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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-32789
EMTEC, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0273300
(State of incorporation or organization) (I.R.S. Employer Identification No.)
817 East Gate Drive
Mount Laurel, New Jersey 08054
(Address of principal executive offices, including zip code)
(856) 235-2121
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No
As of January 2, 2004, there were outstanding 7,380,498 shares of the
registrant's common stock.
EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2003
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
December 31, 2003 (Unaudited) and March 31, 2003............ 1-2
Consolidated Statements of Operations
Three and Nine months ended December 31, 2003 (Unaudited)
and 2002 (Unaudited) ....................................... 3
Consolidated Statements of Cash Flows
Nine months ended December 31, 2003 (Unaudited)
and 2002 (Unaudited) ....................................... 4
Notes to Consolidated Financial Statements (Unaudited) ..... 5-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Result of Operations ......................... 11-23
Item 3 - Quantitative and Qualitative Information About Market Risk .... 24
Item 4 - Controls and Procedures ....................................... 25
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote by Security Holders............ 26
Item 6 - Exhibits and Reports on Form 8-K .............................. 27
SIGNATURES ............................................................. 28
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2003
------------ -----------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 190,907 $ 1,792,101
Receivables:
Trade, net 19,220,168 14,553,124
Others 315,612 476,682
Inventories 1,775,413 2,881,868
Prepaid expenses 474,253 462,827
Deferred tax assets 33,279 34,954
----------- -----------
Total Current Assets 22,009,632 20,201,556
Property and equipment, net 620,280 1,190,851
Investment in geothermal power unit,
less accumulated amortization
of $368,648 and $337,478 580,350 611,519
Deferred tax assets -- 105,201
Intangible assets 132,807 176,632
Other assets 46,512 48,825
----------- -----------
Total Assets $23,389,581 $22,334,584
=========== ===========
1
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2003
------------ ------------
(unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 3,419,355 $ 8,203,290
Accounts payable 14,156,026 8,199,792
Customer deposits 190,000 488,127
Accrued liabilities 1,442,534 1,474,907
Deferred revenues 939,783 1,321,013
----------- ------------
Total Current Liabilities 20,147,698 19,687,129
Deferred revenue 725,182 757,023
Deferred tax liability 51,945 51,945
----------- ------------
Total Liabilities 20,924,825 20,496,097
----------- ------------
Shareholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized; 7,380,498 shares issued
and outstanding 73,805 70,805
Additional paid-in capital 2,294,805 2,210,805
Retained earnings (accumulated deficit) 96,146 (443,123)
----------- ------------
Total Shareholders' Equity 2,464,756 1,838,487
----------- ------------
Total Liabilities and
Shareholders' Equity $23,389,581 $ 22,334,584
=========== ============
2
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Procurement services $19,648,683 $18,522,103 $65,286,512 $55,237,353
Service and consulting 4,969,881 3,972,432 13,533,973 11,218,523
Geothermal 47,900 45,353 140,873 127,705
----------- ----------- ----------- -----------
Total Revenues 24,666,464 22,539,888 78,961,358 66,583,581
----------- ----------- ----------- -----------
Cost of Revenues:
Procurement services 17,686,595 16,681,947 59,127,426 49,070,806
Service and consulting 3,094,958 3,531,446 8,917,374 8,851,590
Geothermal 61,167 18,154 91,249 53,783
----------- ----------- ----------- -----------
Total Cost of Revenues 20,842,720 20,231,547 68,136,049 57,976,179
----------- ----------- ----------- -----------
Gross Profit:
Procurement services 1,962,088 1,840,156 6,159,086 6,166,547
Service and consulting 1,874,923 440,986 4,616,599 2,366,933
Geothermal (13,267) 27,199 49,624 73,922
----------- ----------- ----------- -----------
Total Gross Profit 3,823,744 2,308,341 10,825,309 8,607,402
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and
administrative 3,350,077 3,016,008 9,934,891 9,020,806
Interest 75,333 59,359 247,885 106,926
----------- ----------- ----------- -----------
Total Operating Expenses 3,425,410 3,075,367 10,182,776 9,127,732
----------- ----------- ----------- -----------
Income (Loss) Before Income Tax
Expense 398,334 (767,026) 642,533 (520,330)
Income tax expense 78,008 -- 103,264 9,870
----------- ----------- ----------- -----------
Net Income (Loss) $ 320,326 $ (767,026) $ 539,269 $ (530,200)
=========== =========== =========== ===========
Net Income (Loss) Per Share Basic $ .04 $ (.11) $ .08 $ (.07)
Net Income (Loss) Per Share Diluted $ .04 $ (.11) $ .07 $ (.07)
Weighted Average Number Of
Shares Outstanding {Basic} 7,194,628 7,080,498 7,118,680 7,080,498
Weighted Average Number Of
Shares Outstanding {Diluted} 7,504,498 7,080,498 7,470,137 7,080,498
3
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended:
---------------------------
December 31, December 31,
2003 2002
------------ ------------
Cash Flows From Operating Activities
Net income (loss) for the nine months $ 539,269 ($530,200)
Adjustments to Reconcile Net Income To Net
Cash Used In Operating Activities
Depreciation and amortization 504,071 439,855
Impairment charges 223,858
Deferred income tax 106,876 9,870
Issuance of stock compensation 87,000 --
Changes In Operating Assets and Liabilities
Increase in receivables (4,505,974) (9,380,513)
Decrease (Increase) in inventories 1,106,455 (517,719)
Increase in prepaid expenses (11,426) (307,402)
Decrease in other assets 2,313 --
Increase in accounts payable 5,956,235 7,879,802
Decrease in customer deposits (298,127) (55,387)
(Decrease) Increase in accrued liabilities (32,373) 813,768
(Decrease) Increase in deferred revenue (413,067) 1,080,610
----------- -----------
Net Cash Provided By (Used In)
Operating Activities 3,265,110 (567,316)
----------- -----------
Cash Flows From Investing Activities
Purchases of equipment (82,369) (978,185)
Additional investment in Geothermal Unit -- (20,956)
Purchase of other assets -- (3,639)
----------- -----------
Net Cash Used In Investing Activities (82,369) (1,002,780)
----------- -----------
Cash Flows From Financing Activities
Net (decrease) increase in line of credit (4,783,935) 326,483
Decrease in due to related parties -- (19,000)
----------- -----------
Net Cash (Used In) Provided By
Financing Activities (4,783,935) 307,483
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,601,194) (1,262,613)
Beginning Cash and Cash Equivalents 1,792,101 1,552,666
----------- -----------
Ending Cash and Cash Equivalents $ 190,907 $ 290,053
=========== ===========
4
The accompanying notes are integral parts of these consolidated
financial statements.
EMTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and note
disclosures required by generally accepted accounting principles in the United
States. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Quarterly results are not necessarily indicative of results for the
full year. For further information, refer to the annual financial statements and
notes thereto included in the Company's Form 10-K for the year ended March 31,
2003.
2. 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 provided as if the Company
had accounted for employee stock options under the fair value method of this
statement, including disclosing pro forma information regarding net income
(loss) and earnings (loss) per share. The Company accounts for stock-based
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," as permitted by SFAS No. 123. Compensation expense for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount the employee must pay
to acquire the stock. No compensation cost has been recognized for any option
grants in the accompanying consolidated statements of operations since the price
of the options was set at the quoted market price of Company stock at dates of
grant. The weighted average fair value of all of the employee options was
estimated on the date of grant using the Black-Scholes model. Had the Company
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation, the Company's net income (loss) and basic and diluted earnings
(loss) per share would have been changed from the "as reported" amounts to the
"pro forma" amounts as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
Pro Forma:
2003 2002 2003 2002
-------- --------- -------- ---------
Net Income (Loss) $319,426 $(774,946) $536,566 $(556,840)
Net Income (Loss) Per Share Basic $ .04 $ (.11) $ .08 $ (.08)
-------------------------------------------
Net Income (Loss) Per Share Diluted $ .04 $ (.11) $ .07 $ (.08)
-------------------------------------------
Option activity is summarized in the following table:
5
Options outstanding - October 1, 2003 451,428
Activity for the three months ended December 31, 2003:
Options granted --
Options exercised --
Options forfeited or expired 32,200
-------
Options outstanding - December 31, 2003 419,228
=======
3. Line of Credit
On November 21, 2001, the Company entered into a $10.0 million revolving
credit facility with Fleet Capital Corporation, formerly Summit Business Capital
Corporation ("Fleet") under which the Company may borrow on 85% of its eligible
trade receivables. Interest on outstanding loans under the revolving credit
facility with Fleet is charged monthly at a fluctuating rate per annum equal to
0.25% above the prime rate and, at 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 of the Company's customers. The maximum credit facility is
reduced by the outstanding letters of credit.
At December 31, 2003, the Company had a $3,419,355 outstanding balance
under the credit facility and unused line of $5,330,645.
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 is 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).
As of December 31, 2003 the Company is in compliance with all its financial
covenants.
6
4. 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 the following:
December 31, 2003 March 31, 2003
----------------- --------------
Trade Receivable $19,531,748 $14,793,971
Allowance for doubtful accounts (311,580) (240,847)
----------------- --------------
Trade Receivable, net $19,220,168 $14,553,124
----------------- --------------
5. Inventory
Inventories are stated at lower of cost (first-in, first-out) or market.
Cost is based on standard costs generated principally by the most recent
purchase price. The Company provides an inventory reserve for obsolescence and
deterioration based on management's review of product sales. Inventory is
recorded on the balance sheet net of allowances for inventory valuation of
$626,260 and $471,203 at December 31, 2003 and March 31, 2003, respectively.
6. 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 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.
7
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 an impairment test of these assets as of December 31, 2003.
The company compared its original projections of the future undiscounted cash
flows with actual performance, and reviewed its current sales pipeline. Based on
this impairment test performed as of December 31, 2003, the Company recorded an
impairment charge of 223,858 which was classified as general and administrative
expense during the three months ended December 31, 2003. The net book value of
this asset after impairment charges was $239,057. The company intends to perform
another impairment test in next 90 days at which point the company will
reevaluate additional impairment, if any.
7. Acquisitions
On August 31, 2002, the Company acquired all of the customer contracts and
certain assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The purchase
price will be paid over a two-year period and will be based on an earning share
derived from the customer contracts transferred from Turnkey to Emtec. Earnings
share for a given period shall mean 50% of earnings for that period, provided,
that, if for that period earnings is less than $120,000, then the earnings share
for that period shall be the earnings in excess of $60,000. 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.
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
=========
8. Major Customers
Two major customers accounted for approximately 38%, and 44% of the
Company's net sales for the three months ended December 31, 2003 and 2002,
respectively. The same two major customers accounted for approximated 48%,
8
and 53% of the Company's net sales for the nine months ended December 31, 2003
and 2002, respectively.
Another major customer purchased manufacturer support service contracts
from the Company. Net revenues associated with these contracts accounted for
approximately 20%, and 16% of the Company's gross profit for the three months
ended December 31, 2003 and 2002, respectively and for approximately 8%, and 11%
of the Company's gross profit for the nine months ended December 31, 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.
9. Segment Information
Summarized financial information relating to the Company's operating
segments are as follows:
For the three months ended December 31: 2003 2002
- --------------------------------------- ----------- -----------
Revenues
Information Technology $24,618,564 $22,494,535
Geothermal 47,900 45,353
----------- -----------
Total Revenues $24,666,464 $22,539,888
=========== ===========
Operating Profit/(Loss)
Information Technology $ 426,641 $ (783,042)
Geothermal (28,307) 16,016
----------- -----------
Net Segment Operating
Income/(Loss) $ 398,334 $ (767,026)
Income Tax Expense (78,008) __
----------- -----------
Net Income (Loss) $ 320,326 $ (767,026)
=========== ===========
9
For the nine months ended December 31: 2003 2002
- --------------------------------------- ----------- -----------
Revenues
Information Technology $78,820,485 $66,455,876
Geothermal 140,873 127,705
----------- -----------
Total Revenues $78,961,358 $66,583,581
=========== ===========
Operating Profit/(Loss)
Information Technology $ 635,737 $ (562,682)
Geothermal 6,816 42,352
----------- -----------
Net Segment Operating
Income $ 642,553 $ (520,330)
Income Tax Expense 103,264 9,870
----------- -----------
Net Income (Loss) $ 539,269 $ (530,200)
=========== ===========
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the unaudited financial statements,
including the notes thereto, appearing elsewhere in this quarterly report on
Form 10-Q.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The 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
sales of computer hardware and prepackaged software. Revenue from consulting and
support service contracts is recognized ratably over the contract or service
period. Revenues from manufacturer support service contracts where the
manufacturer is responsible for fulfilling the service requirements of the
customer are recognized immediately on their contract date. These contracts
contain cancellation privileges that allow our customer to terminate a contract
with 90 days written notice. In this event, the customer is entitled to a
pro-rated refund based on the remaining term of the contract and the
manufacturer would owe us a pro-rated refund of the cost of the contract.
However, we have experienced no customer cancellations of any significance
during our most recent 3-year history and do not expect cancellations of any
significance in the future. We believe that net revenue reporting for
manufacturer support service contracts is more appropriate. Thus starting the
fiscal year ended March 31, 2003, we have adopted net revenue reporting for
manufacturer support service contracts and to conform to the current
presentation, have reclassified contract costs from prior periods as an offset
to revenue.
11
o Trade Receivables
We maintain allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We base our
estimates on the aging of our accounts receivable balances and our historical
write-off experience, net of recoveries. If the financial condition of our
customers were to deteriorate, additional allowances may be required. We believe
the accounting estimate related to the allowance for doubtful accounts is a
"critical accounting estimate" because changes in it can significantly affect
net income.
o Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is based on standard costs generated principally by the most recent
purchase prices. We provide an inventory reserve for obsolescence and
deterioration based on management's review of the current status of the excess
inventory, its age, and net realizable value based upon assumptions about future
demand and market condition.
o Property and Equipment
We estimate the useful lives of property and equipment in order to
determine the amount of depreciation and amortization expense to be recorded
during any reporting period. The majority of our equipment is depreciated over
three years. The estimated useful lives are based on the historical experience
with similar assets as well as taking into account anticipated technological or
other changes. If technological changes were to occur more rapidly than
anticipated or in a different form than anticipated, the useful lives assigned
to these assets may need to be accelerated, resulting in the recognition of
increased depreciation and amortization expense in future periods. We evaluate
the recoverability of our long-lived assets (other than intangibles and deferred
tax assets) in accordance with Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"(SFAS No.
144). Long-lived assets are reviewed for impairment under SFAS No. 144 whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS No. 144 requires recognition of impairment of
long-lived assets in the event that the net book value of such assets exceeds
the future undiscounted net cash flows attributable to such assets. Impairment,
if any, is recognized in the period of identification to the extent the carrying
amount of an asset exceeds the fair value of such asset.
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. We compared our
original projections of the future undiscounted cash flows with actual
performance, and reviewed our current sales pipeline. Based on this impairment
test performed as of December 31, 2003, we recorded an impairment charge of
$223,858, which was classified as general and administrative expense during the
three months ended December 31, 2003. The net book value of these assets after
the
12
impairment charge was $239,057. We intend to perform another impairment test in
the next 90 days at which point we will reevaluate additional impairment, if
any.
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 in fiscal year ended
March 31, 2003. 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 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 $40,908 was expensed in the nine months ended December 31, 2003 based
upon the current contract term that ends at May 2004. The contract is subject to
annual renewals. The net carrying value for this contract amounted to $22,727 at
December 31, 2003.
o Income Taxes
Income taxes are accounted for under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in our financial
statements or tax returns. In estimating future tax consequences, we generally
consider all expected future events other than the enactment of changes in tax
laws or rates. A valuation allowance is recognized if, on weight of available
evidence, it is more likely than not that some portion or all the deferred tax
assets will not be realized. We continue to be conservative in accounting for
income taxes by recording significant valuation allowances for deferred tax
assets due to the high degree of uncertainty that exists regarding future
operating results.
Results of Operations
Three months ended December 31, 2003 Compared to Three months ended December 31,
2002.
Total Revenues
Total revenues for our IT business, which includes services and consulting
revenue, and procurement revenues, increased by 9.44% or $2.12 million, to
$24.62 million for the quarter ended December 31, 2003, compared to $22.49
million for the quarter ended December 31, 2002. This increase is primarily
attributable to increase in our services and consulting revenues as well as
procurement revenues from our commercial customers during this quarter.
13
Services and consulting revenue increased by 25.11%, or $1.00 million, to
$4.97 million for the quarter ended December 31, 2003 compared to $3.97 million
for the quarter ended December 31, 2002. This increase is mainly attributable to
over all increase in our installation services associated with computer roll-out
projects for the various state agencies in the State of New Jersey, school
district in Georgia, as well as an increase in our manufacturers' support
services contract revenues. The increase in manufacturers' support services
contracts revenue is mainly attributable to a sale of a third year's annual
maintenance contract to one customer. Net revenue associated with this sale
increased by approximately $410,000 for the quarter ended December 31, 2003.
Procurement revenues also increased by 6.08%, or $1.13 million, to $19.65
million for the quarter ended December 31, 2003. This increase is mainly
attributable to increased IT spending in our commercial customer base compared
with prior comparable period.
Geothermal Revenues of $47,900 for the three months ended December 31, 2003
are consistent with the revenues for comparable previous periods.
Gross Profit
Our aggregate gross profit for IT business increased by 68.21%, or $1.56
million, to $3.84 million for the quarter ended December 31, 2003. This increase
is mainly attributable to a 25.11% increase in our services and consulting
revenues. Measured as a percentage of our total revenues for IT business, our
overall gross profit margin also increased to 15.59% of total revenues for the
quarter ended December 31, 2003 from 10.14% for the quarter ended December 31,
2002. This increase is also attributable to an increase in our services and
consulting revenues.
Gross profit for product sales increased by 6.63%, or $121,932, to $1.96
million for the quarter ended December 31, 2003 as compared with $1.84 million
for the quarter ended December 31, 2002. Also, measured as a percentage of
procurement revenues, our gross profit margin slightly increased to 9.99% of
procurement revenue for the quarter ended December 31, 2003 from 9.93% for the
quarter ended December 31, 2002. Both of these increases are mainly attributable
to increase in our procurement revenues.
Gross profit for service and consulting increased by 325.17%, or $1.43
million, to $1.87 million for the quarter ended December 31, 2003 as compared
with $440,986 for the quarter ended December 31, 2002. Measured as a percentage
of services and consulting revenues, our gross margin attributable to services
and consulting revenue also increased to 37.73% of services and consulting
revenue for the quarter ended December 31, 2003 from 11.10% for the quarter
ended December 31, 2002. These increases are mainly attributable to higher
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 during this quarter as well as increase in our manufacturers
support services contract revenues. The increase in manufacturers' support
services contracts revenue is mainly attributable to a sale of a third year's
annual maintenance contract to one customer. Net revenue associated with this
sale increased by approximately $410,000 for the quarter ended December 31,
2003.
14
The geothermal gross profit decreased by 148.78%, or $40,466. to $(13,267)
for the quarter ended December 31, 2003 compared with $27,199 for the quarter
ended December 31, 2002. This is mainly due to approximately $40,000 higher
operating and maintenance expense associated with the geothermal unit. 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 11.08%, or
$334,068, to $3.35 million for the three months ended December 31, 2003 as
compared with $3.02 million for the three months ended December 31, 2002. This
increase is primarily a result of the following: 1) approximately $200,000
increase in commission expense due to increased gross profits during the
quarter, 2) $90,000 increase due to accrual of potential bonus payout associated
with increased earnings before interest, taxes, depreciation and
amortization("EBITDA"), of our government division for this period, 3) $223,000
increase is due to impairment charges incurred during this quarter based on the
impairment test performed for the investment made in our Network Operations
Center.
Interest expense
Interest expense increased by 26.91%, or $15,974, to $75,333 for the
quarter ended December 31, 2003 as compared with $59,359 for the quarter ended
December 31, 2002. This increase is mainly due to a higher interest rate charged
by our lender starting this quarter than prior quarters.
Income Taxes
Income tax expense for the three months ended December 31, 2003 was
$78,008, as compared with an expense of $0 for the three months ended December
31, 2002.
Net Income
For the three months ended December 31, 2003, net income was $320,326
compared to net loss of $(767,026) for the comparable period in 2002, an
increase of 141.76%.
As discussed, the increase in net income is mainly attributable to
increased services and consulting revenues as well as gross profit associated
with it.
Nine months ended December 31, 2003 Compared to Nine months ended December 31,
2002.
Total Revenues
Total revenues for our IT business, which includes services and consulting
revenue, and procurement revenues, increased by 18.61% or $12.36 million, to
$78.82 million for the nine months ended December 31, 2003, compared to $66.46
million for the nine months ended December 31, 2002. This increase is primarily
attributable to acquisitions of Acentra Technologies, Inc. in August 2002 and
Turnkey Computer Systems, Inc. in August 2002. IT revenue associated with these
acquisitions equaled $17.81 million for the nine months ended December 31, 2003.
Without these acquisitions, revenues associated with our IT business would
15
have decreased by 8.19% or $5.45 million for the nine months ended December 31,
2003. This decrease is mainly due to an over all decrease in our customers' IT
spending and a slow-down in the economy.
Services and consulting revenue increased by 20.64%, or $2.31 million, to
$13.53 million for the nine months ended December 31, 2003 compared to $11.22
million for the nine months ended December 31, 2002. This increase is also
attributable to acquisitions of Acentra Technologies Inc., and Turnkey Computer
Systems, Inc. Services and consulting revenue associated with these acquisitions
aggregated $3.55 million for the nine months ended December 31, 2003. Without
these acquisitions, services and consulting revenue would have decreased by
11.00% or $1.23 million, to $9.98 million for the nine months ended December 31,
2003. This decrease is mainly due to an over all decrease in our customers IT
spending and a slow-down in the economy.
Procurement revenues also increased by 18.19%, or $10.05 million, to $65.29
million for the nine months ended December 31, 2003. This increase is the net
result of the acquisitions of Acentra Technologies, Inc. and Turnkey Computer
Systems, Inc. of approximately $14.26 million recorded in for the nine months
ended December 31, 2003. Without these acquisitions, procurement revenue would
have decreased by 7.62%, or $4.21 million for the nine months ended December 31,
2003. This decrease is also mainly due to reasons mentioned above regarding
total IT revenues.
Geothermal Revenues increased by 10.31%, or $13,168 to $140,873 for the
nine months ended December 31, 2003. This increase is mainly attributable to
higher production of steam during this period.
Gross Profit
Our aggregate gross profit for IT business increased by 26.28%, or $2.24
million, to $10.77 million for the nine months ended December 31, 2003. This
increase is mainly attributable to 20.64% increase in our services and
consulting revenues. Measured as a percentage of our total revenues for IT
business, our overall gross profit margin also increased to 13.67% of total
revenues for the nine months ended December 31, 2003 from 12.84% for the nine
months ended December 31, 2002. This increase is also mainly attributable to
increase in our services and consulting revenues.
Gross profit for product sales slightly decreased by 0.12%, or $7,461, to
$6.16 million for the nine months ended December 31, 2003 as compared with $6.17
million for the nine months ended December 31, 2002. Also, measured as a
percentage of procurement revenues, our gross profit margin also decreased to
9.43% of procurement revenue for the nine months ended December 31, 2003 from
11.16% for the nine months ended December 31, 2002. This decrease is mainly due
to continued downward pricing pressure on product sales.
Gross profit for service and consulting increased by 95.05%, or $2.25
million, to $4.62 million for the nine months ended December 31, 2003 as
compared with $2.37 million for the nine months ended December 31, 2002. This
increase is mainly attributable to a 20.64% increase in services and consulting
revenues. Measured as a percentage of services and consulting
16
revenues, our gross margin attributable to services and consulting revenue
increased to 34.11% of services and consulting revenue for the nine months ended
December 31, 2003 from 21.10% for the nine months ended December 31, 2002. This
increase is attributable to higher 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 during this period.
The geothermal gross profit of $49,624 for the nine months ended December
31, 2003 decreased by 32.87%, or $24,298 for the nine months ended December 31,
2003 as compared with $73,922 for the nine months ended December 31, 2002. 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.
Sales, General, and Administrative Expenses
Sales, general and administrative expenses increased by 10.13%, or
$914,085, to $9.93 million for the nine months ended December 31, 2003. Absent
the acquisitions of Acentra Technologies, Inc. and Turnkey Computer Systems,
Inc., our sales, general and administrative expenses would have decreased by
approximately 11.41 %, or $1.03 million, to $7.99 million for the nine months
ended December 31, 2003 compared with $9.02 million for the nine months ended
December 31, 2002. This decrease is mainly attributable to the following:
1. Elimination of non-productive sales staff.
2. Reduction in sales commission compensation plans. and
3. Eliminated duplication of non-essential administrative support
services.
Interest expense
Interest expense increased by 131.83%, or $140,959, to $247,885 for the
nine months ended December 31, 2003 as compared with $106,926 for the nine
months ended December 31, 2002. This increase is mainly due to a higher balance
on our line of credit, higher day's sales outstanding during the period as well
as higher interest rate charged by our lender starting October 2003.
Income Taxes
Income tax expense for the nine months ended December 31, 2003 was
$103,264. For the nine months ended December 31, 2003, we recognized a deferred
income tax expense of $109,884 that is partially offset by an income tax refund
of $6,620.
Net Income
For the nine months ended December 31, 2003, net income was $539,269
compared to net loss of $(530,200) for the comparable period in 2002, an
increase of 201.71%.
As discussed, the increase in net income is mainly attributable to
increased services and consulting revenues as well as gross profit associated
with such increases.
17
References in this 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 Quarterly
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Quarterly Report, we
state our beliefs of future events and of our future financial performance. In
some cases, you can identify those so-called "forward-looking statements" by
words such as "may," "will," "should," expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of those words and other comparable words. You should be aware that those
statements are only our predictions. Actual events or results may differ
materially. In evaluating those statements, you should specifically consider
various factors, including the risks discussed in this Annual Report for the
year ended March 31, 2003 and other reports or documents that we file from time
to time with the SEC. Those factors may cause our actual results to differ
materially from any of our forward-looking statements. All forward-looking
statements attributable to us or a person acting on our behalf are expressly
qualified in their entirety by this cautionary statement.
Assumptions relating to budgeting, marketing, and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our marketing, capital
expenditure, or other budgets, which may in turn affect our business, financial
position, results of operations, and cash flows.
Factors That May Affect Future Results
Our future operating results may be affected by a number of factors,
including uncertainties relative to national economic conditions, especially as
such factors affect interest rates, business insurance industry factors, our
ability to successfully increase business, and effectively manage expense
margins.
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. We are in compliance with the covenants
contained in our loan and security agreement at December 31, 2003. Although we
expect to remain in compliance with the financial covenants, no assurance can be
given.
We must continue to effectively manage expenses in relation to revenues by
directing new business development towards markets that complement or improve
our existing service lines. Management must also continue to emphasize operating
efficiencies through cost containment strategies, reengineering efforts, and
improved service delivery techniques. The most significant cost relating to the
services component of our business is personnel expense, which consists of
salaries, benefits, and payroll related expenses. Thus, the financial
performance of our service business is based primarily upon billing margins
(billable hourly rates less the costs to us of service personnel on an hourly
basis) and utilization rates (billable
18
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.
Emtec is a system integrator focused on providing technology solutions that
enables our customers to effectively use and manage their data to grow their
business. Our areas of specialization in IT services include remote network
monitoring, help desk, network design, enterprise backup and storage
consolidation, and network security. While we have offered IT services to our
customers since 1983, our major emphasis on IT consulting and services began in
1995. We also started focusing on our new managed services and network security
during the fiscal year 2002. We have invested approximately $700,000 for the
purchase of computer hardware, software, and consulting services for our Network
Operations Center to enhance our offerings in Managed Services. Currently our
recurring managed services revenues equal approximately $35,000 a month. We have
limited experience in developing, marketing, or providing these services. We
cannot assure that we will be able to successfully market such services to
either new or existing customers, that our services will achieve market
acceptance, or that we will be able to effectively hire, integrate, and manage
additional technical personnel to enable us to perform these services to our
customers' expectations This industry has been characterized by rapid
technological advances that have resulted in frequent introductions of new
products, product enhancements and aggressive pricing practices, which also
impacts pricing of service activities. Our operating results could be adversely
affected by industry-wide pricing pressures, the ability to recruit, train and
retain personnel integral to our operations and the presence of competitors with
greater financial and other resources. Also, our operating results could also be
adversely impacted should our company be unable to effectively achieve the
revenue growth necessary to provide profitable operating margins in various
operations. Our plan for growth includes marketing efforts, acquisitions that
expand market share. There can be no assurances these efforts will be
successful, or if successful the timing thereof.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2003 of $190,907 represented a
decrease of $1,601,194 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.
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"). Our Fleet revolving credit
facility is collateralized by a lien upon and security interest in substantially
all of our assets. As our current credit facilities with two of our primary
trade vendors, GE Access and Ingram Micro, were also collateralized by
substantially all of our assets, we, Fleet, GE Access and Ingram Micro, have
entered into intercreditor agreements, which provide that as regards to these
vendors, our obligations to Fleet are accorded priority. On November 21, 2001,
19
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 Vandergrand Properties Co., L.P., 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.
At December 31, 2003, the Company had a $3,419,355 outstanding balance
under the credit facility and unused line of $5,330,645.
On October 17, 2003, the Company and Fleet executed an amendment to the
loan and security agreement under which the Company may borrow on 80% of its
eligible trade receivables up to $10 million through November 20, 2004. Interest
on outstanding loans is charged monthly at a fluctuating rate per annum equal to
2.00% above the prime rate. Prior to October 17, 2003, the Company was charged
monthly at a fluctuating rate per annum equal to 0.25% above the prime rate. The
Company 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 the Company to
maintain a maximum leverage ratio, a minimum debt ratio, and a minimum EBITDA.
As of December 31, 2003 the Company was in compliance with all its financial
covenants.
The following section lists and quantifies our compliance with our
financial covenants with Fleet.
Leverage Ratio. Borrower will not permit the Leverage Ratio to exceed:
11.0:1.0 as of December 31, 2003, then no greater than 9.0 : 1.0 thereafter on a
quarterly basis.
Debt Service Coverage Ratio. Borrower will not permit the Debt Service
Coverage Ratio to be less than: (A) .90:1.00 as of September 30, 2003, or (B)
2.0:1.0 as of the end of any fiscal quarter from and after December 31, 2003.
Minimum EBITDA. Borrower's actual EBITDA must be no less than the following
amount as of the end of the months set forth below:
Month Ending Projected Required
- ------------ --------- ---------
August 31, 2003 ($67,671) ($74,438)
September 30, 2003 ($182,593) ($200,852)
October 31, 2003 ($93,743) ($103,117)
20
Borrower's actual EBITDA must be at least the following amount as of the
end of the months set forth below:
Month Ending Projected Required
- ------------ --------- --------
November 30, 2003 $194,091 $174,682
December 31, 2003 $562,877 $506,589
January 31, 2004 $131,979 $118,781
February 29, 2004 $210,034 $189,031
March 31, 2004 $137,276 $123,548
provided however that, in the event Borrower's EBITDA in any month exceeds the
Projected EBITDA set forth above for such month such excess shall be added to
the actual EBITDA for the succeeding months through March 2004 for the purposes
of determining compliance with this covenant. However, should EBITDA in any
month fall short of the projected EBITDA that amount shall be deducted from any
carryover surplus EBITDA accrued in previous months.
- -----------------------------------------------------------------------
Actual As of
Covenants Required 12/31/2003
- -----------------------------------------------------------------------
Leverage Ratio Not to exceed 11 : 1 9.16 : 1.0
- -----------------------------------------------------------------------
Debt Service Coverage Ratio Not to be less than 2 : 1 6.95 : 1.0
- -----------------------------------------------------------------------
EBITDA - Not to be less than August 2003 $(74,438) $28,265
September 2003 $(200,852) $(94,395)
October 2003 $(103,117) $(157,372)
November 2003 $174,682 $210,304
December 2003 $506,589 $739,486
- -----------------------------------------------------------------------
At December 31, 2003, our credit facilities with our primary trade vendors,
GE Access, Ingram Micro, and Tech Data were as follows: 1) Our credit Line with
GE Access was approximately $10.0 million, no interest charged, with an
outstanding principal balance of $9.12 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 $2.46 million. 3) Our
credit line with Tech Data was $2.0 million, no interest charged, with an
outstanding balance
21
of $337,239. Under these credit lines, we are obligated to pay each invoice
within 30 days from the date of such invoice.
Capital expenditures of $82,369 during nine months ended December 31, 2003,
were primarily for the purchase of computer equipment for internal use and
leasehold improvements.
Emtec has no arrangements or other relationships with unconsolidated
entities or other persons that are reasonably likely to materially affect
liquidity or the availability of or requirements for capital resources.
We believe that our available funds, together with existing and anticipated
credit facilities, as discussed above, will be adequate to satisfy our current
and planned operations for at least next twelve months.
Recently Issued Accounting Standards
In June 2001, the FASB issued two new statements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other intangible Assets."
Effective April 1, 2002, Emtec adopted SFAS No. 141 that requires business
combinations entered into after June 30, 2001 to be accounted for using the
purchase method of accounting. Specifically identifiable intangible assets,
other than goodwill, are to be amortized over their estimated useful economic
life.
SFAS No. 142 requires that goodwill not be amortized, but should be tested
for impairment at least annually. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 and applies to goodwill and other intangible
assets, regardless of when those assets were initially recognized. Effective
April 1, 2002, Emtec adopted SFAS No. 142 and in connection with its adoption,
discontinued the amortization of goodwill and reviewed the estimated useful
lives of previously recorded identifiable intangible assets. Emtec follows the
two-step process prescribed in SFAS 142 to test its goodwill for impairment. The
first step is a screen for potential impairment, while the second step measures
the amount of the impairment, if any. Under the guidelines of SFAS No. 142,
Emtec is required to perform an impairment test at least on an annual basis.
Emtec performed its initial goodwill impairment test as of April 1, 2002 and
another impairment test as of March 31, 2003. Based on the impairment test
performed on March 31, 2003 the goodwill of $254,894 associated with the
acquisitions of Devise Associates, Inc. was impaired.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of SFAS 121
for (I) recognition/measurement of impairment of long-lived assets to be held
and used and (II) measurement of long-lived assets to be disposed of by sale.
SFAS 144 also supersedes the accounting and reporting provisions of Accounting
Principles Board's No. 30 ("APB 30"). "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, "for segments of a
business to be disposed of but retains
22
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.
23
Item 3. Quantitative and Qualitative Information About Market Risk
We do not engage in trading market risk sensitive instruments and do not
purchase hedging instruments or "other than trading" instruments that are likely
to expose us to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. We have issued no debt instruments,
entered into no forward or future contracts, purchased no options and entered
into no swaps. Our primary market risk exposures are those of interest rate
fluctuations. A change in interest rates would affect the rate at which we could
borrow funds under our revolving credit facility. Our balance on the line of
credit at December 31, 2003 was approximately $3.5 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 $35,000 annually.
24
Item 4. Controls and Procedures
Our management carried out an evaluation, with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of December 31, 2003. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote by Securities Holders
The Annual Meeting of Shareholders of the Company (the "Meeting") was
held on December 19, 2003. There were present at the Meeting in person or by
proxy shareholders holding an aggregate of 4,778,985 shares of Common Stock of a
total number of 7,080,498 shares of Common Stock issued, outstanding and
entitled to vote at the Meeting. The results of the vote taken at the Meeting
with respect to the nominee for director were as follows:
- ---------------------------------------------------------
Nominee For Withhold
- ---------------------------------------------------------
John P. Howlett (three years term) 4,778,105 880
- ---------------------------------------------------------
Ronald A. Seitz (three years term) 4,778,105 880
- ---------------------------------------------------------
George F. Raymond (one year term) 4,778,105 880
- ---------------------------------------------------------
26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31 - Rule 13a-14(a)/15-d-14(a) Certifications
Exhibit 32 Section 1350 Certifications
(b) Reports on Form 8-K filed during the quarter ended December 31, 2003:
None
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
EMTEC, INC.
By: /s/ JOHN P. HOWLETT
-----------------------------------
John P. Howlett
Chairman, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ SAM BHATT
-----------------------------------
Sam Bhatt
Vice President - Finance
(Principal Financial and
Accounting Officer)
Date: February 17, 2004
28
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'