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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
EMTEC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 2-54020 87-0273300
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) Number) Identification No.)
817 East Gate Drive
Mount Laurel, New Jersey 08054
(Address of principal executive offices)
Registrant's telephone number: (856) 235-2121
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Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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Item 1. Business
We are an e-Business and information technology ("IT") solutions
provider that structures and implements complex, highly integrated systems that
enable our customers to exchange information with their partners and customers
in a purely digital format, making them more efficient and effective and thereby
affording them a competitive advantage. We also offer our clients a variety of
IT services ranging from basic product support to complex network and
applications design. Our e-Business services include, among others, web
enablement, consulting, application development, and information security. Our
customers are primarily Fortune 2000 and other large and mid-sized companies
located principally in the Mid-Atlantic and Southeastern United States, with
annual revenues ranging from $50.0 million to $500.0 million. We service our
customer base from leased facilities in New Jersey, Connecticut, Georgia, and
South Carolina.
Historically, the most significant portion of our revenues has been
derived from our activities as a reseller of IT products such as workstations,
servers, microcomputers, applications software and networking and communications
equipment. However, as we are actively endeavoring to transition our business
from that of a reseller to an e-Business and IT solutions provider, we
anticipate that an increasing percentage of our future revenues will be derived
from the IT solutions component of our business.
Prior to January 17, 2001, we were engaged in the oil and gas
exploration and development business under the name American Geological
Enterprises, Inc. On that date, we completed a merger with Emtec, Inc., a
privately held New Jersey corporation ("Emtec-NJ"), which since 1980 had been
engaged in the business of providing IT products and services to the computer
industry. As a consequence of this merger, Emtec's executive officers replaced
our executive officers; its designees assumed majority control of our board of
directors; its shareholders and others collectively acquired approximately 81.8%
of our outstanding equity; and we changed our name to "Emtec, Inc."
Our executive offices are located at 817 East Gate Drive, Mount Laurel,
New Jersey; telephone: (856) 235-2121. Our website is located at
www.emtecinc.com. The information on our website is not part of this
registration statement.
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, e-Business
consulting, e-Business application development, 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 structure have led to both consolidations and business failures among
resellers. Manufacturers have shifted from exclusive distribution partners to
"open sourcing" and some have begun direct selling efforts with a view to
capturing market share from resellers.
At the same time that the market for IT products is consolidating, the
market for IT services and, in particular, for e-Business 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 solutions continues to grow more complex.
Organizations are continually faced with technology obsolescence and must design
new networks and 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:
o Capitalizing on Existing Relationships
We are striving to grow the e-Business solutions and e-Business
infrastructure components of our business, predicated upon our ability to
successfully cultivate our long-term relationships with both our client base and
with manufacturers of IT products. We have strong ties with Sun, IBM, and CISCO,
as well as relationships with key industry participants such as Microsoft,
Novell, Veritas, Citrix, Compaq, HP, and others. Moreover, we believe that our
history of satisfying our larger clients' IT product requirements will
facilitate our efforts to successfully market our broad range of e-Business
services to this particular segment of our client base.
o Developing New Relationships
We will focus on directing new prospects to our web site, as well as
encouraging their use of our strategy workshops and e-Business innovation
centers.
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o Promoting New Products
In the last several years, we have cultivated an internal application
development practice that has yielded several product offerings, the most
significant of which focuses on sales force automation. Our sales force
automation system, which goes well beyond traditional sales prospect management,
encompasses a number of alternative strategies for lead and prospect
development, as well as a means of tracking sales progress according to specific
selling processes and methodologies. This software package, which we utilize as
part of our own sales and marketing strategy, is marketed to our clients as
well. We intend to enhance promotional efforts for this new product and others
in the coming years.
o Pursuing Strategic Acquisitions
We will seek 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 synergistic acquisitions. We intend to focus on
companies with management teams that are willing to commit to their continued
long-term participation in our growth, in the following candidate categories:
o Sun Microsystems resellers that possess solution-oriented sales
staffs and certified engineers;
o e-Business consultants that complement our existing e-Business
infrastructure; and
o Companies that specialize in, or have broad experience with,
Oracle database development.
Our Business
o e-Business and IT Services
o Web Self-Service Solutions
Many businesses are seeking ways to improve client
communication, to provide access to account, shipping, and order information,
and generally to manage their client relationships more efficiently in "real
time". We help structure web enabling front-end systems and company "frequently
asked questions" libraries, providing productive ways to expand a client's
business and service its clients. We also structure web enabling for back-end
legacy systems that afford access by authorized employees, clients, and
suppliers to order entry, account, and shipping status.
o Business Relationship Management
The rapid creation and sometimes equally rapid disappearance
of e-marketplaces or other business to business resources require that
organizations find ways to quickly develop
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new online relationships that can help them achieve their business objectives.
Our business relationship management solutions provide clients with a business
partner integration platform that streamlines and simplifies connectivity and
integration with trading partners and any trading exchanges (e-marketplaces or
e-hubs) within a given industry. Based on an open data model, it extends the
enterprise by sharing data, both inside and outside the enterprise, with key
suppliers, manufacturers, and clients.
o Data Management
The emergence of e-Business, combined with the introduction of
data-intensive technologies such as multimedia and data warehousing, has
resulted in an explosive growth of information to manage within an enterprise.
Management of this information is essential to the success of the enterprise. We
help manage and protect our clients' critical data by offering options to store
and manage data; creating tailored backup solutions to preserve data in the
event of system failure; designing highly available systems that protect against
lost productivity, delivery times, and profitability that occur when a company's
IT resources fail; and building a strategic resource that includes an entity's
full computer infrastructure from server to desktop and backup and storage,
which simplifies management of complex computing environments, while ensuring
consistently high levels of service to end users.
o E-Infrastructure Architecture
Configuration management is a process applied over the life
cycle of any product that provides visibility and control of a product's
functional, performance, and physical attributes. We offer configuration
management solutions to assure that a product performs as intended, and its
physical configuration is adequately identified and documented to a level of
detail sufficient to repeatedly produce the product and meet anticipated needs
for operation, maintenance, repair, and replacement.
If revisions to systems are not tracked, the benefits of
having a documented configuration management system diminish over time. The
tracking and management of revisions are an integral part of maintaining an
accurate database of configurations. We help clients implement processes to
manage revisions made to systems and help manage the loading of patches and
updates, from testing through to installation. Security concerns are also a
vital component of infrastructure architecture. Design and implementation of
systems require authentication and authorization services for users and the
construction of network firewalls.
o Information Appliance Solutions
System architecture has evolved over time from mainframes to
client/server models. "Thin Client" architecture is a new approach that removes
everything from the desktop except the physical components a user needs --
keyboard, mouse, a display, and audio input and output. All of the computing is
performed on centralized shared servers. We utilize thin client technology in
developing solutions for our clients and provide maintenance and upgrade
services for such technology. Use of thin client technology decreases
acquisition and maintenance costs for clients implementing it, as all
installation and maintenance is completed at the server level rather than at
individual workstations.
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We offer our clients network design and implementation services that
facilitate the development of detailed network specifications and implementation
tactics. We work with our clients to produce design documentation for the
physical, logical, and operational network infrastructures. When producing this
documentation, we consider how the new technology will integrate existing
hardware and software and how it will be managed on an ongoing basis.
o Lifecycle Management Services
Our lifecycle management services are designed to provide clients 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 clients;
o Consultation with clients to identify the right IT products and
services for their needs;
o Leveraging our extensive vendor relationships to quickly source
the right combination of products;
o Providing logistical support needed to deploy a major technology
roll out;
o Offering financial support to reduce the overall operating cost
of maintaining current technology through a private label lease
program; and
o Providing continuous support to enable a client to improve
end-user satisfaction, minimize downtime, and lower the total
cost of ownership.
o e-Business Solution Development
In fiscal 2000, we initiated an effort to develop e-Business
applications. To date, we have:
o Developed two human resources web self-service solutions for
clients; and
o Developed a proprietary application for automating and enhancing
the front-end sales process.
Our proprietary application has been sold to one client and is being
branded and packaged for sales to others. We expect to offer it both for
internal deployment by clients and for remote deployment by means of our own
application hosting services.
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We have also developed proprietary software applications to be used in
conjunction with configuration management (cataloguing a product's attributes
and performance so as to optimize operational life) and disaster recovery
(recovering data in the event of system malfunction or failure) of large
enterprise servers. Presently, we are incorporating these applications into our
configuration management of large enterprise servers and are developing
enhancements that will permit their deployment directly over the web to a client
location.
Our e-Business and IT services activities accounted for approximately
15.45%, 13.42% and 10.74% of our total revenues for the nine months ended
December 31, 2000 and fiscal years 2000 and 1999, respectively.
o IT Reseller
We are an authorized reseller of the products of many leading IT
manufacturers, such as 3Com, CISCO, Compaq, HP, IBM, Intel, Microsoft, NEC,
Veritas, Novell, 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 Ingram Micro, Inc. and Tech Data
Corp. to enable us to acquire IT products at competitive prices and on
reasonable terms for resale to our clients.
Through our alliances with Ingram and Tech Data, 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 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, thereby enabling our sales team to schedule shipments more accurately
and to provide electronically-generated client price lists.
In particular, we rely upon products manufactured by Sun, which accounted
for 47%, 36% and 21% of our computer products acquired for resale in the nine
months ended December 31, 2000 and fiscal years 2000 and 1999, respectively.
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 Ingram and Tech Data, who
collectively supplied approximately 80%, 43% and 22% of our resale products in
the nine months ended December 31, 2000 and fiscal years 2000 and 1999,
respectively, may be terminated by such companies at any time upon prior written
notice ranging from 30 to 90 days.
We may receive manufacturer rebates resulting from 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. Both of our
primary vendors limit price protection to that provided by the
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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 product 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 84.55%, 86.58% and
89.26% of our total revenues for the nine months ended December 31, 2000 and
fiscal years ended 2000 and 1999, respectively.
o Consulting Services
o Strategy Workshops
We conduct e-strategy workshops to help our clients determine where to
start and what to build. Participation enables our clients to evaluate critical
business processes and organizational structures. It also helps them to define
their e-Business objectives and then translate them into a roadmap for
implementation.
In these workshops, we examine organizational or project goals, target
clients, marketplace, competitive environment, and a variety of other factors to
identify the best opportunities for the client, and we then create a plan for
developing the best solution. We benchmark best practices across industries to
help leverage what others have already successfully implemented. Competitors'
e-Business efforts are also examined for a strategic comparison. The strategy
can be used to mold ideas into manageable projects that can be implemented
immediately. Finally, opportunities are prioritized, a program plan and business
case are created, and a roadmap is set-up to move forward with definition,
design, and implementation.
o e-Business Innovation Centers
We have developed e-Business innovation centers at our Norcross,
Georgia and northern New Jersey locations. These facilities offer our clients
the ability to test the scalability and suitability of a hardware and software
configuration before investing in the technology. Equipped with high-end Sun TM
servers, Sun Ray TM thin clients, Sun TM storage arrays, and 600MHz
eight-processor NT servers, as well as a wide array of software applications
including Lotus Notes/Domino, Cognos Business Intelligence software, IBM's DB2
product family, WebSphere Application Server, and Commerce Suite, and staffed by
high-level certified engineers, each e-Business innovation center can simulate
up to a 2,000-user load, including a complete e-Business framework from the
end-user to the back-office system.
o Other Services
o K-12 Specialized Solutions for Student and Faculty Needs
We integrate top-quality curriculum software and computer products into
the classroom. We have significant experience in building local area networks
that link many campuses together. We also provide district-wide support and
sustain Internet access to
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educational resources worldwide. We tailor our array of services to make the
best use of limited funds.
Marketing
Our marketing efforts are focused on:
o Broadening our public image as an e-Business and IT service provider;
o Promoting our new e-Business and e-Infrastructure offerings to
current clients, prospects, partners, and investors;
o Maintaining a constant flow of marketing communications to increase
and maintain our market presence;
o Driving prospects to our web site; and
o Increasing overall inquiries and sales from all sources.
Our business development center is charged with sales lead generation.
We have developed a computer-based process by which a series of letters or
e-mails are sent to a prospective customer to provide initial information about
us before a sales call is made. The system executes strategies automatically and
prompts the sales representative when action is required. Because its
fundamental concept is to create multiple and frequent "touches" of the prospect
through letters, faxes, e-mails, and phone calls, multiple and frequent contacts
of prospective clients will be the basis of our marketing efforts. This process
will be supplemented with seminars and solutions-oriented direct mail.
We have developed two proprietary software programs that track the
success of a number of our sales and marketing programs. One software package
manages the business development center process, while the other tracks the
progress of sales engagements ensuring that the correct process is followed.
These software packages are not only utilized as part of our sales and marketing
strategy, but are also marketed to our clients as well.
Customers
Our targeted client base is companies with sales revenues of between
$50.0 and $500.0 million. Although we have approximately 150 clients, our two
largest clients, Gwinnett County School System (Georgia) and Bell South,
accounted for approximately 11.23% and 8.02% of our revenues for the nine months
ended December 31, 2000, respectively. These same two customers accounted for
approximately 16.88% and 16.80% of our revenues in fiscal year 2000 and for
approximately 24.08% and 8.60% of our revenues in fiscal year 1999,
respectively. An additional eight customers, Instinet Corporation, Educational
Testing Service, Tiffany & Co., Atlanta Newspapers, MBNA, Bally's Park Place
Casinos, Matsushita Electric Corporation, and Pershing (a division of Donaldson
Lufkin & Jenrette), collectively accounted for 37.13%, 24.86% and 19.68% of our
revenues for the nine months ended December 31, 2000 and fiscal years 2000 and
1999, respectively.
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Intellectual Property
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect our
proprietary rights and the proprietary rights of third parties from whom we
license intellectual property. We enter into confidentiality agreements with our
employees and limit distribution of proprietary information.
Our business also includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to our client.
Competition
The IT services industry is highly competitive. Our competitors
include:
o established computer product manufacturers (some of which
supply products to us);
o distributors;
o computer resellers;
o systems integrators; and
o other IT service providers.
Many computer product manufacturers also sell to clients 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. Such competitors could also attempt to increase their
presence in our markets by forming strategic alliances with our other
competitors or with our clients, offering new or improved products and services
to our clients or increasing their efforts to gain and retain market share
through competitive pricing. We have no ongoing written commitments by clients
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 run the gamut from new dot com consulting
companies to the established consulting arms of nationwide accounting and
auditing firms. Several of these competitors offer most of the same basic
products as we do. We also encounter competition from microcomputer suppliers
that sell their products through direct sales forces, rather than through
resellers such as ourselves, and from manufacturers and distributors that
emphasize mail order and telemarketing sales techniques.
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The tri-state metropolitan Connecticut, New Jersey, and New York area
and parts of New England, which, on a revenue basis, accounted for 64.5%, 49.5%,
and 43.6% of our revenues during the nine months ended December 31, 2000 and
fiscal 2000 and 1999, respectively, are particularly characterized by highly
discounted pricing on microcomputer products from various sources.
Depending on the client, 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 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.
Our near term strategy is to leverage the areas in which we hold a
competitive advantage. We believe that our primary areas of competitive
advantage are our:
o long-term relationships with significant industry
participants;
o twenty years of general business experience deploying and
integrating back office solutions using traditional IT
platforms;
o sales processes that are unique in their degree of
management information, tracking, and control; and
o association with the Ingram Systems Group, approximating 60
computer resellers located throughout the U.S., through
which we are able to offer a broad range of services on a
nationwide and global basis.
Employees
As of May 10, 2001, we employed 164 individuals, including 34 sales,
marketing and related support personnel, 92 service and support employees, 27
operations and administration personnel, and 11 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. None of our employees
are represented by a labor union or are subject to a collective bargaining
agreement. We believe that our relations with our employees are good.
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Item 2. Financial Information
Selected Financial Data
YEAR ENDED MARCH 31
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2000 1999 1998 1997 1996
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Net revenues $100,752,490 $ 91,683,046 $ 77,273,483 $ 52,810,313 $ 34,315,828
Income from continuing $ 316,004 $ 971,468 $ 454,232 $ 30,836 $ 21,107
operations
Income per common share from $ 0.056 $ 0.170 $ 0.080 $ 0.002 $ 0.005
continuing operations (basic
and diluted)
Total assets $ 21,401,172 $ 26,910,725 $ 15,488,303 $ 15,855,608 $ 7,712,406
The Company had no long term debt obligations or outstanding preferred stock
during the 5 years ended March 31, 2000. In addition, no dividends were paid to
common stockholders during the same period.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Comparison of Nine Months Ended December 31, 2000 and 1999
Total Revenues
Total revenues decreased by 8.79%, or $6.85 million, to $71.08 million
for the nine months ended December 31, 2000. Product procurement revenues
decreased by 13.36%, or $9.27 million, to $60.10 million for the nine months
ended December 31, 2000. This decline in product procurement revenue is mainly
due to our continued focus on our services and consulting organization. Services
and consulting revenue increased by 28.28%, or $2.42 million, to $10.98 million
for the nine months ended December 31, 2000.
Gross Profit
Our aggregate gross profit declined by 12.59%, or $1.22 million, to
$8.52 million for the nine months ended December 31, 2000. Measured as a
percentage of net sales, our overall gross profit margin also decreased to
11.99% of net sales for the nine months ended December 31, 2000 from 12.51% for
the nine months ended December 31, 1999. Due to continued downward pricing
pressure on product sales, gross profit margin attributable to product sales
decreased to 10.50% for the nine months ended December 31, 2000 from 10.79% for
the nine months ended December 31, 1999. We expect that downward pricing
pressure on products will persist due to the continued commoditization of
computer products.
Gross margin attributable to services and consulting revenue decreased
to 20.17% of services and consulting revenue for the nine months ended December
31, 2000 from 26.48% for the nine months ended December 31, 1999. We believe
this decline was due primarily to lower utilization rates and the lack of Y2K
revenue during the period ended December 31, 2000. During the nine months ended
December 31, 2000, services and consulting contributed 25.99% of our gross
profit dollars, as compared to 23.25% during the nine months ended December 31,
1999.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses decreased by 7.33%, or
$601,956.00, to $7.60 million for the nine months ended December 31, 2000. This
decrease is primarily a result of lower sales commission expenses as well as our
efforts to streamline many of our operational functions.
Startup Costs; e-Business
Startup Costs; e-Business for the nine months ended December 31, 2000
was $909,573, or 9.93% of total operating expenses. We started our e-Business
division in January 2000. This cost mainly includes the building of a sales and
consulting team of approximately 13 employees, including training, certifying,
marketing, and advertising expenses.
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Other Income (Expense)
Total other income (expense) in 2000 of $25,825 relates primarily to
legal settlement income, net of costs, as well as a loss from the disposition of
marketable securities. Legal settlement income net of cost is $175,110. This
includes approximately $350,000 in cash and marketable securities worth
$176,000, less legal and other operating expenses equal to approximately
$351,000. Loss from the disposition of marketable securities received in legal
settlement equals $149,285.
Income Taxes
No current income tax expense or benefit has been recorded related to
the loss from continuing operations and loss from discontinued operations for
the nine months ended December 31, 2000. A net current income tax benefit of
$19,528 was recorded for the nine months ended December 31, 1999. This amount
was allocated as a $259,692 expense charged to income from continuing operations
and a $279,220 benefit reducing the loss from discontinued operations. No
deferred tax benefit has been recognized in the periods due to a 100% valuation
allowance for deferred tax assets.
Loss from Discontinued Operations
Loss from discontinued operations, net of income taxes, for the nine
months ended December 31, 2000 equaled $63,916, as compared to $442,455 for the
nine months ended December 31, 1999. The loss from discontinued operations for
the nine months ended December 31, 2000 was primarily due to lease payments,
contracted advertising expenses, and additional reserve for bad-debt.
Comparison of Years Ended March 31, 2000 and 1999
Total Revenues
Total revenues in 2000 of $100.75 million increased 9.89% or $9.06
million, from total revenue of $91.68 million in 1999. We continued to focus on
the strategy of transition from primarily a reseller of products to a services
and consulting organization. As a result of this transition, procurement
revenues only increased by 6.60%, or $5.40 million, to $87.23 million, while
services and consulting revenues increased by 37.22%, or $3.66 million, to
$13.51 million for the year ended March 31, 2000.
Gross Profit
Our total gross profit increased by 2.62%, or $323,000, to $12.64
million for the year ended March 31, 2000. Measured as a percentage of net
sales, our overall gross profit margin decreased to 12.55% of total revenues for
the year ended March 31, 2000 from 13.44% for the year ended March 31, 1999. Due
to continued downward pricing pressure on product sales, gross profit
attributable to product sales decreased to 10.68% for the year ended March 31,
2000 from 12.38% for the year ended March 31, 1999. We expect that downward
pricing pressure on products will persist due to the continued commoditization
of computer products. Gross margin attributable to services and consulting
revenue increased to 24.62% of services and consulting
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revenue for the year ended March 31, 2000 from 22.18% for the year ended March
31, 1999. During the year ended March 31, 2000, services and consulting
contributed 26.32% of our gross profit dollars, as compared to 17.73% during the
year 1999.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses in 2000 of $10.89 million
increased 5.02%, or $520,000, from $10.37 million in 1999. This increase is
primarily due to an increase in sales staff and in commissions paid on services
and consulting activities.
Startup Costs; e-Business
Startup Costs; e-Business for the year ended March 31, 2000 was
$355,933. We started our e-Business division in January 2000. This cost mainly
includes building of the sales and consulting team, training costs,
certification costs, and marketing and advertisement expense related to
e-Business.
Income Taxes
A net current income tax benefit of $64,311 was recorded for the year
ended March 31, 2000. This amount was allocated as a $326,318 expense charged to
income from continuing operations and a $390,629 benefit reducing the loss from
discontinued operations. A net current income tax expense of $118,723 was
recorded for the year ended March 31, 1999. This amount was allocated as a
$136,085 expense charged to income from continuing operations and a $17,362
benefit reducing the loss from discontinued operations. No deferred tax benefit
has been recognized in the periods due to a 100% valuation allowance for
deferred tax assets.
Loss from Discontinued Operations
Loss from discontinued operations, net of income taxes for the year
2000 equals to $618,030, as compared to $171,528 for the year 1999. We sold our
Charleston and Greenville, South Carolina operations in February of 2000.
Comparison of Years Ended March 31, 1999 and 1998
Total Revenues
Total revenues in 1999 of $91.68 million increased 18.65% or $14.40
million, from total revenues of $77.27 million in 1998. Procurement revenue
increased by 22.43%, or $14.99 million, from $66.84 million in 1998 to $81.83
million in 1999. This increase in procurement revenue was primarily attributable
to one major rollout of computer desktops that we sold to a school district in
Georgia. Services and consulting revenue decreased by 5.58%, or $581,000, from
$10.43 million in year 1998 to $9.85 million in 1999. Many of the services
normally performed by us in-house, such as the configuration and installation of
desktops, were outsourced to a distributor for the Georgia school district
rollout. The revenue associated with these services was included in the price of
procurement to the client. This was approximately $600,000.
-14-
Gross Profit
Our total gross profit increased by 14.26%, or $1.53 million, to $12.31
million for the year ended March 31, 1999. Gross margin attributable to
procurement revenue increased by 15.05%, or $1.32 million, from $8.80 million in
year 1998 to $10.13 million in 1999. Again, this increase in product gross
profit is attributable to the Georgia school district rollout mentioned above.
Gross profit from services and consulting in 1999 of $2.18 million increased
10.73%, or $211,717, from $1.97 million in 1998, while increasing as a
percentage of services and consulting revenue from 18.91% in 1998 to 22.18% in
1999. This increase was attributable primarily to higher utilization of billable
personnel and higher bill rates over previous years.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses increased by 7.51%, or
$724,000 from $9.64 million in 1998 to $10.37 million in 1999. This increase is
primarily attributable to increased commission expense due to increased activity
and revenues.
Income Taxes
A net current income tax expense of $118,723 was recorded for the year
ended March 31, 199. This amount was allocated as a $136,085 expense charged to
income from continuing operations and a $17,362 benefit reducing the loss from
discontinued operations. No current income tax expense or benefit was recorded
related to the income from continuing operations and loss from discontinued
operations for the year ended March 31, 1998. No deferred tax benefit has been
recognized in the periods due to a 100% valuation allowance for deferred tax
assets.
Loss from Discontinued Operations
Loss from discontinued operations, net of income taxes for the year
1999 equals to $171,528, as compared to $434,472 for the year 1998. We closed
our Charleston and Greenville, South Carolina operations in February of 2000.
Liquidity and Capital Resources
Pro forma cash and cash equivalents at December 31, 2000 of $1.10
million increased by 60.84%, or $417,643, from $686,413 at March 31, 2000.
Working capital at December 31, 2000 was $1.75 million as compared to $1.10
million at March 31, 2000, representing an increase of $645,540, or 58.17%. The
increase in cash and cash equivalents and working capital is primarily the
result of the merger. Cash and cash equivalents at December 31, 2000, March 31,
2000, and March 31, 1999 were $86,851, $686,413, and $832,606, respectively. We
are a net borrower, so our cash and cash equivalents balance must be analyzed
along with the balance on our line of credit. Working capital, which is the
excess of current assets over current liabilities, at December 31, 2000, March
31, 2000, and March 31, 1999 was $557,783, $1,109,691, and $1,862,394,
respectively. The decrease in our cash and cash equivalents and working capital
for the nine months ended December 31, 2000 is primarily the result of the loss
of almost $600,000 plus investment in capital assets due to the close of our
Charleston and Greenville operations.
-15-
Since our inception, we have funded our operations primarily from
borrowings under our credit facility. We have a $15 million revolving line of
credit under a business financing agreement with a lender, through which we
borrow on 85% of our eligible trade receivables and 95% of our eligible
inventory value. Eligible inventory value is defined as 100% of the total
aggregate wholesale inventory price financed by the creditor that is unsold and
in our possession and control at each inventory report date. Interest on the
borrowings is charged monthly at 0.50% over the current prime rate.
Substantially all of our assets collateralize amounts borrowed. The lending
agreement contains financial covenants that require us to maintain a minimum
current ratio, a minimum total liabilities to net worth ratio, and minimum
results of operations. The credit line may be renewed for another year or
terminated at the option of either the lender or ourselves on September 23,
2001. Currently, we are in negotiations with our lender to revise financial
covenants and to obtain a waiver for the fiscal year 2001 net profits covenant.
At December 31, 2000, we had $9.56 million outstanding borrowings under the
credit facility. The unused line of credit as of December 31, 2000 was $5.43
million.
We have open credit lines with all of our trade vendors including
primary vendors such as Ingram Micro and Tech Data. The total combined credit
line available with Ingram and Tech Data is approximately $6.0 million.
Capital expenditures of $170,099 and $616,003 during nine months ended
December 31, 2000 and year ended March 31, 2000, respectively, were primarily
for the purchase of computer equipment for internal use, as well as for the
development of our e-Business innovation centers located in our Cranford, New
Jersey and Atlanta, Georgia facilities. The centers allow us to pilot and test
drive the scalability and suitability of applications in a production
environment, verify configurations, conduct transactional benchmark testing,
test application development, and tune applications. We anticipate additional
capital expenditures to continue the expansion of the services component of its
business and for the enhancement of its management information systems
infrastructure.
We believe that our available funds, together with existing and
anticipated credit facilities, will be adequate to satisfy our current and
planned operations for at least the next 12 months.
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.
-16-
Cautionary Note Regarding Forward-Looking Statements
We believe this registration statement contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of our management based on information currently
available to it. When we use words such as "believes", "expects", "anticipates",
"intends", "plans", "estimates", "should", "likely", or similar expressions, we
are making forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties, and assumptions.
Our future results and stockholder values may differ materially from those
expressed in the forward-looking statements. Many of the factors that will
determine these results and values are beyond our ability to control or predict.
In addition to the information set forth elsewhere in this registration
statement under the respective captions "Risk Factors," "Unaudited Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business", the following factors should be
considered carefully in evaluating our business and prospects:
o a significant portion of our sales are concentrated with a limited
number of large customers;
o our continued dependence on certain allied distributors,
o continued downward pricing pressures in the IT market, and
o our limited prior experience in the provision of e-Business
services.
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. Readers are specifically
cautioned not to put undue reliance on any forward-looking statements, as to
which we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Risk Factors
We cannot assure you that we can successfully manage our transition to
an e-Business and IT services provider. Our transition from an IT products
reseller to an e-Business and IT services provider 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
-17-
e-Business offerings, periods of variability in utilization may continue to
occur. In addition, we are likely to incur greater technical training costs
during such periods.
Our new services have not achieved widespread client acceptance. We
first began to offer new e-Business and IT services to our clients 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 clients, 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
clients' 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. 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, some
of which are not within our control that can contribute to fluctuations in our
operating results, including the following:
o our transition from product reseller to e-Business solution
provider and all anticipated and unanticipated costs and events
related to such transition;
o intense competition from other e-Business providers;
o our dependence upon a limited number of key clients for a
significant portion of our revenues;
o the short-term nature of our clients' commitments;
o patterns of capital spending by clients;
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
clients; 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 fourth quarter
due to the capital budgeting and spending patterns of some of our larger
clients. Operating results have been, and may in the
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future also be, affected by the cost, timing, and other effects of acquisitions,
including the mix of product and service revenues of acquired companies.
Our revenues are concentrated. Our client base is highly concentrated,
with our top two clients in fiscal years 2000 and 1999 accounting in the
aggregate for approximately 33.68% and 32.68%, respectively, of our revenues. An
additional eight clients, collectively accounted for approximately 24.86% and
19.68% of our net revenues during these respective fiscal years. We anticipate
that a substantial portion of our net revenues and gross profits will continue
to be derived from sales to a concentrated group of clients. In general, there
are no ongoing written commitments by clients to purchase products from us. All
product sales we make are on a purchase order basis. Further, we derive a
significant portion of our revenues from a relatively limited number of clients
primarily located in the New York/New Jersey metropolitan area of the United
States. Adverse economic conditions affecting this region could have an adverse
effect on the financial condition of our clients located there, which, in turn,
could adversely impact our business and future growth.
We must maintain our status as an authorized reseller/servicer of IT
products. 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. Our
resale agreements with manufacturers generally are terminable by manufacturers
upon 90 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 our two principal
suppliers. Our IT reseller business depends in large part upon our access to
aggregators, in particular Ingram and Tech Data, to supply us with products at
competitive prices and on reasonable terms for resale by us to our clients. Our
agreements with Ingram and Tech Data may be terminated by such companies upon
prior written notice ranging from 30 to 90 days. We cannot assure you that we
will be able to continue to obtain products from Ingram and Tech Data or our
other vendors at prices or on terms acceptable to us, if at all.
Our client engagements entail significant risks. Many of our
engagements involve projects that are critical to the operations of our clients'
businesses and provide benefits that may be difficult to quantify. Our failure
or inability to meet a client's expectations in the performance of our services
could result in a material adverse change to the client's operations and,
therefore, could give rise to claims against us or damage our reputation,
adversely affecting our business, results of operations, and financial
condition.
Our ability to protect our intellectual property rights is
questionable. 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
-19-
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.
Acquisition Risk. 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 clients 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 clients and personnel;
o diversion of management's attention;
o amortization of acquired intangible assets; and
o risks associated with unanticipated problems, liabilities, or
contingencies.
Item 3. Properties
We lease office space in five locations. Our corporate headquarters and
principal operational facilities are currently located in Mount Laurel, New
Jersey. The following table contains certain information for each of our leased
facilities:
Size (in square
Address feet) Monthly Rent Expiration Date
- ------- ----- ------------ ---------------
817 East Gate Drive 15,596 $14,166.37 March 31, 2004
Mount Laurel, NJ 08054
70 Jackson Drive 13,360 $9,575.00 June 30, 2004
Cranford, NJ 07016
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Size (in square
Address feet) Monthly Rent Expiration Date
- ------- ----- ------------ ---------------
2990 Gateway Drive, Suite 500
Norcross, GA 06855 17,102 $11,532.95 August 14, 2004
4995 LaCross Road, Suite 1300 2,337 $3,462.37 June 30, 2004(1)
Charleston, SC 29406
14 Strawberry Hill 2,000 $2,151.00 July 31, 2002
Norwalk, CT 06855
We believe these facilities will satisfy our anticipated needs for the
foreseeable future.
- ------------
(1) These premises were sublet at cost to the new owners of our South Carolina
operation.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of May 10, 2001, 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; 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 Howlett 1,436,444 19.0%
Ronald A. Seitz 1,653,120(3) 21.9%
R. Frank Jerd -- 0.0%
Tom Dresser 1,055,894 14.0%
Richard Landon 1,055,894 14.0%
All executive officers and directors as a 3,235,210 42.7%
group (4 persons)
- ------------
(1) Each stockholder's address is c/o Emtec, 817 East Gate Drive, Mount Laurel,
New Jersey, unless otherwise indicated.
(2) As used herein, beneficial ownership means the sole or shared power to vote,
or direct the voting of, a security, or the sole or shared power to invest
or dispose, or direct the investment or disposition, of a security. Except
as otherwise indicated, all persons named herein have (i) sole voting power
and investment power with respect to their shares, except to the extent that
authority is shared by spouses under applicable law and
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(ii) record and beneficial ownership with respect to their shares; also
includes any shares issuable upon exercise of options or warrants that are
currently exercisable or will become exercisable within 60 days of after the
date of this proxy statement.
(3) Includes 802,560 shares owned by Carla Seitz, Mr. Seitz' spouse. Mr. Seitz
disclaims any beneficial interest in these shares.
Item 5. 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 56 Chairman of the Board and President
Ronald A. Seitz 53 Executive Vice President and Director
R. Frank Jerd 59 Director
John P. Howlett has been the President and Chairman of Emtec since
January 17, 2001 and of Emtec-NJ since August, 1997 and Chairman 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
solutions, 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 the Executive Vice-President of Emtec since
January 17, 2001 and 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 solutions, 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 a director of Emtec upon the consummation
of the merger with Emtec-NJ. Mr. Jerd is a securities analyst for Josepthal and
Company in New York. Previously, he was chief executive officer of Benesys,
Inc., a medcal software company. He was
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also CEO of Gandalf Systems Corporation. He earned a Bachelor of Science Degree
in Mathematics at Marshall University.
Item 6. 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, 2000, 1999 and 1998 by our chief executive officer and by our only
other executive officers whose cash compensation exceeded $100,000 per year in
any such year.
Summary Compensation Table
Long Term Compensation
------------------------------------------------
Annual Compensation Awards Payouts
------------------------- --------------------- --------
Long
Restrict- Term
Name and Fiscal Other Annual ed Stock Number of Incentive All Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
- ------------------ ---- ------ ----- ------------ ------ ------- ------- ------------
John Howlett 2000 $ 200,000 $54,000 -- -- --
President and 1999 $ 169,245 $50,000 -- -- --
Chief Executive 1998 $ 140,396 $ -- -- -- -- $13,724(1)
Officer
Ronald A. Seitz 2000 $ 200,000 $54,000 -- -- --
Executive Vice- 1999 $ 169,076 $50,000 -- -- --
President 1998 $ 140,396 $ -- -- -- -- $ 6,944(2)
Sam Bhatt 2000 $ 95,983 $ 9,826 -- --
- -Vice President
- -Finance & $ --
Operations
- ---------
(1) Reflects employer contributions of $4,828 for life insurance premiums and
$8,896 for disability insurance premiums.
(2) Reflects employer contribution for life insurance premiums.
-23-
There were no options granted to our executive officers during our
fiscal year ended March 31, 2000.
Set forth below is information with respect to unexercised options held
by our executive officers to purchase our common stock:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Unexercised
Number of Securities Underlying Options Value of Unexercised
Shares at March 31, 2000 In-the-Money Options
Acquired on Value ----------------------------- -----------------------------
Name Exercise Realized Exercisable Unexerciseable Exercisable Unexerciseable
- ----------------------- -------- -------- ----------- -------------- ----------- --------------
John Howlett............ -- $ 0 0 0 $ 0 $ 0
Ronald A. Seitz........ -- $ 0 166,227 0 $ 0 $ 59,842.00
Item 7. Certain Relationships and Related Transactions
There are no relationships or related party transactions of a nature
required to be disclosed hereunder.
Item 8. Legal Proceedings
In 1999 we instituted an action against one of our customers in the
Court of Common Pleas, Greenville County, South Carolina, for breach of contract
in an amount approximating $50,000. The defendant counterclaimed for damages in
excess of $8.0 million, alleging that our negligence corrupted its computer
system. The case is currently in the discovery phase.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ETEC." The following table sets forth the high and low closing prices of our
common stock for the periods indicated:
Three Months Ended High Low
- ---------------------------------------- -----------------------
March 31, 2001 $1.81 $0.44
December 31, 2000 $0.56 $0.44
September 30, 2000 0.56 0.44
June 30,2000 0.44 0.44
March 31, 2000 0.44 0.44
December 31, 1999 $0.75 $0.44
September 30, 1999 0.75 0.56
June 30,1999 0.63 0.38
March 31, 1999 1.00 0.44
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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 May 10, 2000, there were 705 recordholders of our common stock,
although we believe that beneficial holders approximate 805.
We have never declared any dividends on our common stock and we have no
intention to do so in the foreseeable future.
Item 10. Recent Sales of Unregistered Securities
Our only sales of unregistered securities in the past three years was
the issuance of an aggregate of 5,699,500 shares of our common stock to 13
persons in connection with the merger of Emtec-NJ with our wholly owned
subsidiary on January 17, 2001.
The several persons who acquired shares of our common stock as a
consequence of this transaction delivered investment representations to us as a
prerequisite to their receipt of such shares and the certificates evidencing the
shares were each imprinted with a legend restricting their future transfer
absent compliance with the Securities Act of 1933. Exemption from registration
under the Securities Act is claimed by reason of Section 4(2) of that Act as a
transaction by an issuer not involving a public offering.
A.D. Gilhart & Co., Inc. and Colebrooke Capital Corp, investment
banking firms that facilitated the consummation of this transaction, received
16,666 and 320,500 shares, respectively, of our common stock for their
services. A.D. Gilhart & Co. Inc. was an affiliate of Milton Fisher, one of our
former directors who is now deceased. Shelly Fisher, who is Mr. Fisher's
daughter, and Charles Snebnik each received 16,667 shares of our common stock in
connection with this transaction.
Item 11. Description of Registrant's Securities to be Registered
Our authorized capitalization consists of 25,000,000 shares of common
stock, par value $.01 per share.
Each stockholder of record is entitled to one vote for each share of
our common stock owned by that stockholder on all matters properly submitted to
the stockholders for their vote. Our certificate of incorporation does not
provide for cumulative voting for the election of our directors, with the result
that stockholders owning or controlling more than 50% of the shares voted for
the election of directors can elect all of the directors. Holders of common
stock are entitled to receive dividends when, as, and if declared by our board
out of funds legally available for this purpose. In the event of our
liquidation, dissolution, or winding up, the holders of common stock are
entitled to receive, on a pro rata basis, any assets remaining available for
distribution after payment of our liabilities. Holders of common stock have no
conversion or redemption provisions or preemptive or other subscription rights.
The outstanding shares of common stock are fully paid and non-assessable.
The transfer agent for our common stock is Zions Bank, Salt Lake City,
Utah.
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Item 12. Indemnification of Directors and Officers
As permitted by the Delaware general corporation law, our certificate
of incorporation provides that our directors shall not be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, relating to unlawful
payment of dividends or unlawful stock purchases or redemption of stock or (iv)
for any transaction from which the director derives an improper personal
benefit. As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the
indemnification of our directors and officers and, to the extent authorized by
the board in its sole and absolute discretion, employees and agents, to the
fullest extent authorized by, and subject to the conditions set forth in the
Delaware general corporation law, except that we will indemnify a director or
officer in connection with a proceeding initiated by such personally if the
proceeding was authorized by our board. The indemnification provided under our
certificate of incorporation and bylaws includes the right to be paid the
expenses, including attorneys' fees, in advance of any proceeding for which
indemnification may be had, provided that the payment of such expenses incurred
by a director, officer, employee or agent in advance of the final disposition of
a proceeding may be made only upon delivery to us of an undertaking by or on
behalf of the director, officer, employee or agent to repay all amounts so paid
in advance if it is ultimately determined that the director of officer is not
entitled to be indemnified.
Under our bylaws, we have the power to purchase and maintain insurance
on behalf of any person who is or was one of our directors, officers, employees
or agents, against any liability asserted against the person of incurred by the
person in any such capacity, or arising out of the person's status as such, and
related expenses, whether or not we would have the power to indemnify the person
against such liability under the provisions of the Delaware general corporation
law. We currently have director and officer liability insurance on behalf of our
directors and officers in the aggregate amount of $1 million.
Item 13. Financial Statements and Supplementary Data
Reference is made to pps. F-1 through F-31 comprising a portion of
this registration statement.
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On March 22, 2001, we dismissed KPMG LLP as our independent auditor.
KPMG's reports on our financial statements for each of our two fiscal
years ended December 31, 2000 and 1999, respectively (collectively, the "prior
fiscal years"), did not contain an adverse opinion or disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope or
accounting principles.
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Our dismissal of KPMG was unanimously approved by our board of
directors.
There were no disagreements between us and KPMG during either (i) the
prior fiscal years, or (ii) the period January 1, 2001 through March 22, 2001
(the "interim period") on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject matter of the disagreement in connection
with its reports for the prior fiscal years.
There were no "reportable events," as such term is defined in Item
304(A)(1)(v) of Regulation S-K, during either (i) the prior fiscal years or (ii)
the interim period.
We have engaged Baratz & Associates ("BA") as our independent auditor
for our fiscal year ending March 31, 2001. We did not consult with BA during (i)
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.
Item 15. Financial Statements and Exhibits
(a) Financial Statements:
o Independent Auditors' Report
o Balance Sheets at March 31, 2000 and 1999
o Statements of Operations for the Fiscal Years Ended March 31,
2000, 1999 and 1998
o Statements of Shareholders' Equity for the Fiscal Years Ended
March 31, 2000, 1999 and 1998
o Statements of Cash Flows for the Fiscal Years Ended March 31,
2000, 1999 and 1998
o Notes to Financial Statements
o Balance Sheets at December 31, 2000 and 1999 (unaudited)
o Statements of Operations for the Nine Months Ended March 31,
2000, 1999 and 1998
o Statements of Cash Flows for the Nine Months Ended March 31,
2000, 1999 and 1998
o Notes to Financial Statements (unaudited)
-27-
(b) Exhibits:
Number 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
3.2 Amended and Restated Bylaws
4.1 Certificate evidencing shares of common stock
4.2 1996 Stock Option Plan, as amended
10.1 Resale Agreement dated September 29, 1997 between
Registrant and Ingram Micro, Inc.
10.2 Volume Purchase Agreement dated January 28, 1998
between Registrant and Tech Data Corporation
10.3 Inventory and Working Capital Financing Agreement
dated September 24, 1999 between Registrant and
IBM Credit Corporation.
10.4 Agreement of Lease dated April 1, 1992 between
Registrant and Bell Atlantic Properties, Inc., as
amended, for Mt. Laurel, New Jersey facility
10.5 Lease Agreement dated May 5, 1993 between registrant
and Central Cranford Associates, for Cranford, New
Jersey facility
10.6 Lease Agreement dated July 7, 1994 between Registrant
and Connecticut General Life Insurance Company, as
amended, for Norcross, Georgia facility
21 Subsidiaries
- ---------
(1) Exhibit 2.1 to Registrant's Current Report on Form 8-K dated January 17,
2001, filed on January 31, 2001, is incorporated herein by reference.
-28-
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Balance Sheets at March 31, 2000 and 1999 F-3
Statements of Operations for the Fiscal Years
ended March 31, 2000, 1999 and 1998 F-5
Statements of Shareholders' Equity for the Fiscal Years
ended March 31, 2000, 1999 and 1998 F-6
Statements of Cash Flows for the Fiscal Years
ended March 31, 2000, 1999 and 1998 F-7
Notes to Financial Statements F-8
Balance Sheets at December 31, 2000 and 1999 (unaudited) F-18
Statements of Operations for the Nine Months
ended December 31, 2000 and 1999 (unaudited) F-20
Statements of Cash Flows for the Nine Months
ended December 31, 2000 and 1999 (unaudited) F-21
Notes to Financial Statements (unaudited) F-22
Introduction to Pro Forma Statements (unaudited) F-27
Pro Forma Balance Sheet - December 31, 2000 (unaudited) F-28
Pro Forma Statement of Operations -
March 31, 2000 and December 31, 1999 (unaudited) F-29
Pro Forma Statement of Operations -
December 31, 2000 and September 30, 2000 (unaudited) F-30
Notes to Pro Forma Financial Statements (unaudited) F-31
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Emtec, Inc.
817 Eastgate Drive
Mount Laurel, NJ 08054
We have audited the accompanying balance sheets of Emtec, Inc. as of
March 31, 2000 and 1999 and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Emtec, Inc. at March
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2000 in conformity with
generally accepted accounting principles.
BARATZ & ASSOCIATES, P.A.
June 22, 2000
January 17, 2001 (Subsequent Event)
F-2
EMTEC, INC.
BALANCE SHEETS
MARCH 31, 2000 AND 1999
2000 1999
---- ----
Assets
Current Assets
Cash and cash equivalents $ 686,413 $ 832,606
Marketable securities 7,086 -
Receivables:
Trade, less allowance
for doubtful accounts
of $368,058 in 2000
and $209,397 in 1999 16,313,411 21,067,992
Others 1,710,003 3,178,703
Inventories 1,091,463 954,317
Prepaid expenses 459,690 132,483
---------- ----------
Total Current Assets 20,268,066 26,166,101
---------- ----------
Property and Equipment
Equipment 2,108,549 1,575,520
Furniture and fixtures 221,536 163,663
Leasehold improvements 107,917 77,788
Vehicles 54,714 59,742
---------- ----------
2,492,716 1,876,713
Less accumulated depreciation 1,551,092 1,348,488
---------- ----------
Net Property and Equipment 941,624 528,225
---------- ----------
Other Assets 191,482 216,399
---------- ----------
Total Assets $ 21,401,172 $ 26,910,725
========== ==========
The accompanying notes are an integral part of
these financial statements.
F-3
EMTEC, INC.
BALANCE SHEETS
MARCH 31, 2000 AND 1999
2000 1999
---- ----
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 8,310,741 $ 5,754,814
Due to related parties 19,000 19,000
Accounts payable 8,182,484 15,336,735
Income taxes payable - 10,555
Customer deposits 358,000 634,000
Accrued liabilities 1,145,599 1,904,750
Deferred revenue 1,142,551 643,853
---------- ----------
Total Current Liabilities 19,158,375 24,303,707
---------- ----------
Shareholders' Equity
Common stock, no par value;
25,000,000 shares authorized;
5,704,683 shares issued at
March 31, 2000 and 1999 1,431,171 1,431,171
Accumulated other comprehensive income 1,776 -
Retained Earnings 872,850 1,175,847
---------- ----------
2,305,797 2,607,018
Less cost of treasury stock (240,000 shares) 63,000 -
---------- ----------
Total Shareholders' Equity 2,242,797 2,607,018
---------- ----------
Total Liabilities and
Shareholders' Equity $ 21,401,172 $ 26,910,725
========== ==========
The accompanying notes are an integral part of
these financial statements.
F-4
EMTEC, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Revenues
Procurement services $ 87,235,968 $ 81,832,879 $ 66,841,655
Service and consulting 13,516,522 9,850,167 10,431,828
----------- ----------- ----------
Total Revenues 100,752,490 91,683,046 77,273,483
----------- ----------- ----------
Cost of Revenues
Procurement services 77,921,447 71,698,058 58,032,630
Service and consulting 10,188,181 7,665,474 8,458,852
----------- ----------- -----------
Total Cost of Revenues 88,109,628 79,363,532 66,491,482
----------- ----------- -----------
Gross Profit
Procurement services 9,314,521 10,134,821 8,809,025
Service and consulting 3,328,341 2,184,693 1,972,976
----------- ----------- -----------
Total Gross Profit 12,642,862 12,319,514 10,782,001
----------- ----------- -----------
Operating Expenses
Selling, general and
administrative expenses 10,890,841 10,370,696 9,645,916
Termination costs 74,480 127,412 -
Interest expense 679,286 713,853 681,853
Startup costs, E-Business 355,933 - -
---------- ----------- -----------
Total Operating Expenses 12,000,540 11,211,961 10,327,769
----------- ----------- -----------
Income from Continuing Operations
before income taxes 642,322 1,107,553 454,232
Income Taxes 326,318 136,085 -
----------- ----------- -----------
Income from Continuing Operations,
net of income taxes 316,004 971,468 454,232
Loss from Discontinued Operations,
net of income taxes ( 618,030) ( 171,528) ( 434,472)
Loss from sale of Discontinued
Operations, net of income taxes ( 971) - -
----------- ----------- -----------
Net Income (Loss) $ ( 302,997) $ 799,940 $ 19,760
=========== =========== ==========
Income per share from Continuing
Operations {basic and diluted} $ 0.056 $ 0.170 $ 0.080
Net Income (Loss) per share
{basic and diluted} $( 0.054) $ 0.140 $ 0.003
Weighted Average Number of Shares
Outstanding {basic and diluted} 5,642,875 5,704,683 5,704,683
The accompanying notes are an integral part of
these financial statements.
F-5
EMTEC, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
Accumulated
Common Stock Retained Comprehensive Treasury Comprehensive Total
Shares Amount Earnings Income Stock Income Equity
------ ------ -------- -------------- -------- ------------- -----------
Balance, April 1, 1997 5,704,683 $ 1,431,171 $ 356,147 $ $ $ $ 1,787,318
Net Income for the year 19,760 19,760
---------- ---------- --------- -----------
Balance, March 31, 1998 5,704,683 $ 1,431,171 $ 375,907 1,807,078
Net Income for the year 799,940 799,940
---------- ---------- --------- -----------
Balance, March 31, 1999 5,704,683 1,431,171 1,175,847 2,607,018
Net Loss for the year ( 302,997) ( 302,997)
Unrealized Gain on
Marketable Securities 1,776 $ 1,776 1,776
=====
Acquisition of
Treasury Stock ( 240,000) (63,000) ( 63,000)
----------- --------- --------- ------- -------- -----------
Balance, March 31, 2000 5,464,683 $ 1,431,171 $ 872,850 $ 1,776 $(63,000) $ 2,242,797
========== ========= ========= ======= ======== ===========
The accompanying notes are an integral part of
these financial statements.
F-6
EMTEC, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Cash Flows From Operating Activities
Net (loss) income for the year $( 302,997) $ 799,940 $ 19,760
Adjustments to Reconcile Net (Loss)
Income To Net Cash Provided By
Operating Activities
Depreciation and amortization 387,061 382,425 369,704
Loss on sale of discontinued operations 971 - -
Changes In Operating Assets and
Liabilities
Increase in marketable securities ( 7,086) - -
Decrease (increase) in receivables 6,223,281 (11,428,201) 375,586
(Increase) decrease in inventories ( 137,146) 230,557 273,840
(Increase) decrease in prepaid expenses ( 327,207) 78,585 ( 120,136)
Decrease in other assets 5,832 8,452 -
(Decrease) increase in accounts payable (7,154,251) 9,204,112 226,478
(Decrease) increase in income taxes payable ( 10,555) 10,555 -
(Decrease) increase in customer deposits ( 276,000) 331,000 -
(Decrease) increase in accrued liabilities ( 759,151) 409,777 244,753
Increase in deferred revenue 498,698 324,342 81,031
------------ ------------ -----------
Net Cash (Used In) Provided By
Operating Activities (1,858,550) 351,544 1,471,016
------------ ------------ -----------
Cash Flows Used In Investing Activities
Purchase of equipment ( 824,280) ( 197,079) ( 372,193)
Proceeds from sale of equipment 43,710 - -
------------ ------------- -----------
Net Cash Used In Investing Activities ( 780,570) ( 197,079) ( 372,193)
------------ ------------ -----------
Cash Flows From Financing Activities
Net increase (decrease) in line of credit 2,555,927 207,832 ( 724,050)
Repayments to related parties - ( 148,654) ( 198,206)
Debt reduction - ( 19,482) ( 37,566)
Purchased treasury stock ( 63,000) - -
------------ ------------- -----------
Net Cash Provided By (Used In)
Financing Activities 2,492,927 39,696 ( 959,822)
------------ ------------ -----------
Net (Decrease) Increase in
Cash and Cash Equivalents ( 146,193) 194,161 139,001
Beginning Cash and Cash Equivalents 832,606 638,445 499,444
------------ ------------ -----------
Ending Cash and Cash Equivalents $ 686,413 $ 832,606 $ 638,445
============ ============ ===========
The accompanying notes are an integral part of
these financial statements.
F-7
EMTEC, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
1. Organization and Summary of Significant Accounting Policies
Organization
Emtec, Inc. (the Company) is an e-business solutions provider that
implements the complex, highly integrated systems required for effective
e-business solutions. Emtec's solutions enable its customers to exchange
information with their partners and customers in a purely digital format,
making them more efficient and effective, thereby giving them a competitive
advantage. The company offers the following services to its customers:
e-business strategy consulting
web self service solutions
business relationship management
marketplace connectivity
e-infrastructure design and integration
configuration management
enterprise data management
resource optimization solutions
lifecycle management of IT infrastructure
Emtec's customers are primarily Fortune 2000 and other large and mid-sized
companies located principally in the Mid-Atlantic and Southeastern United
States. The Company, a NJ corporation formed at April 1, 1995, resulted from
mergers in 1995 and 1996 of three information technology companies that were
originally founded between 1980 and 1983.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue Recognition
The sale of computer hardware and prepackaged software (procurement
services) is recognized when products are shipped to or installed at
customer locations, which is also when title passes to customers. Service
and consulting revenues represent services provided to customers for
information systems design, configuration, installation and support and are
recognized as services are rendered over the service or contract period.
F-8
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 high quality financial institutions; at times, such deposits
may exceed FDIC 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 a review of products and sales.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization for
financial accounting purposes is computed using the straight line method
over the estimated lives of the respective assets. Estimated lives are as
follows:
Computer equipment 3 years
Office equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements 5 years
Vehicles 2 years
For income tax purposes, accelerated methods of depreciation are used.
Maintenance and repairs are charged to expense in the year incurred. When
properties are retired or otherwise disposed of the related cost and
accumulated depreciation are removed from the respective accounts and any
profit or loss on disposition is credited or charged to income.
F-9
Income Taxes
The Company accounts for income taxes 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. The Company
provides a valuation allowance for deferred tax assets for which it does not
consider realization of such assets to be more likely than not.
Valuation of Long Lived Assets
The Company evaluates its long lived assets by measuring the carrying amount
of the assets against the estimated undiscounted future cash flows
associated with them. If such evaluations indicate that the future
undiscounted cash flows of certain long lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their
fair values.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense for the years ended March 31, 2000, 1999 and 1998 was $426,605,
$324,070 and $ 139,671 respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has adopted Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). APB
No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25
to provide a pro forma disclosure of the impact of applying the fair value
method of SFAS No. 123.
Net Income (Loss) per Share
The net income (loss) per share and the income per share from continuing
operations computations have been made in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128).
These per share computations use the weighted average number of shares
outstanding during the period. SFAS No. 128 requires a separate presentation
of diluted income per share from continuing operations and diluted net
income per share for the potential dilutive effect of securities such as
stock options. The Company maintains a stock option plan as outlined in Note
8. However, based upon the pricing of the options in excess of the
underlying value of the Company stock during the three years in the period
ended March 31, 2000, the stock options are antidilutive. Therefore, there
is no separate presentation of diluted net income per share.
F-10
2. Inventories
The components of inventories at March 31, 2000 and 1999 were as follows:
2000 1999
---- ----
Hardware, software and
accessories $ 1,089,635 $ 921,753
Service parts 177,315 180,154
--------- ---------
1,266,950 1,101,907
Less inventory reserve 175,487 147,590
--------- ---------
$ 1,091,463 $ 954,317
========= =========
Appropriate consideration has been given to deterioration, obsolescence and
other factors in evaluating net realizable value.
3. Financing Arrangements
The Company has available a $15,000,000 revolving line of credit under a
business financing agreement whereas the Company may borrow on 85% of its
eligible trade receivables and 95% on its eligible inventory value. Eligible
inventory value is defined as 100% of the total aggregate wholesale
inventory price financed by the creditor that is unsold and in the Company's
possession and control at each inventory report date. At March 31, 2000, the
Company had approximately $6,600,000 available under the terms of the
agreement. Interest on the borrowings is charged monthly at 0.50% over the
existing prime rate. Substantially all Company assets collateralize amounts
borrowed. The lending agreement contains financial covenants that require
the Company to maintain a minimum current ratio, a minimum total liabilities
to net worth ratio and minimum results of operations. The credit line may be
renewed for another year or terminated at the option of either the Company
or the lender at September 23, 2001.
4. Income Taxes
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 taxes (benefit) consisted of the following for the years ended March
31:
2000 1999 1998
---- ---- ----
Continuing Operations
Current taxes
Federal $ 298,722 $ 101,801 $ -
State 27,596 30,265
------- -------
326,318 132,066
Deferred taxes
Federal 4,019
------- -------
326,318 136,085
------- -------
Discontinued Operations
Current benefit
Federal (347,053) ( 17,362)
State ( 43,576) -
------- ----
(390,629) ( 17,362) -
------- ------- ----
Net Income Tax (Benefit) $( 64,311) $ 118,723 $ -
======= ======= ====
F-11
Significant items comprising the Company's deferred tax assets and
liabilities at March 31, were as follows:
2000 1999 1998
---- ---- ----
Deferred Tax Assets
Temporary Differences:
Trade receivables $ 144,573 $ 82,251 $ 99,120
Inventories 99,277 77,103 119,467
Property and equipment 29,422
Accrued liabilities 1,195 11,062 55,043
Others 25,875 14,692 11,396
Net Operating loss carryforwards 189,000
------- ------- -------
270,920 214,530 474,026
Deferred Tax Liability
Temporary Differences:
Property and equipment ( 58,281) ( 4,706)
------- ------- -------
Deferred Tax Assets 212,639 214,530 469,320
before valuation allowance
Valuation Allowance (212,639) (214,530) (469,320)
------- ------- -------
Net Deferred Tax Balance $ - $ - $ -
======= ======= =======
At March 31, 2000, 1999 and 1998 the Company recorded a valuation allowance
against its deferred tax assets, reducing those assets to amounts which are
more likely than not to be realized. Federal net operating loss carrybacks
approximated $115,000 at March 31, 2000. State net operating loss
carryforwards approximated $97,000 at the 2000 fiscal year end. The state
net operating loss carryforwards expire in 2007.
5. Related Party Transactions
At March 31, 2000 and 1999 the Company owed $19,000 to a Company officer's
relative. Except for quarterly interest payments there was no other loan
activity during the fiscal 2000 and 1999 years. Interest paid on this loan
during each of the three years in the period ended March 31, 2000 was $2,280
in fiscal 2000, $5,249 in fiscal 1999 and $2,280 in fiscal 1998.
6. Major Customers
Two customers accounted for approximately 33% and 23% of the Company's net
sales in fiscal 2000 and 1999 respectively. One of these customers accounted
for 11.2% of the Company's net sales in fiscal 1998. 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.
F-12
7. 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 amounted to $103,087, $86,382 and $ 83,505
in fiscal years 2000, 1999 and 1998 respectively.
8. Stock Option Plan
On September 6, 1996, the shareholders approved a Stock Option Plan (the
"Plan"), (amended in 1999) which provides for 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 on the date of grant (110% in the case of
shareholders owning more than 10% of the Company's common stock). Options
vest at the rate of 25% per year commencing on the first anniversary of, and
expire at the earliest of 5 years after the date of grant; three months from
date of retirement or upon date of other termination of employment. The
Company used the minimum value option pricing model as prescribed by SFAS
No. 123 to determine the impact of applying the fair value method of SFAS
No. 123. All stock options granted for the three years in the period ended
March 31, 2000 were determined to have a fair value of zero. The exercise
price of these options was set at $ 1 per share, an amount in excess of 150%
of the fair value of the underlying stock. Therefore, no options granted
during the three year period have been exercised as of March 31, 2000. A pro
forma presentation of compensation cost and earnings per share is not
required due to the zero fair value determination. At September 23, 1996,
options to purchase 372,895 shares were issued primarily to the founders of
the Company at an exercise price of $ .48 per share. At March 31, 2000,
166,227 of these founder options were outstanding. Option activity is
summarized in the following table.
Options outstanding - April 1, 1997 372,895
For the year ended March 31, 1998:
Options granted 460,640
Options exercised 0
Options forfeited or expired ( 22,375)
--------
Options outstanding - March 31, 1998 811,160
For the year ended March 31, 1999:
Options granted 191,900
Options exercised 0
Options forfeited or expired (432,186)
--------
Options outstanding - March 31, 1999 570,874
For the year ended March 31, 2000:
Options granted 29,250
Options exercised 0
Options forfeited or expired (176,042)
--------
Options outstanding - March 31, 2000 424,082
========
F-13
9. Termination Costs
The Company paid termination costs of $74,480 (2000) and $48,561 (1999) to
former Company executives. In 1999 the Company paid $78,851 to a former
officer as final payment under an employment agreement.
10. Commitments and Contingencies
Leases:
The Company leases warehouse and office facilities, vehicles and certain
office equipment under noncancellable operating leases.
Future minimum lease payments under such leases are as follows:
Fiscal Years
------------
2001 $ 671,756
2002 381,274
2003 321,231
2004 299,841
Thereafter 96,642
-----------
Total $ 1,770,744
===========
Aggregate rent expense for the years ended March 31, 2000, 1999 and 1998
approximated $792,000, $761,000 and $497,000 respectively.
Litigation:
In a previous year Emtec Inc. instituted litigation against two companies
(defendants) that were in discussions with Emtec about a possible merger.
The complaint in the action charged the two companies for breach of
contract, interference with business relationships and misappropriation of
trade secrets. The parties settled the litigation in June 2000. Under terms
of the settlement, the Company received a $350,000 cash payment and 333,116
shares of the defendant's common stock with a market value of $176,885 at
date of settlement.
In 1999 Emtec, Inc. instituted litigation against a company (defendant) for
breach of contract action in an amount approximating $50,000. The defendant
has stated a counter claim in excess of $8 million for damages resulting
from Emtec's alleged negligence, causing the defendant's computer system to
become corrupted and unavailable. Damages will be contested by Emtec, as
will liability. At December 31, 2000, the case is in the discovery phase.
11. Supplemental Cash Flow Information
Cash paid for interest and income taxes were as follows:
2000 1999 1998
---- ---- ----
Interest $ 731,723 $ 770,573 $ 746,615
Income Taxes $ 168,030 $ 104,149 $ 883
F-14
12. Discontinued Operations
During fiscal 2000, the Company completed the sale of assets of its two
South Carolina locations (Greenville and Charleston) to a company formed by
some of its prior employees. The Company incurred a loss of $971, net of an
income tax benefit of $613 on the disposition of the assets. Financial
information with respect to the discontinued operations is summarized as
follows:
2000 1999 1998
---- ---- ----
Net revenues $ 7,606,953 $ 13,090,516 $ 8,218,964
Cost of revenues 6,551,899 11,001,801 7,005,653
----------- ------------ -----------
Gross profit 1,055,054 2,088,715 1,213,311
Operating expenses 2,063,100 2,277,605 1,647,783
----------- ------------ -----------
Loss before income taxes (1,008,046) ( 188,890) ( 434,472)
Income tax benefit ( 390,016) ( 17,362) -
----------- ------------ -----------
Net Loss from
Discontinued Operations $( 618,030) $( 171,528) $( 434,472)
=========== ============ ===========
13. Segment Information
The Company has organized business segments based upon branch office
locations in the Mid-Atlantic and Southeastern United States. These branch
office locations offer similar business information systems services with
the exception of the educational services unit at the Atlanta, GA office.
The Company started a new e-business solutions segment in fiscal 2000 at the
Atlanta, GA and Mt. Laurel, NJ locations.
TheCompany has adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information"(SFAS
No. 131). Operating segments are defined by SFAS No. 131 as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Emtec's chief operating
decision maker is the Chief Executive Officer of the Company. The Company's
reportable operating segments include the individual branch offices as
outlined below and the educational and e-business units. The educational
unit services schools, kindergarten through 12th grade. The e-business unit
is focused on marketing internet business solutions. The branch offices in
Greenville and Charleston, South Carolina which discontinued operations in
fiscal 2000 as described in Note 12 have been combined as one reportable
segment. The accounting policies of the segments are the same as those
described in Note 1. The Company had no intersegment revenues for the three
years in the period ended March 31, 2000. The company allocates corporate
overhead to segments based upon a combination of revenues earned and the
number of employees attributable to each segment. The following is financial
information relating to the operating segments:
F-15
For years ended March 31: 2000 1999 1998
---- ---- ----
External Sales
Mt. Laurel, NJ $ 19,480,769 $ 16,846,512 $ 15,963,403
Cranford, NJ 29,003,759 28,639,312 32,192,589
Atlanta, GA 29,521,736 19,252,643 12,507,915
Greenville/Charleston, SC 7,606,953 13,090,516 8,218,964
Norwalk, CT 5,125,806 64,987 -
Education-Atlanta 17,620,420 26,879,592 16,609,576
e-Business - - -
------------- ------------- ------------
Total External Sales $ 108,359,443 $ 104,773,562 $ 85,492,447
============= ============= ============
Interest Expense
Mt. Laurel, NJ $ 109,029 $ 109,598 $ 117,632
Cranford, NJ 188,810 173,987 316,822
Atlanta, GA 156,318 103,148 78,195
Greenville/Charleston, SC 55,548 63,612 63,867
Norwalk, CT 35,273 1,349 -
Education-Atlanta 177,104 320,642 141,065
e-Business - - -
------------- ------------- ------------
Allocated Interest Expense 722,082 772,336 717,581
Unallocated Interest Expense 12,752 5,129 28,139
------------- ------------- ------------
Total Interest Expense $ 734,834 $ 777,465 $ 745,720
============= ============= = ==========
Depreciation and Amortization
Mt. Laurel, NJ $ 92,585 $ 69,960 $ 91,813
Cranford, NJ 95,028 135,288 103,045
Atlanta, GA 77,927 63,072 54,783
Greenville/Charleston, SC 33,303 47,604 34,299
Norwalk, CT 1,397 - -
Education-Atlanta 1,223 6,000 7,215
e-Business - - -
------------- ------------- ------------
Allocated Depreciation
and Amortization 301,463 321,924 291,155
Unallocated Depreciation
and Amortization 85,598 60,501 78,549
------------- ------------- ------------
Total Depreciation
and Amortization $ 387,061 $ 382,425 $ 369,704
============= ============= ============
Operating Profit/(Loss)
Mt. Laurel, NJ $ 70,729 $( 413,703) $( 533,764)
Cranford, NJ ( 61,993) 537,820 368,884
Atlanta, GA ( 374,670) ( 663,693) ( 55,513)
Greenville/Charleston, SC ( 1,008,046) ( 188,890) ( 434,472)
Norwalk, CT ( 140,350) ( 95,275) -
Education-Atlanta 1,211,918 2,119,215 789,345
e-Business ( 355,933) - -
------------- ------------- ------------
Not Segment Operating
Profit (Loss) ( 658,345) 1,295,474 134,480
Over (Under) Allocated
Corporate Expenses 292,621 ( 376,811) ( 114,720)
------------- ------------- ------------
Total Operating Profit/
(Loss) Before Income
Taxes $( 365,724) $ 918,663 $ 19,760
Loss From Sale of
Greenville/Charleston ( 1,584) - -
Total Income Tax Benefit
(Expense) 64,311 118,723 -
------------- ------------- ------------
Net Income (Loss) $( 302,997) $ 799,940 $ 19,760
============= ============= ============
F-16
14. Subsequent Event
At January 17, 2001, the Company was acquired by American Geological
Enterprises, Inc. ("AGE") through an exchange of stock at a ratio of .9753
shares of AGE stock for 1 share of Company stock whereas AGE issued stock to
the shareholders of the Company in exchange for stock representing 100% of
the outstanding shares of the Company. Pursuant to the acquisition
agreement, AGE changed its name to Emtec, Inc. and a majority of the
directors and officers of the former AGE resigned in favor of the directors
and officers of the Company. Emtec, Inc. intends to seek a listing of its
common stock on NASDAQ's Over-The-Counter Bulletin Board. Immediately after
the transaction, the stock ownership of Emtec, Inc. {formerly AGE} was as
follows:
Shares Percent
------ -------
Original shareholders 1,380,997 19.5
(including public owners)
Transaction brokers 370,000 5.2
Former shareholders of the Company 5,329,501 75.3
--------- -----
Total 7,080,498 100.0
========= =====
Because the former shareholders of the Company acquired control of Emtec,
Inc.{formerly AGE}, the transaction is considered a "reverse acquisition" by
the Company for accounting purposes. The Company is treated as the
accounting acquirer of Emtec, Inc. {formerly AGE}, the legal acquirer. The
business combination shall be accounted for as a purchase under Accounting
Principles Board Opinion No. 16 "Business Combinations" (APB No. 16).
F-17
EMTEC, INC.
BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Assets
Current Assets
Cash and cash equivalents $ 86,851 $ 209,705
Marketable securities 13,149 5,310
Receivables:
Trade, less allowance
for doubtful accounts 14,663,228 20,493,121
Others 1,543,879 1,667,185
Inventories 1,509,853 1,613,526
Prepaid expenses 315,499 567,070
------------ ------------
Total Current Assets 18,132,459 24,555,917
------------ ------------
Property and Equipment
Equipment 2,257,431 1,587,375
Furniture and fixtures 230,722 230,637
Leasehold improvements 107,917 86,320
Vehicles 66,745 65,103
------------ ------------
2,662,815 1,969,435
Less accumulated depreciation 1,837,514 1,618,555
------------ ------------
Net Property and Equipment 825,301 350,880
------------ ------------
Other Assets 184,248 197,054
------------ ------------
Total Assets $ 19,142,008 $ 25,103,851
============ ============
The accompanying notes are an integral part of
these financial statements.
F-18
EMTEC, INC.
BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 9,563,175 $ 7,779,402
Due to related parties 19,000 19,000
Accounts payable 5,848,793 11,620,219
Income taxes payable - 89,443
Accrued liabilities 1,077,941 1,788,242
Deferred revenue 1,065,767 1,055,717
----------- -----------
Total Current Liabilities 17,574,676 22,352,023
----------- -----------
Shareholders' Equity
Common stock, no par value;
25,000,000 shares authorized;
5,704,683 shares issued at
December 31, 2000 and 1999 1,431,171 1,431,171
Accumulated other comprehensive income 1,776 -
Retained Earnings 197,385 1,383,657
----------- -----------
1,630,332 2,814,828
Less cost of treasury stock (240,000 shares) 63,000 63,000
----------- -----------
Total Shareholders' Equity 1,567,332 2,751,828
----------- -----------
Total Liabilities and
Shareholders' Equity $19,142,008 $25,103,851
=========== ===========
The accompanying notes are an integral part of
these financial statements.
F-19
EMTEC, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Revenues
Procurement services $ 60,104,527 $ 69,376,368
Service and consulting 10,984,204 8,562,636
------------ ------------
Total Revenues 71,088,731 77,939,004
------------ ------------
Cost of Revenues
Procurement services 53,795,330 61,890,761
Service and consulting 8,768,527 6,295,408
------------ ------------
Total Cost of Revenues 62,563,857 68,186,169
------------ ------------
Gross Profit
Procurement services 6,309,197 7,485,607
Service and consulting 2,215,677 2,267,228
------------ ------------
Total Gross Profit 8,524,874 9,752,835
------------ ------------
Operating Expenses
Sales, general and
administrative expenses 7,607,758 8,209,714
Termination costs 90,000 113,474
Interest expense 554,917 519,691
Startup costs, E-Business 909,573 -
-------------- ------------
Total Operating Expenses 9,162,248 8,842,879
------------ ------------
Income (Loss) from continuing operations ( 637,374) 909,956
------------ ------------
Other Income (Expense)
Legal settlement income, net of costs 175,110 -
Loss from disposition of marketable securities ( 149,285) -
------------ ------------
Total Other Income (Expense) 25,825 -
------------ ------------
Income (Loss) From Continuing Operations
Before Income Taxes ( 611,549) 909,956
------------ ------------
Income Taxes - 259,692
------------ ------------
Income (Loss) from Continuing Operations,
net of income taxes ( 611,549) 650,264
Loss from Discontinued Operations,
net of income taxes ( 63,916) ( 442,455)
------------ ------------
Net Income (Loss) $( 675,465) $ 207,809
============ ============
Income (loss) per share from Continuing
Operations {basic and diluted} $( 0.112) $ 0.114
Net Income (Loss) per share
{basic and diluted} $( 0.124) $ 0.036
Weighted Average Number of Shares
Outstanding {basic and diluted} 5,464,683 5,701,192
The accompanying notes are an integral part of
these financial statements.
F-20
EMTEC, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Cash Flows From Operating Activities
Net income (loss) for the nine months $( 675,465) $ 207,809
Adjustments to Reconcile Net Income
(Loss) To Net Cash Provided By
Operating Activities
Depreciation and amortization 286,421 270,068
Marketable securities received as legal settlement income ( 158,084) -
Loss from marketable securities 149,285 -
Changes In Operating Assets and
Liabilities
Increase in marketable securities - ( 5,310)
Decrease in receivables 1,816,307 2,086,389
Increase in inventories ( 418,390) ( 659,209)
Decrease (increase) in prepaid expenses 144,191 ( 434,587)
Decrease in other assets 7,234 19,345
Decrease in accounts payable (2,330,954) ( 3,716,515)
Increase in income taxes payable - 78,888
Decrease in customer deposits ( 358,000) ( 634,000)
Decrease in accrued liabilities ( 67,658) ( 116,508)
(Decrease) increase in deferred revenue ( 76,784) 411,864
----------- ------------
Net Cash Used In Operating Activities (1,681,897) ( 2,491,766)
----------- ------------
Cash Flows Used In Investing Activities
Purchase of equipment ( 170,099) ( 92,723)
----------- ------------
Net Cash Used In Investing Activities ( 170,099) ( 92,723)
----------- ------------
Cash Flows From Financing Activities
Net increase in line of credit 1,252,434 2,024,588
Purchased treasury stock ( 63,000)
----------- ------------
Net Cash Provided By Financing Activities 1,252,434 1,961,588
----------- ------------
Net Decrease in Cash and Cash Equivalents ( 599,562) ( 622,901)
Beginning Cash and Cash Equivalents 686,413 832,606
----------- ------------
Ending Cash and Cash Equivalents $ 86,851 $ 209,705
============ ============
The accompanying notes are an integral
part of these financial statements.
F-21
EMTEC, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
1.) Basis of Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months
ended December 31, 2000 are not necessarily indicative of the results that
may be expected for the year ended March 31, 2001. For further
information, refer to the other financial statements and footnotes thereto
included in this Form 8-K/A.
2.) Reverse Acquisition
At January 17, 2001, the Company was acquired by American Geological
Enterprises, Inc. ("AGE") through an exchange of stock at a ratio of .9753
shares of AGE stock for 1 share of Company stock whereas AGE issued stock
to the shareholders of the Company in exchange for stock representing 100%
of the outstanding shares of the Company. Pursuant to the acquisition
agreement, AGE changed its name to Emtec, Inc. and a majority of the
directors and officers of the former AGE resigned in favor of the
directors and officers of the Company. Emtec, Inc. intends to seek a
listing of its common stock on NASDAQ's Over-The-Counter Bulletin Board.
Immediately after the transaction, the stock ownership of Emtec, Inc.
{formerly AGE} was as follows:
Shares Percent
------ -------
Original shareholders 1,380,997 19.5
(including public owners)
Transaction brokers 370,000 5.2
Former shareholders of the Company 5,329,501 75.3
--------- -----
Total 7,080,498 100.0
========= =====
Because the former shareholders of the Company acquired control of Emtec,
Inc.{formerly AGE}, the transaction is considered a "reverse acquisition"
by the Company for accounting purposes. The Company is treated as the
accounting acquirer of Emtec, Inc. {formerly AGE}, the legal acquirer. The
business combination shall be accounted for as a purchase under Accounting
Principles Board Opinion No. 16 "Business Combinations" (APB No. 16).
F-22
3.) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) encourages, but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has adopted Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the
impact of applying the fair value method of SFAS No. 123.
All stock options granted for the nine months ended December 31, 2000 and
1999 were determined to have a fair value of zero. The exercise price of
these options was set at $1 per share, an amount in excess of 150% of the
fair value of the underlying stock. Therefore, no options granted during
the nine month periods have been exercised as of December 31, 2000. A pro
forma presentation of compensation cost and earnings per share is not
required due to the zero fair value determination. At September 23, 1996,
options to purchase 372,895 shares were issued primarily to the founders
of the Company at an exercise price of $.48 per share. At December 31,
2000, 166,227 of these founder options were outstanding. Option activity
is summarized in the following table.
Options outstanding - April 1, 2000 424,082
For the nine months ended December 31, 2000:
Options granted 218,407
Options exercised 0
Options forfeited or expired ( 49,500)
-------
Options outstanding - December 31, 2000 592,989
=======
4.) Net Income (Loss) per Share
The net income (loss) per share and the income per share from continuing
operations computations have been made in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No.
128). These per share computations use the weighted average number of
shares outstanding during the period. SFAS No. 128 requires a separate
presentation of diluted income per share from continuing operations and
diluted net income per share for the potential dilutive effect of
securities such as stock options. The Company maintains a stock option
plan as discussed in Note 3. However, based upon the pricing of the
options in excess of the underlying value of the Company stock during the
nine months ended December 31, 2000 and 1999, the stock options are
antidilutive. Therefore, there is no separate presentation of diluted net
income per share.
F-23
5.) Litigation
In a previous year Emtec Inc. instituted litigation against two companies
(defendants) that were in discussions with Emtec about a possible merger.
The complaint in the action charged the two companies for breach of
contract, interference with business relationships and misappropriation of
trade secrets. The parties settled the litigation in June 2000. Under
terms of the settlement, the Company received a $350,000 cash payment and
333,116 shares of the defendant's common stock with a market value of
$176,885 at date of settlement. Legal and other costs of litigation
reduced net settlement income to $175,110. The Company has recorded a
loss of $149,285 related to a permanent decline in the value of the
securities received in this settlement during the nine months ended
December 31, 2000.
In 1999 Emtec, Inc. instituted litigation against a company (defendant)
for breach of contract action in an amount approximating $50,000. The
defendant has stated a counter claim in excess of $8 million for damages
resulting from Emtec's alleged negligence, causing the defendant's
computer system to become corrupted and unavailable. Damages will be
contested by Emtec, as will liability. At December 31, 2000, the case is
in the discovery phase.
6.) Financing Agreements
The Company has available a $15,000,000 revolving line of credit under a
business financing agreement whereas the Company may borrow on 85% of its
eligible trade receivables and 95% on its eligible inventory value.
Eligible inventory value is defined as 100% of the total aggregate
wholesale inventory price financed by the creditor that is unsold and in
the Company's possession and control at each inventory report date. At
December 31, 2000, the Company had approximately $3,300,000 available
under the terms of the agreement. Interest on the borrowings is charged
monthly at 0.50% over the existing prime rate. Substantially all Company
assets collateralize amounts borrowed. The lending agreement contains
financial covenants that require the Company to maintain a minimum current
ratio, a minimum total liabilities to net worth ratio and minimum results
of operations. The credit line may be renewed for another year or
terminated at the option of either the Company or the lender at September
23, 2001. Currently, the company is in negotiations with its lender to
revise financial covenants and obtain a waiver for the fiscal 2001 net
profit covenant.
F-24
7.) Income Taxes
Income taxes (benefit) consisted of the following for the nine months
ended December 31, 2000 and 1999:
2000 1999
---- ----
Continuing Operations
Current taxes
Federal $ - $ 236,084
State - 23,608
--------- -------
- 259,692
Deferred taxes
Federal - -
--------- -------
- 259,692
Discontinued Operations
Current benefit
Federal - (244,619)
State - ( 34,601)
--------- ----------
$ - $ (279,220)
--------- ----------
Net Income Tax Benefit $ - $ ( 19,528)
========= ---=======
8.) Discontinued Operations
During fiscal 2000, the Company completed the sale of assets of its two
South Carolina locations (Greenville and Charleston) to a company formed
by some of its prior employees. The Company recorded an additional loss
from discontinued operations of $63,916 for the nine months ended
December 31, 2000. The loss from discontinued operations of $63K this year
is mainly due to some lease payments, contracted advertising expenses and
additional reserve for bad-debt allowance.
F-25
9.) Segment Information
The following is financial information relating to the operating segments:
Nine months ended Dec. 31: 2000 1999
---- ----
External Sales
Mt. Laurel, NJ $ 13,173,890 $ 16,195,149
Cranford, NJ 30,594,796 20,233,200
Atlanta, GA 16,341,537 25,253,092
Greenville/Charleston, SC - 6,508,171
Norwalk, CT 1,988,311 3,523,098
Education-Atlanta 8,981,447 12,734,465
e-Business 8,750 -
------------- -------------
Total External Sales $ 71,088,731 $ 84,447,175
============= =============
Interest Expense
Mt. Laurel, NJ $ 101,299 $ 87,389
Cranford, NJ 228,215 131,946
Atlanta, GA 118,308 117,560
Greenville/Charleston, SC - 46,884
Norwalk, CT 24,417 22,381
Education-Atlanta 59,288 147,306
e-Business - -
------------- -------------
Allocated Interest Expense 531,527 553,466
Unallocated Interest Expense 23,390 13,109
------------- -------------
Total Interest Expense $ 554,917 $ 566,575
============= =============
Depreciation and Amortization
Mt. Laurel, NJ $ 51,000 $ 48,980
Cranford, NJ 98,314 93,896
Atlanta, GA 45,848 43,826
Greenville/Charleston, SC - 35,603
Norwalk, CT 8,000 -
Education-Atlanta 4,400 4,500
e-Business - -
------------- -------------
Allocated Depreciation
and Amortization 207,562 226,805
Unallocated Depreciation
and Amortization 78,859 43,263
------------- -------------
Total Depreciation
and Amortization $ 286,421 $ 270,068
------------------ ============= =============
Operating Profit/(Loss)
Mt. Laurel, NJ $( 425,082) $ 259,448
Cranford, NJ 513,929 ( 76,549)
Atlanta, GA ( 164,498) ( 108,005)
Greenville/Charleston, SC ( 63,916) ( 721,675)
Norwalk, CT ( 298,929) ( 144,701)
Education-Atlanta 646,531 905,491
e-Business ( 909,308) -
------------- ------------
Not Segment Operating
Profit (Loss) ( 701,273) 114,009
Over (Under) Allocated
Corporate Expenses ( 17) 74,272
------------- -------------
Net Income (Loss) from Operations ( 701,290) 188,281
Other Income 25,825 -
Income Tax Benefit ( - ) ( 19,528)
------------- -------------
Net Income (Loss) ( 675,465) 207,809
============= =============
F-26
EMTEC, INC.
(Formerly AMERICAN GEOLOGICAL ENTERPRISES, INC.)
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The Company's pro forma financial statements give effect to the January 17, 2001
acquisition by Emtec, Inc. {Delaware Corp - formerly American Geological
Enterprises, Inc. ("AGE")} of Emtec, Inc. {New Jersey Corp} as set forth in Note
(1), as if such transaction had occurred at December 31, 2000 for pro forma
balance sheet purposes and as if such transaction had occurred at the beginning
of the periods presented for the purposes of the pro forma statements of
operations. Because the former shareholders of Emtec, Inc. {NJ Corp} end up with
control of Emtec, Inc. {formerly AGE}, the transaction is considered a "reverse
acquisition" purchase by Emtec, Inc. {NJ Corp} of Emtec, Inc. {formerly AGE}.
Emtec, Inc. {NJ Corp} has a March 31 fiscal year, whereas Emtec, Inc. {formerly
AGE} had a December 31 fiscal year. Therefore, the pro forma statements of
operations combine the years ended March 31, 2000 and December 31, 1999 and the
nine months ended December 31, 2000 and September 30, 2000.
The historical financial statements of Emtec, Inc. {NJ Corp} are the historical
financial statements of the combined Company. The pro forma financial statements
and accompanying Notes 1 and 2 should be read in conjunction with a reading of
the financial statements of Emtec, Inc. {NJ Corp.} and Emtec, Inc. {formerly
AGE}. All pro forma adjustment note references pertain to Note 2.
F-27
EMTEC, INC.
{Formerly AMERICAN GEOLOGICAL ENTERPRISES, INC.}
PRO FORMA BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2000
Historical
Emtec, Inc. Emtec, Inc.
(New Jersey (Delaware Corp) Pro Forma Pro Forma
Corp) (Formerly AGE) Adjustments Totals
----------- -------------- ----------- ------
Assets
Current Assets
Cash and cash equivalents $ 86,851 $ 1,017,205 $ - $ 1,104,056
Marketable securities 13,149 222,308 - 235,457
Receivables:
Trade, less allowance
for doubtful accounts 14,663,228 19,625 - 14,682,853
Others 1,543,879 1,276 - 1,545,155
Inventories 1,509,853 - - 1,509,853
Prepaid expenses 315,499 73 - 315,572
------------ ----------- ----------- ------------
Total Current Assets 18,132,459 1,260,487 - 19,392,946
Investments in Geothermal Power Unit - 602,280 ( 46,613)(a) 555,667
Marketable securities 70,697 2,197 (a) 72,894
Net Property and Equipment 825,301 - - 825,301
Other Assets 184,248 - - 184,248
------------ ----------- ----------- ------------
Total Assets $ 19,142,008 $ 1,933,464 $( 44,416) $ 21,031,056
============ =========== =========== ============
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit $ 9,563,175 $ - $ - $ 9,563,175
Accounts payable 5,848,793 53,946 - 5,902,739
Other current liabilities 2,162,708 9,093 - 2,171,801
------------ ----------- ----------- ------------
Total Current Liabilities 17,574,676 63,039 - 17,637,715
Deferred income taxes - 68,948 ( 10,834)(a) 58,114
Deferred revenue - 852,535 - 852,535
------------ ----------- ----------- ------------
Total Liabilities 17,574,676 984,522 ( 10,834) 18,548,364
------------ ----------- ----------- ------------
Shareholders' Equity
Common stock 1,431,171 13,810 (1,374,176)(a)(b) 70,805
Additional paid-in capital - 600,411 1,675,315 (b) 2,275,726
Accumulated other comprehensive
income 1,776 9,506 ( 9,506)(b) 1,776
Retained Earnings 197,385 325,215 ( 325,215)(b) 197,385
------------ ----------- ----------- ------------
1,630,332 948,942 ( 33,582) 2,545,692
Less cost of treasury stock 63,000 - - 63,000
------------ ----------- ----------- ------------
Total Shareholders' Equity 1,567,332 948,942 ( 33,582) 2,482,692
------------ ----------- ----------- ------------
Total Liabilities and
Shareholders' Equity $ 19,142,008 $ 1,933,464 ( 44,416) $ 21,031,056
============ =========== =========== ============
F-28
EMTEC, INC.
{Formerly AMERICAN GEOLOGICAL ENTERPRISES, INC.}
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
Historical
Emtec, Inc. Emtec, Inc.
(New Jersey (Delaware Corp) Pro Forma Pro Forma
Corp) (Formerly AGE) Adjustments Totals
----------- -------------- ----------- ------
Year Ended: March 31, 2000 December 31, 1999
- ---------- -------------- -----------------
Total Revenues $ 100,752,490 $ 172,034 $ - $100,924,524
Total Cost of Revenues 88,109,628 86,058 (1,942)(c) 88,193,744
------------- --------- ------- ------------
Total Gross Profit 12,642,862 85,976 1,942 12,730,780
------------- --------- ------- ------------
Operating Expenses
Sales, general & administrative
expenses 10,890,841 79,560 - 10,970,401
Termination costs 74,480 - - 74,480
Interest expense 679,286 - - 679,286
Startup costs; E-Business 355,933 - - 355,933
------------- --------- ------- ------------
Total Operating Expenses 12,000,540 79,560 - 12,080,100
------------- --------- ------- ------------
Income From Continuing
Operations 642,322 6,416 1,942 650,680
------------- --------- ------- ------------
Other Income
Interest income - 31,838 - 31,838
Dividend income - 12,756 - 12,756
Royalties - 404 - 404
------------- --------- ------- ------------
Total Other Income - 44,998 - 44,998
------------- --------- ------- ------------
Income From Continuing
Operations Before Income Taxes 642,322 51,414 1,942 695,678
Income taxes 326,318 7,505 486(c) 334,309
------------- --------- ------- ------------
Income From Continuing
Operations, Net of Income Taxes 316,004 43,909 1,456 361,369
Loss from discontinued operations,
net of income taxes ( 618,030) - - ( 618,030)
Loss on sale of discontinued
operations, net of income taxes ( 971) - - ( 971)
------------- --------- ------- -------------
Net Income (Loss) $( 302,997) $ 43,909 $ 1,456 $( 257,632)
============= ========= ======= =============
Income per share
from continuing operations $ 0.032 $ 0.050
(basic and diluted)
Net income (loss) per share $ 0.032 $( 0.036)
(basic and diluted)
Weighted average number
of shares outstanding 1,380,997 7,254,493
(basic and diluted)
F-29
EMTEC, INC.
{Formerly AMERICAN GEOLOGICAL ENTERPRISES, INC.}
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
Historical
Emtec, Inc.
Emtec, Inc. (Delaware Corp) Pro Forma Pro Forma
(New Jersey Corp) (Formerly AGE) Adjustments Totals
----------------- -------------- ----------- ------
Nine Months Ended: December 31, 2000 September 30, 2000
- ----------------- ----------------- ------------------
Total Revenues $71,088,731 $128,860 $ - $71,217,591
Total Cost of Revenues 62,563,857 64,605 (1,457)(c) 62,627,005
----------- -------- ------- -----------
Total Gross Profit 8,524,874 64,255 1,457 8,590,586
----------- -------- ------- -----------
Operating Expenses
Sales, general & administrative
expenses 7,607,758 27,151 - 7,634,909
Termination costs 90,000 - - 90,000
Interest expense 554,917 - - 554,917
Startup costs; E-Business 909,573 - - 909,573
----------- -------- ------- -----------
Total Operating Expenses 9,162,248 27,151 - 9,189,399
----------- -------- ------- -----------
Income (Loss) From Continuing
Operations ( 637,374) 37,104 1,457 ( 598,813)
----------- -------- ------- -----------
Other Income (Expense)
Legal settlement income, net of costs 175,110 - - 175,110
Loss from marketable securities ( 149,285) - - ( 149,285)
Interest income 21,772 - 21,772
Dividend income - 6,078 - 6,078
Royalties - 96 - 96
----------- -------- ------- -----------
Total Other Income (Expense) 25,825 27,946 - 53,771
----------- -------- ------- -----------
Income (Loss) From Continuing
Operations Before Income Taxes ( 611,549) 65,050 1,457 ( 545,042)
Income taxes - 16,940 364 (c) 17,304
----------- -------- ------- -----------
Income (Loss) From Continuing
Operations, Net of Income Taxes ( 611,549) 48,110 1,093 ( 562,346)
Loss from discontinued operations,
net of income taxes ( 63,916) - - ( 63,916)
Loss on sale of discontinued
operations, net of income taxes - - - -
----------- -------- ------- ------------
Net Income (Loss) $( 675,465) $ 48,110 $ 1,093 $( 626,262)
============ ======== ------- ------------
Income (loss) per share from
continuing operations $ 0.035 $( 0.079)
(basic and diluted)
Net income (loss) per share $ 0.035 $( 0.088)
(basic and diluted)
Weighted average number
of shares outstanding 1,380,997 7,080,498
(basic and diluted)
F-30
EMTEC, INC.
(FORMERLY AMERICAN GEOLOGICAL ENTERPRISES, INC.)
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
1. Acquisition of Emtec, Inc. {NJ Corp}
At January 17, 2001, Emtec, Inc. {NJ Corp} was acquired by American
Geological Enterprises, Inc. ("AGE") through an exchange of stock at a ratio
of .9753 shares of AGE stock for 1 share of Emtec, Inc. {NJ Corp} stock
whereas AGE issued stock to the shareholders of the Emtec, Inc. {NJ Corp} in
exchange for stock representing 100% of the outstanding shares of the Emtec,
Inc. {NJ Corp}. Pursuant to the acquisition agreement, AGE changed its name
to Emtec, Inc. and a majority of the directors and officers of the former
AGE resigned in favor of the directors and officers of the Emtec, Inc. {NJ
Corp}. Emtec, Inc. intends to seek a listing of its common stock on NASDAQ's
Over-The-Counter Bulletin Board. Immediately after the transaction, the
stock ownership of Emtec, Inc. {formerly AGE} was as follows:
Shares Percent
------ -------
Original shareholders 1,380,997 19.5
(including public owners)
Transaction brokers 370,000 5.2
Former shareholders of the Company 5,329,501 75.3
--------- -----
Total 7,080,498 100.0
========= =====
Because the former shareholders of the Emtec, Inc. {NJ Corp} acquired
control of Emtec, Inc.{formerly AGE}, the transaction is considered a
"reverse acquisition" by Emtec, Inc. {NJ Corp} for accounting purposes. The
Company is treated as the accounting acquirer of Emtec, Inc. {formerly AGE},
the legal acquirer.
2.) Pro Forma Adjustments
a.) The Company shall account for the reverse acquisition as a purchase
under Accounting Principles Board Opinion No. 16 "Business
Combinations" (APB No. 16). APB No. 16 states that assets acquired
for issuances of stock should be stated at "cost" when acquired and
cost may be determined by the fair value of the consideration given
or by the fair value of the property acquired, whichever is more
clearly evident. Due to inactive trading of Company stock, the
Company has determined cost based upon the fair value of the
property acquired including direct costs of acquisition. Pro forma
adjustments pertaining to the costs of purchase of the assets and
liabilities of Emtec, Inc. {formerly AGE} and the effect of the
measurement of fair value on the net deferred tax liability are
presented on the pro forma balance sheet.
F-31
b.) A pro forma adjustment is presented on the pro forma balance sheet
to reflect the change of the capital structure of Emtec, Inc. {NJ
Corp} to correspond with the capital structure of its legal parent
company, Emtec, Inc. {formerly AGE}. Common stock is stated based
upon pro forma outstanding shares and the par value per share of
the legal parent company. Pro forma retained earnings are those of
Emtec, Inc. {NJ Corp}, the accounting acquirer.
c.) A pro forma adjustment is presented in the pro forma statements of
operations to account for the reduction in amortization expense
attributable to the determination of the purchase cost of the
investment in geothermal power unit as an amount below its prior
balance sheet value. The tax effect of the amortization reduction
is also presented as a pro forma adjustment.
F-32
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement on Form
10 to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 17, 2001 EMTEC, INC.
By:/s/ John P. Howlett
-------------------------------
John P. Howlett, Chairman,
President and Chief
Executive Officer