of our credit facility with Fleet and other financial
institutions during the second quarter of fiscal year 2005 but cannot state with
any certainty whether the credit facility with Fleet will be renewed, or if
renewed or replaced, our future credit terms.
We do not have long-term commitments from any of our customers and our
product sales are on a purchase order basis. Our revenues are concentrated and a
loss of any one of our three top customers could materially affect our
operations and business.
In general, there are no ongoing written commitments by customers to
purchase products from us. All product sales we make are on a purchase order
basis. Moreover, our client base is highly concentrated, with our two largest
customers, State of New Jersey, and Gwinnett County School System (Georgia),
accounted, respectively, for approximately 31% and 16% of our revenues for the
year ended March 31, 2004. These same two customers accounted, respectively, for
approximately 15% and 20% of our revenues in fiscal year 2003 and approximately
0% and 14% of our revenues in fiscal year 2002. The State of New Jersey computer
supply and service contract was acquired in the August 12, 2002 asset
acquisition from Acentra Technologies. The State of New Jersey contract is
subject to annual renewals. In May 2004, the State of New Jersey extended the
contract terms through December 2004. An additional eight customers, Duval
County School System, Cingular Wireless, Tiffany & Co., Bally's Park Place
Casinos, ING Financial Services, BellSouth Corporation, GE, and Cox
Communications, collectively accounted for 37%, 31%, and 22% of our revenues for
the years ended March 31, 2004, 2003 and 2002, respectively. We anticipate that
these customer concentrations will continue for the foreseeable future. The loss
of any one of these customers may cause results of operations to vary materially
from those anticipated.
We may not be able to compete effectively in the highly competitive IT
services industry.
The IT services business is highly competitive. Our competitors
include:
o established computer product manufacturers, some of which supply
products to us;
o distributors;
o computer resellers;
o systems integrators; and
o other IT service providers.
-23-
Many computer product manufacturers also sell to customers through
their direct sales organizations and certain of them have announced their
intentions to enhance such direct sales efforts. Many of our current and
potential competitors have longer operating histories and financial, sales,
marketing, technical, and other resources substantially greater than we do. As a
result, our competitors may be able to adapt more quickly to changes in client
needs or to devote greater resources than we can to the sales of IT products and
the provision of IT services and we may not have the resources to compete
effectively.
We must maintain our status as an authorized reseller/service of IT
products. The loss on any one of such authorizations could have a material
adverse effect on our business and operations.
We are materially dependent on our continued status as an approved
reseller of IT products and our continued authorization as an IT service
provider. Without such authorizations, we would be unable to provide the range
of products and services we currently offer, including warranty services, and
manufacturers support services contracts. Our resale agreements with
manufacturers generally are terminable by manufacturers upon 30 days' prior
written notice. The loss of one or more of such authorizations could have a
material adverse effect on our business and results of operations.
We have no long-term sales commitments from any of our suppliers. A
loss of any of our four principal suppliers would material adversely affect our
IT reseller business.
Our IT reseller business depends on large part upon our access to
aggregators and manufacturers, in particular GE Access, Ingram, Tech Data, and
Dell to supply us with products at competitive prices and on reasonable terms
for resale by us to our customers. Our agreements with Ingram, Tech Data and
Dell may be terminated by such companies upon 30 days prior written notice. Our
agreement with GE Access is effective until February 28, 2005. After February
28, 2005, our agreement with GE Access can be terminated by either party. We
cannot assure you that we will be able to continue to obtain products from GE
Access, Ingram, Tech Data, and Dell or our other vendors at prices or on terms
acceptable to us, if at all.
Reduction in or elimination of our credit facilities with our primary
trade vendors could have a material adverse effect on our business and
operations.
Our credit facilities as of the current date with our primary trade
vendors, GE Access, Ingram Micro, and Tech Data are $4.0 million, $9.0 million
and $3.0 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.
Our client engagements entail significant risks; a failure to meet a
client's expectations could materially adversely affect our reputation and
business.
Many of our engagements involve projects that are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. Our failure or inability to meet a client's expectations
in the performance of our services could result in a material adverse change to
the client's operations and therefore could give rise to claims against us or
damage our reputation, adversely affecting our business, results of operations,
and financial condition.
-24-
Our ability to protect our intellectual property rights is
questionable. If we are unable to protect such rights, our financial condition
could be materially adversely affected.
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect our
proprietary rights and the proprietary rights of third parties from whom we
license intellectual property. We enter into confidentiality agreements with our
employees and limit distribution of proprietary information. However, we cannot
assure you that the steps taken by us in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights. We are subject to the risk of litigation alleging infringement of
third-party intellectual property rights. Any such claims could require us to
spend significant sums in litigation, pay damages, develop non-infringing
intellectual property, or acquire licenses to the intellectual property that is
the subject of the alleged infringement. Our inability or failure to establish
rights or to protect our rights may have a material adverse effect on our
business, results of operations, and financial condition.
We intend to expand our business through acquisitions of complementary
businesses. There is no certainty, however, that we will be successful in
acquiring any new businesses or that any such acquisitions will help us achieve
our strategic objectives.
As a part of our business development strategy, we intend to pursue
acquisitions of IT product and service businesses in order to expand our service
offerings, to add to or enhance our base of technical or sales personnel, or to
provide desirable client relationships. The success of this strategy depends not
only upon our ability to acquire complementary businesses on a cost-effective
basis, but also upon our ability to integrate acquired operations into our
organization effectively, to retain and motivate key personnel, and to retain
customers of acquired firms. We cannot assure you that we will be able to
acquire or integrate such businesses successfully. Furthermore, we cannot assure
you that financing for any such acquisitions will be available on satisfactory
terms, or that we will be able to accomplish our strategic objectives as a
result of any such transaction or transactions. In addition, we expect to
compete for attractive acquisition candidates with other companies or investors
in the IT industry, which could have the effect of increasing the cost of
pursuing our acquisition strategy, or it could reduce the number of attractive
candidates to be acquired. Acquisitions also may involve a number of specific
risks, including:
o possible adverse short-term effects on our operating results;
o dependence on retaining key customers and personnel;
o diversion of management's attention;
o amortization or impairment of acquired intangible assets; and
o risks associated with unanticipated problems, liabilities, or
contingencies.
Item 7A. Quantitative and Qualitative Information About Market Risk
We do not engage in trading market risk sensitive instruments and do
not purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We
-25-
have not issued debt instruments, entered into forward or future contracts,
purchased options and entered into 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 during the fiscal year ended March 31,
2004 was approximately $4.9 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 $49,000 annually.
Item 8. Financial Statements and Supplementary Data
Reference is made to Item 15(a)(i) herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Item 9A. 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 March 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 March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
-26-
PART III
Item 10. Directors and Executive Officers
The following table sets forth certain information as to each of our
executive officers and directors:
Positions and
Name Age Offices Presently Held
----------------- --- ------------------------------------------------------
John P. Howlett 60 Chairman of the Board and Chief Executive Officer
Ronald A. Seitz 57 President and Chief Operating Officer and Director
R. Frank Jerd 62 Director
George F. Raymond 67 Director
Sam Bhatt 36 Vice President Finance and Treasurer
Guy Fessenden 47 Executive Vice President
John P. Howlett has been our Chairman of the Board and Chief Executive
Officer since January 17, 2001 and Chief Executive Officer of Emtec-NJ since
August, 1997 and Chairman of Emtec-NJ since August, 1998. He has been a director
of Emtec-NJ since October, 1996. Mr. Howlett was the founder (in 1983) of
Cranford, New Jersey-based Comprehensive Business Systems, Inc. (CBSI). CBSI
primarily provided microcomputer systems, network integration, training, and
data communications to mid-size and Fortune 1000 corporations. In October 1996,
CBSI merged into Emtec-NJ. Prior to founding CBSI, Mr. Howlett was with the AT&T
Long Lines Division for twelve years. He earned a Bachelor of Science degree in
Electrical Engineering from Rose Hulman Institute of Technology in Terre Haute,
Indiana, and a Master of Business Administration degree from Fairleigh Dickinson
University in New Jersey. A Vietnam veteran, Mr. Howlett served in the U.S. Army
for four years.
Ronald A. Seitz has been our President and Chief Operating Officer
since February 2003 and Executive Vice-President and a director since January
17, 2001 and Executive Vice President of Emtec-NJ since March, 1996. Prior to
that he was the Chief Operating Officer of Emtec-NJ. He has been a director of
Emtec-NJ since April, 1995. Mr. Seitz was the founder (in 1980) of Charleston,
South Carolina-based Computer Source, Inc. (CSI). CSI primarily provided
microcomputer systems, network integration, and data communications to mid-size
and Fortune 1000 corporations. In April 1995, CSI merged with Landress
Information Systems of Mt. Laurel, New Jersey to become Emtec-NJ. Prior to
founding CSI, Mr. Seitz was employed for six years as an engineer with the U.S.
government in Washington, DC. He graduated from North Carolina State University
with a Bachelor of Science degree and from George Washington University with an
MBA in computer science. Mr. Seitz also holds a DMD degree from the Dental
School at the Medical University of South Carolina.
R. Frank Jerd was appointed as a director upon the consummation of our
merger with Emtec-NJ. Mr. Jerd is, and has been, a securities analyst for
Montauk Capital in New York since 1994. From 1992 to 1993, he was chief
executive officer of Benesys, Inc., a medical
-27-
software company. He was also CEO of Gandalf Systems Corporation from 1993 to
1994. Mr. Jerd earned a Bachelor of Science Degree in Mathematics at Marshall
University.
George F. Raymond was elected as a director in August 2001. Mr.
Raymond has been retired from active employment since 1989. Since his
retirement, he has worked as a consultant to the information technology
industry. In 1972, Mr. Raymond founded Automatic Business Centers, Inc., a
payroll process service company and served as its president until its sale to
Automatic Data Processing in 1989. In 1965 he co-founded Computer Services Inc,
a general purpose data processing service company, which was purchased by
Management Data Corp. in 1969. Mr. Raymond served as the president of Computer
Services Inc. until 1972. Prior thereto, Mr. Raymond was a management consultant
with Touche Ross & Co. from 1961 to 1965. Currently Mr. Raymond serves on the
Board of directors of five companies, four of which are publicly traded.
Sam Bhatt has been Vice President - Finance and Treasurer of Emtec
since January 17, 2001 and of Emtec-NJ since July 2000. Prior to that and from
July, 1997, he was Director of Accounting for Emtec-NJ. He also held the
positions at Emtec-NJ of Accounting Manager (from 1994 to July, 1997) and of
Senior Accountant (from 1992 to 1994). Mr. Bhatt holds a Bachelor of Science
Degree in business administration from Drexel University in Pennsylvania and a
Diploma in Hotel Management from the Institute of Hotel Management and Catering
Technology in Bombay, India.
Guy Fessenden has been Executive Vice President of Emtec since January
2002. Mr. Fessenden joined Emtec from DIS Research, Ltd., which he founded in
1984 and where he was a Chief Executive Officer. Prior to founding DIS, Mr.
Fessenden was assistant to the CEO of WR Grace & Co., an international
conglomerate with holdings in number of industries, including shipping, food,
publishing and others. Mr. Fessenden earned a Bachelor of Science Degree in
Accounting and Master of Business Administration Degree at St. John's
University.
During 2004, the Board of Directors met five times. Each director
attended all of the meetings of the Board of Directors. The Board of Directors
has no audit committee, compensation committee or nominating committee. The
Board of Directors as a whole makes all such determinations and any director who
as is an "interested" party in a specific matter abstains from voting on such
matter.
Since we are not a listed company, we are not required to establish an
audit committee. Our board of directors believes it can conduct all of the
functions of an audit committee without unduly burdening the duties and
responsibilities of the board members. Our board of directors has determined
that Mr. George F. Raymond, an independent member of our board of directors,
meets the SEC definition of an "audit committee financial expert."
Our Board of Directors has adopted a Code of Ethics applicable to all
of its employees, including its Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer, as well as the members of its board of
directors. The Code of Ethics is filed as an exhibit to this Form 10-K.
Compliance With Section 16(a) of The Securities Exchange Act Of 1934
Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own beneficially more than 10% of our common stock to
file reports of ownership
-28-
and changes in ownership of such common stock with the Securities and Exchange
Commission, and to file copies of such reports with us. Based solely upon a
review of the copies of such reports filed with Emtec, Emtec believes that
during the fiscal year ended March 31, 2004, such reporting persons complied
with the filing requirements of said Section 16(a), except that Mr. Guy
Fessenden was not timely in the filing of his Initial Statement of Beneficial
Ownership of Securities.
Item 11. Executive Compensation
The following table sets forth the aggregate compensation that we paid
for services rendered to us in all capacities during our fiscal years ended
March 31, 2004, 2003 and 2002 by our chief executive officer and by our other
executive officers whose cash compensation exceeded $100,000 per year in any
such year.
Summary Compensation Table
Long Term Compensation
-------------------------------------------------
Awards Payouts
---------------------- ---------
Annual Compensation Restricted Long Term
Name and Fiscal ------------------- Other Annual Stock Number of Incentive All Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
------------------ ------ -------- ----- ------------ ---------- --------- --------- ------------
John P. Howlett 2004 $216,300 -- -- -- -- -- $16,173(1)
- Chief Executive 2003 $212,000 -- -- -- -- -- $18,553(1)
- Officer 2002 $204,000 -- -- -- -- -- $16,750(1)
Ronald A. Seitz 2004 $216,300 -- -- -- -- -- --
- Chief Operating 2003 $212,000 -- -- -- -- -- $ 6,642(2)
Officer 2002 $204,000 -- -- -- -- -- $ 6,704(2)
- and President.
Sam Bhatt 2004 $128,757 -- -- -- -- -- --
- Vice President 2003 $120,000 -- -- -- -- -- --
- Finance 2002 $114,545 -- -- -- -- -- --
Guy Fessenden -- -- -- --
- Executive Vice 2004 $176,154 -- $17,500(3)
- President 2003 $150,000 -- $83,330(3) -- -- -- --
----------
(1) Reflects employer contributions for life insurance premiums and for
disability insurance premiums.
(2) Reflects employer contribution for life insurance premiums.
(3) Reflects paid commissions during fiscal 2004 and 2003.
Stock Options
None of the named executive officers listed in the Summary
Compensation Table were granted stock options during the fiscal year ended March
31, 2004.
Set forth below is information with respect to unexercised options
held by our named executive officers to purchase our common stock
-29-
Aggregated Option Exercises in Fiscal Year 2004
and Fiscal Year End Option Values
Number of Unexercised
Number of Securities Underlying Options Value of Unexercised
Shares at March 31, 2004 In-the-Money Options
Acquired on Value ----------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------ ----------- -------- ----------- ------------- ----------- -------------
John P. Howlett... -- $0 0 0 $0 $0
Ronald A. Seitz... -- $0 0 0 $0 $0
Sam Bhatt......... -- $0 14,750 1,250 $0 $0
Guy Fessenden..... -- $0 0 0 $0 $0
Compensation of Directors
Non-employee directors receive annual compensation of $10,000.
Directors also receive stock options at the discretion of the Board.
Non-employee directors receive reimbursement of out-of-pocket expenses incurred
for each board meeting or committee meeting attended.
Compensation Committee Interlocks and Insider Participation
Currently, there is no compensation committee. The members of the
entire board deliberate and decide compensation. Neither Mr. Jerd nor Mr.
Raymond is or has been an employee or an officer of our company. Mr. Howlett is
our Chairman, and Chief Executive Officer, and Mr. Seitz is our President and
Chief Operating Officer.
-30-
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 30, 2004, based on
information obtained from the persons named below, with respect to the
beneficial ownership of our common stock held by:
o each person known by us to be the owner of more than 5% of our
outstanding shares;
o each director;
o each executive officer named in the Summary Compensation Table;
and
o all executive officers and directors as a group.
Name and Address of Amount and Percentage of
Beneficial Owner(1) Beneficial Ownership(2)
------------------------------- ------------------------
John P. and Rosemary A. Howlett 1,400,910 18.98%
Ronald A. Seitz 829,519(3) 11.24%
Sam Bhatt 37,504 .51%
Guy Fessenden 0 0
R. Frank Jerd 45,000 .61%
George F. Raymond 30,000 .40%
Tom Dresser 1,029,774 13.95%
3505 S. Ocean Boulevard
Hollywood, FL 33019
Richard Landon 1,029,774 13.95%
142 York Road
Delran, NJ 08075
Carla Seitz 782,707(4) 10.61%
P.O. Box 2243
Mt. Pleasant, SC 29465
All executive officers and
directors as a group
(6 persons) 3,125,640 41.84%
----------
(1) Each stockholder's address is c/o Emtec, 572 Whitehead Road, Bldg#1,
Trenton, New Jersey, 081619, unless otherwise indicated.
(2) As used herein, beneficial ownership means the sole or shared power to
vote, or direct the voting of, a security, or the sole or shared power to
invest or dispose, or direct the investment or disposition, of a security.
Except as otherwise indicated, all persons named herein have (i) sole
voting power and investment power with respect to their shares, except to
the extent that authority is shared by spouses under applicable law and
(ii) record and beneficial ownership with respect to their shares; also
includes any shares issuable upon exercise of options or warrants that are
currently exercisable or will become exercisable within 60 days after June
30, 2004.
-31-
(3) Excludes 782,707 shares owned by Carla Seitz, Mr. Seitz's spouse. Mr. Seitz
disclaims any beneficial interest in these shares.
(4) Excludes 829,519 shares owned by Ronald A. Seitz, Mrs. Seitz's spouse. Mrs.
Seitz disclaims any beneficial ownership in these shares.
Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------------
Number of securites remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of underequity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
Plan category warrants and rights warrants and rights in column(a))
(a) (b) (c)
------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders -- -- --
------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders(1) 415,228 $0.69 584,772
------------------------------------------------------------------------------------------------------------------
Total 415,228 $0.69 584,772
------------------------------------------------------------------------------------------------------------------
(1) The Company's 1996 Stock Option Plan (the Plan) (amended in 1999)
authorizes the granting of stock options to directors and eligible
employees. The Company has reserved 1,000,000 shares of its common stock
for issuance under the Plan at prices not less than 100% of the fair value
of the Company's common stock on the date of grant (110% in the case of
shareholders owning more than 10% of the Company's common stock). The
Black-Scholes option pricing model has been used to determine the fair
value of options granted subsequent to January 17, 2001.
-32-
Item 13. Certain Relationships and Related Transactions
There are no relationships or related party transactions of a nature
required to be disclosed hereunder.
Item 14. Principal Accountants Fees and Services
Baratz & Associates, P.A. ("BA") was retained as our independent
auditors for our fiscal year ended March 31, 2004. We did not consult with BA
during either the prior fiscal years or the interim period with respect to (i)
either the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, or (ii) any matter that was either the
subject of a disagreement or a reportable event.
The following table sets forth the aggregate fees incurred by us for
the fiscal year ended March 31, 2004 and 2003 to our principal auditing firm:
2004 2003
-------- --------
Audit Fees................................................ $ 86,000 $ 86,000
Audit Related Fees........................................ $ 500 $ 7,000
Tax Fees.................................................. $ 20,000 $ 16,000
All Other Fees............................................ $ 7,000 $ 7,000
-------- --------
Total..................................................... $113,500 $116,000
======== ========
Audit Fees: The Audit Fees billed by BA for the fiscal years ended
March 31, 2004 and March 31, 2004, respectively, were for professional services
rendered for the audits of the financial statements of the Company, quarterly
reviews, and assistance with the review of documents filed with the Securities
and Exchange Commission.
Audit Related Fees: The Audit Related Fees for the fiscal years ended
March 31, 2004 and March 31, 2003, respectively, were for attendance at the
annual shareholders meeting, and were for the advice and guidance on the Form
8-K filings concerning the acquisitions of Acentra Technologies, Inc. and
Turnkey Computer Systems.
Tax Fees: The Tax Fees billed by BA for the fiscal years ended March
31, 2004 and March 31, 2004, respectively, were for services performed in
connection with income tax compliance.
All Other Fees: All Other fees billed by BA for the fiscal years ended
March 31, 2004 and March 31, 2004, respectively, were for professional services
rendered for the 401K audit.
-33-
Our board of directors has adopted a policy that requires advance
approval of all audit, audit-related, tax services, and other services performed
by our independent auditor. The policy provides for pre-approval by the board of
directors of specifically defined audit and non-audit services. Unless the
specific service has been previously pre-approved with respect to that year, the
board of directors must approve the permitted service before the independent
auditor is engaged to perform it.
-34-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports and Reports of
Form 8-K
(a) Documents filed as part of this report:
(i) Financial Statements
Report of Independent Registered Public Accounting Firm......................39
Consolidated Balance Sheets as of March 31, 2004 and 2003....................40
Consolidated Statements of Operations for the Fiscal Years Ended
March 2004, 2003 and 2002.................................................42
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
March 31, 2004, 2003 and 2002.............................................43
Consolidated Statements of Cash Flows for the Years Ended
March 2004, 2003 and 2002.................................................44
Notes to Consolidated Financial Statements...................................45
(ii) Financial Statement Schedules
None
(iii) Exhibits:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger and Reorganization dated as of
December 14, 2000 between Registrant, then known as American
Geological Enterprises, Inc., and Emtec, Inc.(1)
3.1 Certificate of Incorporation, as amended(2)
3.2 Amended and Restated Bylaws(2)
4.1 Certificate evidencing shares of common stock(2)
10.1 Resale Agreement dated September 29, 1997 between Registrant and
Ingram Micro, Inc.(2)
10.2 Volume Purchase Agreement dated January 28, 1998 between
Registrant and Tech Data Corporation(2)
10.3 Agreement of Lease dated April 1, 1992 between Registrant and Bell
Atlantic Properties, Inc., as amended, for Mt. Laurel, New Jersey
facility(2)
10.4 Lease Agreement dated May 5, 1993 between registrant and Central
Cranford Associates, for Cranford, New Jersey facility(2)
10.5 Lease Agreement dated July 7, 1994 between Registrant and
Connecticut General Life Insurance Company, as amended, for
Norcross, Georgia facility(2)
10.6 Lease Agreement dated August 8, 1995 between Registrant and
Charleston Rivergate Associates I, as amended, for Charleston,
South Carolina facility(2)
-35-
Exhibit No. Description
----------- -----------
10.7 Lease Agreement dated July 21, 2000 between Registrant and
Strawberry Hill Associates, for Norwalk, Connecticut facility(2)
10.8 Microsoft Certified Partner Agreement, dated December 20, 2000,
between Microsoft and Registrant(3)
10.9 IBM Business Partner Agreement, dated May 31, 2000, between
International Business Machines Corporation and Registrant(3)
10.10 Letter Agreement, dated April 24, 2001, between Novell Inc. and
Registrant(3)
10.11 Citrix Solutions Network Gold Renewal Membership Agreement, dated
April 30, 2001, between Citrix Systems, Inc. and Registrant(3)
10.12 U.S. Systems Integrator Agreement, dated December 22, 1999,
between Cisco System, Inc. and Registrant.(3)
10.13 Sun Microsystem, Inc. Channel Agreement, dated February 1, 2000,
between Sun Microsystems, Inc. and Emtec, Inc. (6)
10.14 Loan and Security Agreement, dated November 21, 2001, by and
between Fleet Capital Corporation and Registrant.(4)
10.15 Agreement for Wholesale Financing, dated November 21, 2001, by and
between IBM Credit Corporation and Registrant.(4)
10.16 Subordination Agreement, dated as of the 21st day of November,
2001, among Registrant, MRA Systems, Inc. dba GE Access and Fleet
Capital Corporation.(4)
10.17 Intercreditor Agreement, dated as of November 21, 2001, between
Fleet Capital Corporation and Ingram Micro Inc. and accepted by
Registrant.(4)
10.18 Asset Acquisition Agreement dated December 5, 2001 by and between
Devise Associates, Inc. and Registrant.(5)
10.19 Lease Agreement dated January 9, 2002 between Registrant and
Vandergrand Properties Co., L.P., for New York, New York
facility.(9)
10.20 Lease Agreement dated March 1, 2002 between Registrant and G. F.
Florida Operating Alpha, Inc., for Jacksonville, Florida
facility.(9)
10.21 Lease Agreement dated August 1, 2002 between Registrant and
Fazzone and Zima, for Cheshire, CT facility.(10)
10.22 Lease Agreement dated November 15, 2002 between Registrant and
Hamilton Transit Corporate Center, for warehouse facility in
Trenton, New Jersey.(10)
10.23 Asset Acquisition Agreement dated August 12, 2002 by and between
Acentra Technologies, Inc. and Registrant.(7)
10.24 Asset Acquisition Agreement dated August 31, 2002 by and between
Turnkey Computer Systems, Inc. and Registrant.(8)
10.25 Assignment of State of New Jersey Contract from Acentra
Technologies, Inc. to the Registrant.(7)
10.26 Remarketer/Integrator Agreement dated August 15, 2002 between Dell
Marketing L.P. and the Registrant.(7)
10.27 Lease Agreement dated June 1, 2004 between Registrant and Hamilton
Transit Corporate Center, for office space in Trenton, New Jersey.
-36-
Exhibit No. Description
----------- -----------
10.28 Lease Agreement dated May 20, 2004 between Registrant and
Facstore, for office space in Cranford, New Jersey.
10.29 1996 Stock Option Plan, as amended in 1999(2)
14.1 Code of Ethics
31.1 Rule 13a-14(a)/15 d-14(a) Certification of John P. Howlett,
Principal Executive Officer, of Emtec, Inc. dated July 14, 2004.
31.2 Rule 13a-14(a)/15 d-14(a) Certification of Sam Bhatt, Principal
Financial Officer, of Emtec, Inc. dated July 14, 2004.
32.1 Section 1350 Certificate of John P. Howlett, Principal Executive
Officer, of Emtec, Inc. dated July 14, 2004.
32.2 Section 1350 Certificate of Sam Bhatt, Principal Financial
Officer, of Emtec, Inc. dated July 14, 2004.
21.1 Subsidiaries(2)
(1) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
dated January 17, 2001, filed on January 31, 2001, and incorporated herein
by reference.
(2) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed on May 21, 2001, and incorporated herein by reference.
(3) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
on Form 10, filed on July 12, and incorporated herein by reference.
(4) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated November 21, 2001, filed on November 26, 2001, and incorporated
herein by reference.
(5) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated December 5, 2001, filed on December 20, 2001, and incorporated herein
by reference.
(6) Previously filed as an exhibit to Registrant's Form 10-K dated March 31,
2001, filed on July 12, 2001, and incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated August 12, 2002 filed on August 26, 2002, and incorporated herein by
reference.
(8) Previously filed as an exhibit to Registrant's Current Report on Form 8K
dated August 31, 2002 filed on September 13, 2002, and incorporated herein
by reference.
(9) Previously filed as an exhibit to Registrant's Form 10-K dated March 31,
2002, filed on June 30, 2002, and incorporated herein by reference.
(10) Previously filed as an exhibit to Registrant's Form 10-K dated March 31,
2003, filed on July 15, 2003, and incorporated herein by reference.
-37-
(b) Reports on Form 8-K filed during the quarter ended March 31, 2004:
Form 8-K filed on February 19, 2004, required by Item 12 of the Form 8-K,
Result of Operations and Financial Condition.
Form 8-K filed on April 1, 2004, required by Item 5 of the Form 8-K, Other
Events and Required FD Disclosure.
Form 8-K filed on June 28, 2004, required by Item 12 of the Form 8-K,
Result of Operations and Financial Condition.
-38-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Emtec, Inc.
572 Whitehead Road, Bldg.# 1
Trenton, New Jersey 08619
We have audited the accompanying consolidated balance sheets of Emtec, Inc. as
of March 31, 2004 and 2003 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Emtec, Inc. at
March 31, 2004 and 2003, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial statements, effective
April 1, 2002, the Company changed its method for accounting for goodwill and
other intangible assets by adopting Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
/s/ Baratz & Associates, P.A.
Marlton, New Jersey
June 4, 2004
-39-
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
2004 2003
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 4,792 $ 1,792,101
Receivables:
Trade, net 15,206,972 14,553,124
Others 289,445 476,682
Inventories 1,599,166 2,881,868
Prepaid expenses 396,313 462,827
Deferred tax assets 186,368 34,954
----------- -----------
Total Current Assets 17,683,056 20,201,556
Property and equipment, net 387,073 1,190,851
Investment in geothermal power unit, net 569,960 611,519
Deferred tax assets 103,813 105,201
Intangible assets 118,198 176,632
Other assets 46,512 48,825
----------- -----------
Total Assets $18,908,612 $22,334,584
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-40-
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
2004 2003
----------- -----------
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 2,308,416 $ 8,203,290
Accounts payable 9,295,882 8,199,792
Customer deposits 332,667 488,127
Income tax payable 279,397 25,781
Accrued liabilities 2,529,885 1,449,126
Deferred revenues 853,393 1,321,013
----------- -----------
Total Current Liabilities 15,599,640 19,687,129
Deferred revenue 714,573 757,023
Deferred tax liability 25,924 51,945
----------- -----------
Total Liabilities 16,340,137 20,496,097
----------- -----------
Shareholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized; 7,380,498 and 7,080,498
shares issued and outstanding at March 31, 2004
and 2003 73,805 70,805
Additional paid-in capital 2,294,805 2,210,805
Retained Earnings (accumulated deficit) 199,865 (443,123)
----------- -----------
Total Shareholders' Equity 2,568,475 1,838,487
----------- -----------
Total Liabilities and
Shareholders' Equity $18,908,612 $22,334,584
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-41-
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ----------- -----------
Revenues:
Procurement services $ 82,184,744 $75,943,230 $50,813,243
Service and consulting 17,986,564 16,140,896 11,654,978
Geothermal 190,346 175,902 187,978
------------ ----------- -----------
Total Revenues 100,361,654 92,260,028 62,656,199
------------ ----------- -----------
Cost of Revenues:
Procurement services 74,282,388 67,525,430 44,832,526
Service and consulting 11,497,465 11,915,844 7,693,460
Geothermal 108,782 72,476 63,083
------------ ----------- -----------
Total Cost of Revenues 85,888,635 79,513,750 52,589,069
------------ ----------- -----------
Gross Profit:
Procurement services 7,902,356 8,417,800 5,980,717
Service and consulting 6,489,099 4,225,052 3,961,518
Geothermal 81,564 103,426 124,895
------------ ----------- -----------
Total Gross Profit 14,473,019 12,746,278 10,067,130
------------ ----------- -----------
Operating Expenses:
Selling, general and
administrative 13,376,048 12,574,667 8,995,255
Termination costs -- -- 21,746
Interest 328,296 160,803 210,305
Loss on impairment, Goodwill -- 254,894 --
E-Business costs -- -- 617,220
------------ ----------- -----------
Total Operating Expenses 13,704,344 12,990,364 9,844,526
------------ ----------- -----------
Income (Loss) Before Income Tax 768,675 (244,086) 222,604
Income tax expense (benefit) 125,687 (32,615) 5,632
------------ ----------- -----------
Net Income (Loss) $ 642,988 $ (211,471) $ 216,972
============ =========== ===========
Net Income (Loss) Per Share
{Basic And Diluted} $ 0.09 $ (0.03) $ 0.03
Weighted Average Number Of Shares
Outstanding:
Basic 7,380,498 7,080,498 7,080,498
Diluted 7,483,549 7,123,831 7,081,398
The accompanying notes are an integral part of these consolidated financial
statements.
-42-
EMTEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Retained
Common Stock Additional Earnings Accumulated Total
------------------- Paid-In (Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit) (Loss) Income Equity
--------- ------- ---------- ------------ ------------- -------------
Balance, April 1, 2001 7,080,498 70,805 2,210,805 (448,624) (5,458) 1,827,528
----------
Net income for the year 216,972 216,972
Unrealized gain on
marketable securities 5,458 5,458
--------- ------- ---------- --------- ------- ----------
Total Comprehensive
Income 222,430
----------
Balance, March 31, 2002 7,080,498 $70,805 $2,210,805 $(231,652) $ -- $2,049,958
Net loss for the year (211,471) (211,471)
--------- ------- ---------- --------- ------- ----------
Balance, March 31, 2003 7,080,498 $70,805 $2,210,805 $(443,123) $ -- $1,838,487
----------
Stock issued as payment
for services 300,000 3,000 4,000 87,000
Net income for the year 642,988 642,988
--------- ------- ---------- --------- ------- ----------
Balance, March 31, 2004 7,380,498 $73,805 $2,294,805 $ 199,865 $ -- $2,568,475
========= ======= ========== ========= ======= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-43-
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
Cash Flows From Operating Activities
Net income (loss) for the year $ 642,988 $ (211,471) $ 216,972
Adjustments to Reconcile Net Income
(Loss) To Net Cash Provided By (Used
In) Operating Activities
Depreciation and amortization 605,309 590,293 548,007
Impairment Charges 462,915 254,894 --
Deferred income tax (benefit) expense (176,047) (78,907) 13,693
Stock issued as payment for services 87,000 -- --
Changes In Operating Assets and
Liabilities
Decrease in marketable securities -- -- 292,346
(Increase) decrease in receivables (466,611) (8,444,852) 6,677,082
Decrease (Increase) in inventories 1,282,702 (1,791,919) (70,235)
Decrease (Increase) in prepaid expenses 66,515 (74,520) (88,537)
Decrease (Increase) in other assets 2,313 (903) 5,289
Increase (decrease) in accounts payable 1,096,092 1,589,955 (674,788)
(Decrease)Increase in customer deposits (155,460) 242,740 42,185
Increase in income tax payable 253,616 23,694 --
Increase (decrease)in accrued liabilities 1,080,759 686,931 (261,361)
(Decrease)Increase in deferred revenues (510,070) 438,150 (101,389)
----------- ----------- -----------
Net Cash Provided By(Used In)
Operating Activities 4,272,021 (6,775,915) 6,599,264
----------- ----------- -----------
Cash Flows From Investing Activities
Purchases of equipment (164,456) (1,003,962) (142,624)
Additional investment in geothermal unit -- (64,978) (56,822)
Acquisition of a business segment -- (100,000) (409,945)
----------- ----------- -----------
Net Cash Used In Investing Activities (164,456) (1,168,940) (609,391)
----------- ----------- -----------
Cash Flows From Financing Activities
Net (decrease) increase in line of credit (5,894,874) 8,203,290 (6,535,405)
Payment of related party debt -- (19,000) --
----------- ----------- -----------
Net Cash (Used In) Provided By Financing
Activities (5,894,874) 8,184,290 (6,535,405)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (1,787,309) 239,435 (545,532)
Beginning Cash and Cash Equivalents 1,792,101 1,552,666 2,098,198
----------- ----------- -----------
Ending Cash and Cash Equivalents $ 4,792 $ 1,792,101 $ 1,552,666
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-44-
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
1. Organization and Summary of Significant Accounting Policies
Emtec (OTC: ETEC) is a systems integrator focused on providing
technology solutions that enable our customers to effectively use and manage
their data to grow their businesses. Our areas of specialization in IT services
include enterprise computing, data communications, data access, network design,
enterprise backup and storage consolidation, managed services and staff
augmentation. Emtec's solutions are crafted to enable our customers to become
more efficient and effective, thereby giving them a competitive advantage. Our
customers are primarily Fortune 2000 companies, state and local government,
local school districts, and other large and mid-sized companies located
principally in the New York/New Jersey Metropolitan area and the Southeastern
United States. Our commercial business is generally with customers with annual
revenues ranging from $50 million to $500 million. We service our customer base
from leased facilities in New Jersey, New York, Georgia, and Florida.
The Company, was formed on April 1, 1995, as a result of the 1995 and
1996 mergers of three information technology companies that were originally
founded between 1980 and 1983.
Principles of Consolidation
The consolidated financial statements include the accounts of the
issuer and its wholly owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Use of Estimates
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States (US GAAP).
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments we make about
the carrying values of assets and liabilities that are not readily apparent from
other sources. We base our estimates and judgments on historical experience and
on various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and the best
estimates and judgments routinely require adjustment. US GAAP requires us to
make estimates and judgments in several areas, including those related to
impairment of goodwill and equity investments, revenue recognition,
recoverability of inventory and receivables, the useful lives of long lived
assets such as property and equipment, the future realization of deferred income
tax benefits and the recording of various accruals.
Revenue Recognition
The Company recognizes revenues based upon Staff Accounting Bulletin
#101 (SAB 101). SAB 101 states that revenue recognition cannot occur until the
earnings process is complete, evidenced by an agreement between the Company and
the customer, there has been delivery and acceptance, collectibility is
probable, and pricing is fixed and determinable. If significant obligations
remain after delivery, revenue is deferred until such obligations are fulfilled.
Procurement services represent sales of computer hardware and prepackaged
software. Revenue from consulting and
-45-
support service contracts are recognized ratably over the contract or service
period. Revenues from manufacturer support service contracts where the
manufacturer is responsible for fulfilling the service requirements of the
customer are recognized immediately at their contract sale date. The Company
believes that net revenue reporting for manufacturer support service contracts
is more appropriate. Thus the Company has adopted net revenue reporting for
manufacturer support service contracts starting with the fiscal year ended March
31, 2003 and has reclassified contract costs from the year ended March 31, 2002
as an offset to revenue to conform to the current presentation.
Cash Equivalents
Cash equivalents include items almost as liquid as cash with maturity
periods of three months or less when purchased. The carrying amount of cash and
cash equivalents approximates fair value.
Trade Receivables
The Company provides an allowance for losses on trade receivables
based on a review of the current status of existing receivables and management's
evaluation of periodic aging of the accounts.
Other Receivables
Other receivables represent rebates, price protection receivables and
amounts due from vendors for purchase returns made in the ordinary course of
business.
Concentration of Credit Risk
The Company provides its services to a wide variety of commercial,
governmental and institutional customers. Financial instruments which
potentially subject the Company to concentrations of credit risk are cash (and
cash equivalents) and trade receivables. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, does not
require collateral from its customers. The Company has not experienced
significant credit losses. The Company maintains deposit accounts with reputable
financial institutions; at times, such deposits may exceed Federal Depository
Insurance Limits.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is based on standard costs generated principally by the most recent
purchase prices. The Company provides an inventory reserve for obsolescence and
deterioration based on management's review of products and sales.
Property and Equipment
Property and equipment are stated at original cost. Depreciation and
amortization for financial accounting purposes are computed using the straight
line method over the estimated lives of the respective assets. Accelerated
methods of depreciation are used for tax purposes. Property and equipment along
with their components are as follows:
-46-
Original Cost
------------------------- Estimated Life
March 2004 March 2003 (Years)
----------- ----------- --------------
Computer equipment $ 3,643,052 $ 3,559,185 3
Furniture and fixtures 357,845 321,670 5
Leasehold improvements 244,847 200,435 5
Vehicles 80,984 80,984 2
----------- -----------
Total Property and Equipment $ 4,326,728 $ 4,162,274
Less: accumulated depreciation
and amortization (3,939,655) (2,971,423)
----------- -----------
Net book value $ 387,073 $ 1,190,851
=========== ===========
Maintenance and repair costs are charged to expense as incurred. The
cost and accumulated depreciation relating to property and equipment retired or
otherwise disposed of are eliminated from the accounts and any resulting gains
or losses are credited or charged to income.
Valuation of Long Lived Assets
The Company evaluates the recoverability of its long-lived assets
(other than intangibles and deferred tax assets) in accordance with Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets,"(SFAS No. 144). Long-lived assets are reviewed
for impairment under SFAS No. 144 whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS No.
144 requires recognition of impairment of long-lived assets in the event that
the net book value of such assets exceeds the future undiscounted net cash flows
attributable to such assets. Impairment, if any, is recognized in the period of
identification to the extent the carrying amount of an asset exceeds the fair
value of such asset.
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of
the net assets acquired in a business combination accounted for under the
purchase method. Beginning April 1, 2002, in accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
(SFAS 142), goodwill and indefinite-lived assets are no longer amortized, but
instead tested for impairment at least annually. Intangible assets that have
finite useful lives are amortized over their useful lives.
Income Taxes
Income taxes are accounted for under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than the enactment of changes in tax laws or rates. A valuation allowance is
recognized if, on weight of available evidence, it is more likely than not that
some portion of the deferred tax assets will not be realized.
Advertising Costs
Advertising and marketing costs are charged to expense as incurred.
-47-
Advertising and marketing expenses for the years ended March 31, 2004, 2003 and
2002 were $370,800, $492,481, and $306,271, respectively.
Stock-Based Compensation
The Company did not change to the fair value based method of
accounting for stock-based employees' compensation. 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 provide as if the
Company had accounted for employee stock options under the fair value method of
this statement, including disclosing proforma information regarding net income
(loss) and earnings (loss) per share. 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. Accordingly, compensation cost for
stock options issued to employees is measured as the excess, if any, of the
quoted market price of the Company stock at the date of grant over the amount an
employee must pay to acquire the stock. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123.
Reclassifications
Certain reclassifications have been made to prior years balances in
order to conform to current presentations.
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net earnings
(loss) by the weighted average shares outstanding during the reporting period.
Diluted earnings (loss) per share are computed similar to basic earnings (loss)
per share except that the weighted average shares outstanding are increased to
include additional shares from the assumed exercise of stock options, if
dilutive.
2. Acquisitions
On August 31, 2002, the Company acquired all of the customer contracts
and certain assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The
purchase price will be paid over a two-year period and will be based on an
earning share derived from the customer contracts transferred from Turnkey to
Emtec. On December 15, 2003, the Company and Turnkey have finalized the earning
share for the twelve months ended August 31, 2003. Total earning share for the
twelve months ended August 31, 2003 was $150,019. The Company had adequately
accrued and charged the potential earning share payout to that period's
earnings. The second earning share will be calculated at the end of twelve
months ended on August 31, 2004.
On August 12, 2002, the Company acquired certain assets of Acentra
Technologies, Inc., including the assignment of the State of New Jersey computer
supply and services contract. The Company paid a net purchase price of $165,607
in cash to be allocated under the purchase method as follows:
Assignment of State of NJ Contract $ 100,000
Inventory 326,798
Equipment 22,715
Advance payment amount from customers (283,906)
---------
Net Purchase Price $ 165,607
=========
-48-
3. Trade Receivables
The Company provides an allowance for losses on trade receivables
based on a review of the current status of existing receivables and management's
evaluation of periodic aging of the accounts. Trade accounts receivable consists
of followings:
March 31, 2004 March 31, 2003
-------------- --------------
Trade Receivable $15,570,374 $14,793,971
Allowance for doubtful accounts (363,402) (240,847)
----------- -----------
Trade Receivable, net $15,206,972 $14,553,124
----------- -----------
4. Inventories
The components of inventories at March 31, are as follows:
2004 2003
---------- ----------
Hardware, software and accessories $2,151,818 $3,221,904
Service parts 169,899 131,167
---------- ----------
2,321,717 3,353,071
Less inventory reserve 722,551 471,203
---------- ----------
$1,599,166 $2,881,868
========== ==========
Appropriate consideration has been given to deterioration,
obsolescence and other factors in evaluating net realizable value.
5. Financing Arrangements
On November 21, 2001, the Company entered into a $10.0 million
revolving credit facility with Fleet Capital Corporation, formerly Summit
Business Capital Corporation ("Fleet") under which the Company may borrow on 85%
of its eligible trade receivables. Interest on outstanding loans under the
revolving credit facility with Fleet was charged monthly at a fluctuating rate
per annum equal to 0.25% above the prime rate and, at the Company's option,
interest on up to 50% of the outstanding loans may be charged at libor plus
2.75%. The Fleet revolving credit facility is collateralized by a lien upon and
security interest in substantially all of the Company assets. Since current
credit facilities with two of the Company's primary trade vendors (GE Access and
Ingram Micro.) were also collateralized by substantially all of the Company's
assets, Fleet, GE Access and Ingram Micro have entered into intercreditor
agreements, which provide that as regards to these vendors, debt obligations to
Fleet are accorded priority. On November 21, 2001, the Company also entered into
a Wholesale Financing Security Agreement with IBM. This credit facility, which
is collateralized by a $750,000 letter of credit from Fleet in favor of IBM,
affords the Company up to a like amount of credit to purchase products floored
by IBM Global Financing. On January 9, 2002, Fleet issued a $250,000 letter of
credit in favor of the Company's landlord for the Company's New York City
office, as a security deposit for the building lease. On July 1, 2003, Fleet
also issued a $250,000 letter of credit in favor of Selective Insurance
Corporation, as collateral for the performance bond issued to The City of
Philadelphia, one
-49-
of the Company's customers. The maximum credit facility is reduced by the
outstanding letters of credit.
On October 17, 2003, the Company and Fleet executed an amendment to
loan and security agreement under which the Company may borrow on 80% of its
eligible trade receivables up to $10 million. Interest on outstanding loans was
charged monthly at a fluctuating rate per annum equal to 2.00% above the prime
rate. The lending agreement contains financial covenants that require the
Company to maintain a maximum leverage ratio, a minimum debt ratio, and a
minimum EBITDA(earnings before interest, taxes, depreciation and amortization
expense).
On April 16, 2004, the Company and Fleet executed another amendment to
the loan and security agreement which permits the Company to obtain a surety
bond line from an insurance company up to a $1 million. This amendment reduced
the interest rate from 2.00% above the prime rate to 1.00% above the prime rate.
As of March 31, 2004 the Company is in compliance with all its
financial covenants.
At March 31, 2004, the Company had a $2,308,416 outstanding balance
under the credit facility and an unused line of $6,441,584.
6. Intangible Assets
The Company adopted SFAS No. 142, effective April 1, 2002. As a
result, amortization of goodwill was discontinued in 2003. Amortization expense
for the year ended March 31, 2002 amounted to $13,158.
The Company performed its initial goodwill impairment test as of April
1, 2002 and another impairment test as of March 31, 2003. Based on the
impairment test performed as of March 31, 2003, the goodwill of $254,894
associated with the acquisition of Devise Associates, Inc. was determined to be
fully impaired and charged to earnings. This determination was based upon the
operating and cash flow losses of this business unit since the January 9, 2002
acquisition date and budgeted fiscal 2004 operating and cash flow losses for
this business unit. The Company found no impairment of its remaining goodwill of
$109,107 for the year ended March 31, 2004.
The Company was assigned a contract to supply computer hardware and
services to the State of New Jersey in the August 12, 2002 acquisition of
Acentra Technologies, Inc. This contract was valued at $100,000 in the
acquisition. Amortization expense of $ 54,545 and $36,364 was expensed in fiscal
years ended March 31, 2004 and 2003, respectively, based upon the current
contract term that ends at May 2004. The contract is subject to annual renewals.
In May of 2004, the State of New Jersey extended the contract term through
December 2004. The net carrying value for this contract amounted to $9,091 and $
63,636 at March 31, 2004 and 2003, respectively.
7. Property and Equipment
The Company estimates 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
-50-
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. The Company evaluates the recoverability of its long-lived assets
(other than intangibles and deferred tax assets) in accordance with Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets,"(SFAS No. 144). Long-lived assets are reviewed
for impairment under SFAS No. 144 whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS No.
144 requires recognition of impairment of long-lived assets in the event that
the net book value of such assets exceeds the future undiscounted net cash flows
attributable to such assets. Impairment, if any, is recognized in the period of
identification to the extent the carrying amount of an asset exceeds the fair
value of such asset.
The Company invested $687,000 for the purchase of computer hardware,
software and consulting services for its Network Operations Center to enhance
its offerings in Managed Services during fiscal year ended March 31, 2003. The
company originally intended to depreciate these assets over 36 months based on
the original projections of the future undiscounted net cash flows. To date the
company has seen modest sales success in its managed services offerings. The
company performed impairment test of these assets as of December 31, 2003 and
March 31, 2004. The company compared its original projections of the future
undiscounted cash flows with actual performance, and reviewed its current sales
pipeline. Based on these impairment tests, the Company recorded an impairment
charge of 223,858 and $239,057 for three months ended December 31, 2003, and
March 31, 2004, respectively. The total impairment charge of $462,915 was
classified as general and administrative expense during the twelve months ended
March 31, 2004. The net book value of this asset after impairment charge was $0.
8. Income Tax Expense (Benefit)
Deferred income taxes reflect the net tax effects of (a) temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b) net
operating loss carryforwards (when available). Income tax expense (benefit)
consisted of the following for the years ended March 31:
2004 2003 2002
--------- -------- --------
Continuing Operations
Current taxes
Federal $ 199,294 $ 9,883 $(21,143)
State and local 102,440 36,409 13,082
--------- -------- --------
301,734 46,292 (8,061)
Deferred taxes
Federal (137,092) (61,616) 10,827
State and local (38,955) (17,291) 2,866
--------- -------- --------
(176,047) (78,907) 13,693
--------- -------- --------
Net Income Tax Expense (Benefit) $ 125,688 $(32,615) $ 5,632
========= ======== ========
Reconciliation of the U.S. statutory income tax rate to our effective tax
rate is as follows:
2004 2003 2002
--------- -------- --------
Expected tax expense (benefit) at statutory rates $ 261,350 $(82,989) $ 73,225
Effect of state taxes, net 63,486 19,118 15,883
Valuation allowances (212,138) 23,927 (92,158)
Permanent differences 12,989 7,329 8,682
--------- -------- --------
Actual Income Tax Expense/ (Benefit) $ 125,687 $(32,615) $ 5,632
========= ======== ========
-51-
Significant items comprising the Company's deferred tax assets and
liability at March 31, are as follows:
2004 2003
--------- ---------
Deferred Tax Assets
Differences between book and tax basis:
Trade receivables $ 145,143 $ 96,195
Inventories 298,477 198,088
Property and equipment 172,715 --
Accrued liabilities 22,301 55,259
Intangible Assets 86,817 93,604
Net Operating loss carryforwards -- 372,590
--------- ---------
725,451 815,736
Less Valuation Allowance (435,271) (675,581)
--------- ---------
Net Deferred Tax Assets $ 290,181 $ 140,155
========= =========
Deferred Tax Liability
Differences between book and tax basis::
Investment in geothermal power unit $ 25,924 $ 45,617
Property and equipment -- 6,328
--------- ---------
Total Deferred Tax Liability $ 25,924 $ 51,945
========= =========
At March 31, 2004 and 2003 the Company recorded a valuation allowance
against its deferred tax assets, as stated in the above table, reducing those
assets to amounts which, conservatively, are more likely than not to be
realized. Federal and state net operating loss carryforwards approximated
$850,000 and $1,050,000 respectively at March 31, 2003. The federal net
operating losses carried forward were utilized in their entirety in 2004 to
reduce current federal income taxes payable. State of New Jersey tax losses
available to be carried forward as of March 31, 2004 approximated $1,160,000 and
expire at various dates through 2010.
9. Major Customers
Major customers approximated 57%, 44%, and 23% of the Company's net
revenues in the years 2004, 2003 and 2002 respectively. Major customer revenues
are as follows:
% Of Total Revenues Customers
------------------- --------------------------------
31% The State of New Jersey Contract
16% Gwinnett County Public Schools
10% Duval County Public Schools
---
2004 57%
===
20% Gwinnett County Public Schools
15% The State of New Jersey Contract
9% Duval County Public Schools
===
2003 44%
===
14% Gwinnett County Public Schools
9% Tiffany & Company
---
2002 23%
===
-52-
Another major customer purchased manufacturer support service
contracts from the Company. Net revenues associated with these contracts
accounted for approximately 6.22%, 10.78%, and 0% of the Company's gross profit
for the year ended March 31, 2004, 2003, and 2002, 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.
10. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value
of financial instruments at balance sheet date:
Short-term financial instruments (cash equivalents, receivables,
payables, customer deposit and accrued liabilities) - cost approximates fair
value because of the short maturity period.
Line of credit - cost approximates fair value because of the short
interest-reset period.
11. 401(k) Plan
The Company sponsors a 401(k) plan for all employees with at least 6
months of service and who are at least 20 years of age. Eligible employees may
contribute 2% to 15% of their annual compensation to the plan. The Company
matches 25% of the first 6% of employee plan contributions and may contribute
additional amounts at the Company's discretion. Participants are vested 20% for
each year of service and are fully vested after 6 years. Company contributions
to the plan were $86,436, $119,911, and $84,707 for the years ended March 31,
2004, 2003, and 2002, respectively.
12. Stock Option Plan
The Company's 1996 Stock Option Plan (the Plan) (amended in 1999)
authorizes the granting of stock options to directors and eligible employees.
The Company has reserved 1,000,000 shares of its common stock for issuance under
the Plan at prices not less than 100% of the fair value of the Company's common
stock on the date of grant (110% in the case of shareholders owning more than
10% of the Company's common stock). The Black-Scholes option pricing model has
been used to determine the fair value of options granted subsequent to January
17, 2001.
Option activity is summarized as follows:
-53-
For the year ended March 31, 2002:
Options Outstanding - April 1, 2001 465,259
Options granted 82,746
Options exercised --
Options forfeited or expired (166,677)
--------
Options outstanding - March 31, 2002 381,328
For the year ended March 31, 2003:
Options granted 180,000
Options exercised --
Options forfeited or expired (99,900)
--------
Options outstanding - March 31, 2003 461,428
For the year ended March 31, 2004:
Options granted --
Options exercised --
Options forfeited or expired (46,200)
--------
Options outstanding- March 31, 2004 415,228
========
Information with respect to stock options outstanding and exercisable
at March 31, 2004 is as follows:
Options Outstanding and Exercisable
Outstanding Weighted Avg. Remaining
as of 3/31/04 Life in Years Exercise Price
------------- ----------------------- --------------
219,228 1.0 $1.00
30,000 2.7 $0.55
136,000 3.5 $0.29
30,000 3.7 $0.44
SFAS No. 123 requires pro forma disclosure under the fair value method
of net income (loss) and income (loss) per share when stock options are granted
to employees and directors. The fair value for options was estimated at the date
of grant using the Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. The weighted average
fair value of options granted in 2004, 2003, and 2002 and the assumptions used
in estimating fair value under the Black-Scholes model are as follows:
2004 2003 2002
---- ----- -----
Estimated weighted average values of options granted $n/a $0.24 $0.17
==== ===== =====
-54-
Principal assumptions in applying the Black-Scholes valuation model:
Expected life, in years n/a 2.50 2.50
Risk-free interest rate n/a 3.01% 2.96%
Expected volatility n/a 1.54 1.72
Expected dividend yield n/a 0.00% 0.00%
For purposes of pro forma disclosures, the estimated fair value of
options granted to employees and directors is amortized to expense over the
options' vesting period and the pro forma expense is adjusted for the effect of
income taxes. Had the Company adopted FASB Statement No. 123 in lieu of APB
No. 25, the Company's net income (loss) and income (loss) per share would have
been the pro forma amounts indicated below:
2004 2003 2002
---------- ---------- ----------
Net income (loss) as reported $ 642,988 $ (211,471) $ 216,972
Less: Stock-based compensation under
SFAS 123 -- 21,473 8,933
---------- ---------- ----------
Pro forma net income (loss) $ 642,988 $ (232,944) $ 208,039
Per share amounts -basic and diluted:
Pro forma net income (loss) per share $ 0.09 $ (0.03) $ 0.03
Net income (loss) per share as reported $ 0.09 $ (0.03) $ 0.03
Shares used in calculation of pro forma
per shares amounts: basic 7,380,498 7,080,498 7,080,498
diluted 7,483,549 7,123,831 7,081,398
13. Termination Costs
Termination costs of $0 (2004), $0 (2003), and $21,746 (2002) were
paid to former Company executives.
14. Commitments and Contingencies
Leases:
The Company leases offices, warehouse facilities, vehicles and office
equipment under noncancellable operating leases. Future minimum lease payments
under such leases are as follows:
Fiscal Years
-------------
2005 $ 538,543
2006 445,744
2007 323,811
2008 293,536
Thereafter 72,657
----------
Total $1,674,291
==========
-55-
Aggregate rent expense for offices and warehouse facilities amounted
to $1,066,962, $920,893, and $590,347 for the years ended March 31, 2004, 2003,
and 2002, respectively. Aggregate rent expense for vehicles and office equipment
amounted to $71,903, $118,026, and $243,444 for the years ended March 31, 2004,
2003, and 2002, respectively.
Litigation:
In March 2002,a lawsuit was filed against the Company by a competitor
seeking damages of an unspecified amount. The competitor is alleging that the
Company illegally interfered with customer relationships of the competitor. At
this time, the outcome of this litigation cannot be determined. There has been
no change to this litigation matter in last twelve months. The lawsuit is still
in the discovery phase.
15. Supplemental Cash Flow Information
Cash paid for interest and income taxes were as follows:
2004 2003 2002
--------- --------- ---------
Interest $328,296 $160,803 $246,287
Income Taxes $ 50,341 $ 17,128 $ 13,082
16. Segment Information
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,".
The Company's business activities are considered to be in two business segments,
our Information Technology Division and our Geothermal Division. Our Information
Technology division provides a comprehensive range of information technology
products, services and solutions to a broad base of commercial and governmental
customers. Our Geothermal division is engaged in activities designed to identify
and acquire geothermal oil and gas leases in the Western United States.
Geothermal revenues are primarily derived from royalty payments from these
leases as well as the applicable portion of geothermal steam revenues sold to
PacifiCorp on a prepayment basis.
The following is financial information relating to the operating
segments:
Years Ended March 31:
----------------------------------------
2004 2003 2002
------------ ----------- -----------
Revenues
Information Technology $100,171,308 $92,084,126 $62,468,221
Geothermal 190,346 175,902 187,978
------------ ----------- -----------
Total Revenues $100,361,654 $92,260,028 $62,656,199
============ =========== ===========
Interest Expense
Information Technology 328,296 160,803 210,305
Geothermal -- -- --
------------ ----------- -----------
Total Interest Expense $ 328,296 $ 160,803 $ 210,305
============ =========== ===========
-56-
Depreciation and Amortization
Information Technology 563,751 555,223 523,174
Geothermal 41,558 35,070 24,833
------------ ----------- -----------
Total Depreciation
and Amortization $ 605,309 $ 590,293 $ 548,007
============ =========== ===========
Operating Income/(Loss)
Information Technology 741,432 (306,750) 138,802
Geothermal 27,243 62,664 83,802
------------ ----------- -----------
Net Segment Operating
Income/(Loss) 768,675 (244,086) 222,604
Income Tax Expense (Benefit) 125,687 (32,615) 5,632
------------ ----------- -----------
Net Income (Loss) $ 642,988 $ (211,471) $ 216,972
============ =========== ===========
Identifiable Assets:
--------------------
As of March 31: 2004 2003
------------ -----------
Information Technology 18,338,652 21,723,065
Geothermal 569,960 611,519
----------- -----------
Total Assets $18,765,945 $22,334,584
=========== ===========
17. Investment in Geothermal Power Unit
The investment in Geothermal Power Unit (Unit) represents a 5.49%
working interest in the Roosevelt Hot Springs geothermal power unit. The net
investment in the unit amounted to $569,960, and $611,519 including accumulated
amortization of $379,037, and $337,478 at March 31, 2004, and 2003,
respectively. An agreement is in place to sell all of the steam from the Unit
through 2023 to PacifiCorp, which has constructed the Blundell power plant to
utilize the steam. This agreement, entered into in 1993, included an advance
payment. The remaining unamortized deferred revenue attributable to the 1993
advance payment in the amount of $714,573 is reported as a non-current liability
at March 31, 2004 and will be recognized into income ratably through 2023.
PacifiCorp pays the revenue to the operator who allocates 5.49% share to the
Company and remits the gross amount on a monthly basis. The Company pays its
proportionate share of operating and maintenance expenses to the operator of the
Unit on a monthly basis as well.
18. Quarterly Financial Information - (Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- ------------
2004
-----------
Revenues $28,480,340 $25,814,554 $24,666,464 $21,400,296 $100,361,654
Gross Profit 3,703,583 3,297,982 3,823,744 3,647,710 14,473,019
Net Income (Loss) $ 357,891 $ (138,948) $ 320,326 $ 103,719 $ 642,988
Per share:
{Basic and Diluted} $ .05 $ (.02) $ .04 $ .01 $ .09
2003
-----------
Revenues $19,709,104 $24,466,189 $22,539,888 $25,544,847 $ 92,260,028
Gross Profit 3,115,305 3,183,756 2,308,341 4,138,876 12,746,278
Net Income (Loss) $ 114,255 $ 122,456 $ (767,026) $ 318,844 $ (211,471)
Per share:
{Basic and Diluted} $ .02 $ .02 $ (0.11) $ .04 $ (.03)
-57-
19. Accounts Receivable and Inventory Allowances
The following table provides information regarding accounts receivable
and inventory valuation allowance activity for the three years ended March 31,
2004.
Allowances
----------------------
Accounts
Receivable Inventory
---------- ---------
Balance, April 1, 2001 $ 432,890 $ 391,183
Charged to costs and expenses 55,917 76,062
Write-offs (336,205) (15,530)
--------- ---------
Balance, March 31, 2002 $ 152,602 $ 451,715
Charged to costs and expenses 88,245 23,536
Write-offs (--) (4,048)
--------- ---------
Balance, March 31, 2003 $ 240,847 $ 471,203
Charged to costs and expenses 165,054 251,348
Write-offs (42,499) (--)
--------- ---------
Balance, March 31, 2004 $ 363,402 $ 722,551
========= =========
-58-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: July 14, 2004
EMTEC, INC.
By: /s/ John P. Howlett
----------------------------------
John P. Howlett
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
------------------------- ----------------------------------- --------------
/s/John P. Howlett Chairman and July 14, 2004
------------------------- Chief Executive Officer
John P. Howlett
/s/Sam Bhatt Vice President-Finance July 14, 2004
------------------------- (Principal Financial Officer)
Sam Bhatt (Principal Accounting Officer)
/s/Ronald A. Seitz President, Chief Operating Officer, July 14, 2004
------------------------- and Director
Ronald A. Seitz
Director
-------------------------
Frank Jerd
/s/George F. Raymond Director July 14, 2004
-------------------------
George F. Raymond
-59-
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as............................... 'TM'
The section symbol shall be expressed as................................. 'SS'