-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BQDAuKGoDDMo0mDB847WVZF3/42LaSGxjaj/Ebd9CeGP+N20tVDwtOJYHF81F8zW 9iwIjzPg4mURZTpt2MFJaQ== 0000950117-04-002593.txt : 20040714 0000950117-04-002593.hdr.sgml : 20040714 20040714135431 ACCESSION NUMBER: 0000950117-04-002593 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMTEC INC/NJ CENTRAL INDEX KEY: 0000005117 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870273300 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32789 FILM NUMBER: 04913527 BUSINESS ADDRESS: STREET 1: 817 EAST LAKE GATE DRIVE CITY: MT LAUREL STATE: UT ZIP: 08054 BUSINESS PHONE: 8013633283 MAIL ADDRESS: STREET 1: 817 EAST GATYE DRIVE CITY: MT LAUREL STATE: NJ ZIP: 08054 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GEOLOGICAL ENTERPRISES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR PROCESSING CORP DATE OF NAME CHANGE: 19820318 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GEOTHERMAL ENERGY INC DATE OF NAME CHANGE: 19681212 10-K 1 a38028.txt EMTEC, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2004 OR For the transition period from to -------- -------- Commission file number: 0-32789 EMTEC, INC. (Exact name of registrant as specified in its charter) Delaware 87-0273300 (State of incorporation or organization) (I.R.S. Employer Identification No.) 572 Whitehead Road, Bldg#1 Trenton, New Jersey 08619 (Address of principal executive offices, including zip code) (609)-528-8500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value ----------------------------- Title of class Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [_] Yes [X] No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of September 30, 2003 was approximately $3,235,670 computed by reference to the closing price of the common stock for that date. As of July 1, 2004, there were outstanding 7,380,498 shares of the registrant's common stock. EMTEC, INC. 2004 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1. Business............................................................1 Item 2. Properties..........................................................7 Item 3. Legal Proceedings...................................................8 Item 4. Submission of Matters to a Vote of Security Holders.................8 PART II Item 5. Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................9 Item 6. Selected Financial Data.............................................9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................10 Item 7A. Quantitative and Qualitative Information About Market Risk.........25 Item 8. Financial Statements and Supplementary Data........................26 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............................................26 Item 9A. Controls and Procedures............................................26 PART III Item 10. Directors and Executive Officers...................................27 Item 11. Executive Compensation.............................................29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................31 Item 13. Certain Relationships and Related Transactions.....................33 Item 14. Principal Accountant Fees and Services.............................33 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................................35 Signatures.........................................................59 -i- References in this Annual Report to "we," "us," or "our" are to Emtec, Inc. and its subsidiaries, unless the context specifies or requires otherwise. Cautionary Statement Regarding Forward-Looking Statements You should carefully review the information contained in this Annual Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the "SEC"). In this Annual Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called "forward-looking statements" by words such as "may," "will," "should," expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those words and other comparable words. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks discussed in this Annual Report for the year ended March 31, 2004 and other reports or documents that we file from time to time with the SEC. Those factors may cause our actual results to differ materially from any of our forward-looking statements. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement. Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure, or other budgets, which may in turn affect our business, financial position, results of operations, and cash flows. -ii- PART I Item 1. Business Introduction Emtec (OTC: ETEC) is a systems integrator focused on providing technology solutions that enable its customers to effectively use and manage their data to grow their businesses. Our areas of specialization in information technology ("IT") services include enterprise computing, data communications, data access, network design, enterprise backup and storage consolidation, managed services and staff augmentation. Emtec's solutions are crafted to enable our customers to become more efficient and effective, thereby giving them a competitive advantage. To date, the most significant portion of our revenues has been derived from our activities as a reseller of IT products, such as workstations, servers, microcomputers, application software and networking and communications equipment. However, we are actively endeavoring to increase the portion of our revenues that are derived from IT services. We anticipate that an increasing percentage of our future revenues will be derived from such business. Named to the VARBusiness 500 list of top network integrators, value added resellers, and consultants in the U.S. every year since 1995, we combine extensive experience in systems integration with premier technology elements to provide our customers with sophisticated, streamlined, truly comprehensive solutions. Over the past two decades, we have built strong relationships with leading manufacturers, such as Cisco, HP, IBM, Microsoft, Sun Microsystems, Dell, and Veritas, thereby enabling us to provide cutting-edge, scalable, reliable and secure solutions. This, along with our background in information technology, positions us as a premier, single-source provider of information systems, and network solutions. Our customers are primarily Fortune 2000 companies, state and local government, local school districts, and other large and mid-sized companies located principally in the New York/New Jersey Metropolitan area and the Southeastern United States. Our commercial business is generally with customers with annual revenues ranging from $50 million to $500 million. We service our customer base from leased facilities in New Jersey, New York, Georgia, and Florida. Our executive offices are located at 572 Whitehead Road, Building#1, Trenton, New Jersey, 08619; telephone: (609) 528-8500. Our website is located at www.emtecinc.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information on our website is not part of this Annual Report. Industry Background The broad market in which we compete is the provision of IT services. This marketplace consists of traditional IT services such as hardware and software procurement, life-cycle services, and network consulting, as well as new and innovative Internet services such as web enablement, remote network monitoring, help desk services, and information security. As the market for IT products has matured over the past several years, price competition has intensified. That factor, combined with abbreviated product lifecycles, has forced IT product manufacturers to pursue lower cost manufacturing and distribution strategies. Resellers who were able to serve the needs of corporate end users requiring diverse brands of products and related IT services were initial beneficiaries of this heightened competition. More recently, however, continuing competition and manufacturers' renewed efforts to improve their cost structures have led to both consolidations and business failures among resellers. Manufacturers have shifted from exclusive distribution partners to "open sourcing" and some have begun direct selling efforts with a view to capturing market share from resellers. At the same time that the market for IT products is consolidating, the market for IT services is expanding. Many companies have become increasingly dependent on the use of IT as a competitive tool in today's business environment. The need to distribute and access data on a real-time basis throughout an organization and between organizations has led to the rapid growth in network computing infrastructures that connect numerous and geographically dispersed end users through local and wide area networks. This growth has been driven by the emergence of industry standard hardware, software, and communications tools, as well as the significant improvement in the performance, capacity, and utility of such network-based equipment and applications. The decision-making process that confronts companies when planning, selecting, and implementing IT infrastructure and services continues to grow more complex. Organizations are continually faced with technology obsolescence and must design new networks, upgrade, and migrate to new systems. As a result of the rapid changes in IT products and the risks associated with the commitment of large capital expenditures for products and services whose features and perceived benefits are not within the day-to-day expertise of operating management, many businesses increasingly are outsourcing some or all of their network management and support functions and are seeking the expertise of independent providers of IT products and services. Our Strategy Our primary business objective is to become a leading single-source provider of high quality and innovative IT products, services, and support. We believe that by working with a single-source provider, business organizations will be able to adapt more quickly to technological changes and reduce their overall IT costs. To this end, we are pursuing the following strategies: Pursuing Strategic Acquisitions We are seeking to expand our service offerings, to add to or enhance our base of technical or sales personnel, and to nurture and expand client relationships by means of acquisitions of companies whose businesses complement our businesses and, in particular, our IT consulting services. We intend to focus on companies with management teams who are willing to commit to long-term participation in our organization and who share our vision of continued growth. As of the filing date of this report, there was no material pending acquisition. -2- On January 9, 2002, we acquired substantially all of the assets of Devise Associates, Inc., an information technology consulting and managed services subsidiary of McLeodUSA, Inc. located in New York City. On August 12, 2002, we acquired certain assets of Acentra Technologies, Inc., including the assumption of the State of New Jersey computer supply and services contract, for a net purchase price of $165,607 in cash. On August 31, 2002, we acquired all of the customer contracts and certain assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The purchase price is being paid over a two-year period commencing on the date of the acquisition and is based on a share of earnings derived from the customer contracts transferred from Turnkey to Emtec. Capitalizing on Existing Relationships We have invested in training and committed resources to obtain company certifications from key industry manufacturers, and have entered into written agreements with most of these manufacturers, such as Sun, IBM, HP, Dell, CISCO, Microsoft, Novell and Citrix. These agreements grant us a nonexclusive right to purchase the manufacturer's hardware and license its software for our internal business use and for commercial integration and resale. Typically, our agreements with such manufacturers, such as those with Sun, IBM, CISCO, Microsoft, Novell, Dell and Citrix, provide for a one-year term, renewable by the parties for successive one-year terms and are terminable by either party on prior written notice ranging from 30 to 45 days. They generally do not contain financial terms for resale of the manufacturer's products, which terms are separately governed by purchase orders. Moreover, we believe that our history of satisfying the IT product requirements of our larger customers is facilitating the marketing of our broad range of services to this important segment of our clientele. Our Business o IT Services Enterprise Computing Solutions: We offer a full spectrum of IT product acquisition and support services needed to support client/server environments, including product sourcing, network design and implementation, technical support, server consolidation, and clustering and load balancing for high availability. Managed Services and Staff Augmentation Solutions: We manage and support customers' networks through the utilization of outsourced help desk and network monitoring services as well as through our own on-site engineering resources. This allows organizations to focus the majority of their efforts on their businesses - not on managing their IT infrastructures. Data Communications Solutions: We offer Local Area Network/ Wide Area Network and data wireless connectivity, voice over IP and structured cabling solutions that are designed to enhance communication capabilities, while decreasing costs. Data Access Solutions: We enable on-demand access to information from anywhere over any network. Our mobility, messaging, and management solutions can provide secure data access, increased business productivity, and reduced IT costs for any organization. -3- Innovation Center: Among our most important customer resources is our Innovation Center established at Norcross, Georgia. This center gives our customers the ability to test the scalability and suitability of a hardware and software configuration before investing in the technology. Staffed by high-level certified engineers, the Innovation Center can simulate up to a 2,000-user load. The Center is equipped with high-end Sun Microsystems'TM' servers, Sun Ray'TM' thin clients, Sun'TM' storage arrays, and NT servers, as well as a wide array of software applications, including Lotus Notes/Domino, IBM's DB2 product family, Oracle, Veritas backup and storage products. Lifecycle Management Services: Our lifecycle management services are designed to provide customers with continuous availability of service and support throughout the lifecycle of their IT investments, including the full spectrum of IT product acquisition and support services needed to support server environments. Our services include: o Evaluation and prioritization of business objectives to determine the best course of action for our customers; o Consultation with customers to identify the right IT products and services for their needs; o Leveraging our vendor relationships to quickly source the right combination of products; o Providing logistical support needed to deploy a major technology roll out; and o Providing continuous support to enable a client to improve end-user satisfaction, minimize downtime, and lower the total cost of ownership. K-12 Specialized Services for Student and Faculty Needs: We integrate top-quality curriculum software and computer products into the classroom. We have significant experience in building local area networks that link many campuses together. We also provide school district-wide support and sustain Internet access to educational resources worldwide. We tailor our array of services to make the best use of limited funds. Manufacturers Support Services Contracts: We offer manufacturer support service contracts that provide our clients with extended technical support, onsite hardware service and access to new software releases at a fixed price. Most of the revenue from this portion of our business comes from selling Sun Microsystems contracts. Our IT services activities accounted for approximately 18%, 17%, and 19% of our total revenues for fiscal years 2004, 2003 and 2002, respectively. o IT Reseller IT Reseller: We are an authorized reseller of the products of many leading IT manufacturers, such as 3Com, CISCO, HP, IBM, Intel, Microsoft, NEC, Veritas, Novell, Dell, Lexmark, and Sun. Such products include workstations, servers, networking and communications equipment, enterprise computing products, and application software. Our business depends in large part upon our ongoing access to well established aggregators, in particular GE Access, Ingram Micro, Inc. and Tech Data Corp. as well as directly with Dell -4- Computers to enable us to acquire IT products at competitive prices and on reasonable terms for resale to our customers. Through our alliances with GE Access, Ingram, Tech Data and Dell Computers, we provide our customers with competitive pricing and value-added services such as electronic product ordering, product configuration, testing, warehousing, and delivery. Our relationships with our aggregators and Dell Computers allow us to minimize inventory risk by ordering products primarily on an as-needed basis. We believe that in most cases our ability to acquire products on a cost-plus basis affords us the opportunity to avail ourselves of prices lower than those that could be obtained independently from manufacturers or other vendors. We utilize electronic ordering and pricing systems that provide real-time status checks on the aggregators' inventories and maintain electronic data interchange links to other suppliers. Our sales team is thereby able to schedule shipments more accurately and to provide electronically-generated client price lists. We have not entered into any long-term supply contracts with any of our suppliers, as we purchase computers, computer systems, components, and parts on a purchase order basis. Our agreements with GE Access, Ingram, Tech Data and Dell, who collectively supplied approximately 93%, 85%, and 79% of our resale products in the fiscal years 2004, 2003, and 2002, respectively, may be terminated by such companies at any time upon 30 days' prior written notice. We receive manufacturer rebates resulting from certain equipment sales. In addition, we receive volume discounts and other incentives from various suppliers. Except for products in transit or products awaiting configuration at our facility, we generally do not maintain large inventory balances. Our primary vendors limit price protection to that provided by the manufacturer (generally less than 30 days) and they restrict product returns, other than defective returns, to a percentage (the percentage varies depending on the vendor and when the return is made) of products purchased. Those returns must occur during a defined period, at the lower of the invoiced price or the current price, subject to the specific manufacturer's requirements and restrictions. Our IT reseller activities accounted for approximately for 82%, 82%, and 81% of our total revenues for the fiscal years ended March 31, 2004, 2003, and 2002, respectively. Marketing Our marketing efforts are focused on: o Broadening our public image an IT service provider; o Promoting our offerings to current customers, prospects, partners, and investors; o Maintaining a constant flow of marketing communications to increase and maintain our market presence; o Driving prospects to our web site; and o Increasing overall inquiries and sales from all sources. -5- Our marketing division is charged with sales lead generation. Through diverse efforts that include seminars, tradeshows, direct mail, telemarketing, a bi-monthly newsletter, and through our website we create multiple and frequent "touches" of our prospective customers. The primary goal - to increase the number of face to face meeting opportunities between our account team and prospective clients, and to drive additional opportunities through our sales pipeline. Our business development center is charged with sales lead generation. Customers Our targeted customers are primarily Fortune 2000 companies, state and local governments, local school districts, and other large and mid-sized companies located principally in the New York/New Jersey Metropolitan area and the Southeastern United States. Our commercial business is generally with customers with annual revenues ranging from $50 million to $500 million. Although we have over 150 customers, our two largest customers, State of New Jersey, and Gwinnett County School System (Georgia), accounted, respectively, for approximately 31% and 16% of our revenues for the year ended March 31, 2004. These same two customers accounted, respectively, for approximately 15% and 20% of our revenues in fiscal year 2003 and approximately 0% and 14% of our revenues in fiscal year 2002. The State of New Jersey computer supply and service contract was acquired in the August 12, 2002 asset acquisition from Acentra Technologies. The State of New Jersey contract is subject to annual renewals. In May 2004, the State of New Jersey extended the contract terms through December 2004. An additional eight customers, Duval County School System, Cingular Wireless, Tiffany & Co., Bally's Park Place Casinos, ING Financial Services, BellSouth Corporation, GE, and Cox Communications, collectively accounted for 37%, 31%, and 22% of our revenues for the years ended March 31, 2004, 2003 and 2002, respectively. We anticipate that these customer concentrations will continue for the foreseeable future. The loss of any one of these customers may cause results of operations to vary materially from those anticipated. Intellectual Property We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. Our business also includes the development of custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to our client. Competition The IT services industry is highly competitive. Our competitors include: o established computer product manufacturers (some of which supply products to us); o distributors; o computer resellers; o systems integrators; and -6- o other IT service providers. Many computer product manufacturers also sell to customers through their direct sales organizations and certain of them have announced their intention to enhance such direct sales efforts. Many of our current and potential competitors have longer operating histories and financial, sales, marketing, technical, and other resources substantially greater than we do. As a result, our competitors may be able to adapt more quickly to changes in client needs or to devote greater resources than we can to the sales of IT products and the provision of IT services. Such competitors could also attempt to increase their presence in our markets by forming strategic alliances with our other competitors or with our customers, offering new or improved products and services to our customers or increasing their efforts to gain and retain market share through competitive pricing. Although, we have contracts with the State of New Jersey, Gwinnett County School System, Duval County School System and Tiffany & Co., we have no ongoing written commitments from any customers to purchase products, and all product sales are made on a purchase-order basis. We are also in direct competition with local, regional, and national distributors of microcomputer products and related services as well as with various IT consulting companies. These competitors run the gamut from new dot com consulting companies to the established consulting firms and former consulting arms of nationwide accounting and auditing firms. Several of these competitors offer most of the same basic products as we do. We also encounter competition from microcomputer suppliers that sell their products through direct sales forces, rather than through resellers such as ourselves, and from manufacturers and distributors that emphasize mail order and telemarketing sales. Depending on the customer, the principal areas of competition may include price, pre-sale and post-sale technical support and service, availability of inventory, and breadth of product line. We have an insignificant market share of sales in the microcomputer industry and of the service markets that we serve. Most of our competitors at the regional and national levels are substantially larger, have more personnel, have materially greater financial and marketing resources, and operate within a larger geographic area than we do. Employees As of June 23, 2004, we employed 169 individuals, including 38 sales, marketing and related support personnel, 108 service and support employees, 13 operations and administration personnel, and 10 employees in accounting, finance, and human resources. We believe that our ability to recruit and retain highly skilled technical and other management personnel will be critical to our ability to execute our business model and growth strategy. We have 4 employees in our Cabling Department who are covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers (IBEW). We believe that our relations with our employees are good. Item 2. Properties We lease space in six locations. Our corporate headquarters and principal operational facilities are currently located in Trenton, New Jersey. The following table contains certain information about each of our leased facilities: -7-
Size Address (in square feet) Monthly Rent Expiration Date - ------- ---------------- ------------ ----------------- 572 Whitehead Road, Bldg. #1 Trenton, NJ 08619 16,000 $11,600 May 31, 2006 354 North Avenue East Cranford, NJ 07016 1,500 $ 2,900 May 31, 2005 2990 Gateway Drive, Suite 500 Norcross, GA 06855 17,102 $13,460 August 14, 2004 7843 Bayberry Road Jacksonville, FL 32256 3,340 $ 2,218 February 28, 2005 880 Third Avenue, 12th floor New York, NY 10022 7,635 $24,777 June 30, 2008(1) 572 Whitehead Road, Bldg. #5 Trenton, NJ 08619 9,582 $ 4,432 Monthly Terms(2)
- ---------- (1) We assumed this lease on January 9, 2002 in connection with our acquisition of Devise Associates, Inc. (2) This space is strictly a warehouse facility, currently on a month to month lease term. We believe these facilities will satisfy our anticipated needs for the foreseeable future. Item 3. Legal Proceedings In March 2002, Logical Business Solutions, Inc., one of our competitors, instituted an action in the Circuit Court, Fourth Judicial Circuit, in Duval County, Florida, against us and Cheryl Pullen, one of our employees, alleging that we wrongfully interfered with its contractual relationship with one of its customers. The amount of damages was not specified. The litigation is currently in the discovery stage. We believe that the claim is without merit and intend to vigorously defend against the claim. In addition we are subject to legal proceedings that arise in the ordinary course of business, but we do not believe these claims will have a material impact on our financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None -8- PART II Item 5. Market for Emtec's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is quoted on the OTC Bulletin Board under the symbol "ETEC." The following table sets forth the high and low closing prices of our common stock for the periods indicated:
Three Months Ended High Low - ------------------ ----- ----- March 31, 2004 $1.45 $0.80 December 31, 2003 1.20 0.80 September 30, 2003 0.96 0.37 June 30, 2003 0.52 0.22 March 31, 2003 0.36 0.24 December 31, 2002 0.53 0.25 September 30, 2002 0.60 0.29 June 30, 2002 0.70 0.35
The above quotations represent prices between dealers and do not include retail mark-ups, markdowns or commissions. They do not necessarily represent actual transactions. As of June 28, 2004, there were 705 record holders of our common stock, although we believe that beneficial holders approximate 800. On November 24, 2003, as part of the employment agreement and consulting agreements dated August 12, 2002 with prior three owners of Acentra Technologies, Inc., we issued 300,000 shares of common stock at $0.29 per share. These shares, which were not registered under the Securities Act of 1933 or any applicable state securities laws, were issued pursuant to an exemption from registration afforded by Rule 506 of Regulation D of the rules and regulation of the SEC. We have never declared any dividends on our common stock and we have no intention to do so in the foreseeable future. Item 6. Selected Financial Data The following selected consolidated financial data below should be read in conjunction with our consolidated financial statements including the accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, both elsewhere in this Report. The data as of March 31, 2004 and 2003 and for each of the three years ended March 31, 2004 have been derived from, and should be read in conjunction with, our audited consolidated financial statements and accompanying notes, which are contained elsewhere in this Report. The data as of March 31, 2002, 2001, and 2000 and for each of the two years ended March 31, 2001 have been derived from our audited financial statements, which are not contained in this Report. -9-
YEAR ENDED MARCH 31, -------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------------------------------------------------------------- Net revenues $100,361,654 $92,260,028 $62,656,199 $88,313,598 $99,543,353 Income (loss) from continuing operations $ 642,988 $ (211,471) $ 216,972 $(1,257,825) $ 316,004 Income (loss) per common share from continuing operations (basic and diluted) $ 0.09 $ (0.03) $ 0.03 $ (0.22) $ 0.06 Total assets $ 18,908,612 $22,334,584 $11,388,473 $18,699,032 $21,401,172
Emtec had no long-term debt obligations or outstanding preferred stock during the five years ended March 31, 2004. In addition, no dividends were paid to common stockholders during the same period. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to the "Risk Factors" below for a discussion of important factors that could cause actual results to differ from expectations and any of our forward-looking statements contained herein. In addition, the following discussion should be read in conjunction with our audited consolidated financial statements as of and for the fiscal years ended March 31, 2004, and 2003. Critical Accounting Policies Emtec's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The methods, estimates, and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission has defined critical accounting policies as policies that involve critical accounting estimates that require (i) management to make assumptions that are highly uncertain at the time the estimate is made, and (ii) different estimates that could have been reasonably used for the current period, or changes in the estimates that are reasonably likely to occur from period to period, which would have a material impact on the presentation of our financial condition, changes in financial condition or in result of operations. Based on this definition, our most critical policies include: revenue recognition, allowance for doubtful accounts, inventory valuation reserve, the assessment of recoverability of long-lived assets, the assessment of recoverability of goodwill and intangible assets, and valuation of deferred tax assets. o Revenue Recognition We recognize revenues based upon Staff Accounting Bulletin #101 (SAB 101). SAB 101 states that revenue recognition cannot occur until the earnings process is complete, evidenced by an agreement between us and the customer, there has been delivery and acceptance, collectibility is probable, and pricing is fixed and determinable. If significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Procurement services represent -10- sales of computer hardware and prepackaged software. Revenue from consulting and support service contracts are recognized ratably over the contract or service period. Revenues from manufacturer support service contracts where the manufacturer is responsible for fulfilling the service requirements of the customer are recognized immediately on their contract sale date. These contracts contain cancellation privileges that allow our customer to terminate a contract with 90 days written notice. In this event, the customer is entitled to a pro-rated refund based on the remaining term of the contract and we would owe the manufacturer a pro-rated refund of the cost of the contract. However, we have experienced no customer cancellations of any significance during our most recent 3-year history and do not expect cancellations of any significance in the future. We believe that net revenue reporting for manufacturer support service contracts is more appropriate. Thus we have adopted net revenue reporting for manufacturer support service contracts starting with the fiscal year ended March 31, 2002 as an offset to revenue to conform to the current presentation. o Trade Receivables We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, additional allowances may be required. We believe the accounting estimate related to the allowance for doubtful accounts is a "critical accounting estimate" because changes in it can significantly affect net income. Allowance for doubtful accounts were $363,402, and $240,847 as of March 31, 2004, and 2003, respectively. o Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Cost is based on standard costs generated principally by the most recent purchase prices. We provide an inventory reserve for obsolescence and deterioration based on management's review of the current status of the excess inventory, its age, and net realizable value based upon assumptions about future demand and market condition. At March 31, 2004, and 2003, inventory reserve was $722,551, and $471,203, respectively. o Property and Equipment We estimate the useful lives of property and equipment in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The majority of our equipment is depreciated over three years. The estimated useful lives are based on the historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be accelerated, resulting in the recognition of increased depreciation and amortization expense in future periods. We evaluate the recoverability of our long-lived assets (other than intangibles and deferred tax assets) in accordance with Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"(SFAS No. 144). Long-lived assets are reviewed for impairment under SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted net cash flows attributable -11- to such assets. Impairment, if any, is recognized in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. We invested $687,000 for the purchase of computer hardware, software and consulting services for our Network Operations Center to enhance our offerings in Managed Services during fiscal year ended March 31, 2003. We originally intended to depreciate these assets over 36 months based on the original projections of the future undiscounted net cash flows. To date we have only seen a modest sales success in our managed services offerings. We performed an impairment test of these assets as of December 31, 2003, and March 31, 2004. We compared our original projections of the future undiscounted cash flows with actual performance, and reviewed our current sales pipeline. Based on these impairment tests, we recorded impairment charges of $223,858, and $239,057 for the three months ended December 31, 2003 and March 31, 2004, respectively. Total impairment charges of $462,915 were classified as general and administrative expense during the twelve months ended March 31, 2004. The net book value of these assets after the impairment charge was $0. o Goodwill and Intangible Assets We have adopted Statement of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". As a result, amortization of goodwill was discontinued. We performed the initial goodwill impairment test as of April 1, 2002 and another impairment test as of March 31, 2003. Based on the impairment test performed as of March 31, 2003, the goodwill of $254,894 associated with the acquisition of Devise Associates, Inc., was determined to be fully impaired and charged to earnings. This determination was based upon the operating and cash flow losses of this business unit since the January 9, 2002 acquisition date and budgeted fiscal 2004 operating and cash flow losses for this business unit. We found no impairment of the remaining goodwill of $109,107 for the year ended March 31, 2004. We were assigned a contract to supply computer hardware and services to the State of New Jersey in the August 12, 2002 acquisition of Acentra Technologies, Inc. This contract was valued at $100,000 in the acquisition. Amortization expense of $54,545, and $36,364 was expensed in fiscal years ended March 31, 2004, and 2003, respectively, based upon then contract term scheduled to end in May 2004. The contract, which is subject to annual renewal by mutual agreement, was instead extended by the State of New Jersey through December 2004. The net carrying value for this contract amounted to $9,091 and $63,636 at March 31, 2004 and 2003, respectively. o Income Taxes Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Emtec's financial statements or tax returns. In estimating future tax consequences, Emtec generally considers all expected future events other than the enactment of changes in tax laws or rates. A valuation allowance is recognized if, on weight of available evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. For the year ended March 31, 2004, we have recognized a deferred income tax benefit of $176,047 as disclosed in Note 8 of our financial statements. This benefit was recorded due to the utilization of tax loss carry-forwards in fiscal 2004 and expected realization of other deferred tax assets in fiscal 2005. We continue to be conservative in accounting for income taxes -12- by recording significant valuation allowances for deferred tax assets due to the high degree of uncertainty that exists regarding future operating results. Results of Operations The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our Results of Operations for the fiscal years ended March 31, 2004, 2003, and 2002 and financial condition as of March 31, 2004 and 2003.
Years Ended March 31, -------------------------------------------------- 2004 2003 Change % -------------------------------------------------- Revenues Procurement services $ 82,184,744 $ 75,943,230 $6,241,514 8.22% Service and consulting 17,986,564 16,140,896 $1,845,668 11.43% Geothermal 190,346 175,902 $ 14,444 8.21% ------------ ------------ Total Revenues 100,361,654 92,260,028 $8,101,626 8.78% ------------ ------------ Cost of Revenues Procurement services 74,282,388 67,525,430 $6,756,958 10.01% Service and consulting 11,497,465 11,915,844 $ (418,379) -3.51% Geothermal 108,782 72,476 $ 36,306 50.09% ------------ ------------ Total Cost of Revenues 85,888,635 79,513,750 $6,374,885 8.02% ------------ ------------ Percent of revenues 85.58% 86.18% Gross Profit Procurement services 7,902,356 8,417,800 $ (515,444) -6.12% Service and consulting 6,489,099 4,225,052 $2,264,047 53.59% Geothermal 81,564 103,426 $ (21,862) -21.14% ------------ ------------ Total Gross Profit 14,473,019 12,746,278 $1,726,741 13.55% ------------ ------------ Percent of revenue 14.42% 13.82% Operating Expenses Sales, General & Administrative Expenses 13,376,048 12,574,667 $ 801,381 6.37% Termination costs -- -- Interest Expense 328,296 160,803 $ 167,493 104.16% Loss on impairment, Goodwill -- 254,894 $ (254,894) N/M E-Business costs -- -- ------------ ------------ Total Operating Expenses 13,704,344 12,990,364 $ 713,980 5.50% ------------ ------------ Percent of revenue 13.65% 14.08% Income (Loss) Before Income Tax 768,675 (244,086) $1,012,761 414.92% Income Tax Expense (Benefit) 125,687 (32,615) $ 158,302 485.37% ------------ ------------ Net Income (Loss) $ 642,988 $ (211,471) $ 854,459 404.05% ============ ============ ========== ======= Income (Loss) Per Share {Basic And Diluted} $ 0.09 $ (0.03) ============ ============ N/M = not meaningful Years Ended March 31, ------------------------------------------------- 2003 2002 Change % ------------------------------------------------- Revenues Procurement services $75,943,230 $50,813,243 $25,129,987 49.46% Service and consulting 16,140,896 11,654,978 $ 4,485,918 38.49% Geothermal 175,902 187,978 $ (12,076) -6.42% ----------- ----------- Total Revenues 92,260,028 62,656,199 $29,603,829 47.25% ----------- ----------- Cost of Revenues Procurement services 67,525,430 44,832,526 $22,692,904 50.62% Service and consulting 11,915,844 7,693,460 $ 4,222,384 54.88% Geothermal 72,476 63,083 $ 9,393 14.89% ----------- ----------- Total Cost of Revenues 79,513,750 52,589,069 $26,924,681 51.20% ----------- ----------- Percent of revenues 86.18% 83.93% Gross Profit Procurement services 8,417,800 5,980,717 $ 2,437,083 40.75% Service and consulting 4,225,052 3,961,518 $ 263,534 6.65% Geothermal 103,426 124,895 $ (21,469) -17.19% ----------- ----------- Total Gross Profit 12,746,278 10,067,130 $ 2,679,148 26.61% ----------- ----------- Percent of revenue 13.82% 16.07% Operating Expenses Sales, General & Administrative Expenses 12,574,667 8,995,255 $ 3,579,412 39.79% Termination costs -- 21,746 $ (21,746) N/M Interest Expense 160,803 210,305 $ (49,502) -23.54% Loss on impairment, Goodwill 254,894 -- $ 254,894 N/M E-Business costs -- 617,220 $ (617,220) N/M ----------- ----------- Total Operating Expenses 12,990,364 9,844,526 $ 3,145,838 31.96% ----------- ----------- Percent of revenue 14.08% 15.71% Income (Loss) Before Income Tax (244,086) 222,604 $ (466,690) -209.65% Income Tax Expense (Benefit) (32,615) 5,632 $ (38,247) -679.10% ----------- ----------- Net Income (Loss) $ (211,471) $ 216,972 $ (428,443) -197.46% =========== =========== =========== ======= Income (Loss) Per Share {Basic And Diluted} $ (0.03) $ 0.03 =========== ===========
-13- Comparison of Years Ended March 31, 2004 and 2003 Total Revenues Total revenues for our IT business, which includes services and consulting revenue, and procurement revenues, increased by 8.78% or $8.09 million, to $100.17 million for the year ended March 31, 2004, compared to $92.08 million for the year ended March 31, 2003. This increase is primarily attributable to our acquisition of Acentra Technologies, Inc. and Turnkey Computer Systems, Inc. in August 2002. IT revenues associated with these acquisitions increased by $12.93 million because in the fiscal year ended March 31, 2004, we recognized a full twelve months of revenue versus eight months in the fiscal year ended March 31, 2003. Without these acquisitions, revenues associated with our IT business would have decreased by 5.26% or $4.84 million for the year ended March 31, 2004. This decrease is mainly due to an over-all decrease in our customers' IT spending, a slow-down in the economy and our inability to attract new major customers. Services and consulting revenue increased by 11.43%, or $1.84 million, to $17.99 million for the year ended March 31, 2004 compared to $16.14 million for the year ended March 31, 2003. This increase is also attributable to our acquisition of Acentra Technologies Inc. and Turnkey Computer Systems, Inc. Services and consulting revenues associated with these acquisitions increased by $2.65 million due to the same reasons discussed in the above paragraph. Without these acquisitions, services and consulting revenue would have decreased by 4.99% or $806,060, to $15.33 million for the year ended March 31, 2004. This decrease is mainly due to an overall decrease in the economy and our inability to attract new major customers. Procurement revenues increased by 8.22%, or $6.24 million, to $82.18 million for the year ended March 31, 2004. This increase is also attributable to the acquisitions discussed in the above paragraph. Without these acquisitions, procurement revenue would have decreased by 5.32%, or $4.04 million, for the year ended March 31, 2004. This decrease is mainly due to reasons mentioned above regarding total IT revenues. Three major customers accounted for in the aggregate approximately 57% and 44% of our revenues in the fiscal years 2004 and 2003, respectively. Another major customer purchased manufacturer support service contracts. The net revenues associated with these contracts accounted for approximately 6.22% and 10.78% of our gross profit for the year ended March 31, 2004 and 2003, respectively. We anticipate that these customer concentrations will continue for the foreseeable future. The loss of any of these customers may cause results of operations to vary materially from those anticipated. Geothermal revenues increased by 8.21%, or $14,444, to $190,346 for the year ended March 31, 2004. This increase is mainly attributable to higher production of steam. Gross Profit Aggregate gross profit for our IT business increased by 13.83%, or $1.75 million, to $14.39 million for the year ended March 31, 2004. This increase is mainly attributable to a 11.43% increase in our services and consulting revenues, and a 3.51% decrease in our cost of revenues for services and consulting. Measured as a percentage of total revenues for our IT business, our overall gross profit margin increased to 14.37% of total revenues for the year ended -14- March 31, 2004 from 13.73% for the year ended March 31, 2003. This increase is also mainly attributable to increase in our services and consulting revenues. Gross profit for product sales decreased by 6.12%, or $515,444, to $7.90 million for the year ended March 31, 2004 as compared with $8.42 million for the year ended March 31, 2003. Measured as a percentage of procurement revenues, our gross profit margin decreased to 9.62% of procurement revenue for the year ended March 31, 2004 from 11.08% for the year ended March 31, 2003. This decrease is mainly due to continued downward pricing pressure on product sales from our customers. We expect this pricing pressure will continue in the future. Gross profit for service and consulting increased by 53.59%, or $2.26 million, to $6.49 million for the year ended March 31, 2004 as compared with $4.22 million for the year ended March 31, 2003. Measured as a percentage of service and consulting revenue, our gross margin attributable to service and consulting revenue increased to 36.08% of service and consulting revenue for the year ended March 31, 2004 from 26.18% for the year ended March 31, 2003. This increase in services and consulting gross profit and margin was mainly attributable to installation services associated with computer roll-out projects for the various state agencies in the State of New Jersey, and school districts in Georgia and Florida as well as our ability to manage our billing rates (total revenue generated divided by total billable hours available during the period) and utilization rates (billable hours divided by paid hours) of engineers more effectively. We must continue to manage billing rates and utilization rates effectively to remain competitive. During the second quarter of our fiscal year ending March 31, 2005, we will begin outsourcing our NOC (Network Operation Center) and Help Desk operations to a third party. By outsourcing this part of our business, we will be able to continue to offer these strategic services while allowing us to change the high fixed cost structure of the business to a variable cost structure due to our failure to achieve budgeted revenues. We expect that this transition will have a positive impact on our gross profit for service and consulting starting July 2004. Our NOC and Help Desk revenues were approximately $414,000, and $559,000 for the fiscal years ended March 31, 2004, and 2003, respectively. The geothermal gross profit of $81,564 for the year ended March 31, 2004 decreased by 21.14%, or $21,862, as compared with $103,426 for the year ended March 31, 2003. This decrease is mainly due to approximately $40,000 higher operating and maintenance expense associated with the geothermal unit during the third quarter ended December 31, 2003. We do not expect to see such a high operating and maintenance expense in future periods. Sales, General, and Administrative Expenses Sales, general and administrative expenses increased by 6.37%, or $801,381, to $13.38 million for the year ended March 31, 2004. This increase is mainly due to our acquisition of Acentra Technologies, Inc. and Turnkey Computer Systems, Inc., and an impairment charge of $462,915 associated with our investment in Network Operation Center (see Note 6 of our Financial Statements). Sales, general and administrative expenses associated with these acquisitions increased by $1.46 million because in the fiscal year ended March 31, 2004, we recorded a full twelve months of expenses versus eight months in the fiscal year ended March 31, 2003. Without these acquisitions and impairment charge, our sales, general and administrative expenses would have decreased by approximately 8.93%, or $1.12 million, for the year ended March 31, 2004. This decrease is mainly attributable to the following: -15- o Elimination of non-productive sales staff; o Reduction in sales commission compensation plans; and o Eliminated duplication of non-essential administrative support services. During the first quarter of the fiscal year 2005, we consolidated all of our operations, administrative and inventory warehousing functions from Mt. Laurel, NJ and Cranford, NJ to Trenton, NJ. We anticipate this consolidation will result in an approximate cost savings of $380,000 annually. In spite of vigorous cost containment efforts, various factors, such as retention of employees, costs associated with marketing and selling activities, costs associated with new Securities and Exchange Commission rules, and insurance markets may increase our sales, general and administrative expenses and this could have a negative impact on fiscal year 2005. Interest expense Interest expense increased by 104.16%, or $167,493, to $328,296 for the year ended March 31, 2004 as compared with $160,803 for the year ended March 31, 2003. This increase is mainly due to increased borrowings activities, higher day's sales outstanding as well as higher interest rate charged by our lender starting October 2003. Starting April 2004, interest charged on the outstanding borrowings was reduced to 1% above prime per annum. Income Taxes Income tax expense for the year ended March 31, 2004 was $125,687, as compared with benefit of $32,615 for the year ended March 31, 2003. For the year ended March 31, 2004, we recognized a deferred income tax benefit of $176,047 which was netted against the income tax expense of $301,734. Net Income Net income increased by 404.05%, or $854,459, to $642,988 or $0.09 per share for the year ended March 31, 2004 as compared with net loss of $(211,471) or $(0.03) per share for the year ended March 31, 2003. As discussed, the increase in net income is mainly attributable to increased installation services associated with computer roll-out projects for the various state agencies in the State of New Jersey, and school districts in Georgia and Florida as well as our ability to manage utilization rates of engineers more effectively. Comparison of Years Ended March 31, 2003 and 2002 Total Revenues Total revenues for our IT business, which includes services and consulting revenue, and procurement revenues, increased by 47.41% or $29.61 million, to $92.08 million for the year ended March 31, 2003, compared to $62.47 million for the year ended March 31, 2002. This -16- increase is primarily attributable to our new business, which commenced in March 2002, with a school district in Jacksonville, Florida, and our acquisitions of Devise Associates, Inc. in January 2002, Acentra Technologies, Inc. in August 2002 and Turnkey Computer Systems, Inc. in August 2002. IT revenue associated with this added business and acquisitions equaled $31.59 million for the year ended March 31, 2003. Services and consulting revenue increased by 38.49%, or $4.48 million, to $16.14 million for the year ended March 31, 2003 compared to $11.65 million for the year ended March 31, 2002. This increase is attributable to an increase in our manufacturers support services contracts revenues and new business with a school district in Jacksonville, Florida, and from the acquired businesses mentioned above. Net revenues associated with manufacturers support services contracts revenue increased by 81.64%, or $1.22 million, to $2.71 million for the year ended March 31, 2003 compared to $1.49 million for the year ended March 31, 2002. This increase in manufacturers support services contracts revenue is mainly attributable to a $1.37 million sale to one customer. Services and consulting revenue associated with this added business and acquisitions amounted to $6.74 million for the year ended March 31, 2003. Without these acquisitions, services and consulting revenue, exclusive of manufacturer support service contracts, decreased by 34.15%, or $3.47 million for the year ended March 31, 2003.This decrease is mainly due to a slow-down in the economy. Procurement revenues also increased by 49.46%, or $25.13 million, to $75.94 million for the year ended March 31, 2003. This increase is the net result of the additional revenues of Jacksonville, Florida location and the acquisitions of Devise Associates, Inc., Acentra Technologies, Inc. and Turnkey Computer Systems, Inc. of approximately $24.29 million recorded in the year ended March 31, 2003. Without these acquisitions, procurement revenue would only have increased by 1.65%, or $836,655 for the year ended March 31, 2003. Geothermal Revenues of $175,902 for the year ended March 31, 2003 decreased by 6.42%, or $12,076 due to lower production of steam. Gross Profit Our aggregate gross profit for IT business increased by 27.16%, or $2.7 million, to $12.64 million for the year ended March 31, 2003. This increase is mainly attributable to a 47.41% increase in our IT revenues. Measured as a percentage of our total revenues for IT business, our overall gross profit margin decreased to 13.73% of total revenues for the year ended March 31, 2003 from 15.92% for the year ended March 31, 2002. This decrease is mainly due to lower gross profit margin from our services and consulting revenues. Gross profit for product sales increased by 40.75%, or $2.44 million, to $8.42 million for the year ended March 31, 2003 as compared with $5.98 million for the year ended March 31, 2002. This increase is mainly attributable to a 49.46% increase in product revenue. Measured as a percentage of procurement revenues, our gross profit margin decreased to 11.08% of procurement revenue for the year ended March 31, 2003 from 11.77% for the year ended March 31, 2002. This decrease is mainly due to continued downward pricing pressure on product sales. Gross profit for service and consulting increased by 6.65%, or $263,534, to $4.22 million for the year ended March 31, 2003 as compared with $3.96 million for the year ended March 31, 2002. This increase is mainly attributable to a 38.49% increase in services and consulting revenues. Measured as a percentage of services and consulting revenues, our gross margin -17- attributable to services and consulting revenue decreased to 26.18% of services and consulting revenue for the year ended March 31, 2003 from 33.99% for the year ended March 31, 2002. This decrease is due to lower billing rates (total revenue generated divided by total billable hours available during the period) due to poor utilization rates (billable hours divided by paid hours) of engineers during this year. The geothermal gross profit of $103,426 for the year ended March 31, 2003 decreased by 17.19%, or $21,469 due to lower production of steam coupled with higher operating expenses for the year. Sales, General, and Administrative Expenses Sales, general, and administrative expenses increased by 39.79%, or $3.58, to $12.57 million for the year ended March 31, 2003 as compared with $8.99 million for the year ended March 31, 2002. This increase is primarily a result of the following: 1) a $3.74 million increase due to our new business with a school district in Jacksonville, Florida and the acquisitions of Devise Associates, Inc., Acentra Technologies, Inc., and Turnkey Computer Systems, Inc. (including expenses such as sales and administrative personnel costs, sales commissions, benefit expense, rent, insurance, depreciation, building maintenance, and other fixed costs) and 2) a $87,000 Sales and Use tax payment including interest to the State of New York as a result a of sales and use tax audit covering the last five years. Interest expense Interest expense for the year ended March 31, 2003 decreased by 23.54%, or $49,502, to $160,803 the year ended March 31, 2003 as compared with $210,305 for the year ended March 31, 2002. This decrease is mainly attributable to lower interest rates, a lower balance on our line of credit, and improved accounts receivable collection performance during the period. Loss on impairment, Goodwill We implemented Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" which required that goodwill no longer be amortized against earnings, but instead be reviewed periodically for impairment. Based on the impairment test performed on March 31, 2003 the goodwill of $254,894 associated with the acquisition of Devise Associates, Inc. was impaired. e-Business Costs e-Business costs for the year ended March 31, 2003 was $0, as compared with $617,220 for the year ended March 31, 2002. As of January 2002 we discontinued our e-Business division, which was started in January 2000. This cost had mainly consisted of costs associated with maintaining a sales and consulting team of approximately 8 employees, as well as training, certifying, marketing, and advertising expenses. Income Taxes Income tax benefit for the year ended March 31, 2003 was $32,615, as compared with expense of $5,632 for the year ended March 31, 2002. For the year ended March 31, 2003, we recognized a deferred income tax benefit of $78,907 that is partially offset by a current income tax expense of $46,292. -18- Recently Issued Accounting Standards In June 2001, the FASB issued two new statements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other intangible Assets." Effective April 1, 2002, Emtec adopted SFAS No. 141 that requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. Specifically identifiable intangible assets, other than goodwill, are to be amortized over their estimated useful economic life. SFAS No. 142 requires that goodwill not be amortized, but should be tested for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and applies to goodwill and other intangible assets, regardless of when those assets were initially recognized. Effective April 1, 2002, Emtec adopted SFAS No. 142 and in connection with its adoption, discontinued the amortization of goodwill and reviewed the estimated useful lives of previously recorded identifiable intangible assets. Emtec follows the two-step process prescribed in SFAS 142 to test its goodwill for impairment. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Under the guidelines of SFAS No. 142, Emtec is required to perform an impairment test at least on an annual basis. (see note#6 on the financial statements) In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of SFAS 121 for (I) recognition/measurement of impairment of long-lived assets to be held and used and (II) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board's No. 30 ("APB 30"). "Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, "for segments of a business to be disposed of but retains APB 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Emtec adopted the provisions of SFAS 144 effective April 1, 2002. (see note#7 on the financial statements) Liquidity and Capital Resources Cash and cash equivalents at March 31, 2004 of $4,792 represented a decrease of $1,787,309 from $1,792,101 at March 31, 2003. We are a net borrower; consequently, we believe our cash and cash equivalents balance must be viewed along with the available balance on our line of credit. At March 31, 2004, our working capital was increased to $2.08 million from $514,427. This increase in working capital was attributable to net earnings for the year ended March 31, 2004. Since our inception, we have funded our operations primarily from borrowings under our credit facility. On November 21, 2001, we entered into a $10.0 million revolving credit facility with Fleet Capital Corporation, formerly Summit Business Capital Corporation ("Fleet"), under which we may borrow on 85% of our eligible trade receivables. Interest on outstanding loans -19- under the revolving credit facility with Fleet was charged monthly at a fluctuating rate per annum equal to 0.25% above the prime rate and, at our option, interest on up to 50% of the outstanding loans may be charged at LIBOR plus 2.75%. The Fleet revolving credit facility is collateralized by a lien upon and security interest in substantially all of our assets. Since current credit facilities with two of our primary trade vendors (GE Access and Ingram Micro.) were also collateralized by substantially all of our assets, Fleet, GE Access and Ingram Micro have entered into intercreditor agreements, which provide that as regards to these vendors, debt obligations to Fleet are accorded priority. On November 21, 2001, we also entered into a Wholesale Financing Security Agreement with IBM. This credit facility, which is collateralized by a $750,000 letter of credit from Fleet in favor of IBM, affords us up to a like amount of credit to purchase products floored by IBM Global Financing. On January 9, 2002, Fleet issued a $250,000 letter of credit in favor of our landlord for our New York City office, as a security deposit for the building lease. On July 1, 2003, Fleet also issued a $250,000 letter of credit in favor of Selective Insurance Corporation, as collateral for the performance bond issued to The City of Philadelphia, one of our customers. The maximum credit facility is reduced by the outstanding letters of credit. On October 17, 2003, Emtec and Fleet executed an amendment to the loan and security agreement under which we may borrow on 80% of our eligible trade receivables up to $10 million through November 20, 2004. Interest on outstanding loans was charged monthly at a fluctuating rate per annum equal to 2.00% above the prime rate. Prior to October 17, 2003, we were charged monthly at a fluctuating rate per annum equal to 0.25% above the prime rate. We also paid an amendment fee of $50,000. This amended loan and security agreement waived all existing events of defaults through June 30, 2003. The lending agreement contains financial covenants that require us to maintain a maximum leverage ratio, a minimum debt ratio, and a minimum EBITDA (earnings before interest, taxes, depreciation and amortization expense). As of March 31, 2004, we were in compliance with all of our financial covenants and we had a $2,308,416 outstanding balance under the credit facility and unused availability of $6,441,584. On April 16, 2004, Emtec and Fleet executed another amendment to the loan and security agreement which permits us to obtain up to a $1.0 million in surety bonding capacity from an insurance company. This amendment reduced our interest rate from 2.00% above the prime rate to 1.00% above the prime rate. At March 31, 2004, our credit facilities with our primary trade vendors, GE Access, Ingram Micro, and Tech Data were as follows: 1) Our credit Line with GE Access was $5.0 million, no interest charged, with an outstanding principal balance of $4.80 million. 2) Our credit line with Ingram Micro was $3.0 million, at an 18% APR interest rate after 30 days from the date of the invoice, with an outstanding principal balance of $2.36 million. 3) Our credit line with Tech Data was $2.0 million, no interest charged, with an outstanding balance of $462,000. Under these credit lines, we are obligated to pay each invoice within 30 days from the date of such invoice. Capital expenditures of $164,456 during twelve months ended March 31, 2004, were primarily for the purchase of computer equipment for internal use, furniture and fixtures, and leasehold improvements. We anticipate our capital expenditures for fiscal year ending March 31, 2005 will be approximately $400,000. -20- Emtec has no arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. We believe that funds generated from operations and bank borrowings should be sufficient to meet our current operating cash requirements through the next twelve months, although there can be no assurance that all of the aforementioned sources of cash can be realized. The following are our contractual obligations associated with lease commitments. We lease warehouse and office facilities, vehicles and certain office equipment under noncancellable operating leases. Future minimum lease payments under such leases are as follows:
Fiscal Years - ------------ 2005 $ 538,543 2006 445,744 2007 323,811 2008 293,536 Thereafter 72,657 ---------- Total $1,674,291 ==========
We have no other long-term commitments. Risk Factors We cannot assure you that we can successfully increase the portion of our revenues derived from IT services. If we are unsuccessful our future results may be adversely affected. Our transition from an emphasis on reselling IT products to an emphasis on providing IT services has placed significant demands on our managerial, administrative, and operational resources. Our ability to manage this transition effectively is dependent upon our ability to develop and improve operational, financial, and other internal systems, as well as our business development capabilities, and to attract, train, retain, motivate, and manage our employees. If we are unable to do so, our ability to effectively deliver and support our services may be adversely affected. Further, our transitional efforts to access higher-margin services and consulting revenues have resulted in reduced IT product sales. If we successfully expand our IT services offerings, periods of variability in utilization may continue to occur. In addition, we are likely to incur greater technical training costs during such periods. Historically, our IT reseller activities accounted for 82%, or $82.18 million, of our total revenue of $100.36 million for the fiscal year ended March 31, 2004, 82%, or $75.94 million, of our total revenue of $92.26 million for the fiscal year ended March 31, 2003, and 81%, or $50.81 million, of our total revenue of $62.66 million for the fiscal year ended March 31, 2002. In contrast, our IT services activities accounted for approximately 18%, or $17.99 million, 17%, or $16.14 million, and 19%, or $11.65 million, of our total revenue for the fiscal years ended March 31, 2004, 2003 and 2002, respectively. -21- Our new services have not achieved widespread client acceptance. If they do not achieve market acceptance, our profit potential may be adversely affected. While we have offered IT services to our customers since 1983, our major emphasis on IT consulting and services began in 1995. We have limited experience in developing, marketing, or providing these services. We cannot assure you that we will be able to successfully market such services to either new or existing customers, that our services will achieve market acceptance, or that we will be able to effectively hire, integrate, and manage additional technical personnel to enable us to perform these services to our customers' expectations. Our inability to maintain high personnel utilization rates may adversely impact our profit potentiality. The most significant cost relating to the services component of our business is personnel expense, which consists of salaries, benefits, and payroll related expenses. Thus, the financial performance of our service business is based primarily upon billing margins (billable hourly rates less the costs to us of service personnel on an hourly basis) and utilization rates (billable hours divided by paid hours). The future success of the services component of our business will depend in large part upon our ability to maintain high utilization rates at profitable billing margins. The competition for quality technical personnel has continued to intensify, resulting in increased personnel costs. This intense competition has caused our billing margins to be lower than they might otherwise have been. Our utilization rates for service personnel likely will also be adversely affected during periods of rapid and concentrated hiring. Our revenues and expenses are unpredictable. A decrease in revenues or increase in expenses could materially adversely affect our operating results. Our operating results have been, and will continue to be, impacted by changes in technical personnel billing and utilization rates. Moreover, we expect that downward pricing pressure will persist due to the continued commoditization of computer products. Our operating results have been, and will continue to be, impacted by changes in technical personnel billing and utilization rates. Further, there are numerous other factors, which are not within our control that can contribute to fluctuations in our operating results, including the following: o patterns of capital spending by customers; o the timing, size, and mix of product and service orders and deliveries; o the timing and size of new projects, including projects for new customers; and o changes in trends affecting outsourcing of IT services; We also believe that, to a limited degree, our business is seasonal with a greater proportion of our product sales occurring in the second and third quarter of our fiscal year due to the capital budgeting and spending patterns of some of our larger customers. Operating results have been, and may in the future also be, affected by the cost, timing, and other effects of acquisitions, including the mix of product and service revenues of acquired companies. -22- Since our inception, we have funded our operations primarily from borrowings under our credit facility. Our lending agreement with Fleet contains financial covenants that require us to maintain a maximum leverage ratio, and a minimum debt ratio on a quarterly basis starting April 1, 2004. As of March 31, 2004 the Company was in compliance with all its financial covenants and the Company had a $2,308,416 outstanding balance under the credit facility and an unused line of $6,441,584. However, there can be no assurance that we will be in compliance will all of our financial covenants through November 2004 and Fleet will not immediately call for repayment of the outstanding borrowings under the credit facility. Our credit facility with Fleet expires on November 20, 2004. We will start negotiating new terms of our credit facility with Fleet and other financial institutions during the second quarter of fiscal year 2005 but cannot state with any certainty whether the credit facility with Fleet will be renewed, or if renewed or replaced, our future credit terms. We do not have long-term commitments from any of our customers and our product sales are on a purchase order basis. Our revenues are concentrated and a loss of any one of our three top customers could materially affect our operations and business. In general, there are no ongoing written commitments by customers to purchase products from us. All product sales we make are on a purchase order basis. Moreover, our client base is highly concentrated, with our two largest customers, State of New Jersey, and Gwinnett County School System (Georgia), accounted, respectively, for approximately 31% and 16% of our revenues for the year ended March 31, 2004. These same two customers accounted, respectively, for approximately 15% and 20% of our revenues in fiscal year 2003 and approximately 0% and 14% of our revenues in fiscal year 2002. The State of New Jersey computer supply and service contract was acquired in the August 12, 2002 asset acquisition from Acentra Technologies. The State of New Jersey contract is subject to annual renewals. In May 2004, the State of New Jersey extended the contract terms through December 2004. An additional eight customers, Duval County School System, Cingular Wireless, Tiffany & Co., Bally's Park Place Casinos, ING Financial Services, BellSouth Corporation, GE, and Cox Communications, collectively accounted for 37%, 31%, and 22% of our revenues for the years ended March 31, 2004, 2003 and 2002, respectively. We anticipate that these customer concentrations will continue for the foreseeable future. The loss of any one of these customers may cause results of operations to vary materially from those anticipated. We may not be able to compete effectively in the highly competitive IT services industry. The IT services business is highly competitive. Our competitors include: o established computer product manufacturers, some of which supply products to us; o distributors; o computer resellers; o systems integrators; and o other IT service providers. -23- Many computer product manufacturers also sell to customers through their direct sales organizations and certain of them have announced their intentions to enhance such direct sales efforts. Many of our current and potential competitors have longer operating histories and financial, sales, marketing, technical, and other resources substantially greater than we do. As a result, our competitors may be able to adapt more quickly to changes in client needs or to devote greater resources than we can to the sales of IT products and the provision of IT services and we may not have the resources to compete effectively. We must maintain our status as an authorized reseller/service of IT products. The loss on any one of such authorizations could have a material adverse effect on our business and operations. We are materially dependent on our continued status as an approved reseller of IT products and our continued authorization as an IT service provider. Without such authorizations, we would be unable to provide the range of products and services we currently offer, including warranty services, and manufacturers support services contracts. Our resale agreements with manufacturers generally are terminable by manufacturers upon 30 days' prior written notice. The loss of one or more of such authorizations could have a material adverse effect on our business and results of operations. We have no long-term sales commitments from any of our suppliers. A loss of any of our four principal suppliers would material adversely affect our IT reseller business. Our IT reseller business depends on large part upon our access to aggregators and manufacturers, in particular GE Access, Ingram, Tech Data, and Dell to supply us with products at competitive prices and on reasonable terms for resale by us to our customers. Our agreements with Ingram, Tech Data and Dell may be terminated by such companies upon 30 days prior written notice. Our agreement with GE Access is effective until February 28, 2005. After February 28, 2005, our agreement with GE Access can be terminated by either party. We cannot assure you that we will be able to continue to obtain products from GE Access, Ingram, Tech Data, and Dell or our other vendors at prices or on terms acceptable to us, if at all. Reduction in or elimination of our credit facilities with our primary trade vendors could have a material adverse effect on our business and operations. Our credit facilities as of the current date with our primary trade vendors, GE Access, Ingram Micro, and Tech Data are $4.0 million, $9.0 million and $3.0 million, respectively. Under these credit lines, we are obligated to pay each invoice within 30 days from the date of such invoice. These credit lines could be reduced or eliminated without a notice, and this action could have a material adverse affect our business, result of operations, and financial condition. Our client engagements entail significant risks; a failure to meet a client's expectations could materially adversely affect our reputation and business. Many of our engagements involve projects that are critical to the operations of our customers' businesses and provide benefits that may be difficult to quantify. Our failure or inability to meet a client's expectations in the performance of our services could result in a material adverse change to the client's operations and therefore could give rise to claims against us or damage our reputation, adversely affecting our business, results of operations, and financial condition. -24- Our ability to protect our intellectual property rights is questionable. If we are unable to protect such rights, our financial condition could be materially adversely affected. We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. However, we cannot assure you that the steps taken by us in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement. Our inability or failure to establish rights or to protect our rights may have a material adverse effect on our business, results of operations, and financial condition. We intend to expand our business through acquisitions of complementary businesses. There is no certainty, however, that we will be successful in acquiring any new businesses or that any such acquisitions will help us achieve our strategic objectives. As a part of our business development strategy, we intend to pursue acquisitions of IT product and service businesses in order to expand our service offerings, to add to or enhance our base of technical or sales personnel, or to provide desirable client relationships. The success of this strategy depends not only upon our ability to acquire complementary businesses on a cost-effective basis, but also upon our ability to integrate acquired operations into our organization effectively, to retain and motivate key personnel, and to retain customers of acquired firms. We cannot assure you that we will be able to acquire or integrate such businesses successfully. Furthermore, we cannot assure you that financing for any such acquisitions will be available on satisfactory terms, or that we will be able to accomplish our strategic objectives as a result of any such transaction or transactions. In addition, we expect to compete for attractive acquisition candidates with other companies or investors in the IT industry, which could have the effect of increasing the cost of pursuing our acquisition strategy, or it could reduce the number of attractive candidates to be acquired. Acquisitions also may involve a number of specific risks, including: o possible adverse short-term effects on our operating results; o dependence on retaining key customers and personnel; o diversion of management's attention; o amortization or impairment of acquired intangible assets; and o risks associated with unanticipated problems, liabilities, or contingencies. Item 7A. Quantitative and Qualitative Information About Market Risk We do not engage in trading market risk sensitive instruments and do not purchase hedging instruments or "other than trading" instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. We -25- have not issued debt instruments, entered into forward or future contracts, purchased options and entered into swaps. Our primary market risk exposures are those of interest rate fluctuations. A change in interest rates would affect the rate at which we could borrow funds under our revolving credit facility. Our average balance on the line of credit during the fiscal year ended March 31, 2004 was approximately $4.9 million. Assuming no material increase or decrease in such balance, a one percent change in the interest rate would change our interest expense by approximately $49,000 annually. Item 8. Financial Statements and Supplementary Data Reference is made to Item 15(a)(i) herein. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2004. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. -26- PART III Item 10. Directors and Executive Officers The following table sets forth certain information as to each of our executive officers and directors:
Positions and Name Age Offices Presently Held - ----------------- --- ------------------------------------------------------ John P. Howlett 60 Chairman of the Board and Chief Executive Officer Ronald A. Seitz 57 President and Chief Operating Officer and Director R. Frank Jerd 62 Director George F. Raymond 67 Director Sam Bhatt 36 Vice President Finance and Treasurer Guy Fessenden 47 Executive Vice President
John P. Howlett has been our Chairman of the Board and Chief Executive Officer since January 17, 2001 and Chief Executive Officer of Emtec-NJ since August, 1997 and Chairman of Emtec-NJ since August, 1998. He has been a director of Emtec-NJ since October, 1996. Mr. Howlett was the founder (in 1983) of Cranford, New Jersey-based Comprehensive Business Systems, Inc. (CBSI). CBSI primarily provided microcomputer systems, network integration, training, and data communications to mid-size and Fortune 1000 corporations. In October 1996, CBSI merged into Emtec-NJ. Prior to founding CBSI, Mr. Howlett was with the AT&T Long Lines Division for twelve years. He earned a Bachelor of Science degree in Electrical Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana, and a Master of Business Administration degree from Fairleigh Dickinson University in New Jersey. A Vietnam veteran, Mr. Howlett served in the U.S. Army for four years. Ronald A. Seitz has been our President and Chief Operating Officer since February 2003 and Executive Vice-President and a director since January 17, 2001 and Executive Vice President of Emtec-NJ since March, 1996. Prior to that he was the Chief Operating Officer of Emtec-NJ. He has been a director of Emtec-NJ since April, 1995. Mr. Seitz was the founder (in 1980) of Charleston, South Carolina-based Computer Source, Inc. (CSI). CSI primarily provided microcomputer systems, network integration, and data communications to mid-size and Fortune 1000 corporations. In April 1995, CSI merged with Landress Information Systems of Mt. Laurel, New Jersey to become Emtec-NJ. Prior to founding CSI, Mr. Seitz was employed for six years as an engineer with the U.S. government in Washington, DC. He graduated from North Carolina State University with a Bachelor of Science degree and from George Washington University with an MBA in computer science. Mr. Seitz also holds a DMD degree from the Dental School at the Medical University of South Carolina. R. Frank Jerd was appointed as a director upon the consummation of our merger with Emtec-NJ. Mr. Jerd is, and has been, a securities analyst for Montauk Capital in New York since 1994. From 1992 to 1993, he was chief executive officer of Benesys, Inc., a medical -27- software company. He was also CEO of Gandalf Systems Corporation from 1993 to 1994. Mr. Jerd earned a Bachelor of Science Degree in Mathematics at Marshall University. George F. Raymond was elected as a director in August 2001. Mr. Raymond has been retired from active employment since 1989. Since his retirement, he has worked as a consultant to the information technology industry. In 1972, Mr. Raymond founded Automatic Business Centers, Inc., a payroll process service company and served as its president until its sale to Automatic Data Processing in 1989. In 1965 he co-founded Computer Services Inc, a general purpose data processing service company, which was purchased by Management Data Corp. in 1969. Mr. Raymond served as the president of Computer Services Inc. until 1972. Prior thereto, Mr. Raymond was a management consultant with Touche Ross & Co. from 1961 to 1965. Currently Mr. Raymond serves on the Board of directors of five companies, four of which are publicly traded. Sam Bhatt has been Vice President - Finance and Treasurer of Emtec since January 17, 2001 and of Emtec-NJ since July 2000. Prior to that and from July, 1997, he was Director of Accounting for Emtec-NJ. He also held the positions at Emtec-NJ of Accounting Manager (from 1994 to July, 1997) and of Senior Accountant (from 1992 to 1994). Mr. Bhatt holds a Bachelor of Science Degree in business administration from Drexel University in Pennsylvania and a Diploma in Hotel Management from the Institute of Hotel Management and Catering Technology in Bombay, India. Guy Fessenden has been Executive Vice President of Emtec since January 2002. Mr. Fessenden joined Emtec from DIS Research, Ltd., which he founded in 1984 and where he was a Chief Executive Officer. Prior to founding DIS, Mr. Fessenden was assistant to the CEO of WR Grace & Co., an international conglomerate with holdings in number of industries, including shipping, food, publishing and others. Mr. Fessenden earned a Bachelor of Science Degree in Accounting and Master of Business Administration Degree at St. John's University. During 2004, the Board of Directors met five times. Each director attended all of the meetings of the Board of Directors. The Board of Directors has no audit committee, compensation committee or nominating committee. The Board of Directors as a whole makes all such determinations and any director who as is an "interested" party in a specific matter abstains from voting on such matter. Since we are not a listed company, we are not required to establish an audit committee. Our board of directors believes it can conduct all of the functions of an audit committee without unduly burdening the duties and responsibilities of the board members. Our board of directors has determined that Mr. George F. Raymond, an independent member of our board of directors, meets the SEC definition of an "audit committee financial expert." Our Board of Directors has adopted a Code of Ethics applicable to all of its employees, including its Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer, as well as the members of its board of directors. The Code of Ethics is filed as an exhibit to this Form 10-K. Compliance With Section 16(a) of The Securities Exchange Act Of 1934 Section 16(a) of the Exchange Act requires our directors and executive officers and persons who own beneficially more than 10% of our common stock to file reports of ownership -28- and changes in ownership of such common stock with the Securities and Exchange Commission, and to file copies of such reports with us. Based solely upon a review of the copies of such reports filed with Emtec, Emtec believes that during the fiscal year ended March 31, 2004, such reporting persons complied with the filing requirements of said Section 16(a), except that Mr. Guy Fessenden was not timely in the filing of his Initial Statement of Beneficial Ownership of Securities. Item 11. Executive Compensation The following table sets forth the aggregate compensation that we paid for services rendered to us in all capacities during our fiscal years ended March 31, 2004, 2003 and 2002 by our chief executive officer and by our other executive officers whose cash compensation exceeded $100,000 per year in any such year. Summary Compensation Table
Long Term Compensation ------------------------------------------------- Awards Payouts ---------------------- --------- Annual Compensation Restricted Long Term Name and Fiscal ------------------- Other Annual Stock Number of Incentive All Other Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation - ------------------ ------ -------- ----- ------------ ---------- --------- --------- ------------ John P. Howlett 2004 $216,300 -- -- -- -- -- $16,173(1) - - Chief Executive 2003 $212,000 -- -- -- -- -- $18,553(1) - - Officer 2002 $204,000 -- -- -- -- -- $16,750(1) Ronald A. Seitz 2004 $216,300 -- -- -- -- -- -- - - Chief Operating 2003 $212,000 -- -- -- -- -- $ 6,642(2) Officer 2002 $204,000 -- -- -- -- -- $ 6,704(2) - - and President. Sam Bhatt 2004 $128,757 -- -- -- -- -- -- - - Vice President 2003 $120,000 -- -- -- -- -- -- - - Finance 2002 $114,545 -- -- -- -- -- -- Guy Fessenden -- -- -- -- - - Executive Vice 2004 $176,154 -- $17,500(3) - - President 2003 $150,000 -- $83,330(3) -- -- -- --
- ---------- (1) Reflects employer contributions for life insurance premiums and for disability insurance premiums. (2) Reflects employer contribution for life insurance premiums. (3) Reflects paid commissions during fiscal 2004 and 2003. Stock Options None of the named executive officers listed in the Summary Compensation Table were granted stock options during the fiscal year ended March 31, 2004. Set forth below is information with respect to unexercised options held by our named executive officers to purchase our common stock -29- Aggregated Option Exercises in Fiscal Year 2004 and Fiscal Year End Option Values
Number of Unexercised Number of Securities Underlying Options Value of Unexercised Shares at March 31, 2004 In-the-Money Options Acquired on Value ----------------------------- --------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------ ----------- -------- ----------- ------------- ----------- ------------- John P. Howlett... -- $0 0 0 $0 $0 Ronald A. Seitz... -- $0 0 0 $0 $0 Sam Bhatt......... -- $0 14,750 1,250 $0 $0 Guy Fessenden..... -- $0 0 0 $0 $0
Compensation of Directors Non-employee directors receive annual compensation of $10,000. Directors also receive stock options at the discretion of the Board. Non-employee directors receive reimbursement of out-of-pocket expenses incurred for each board meeting or committee meeting attended. Compensation Committee Interlocks and Insider Participation Currently, there is no compensation committee. The members of the entire board deliberate and decide compensation. Neither Mr. Jerd nor Mr. Raymond is or has been an employee or an officer of our company. Mr. Howlett is our Chairman, and Chief Executive Officer, and Mr. Seitz is our President and Chief Operating Officer. -30- Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of June 30, 2004, based on information obtained from the persons named below, with respect to the beneficial ownership of our common stock held by: o each person known by us to be the owner of more than 5% of our outstanding shares; o each director; o each executive officer named in the Summary Compensation Table; and o all executive officers and directors as a group.
Name and Address of Amount and Percentage of Beneficial Owner(1) Beneficial Ownership(2) - ------------------------------- ------------------------ John P. and Rosemary A. Howlett 1,400,910 18.98% Ronald A. Seitz 829,519(3) 11.24% Sam Bhatt 37,504 .51% Guy Fessenden 0 0 R. Frank Jerd 45,000 .61% George F. Raymond 30,000 .40% Tom Dresser 1,029,774 13.95% 3505 S. Ocean Boulevard Hollywood, FL 33019 Richard Landon 1,029,774 13.95% 142 York Road Delran, NJ 08075 Carla Seitz 782,707(4) 10.61% P.O. Box 2243 Mt. Pleasant, SC 29465 All executive officers and directors as a group (6 persons) 3,125,640 41.84%
- ---------- (1) Each stockholder's address is c/o Emtec, 572 Whitehead Road, Bldg#1, Trenton, New Jersey, 081619, unless otherwise indicated. (2) As used herein, beneficial ownership means the sole or shared power to vote, or direct the voting of, a security, or the sole or shared power to invest or dispose, or direct the investment or disposition, of a security. Except as otherwise indicated, all persons named herein have (i) sole voting power and investment power with respect to their shares, except to the extent that authority is shared by spouses under applicable law and (ii) record and beneficial ownership with respect to their shares; also includes any shares issuable upon exercise of options or warrants that are currently exercisable or will become exercisable within 60 days after June 30, 2004. -31- (3) Excludes 782,707 shares owned by Carla Seitz, Mr. Seitz's spouse. Mr. Seitz disclaims any beneficial interest in these shares. (4) Excludes 829,519 shares owned by Ronald A. Seitz, Mrs. Seitz's spouse. Mrs. Seitz disclaims any beneficial ownership in these shares. Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------ Number of securites remaining Number of securities to Weighted-average available for future issuance be issued upon exercise exercise price of underequity compensation plans of outstanding options, outstanding options, (excluding securities reflected Plan category warrants and rights warrants and rights in column(a)) (a) (b) (c) - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders -- -- -- - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders(1) 415,228 $0.69 584,772 - ------------------------------------------------------------------------------------------------------------------ Total 415,228 $0.69 584,772 - ------------------------------------------------------------------------------------------------------------------
(1) The Company's 1996 Stock Option Plan (the Plan) (amended in 1999) authorizes the granting of stock options to directors and eligible employees. The Company has reserved 1,000,000 shares of its common stock for issuance under the Plan at prices not less than 100% of the fair value of the Company's common stock on the date of grant (110% in the case of shareholders owning more than 10% of the Company's common stock). The Black-Scholes option pricing model has been used to determine the fair value of options granted subsequent to January 17, 2001. -32- Item 13. Certain Relationships and Related Transactions There are no relationships or related party transactions of a nature required to be disclosed hereunder. Item 14. Principal Accountants Fees and Services Baratz & Associates, P.A. ("BA") was retained as our independent auditors for our fiscal year ended March 31, 2004. We did not consult with BA during either the prior fiscal years or the interim period with respect to (i) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was either the subject of a disagreement or a reportable event. The following table sets forth the aggregate fees incurred by us for the fiscal year ended March 31, 2004 and 2003 to our principal auditing firm:
2004 2003 -------- -------- Audit Fees................................................ $ 86,000 $ 86,000 Audit Related Fees........................................ $ 500 $ 7,000 Tax Fees.................................................. $ 20,000 $ 16,000 All Other Fees............................................ $ 7,000 $ 7,000 -------- -------- Total..................................................... $113,500 $116,000 ======== ========
Audit Fees: The Audit Fees billed by BA for the fiscal years ended March 31, 2004 and March 31, 2004, respectively, were for professional services rendered for the audits of the financial statements of the Company, quarterly reviews, and assistance with the review of documents filed with the Securities and Exchange Commission. Audit Related Fees: The Audit Related Fees for the fiscal years ended March 31, 2004 and March 31, 2003, respectively, were for attendance at the annual shareholders meeting, and were for the advice and guidance on the Form 8-K filings concerning the acquisitions of Acentra Technologies, Inc. and Turnkey Computer Systems. Tax Fees: The Tax Fees billed by BA for the fiscal years ended March 31, 2004 and March 31, 2004, respectively, were for services performed in connection with income tax compliance. All Other Fees: All Other fees billed by BA for the fiscal years ended March 31, 2004 and March 31, 2004, respectively, were for professional services rendered for the 401K audit. -33- Our board of directors has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by our independent auditor. The policy provides for pre-approval by the board of directors of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the board of directors must approve the permitted service before the independent auditor is engaged to perform it. -34- PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports and Reports of Form 8-K (a) Documents filed as part of this report: (i) Financial Statements Report of Independent Registered Public Accounting Firm......................39 Consolidated Balance Sheets as of March 31, 2004 and 2003....................40 Consolidated Statements of Operations for the Fiscal Years Ended March 2004, 2003 and 2002.................................................42 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 2004, 2003 and 2002.............................................43 Consolidated Statements of Cash Flows for the Years Ended March 2004, 2003 and 2002.................................................44 Notes to Consolidated Financial Statements...................................45 (ii) Financial Statement Schedules None (iii) Exhibits: Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger and Reorganization dated as of December 14, 2000 between Registrant, then known as American Geological Enterprises, Inc., and Emtec, Inc.(1) 3.1 Certificate of Incorporation, as amended(2) 3.2 Amended and Restated Bylaws(2) 4.1 Certificate evidencing shares of common stock(2) 10.1 Resale Agreement dated September 29, 1997 between Registrant and Ingram Micro, Inc.(2) 10.2 Volume Purchase Agreement dated January 28, 1998 between Registrant and Tech Data Corporation(2) 10.3 Agreement of Lease dated April 1, 1992 between Registrant and Bell Atlantic Properties, Inc., as amended, for Mt. Laurel, New Jersey facility(2) 10.4 Lease Agreement dated May 5, 1993 between registrant and Central Cranford Associates, for Cranford, New Jersey facility(2) 10.5 Lease Agreement dated July 7, 1994 between Registrant and Connecticut General Life Insurance Company, as amended, for Norcross, Georgia facility(2) 10.6 Lease Agreement dated August 8, 1995 between Registrant and Charleston Rivergate Associates I, as amended, for Charleston, South Carolina facility(2) -35- Exhibit No. Description - ----------- ----------- 10.7 Lease Agreement dated July 21, 2000 between Registrant and Strawberry Hill Associates, for Norwalk, Connecticut facility(2) 10.8 Microsoft Certified Partner Agreement, dated December 20, 2000, between Microsoft and Registrant(3) 10.9 IBM Business Partner Agreement, dated May 31, 2000, between International Business Machines Corporation and Registrant(3) 10.10 Letter Agreement, dated April 24, 2001, between Novell Inc. and Registrant(3) 10.11 Citrix Solutions Network Gold Renewal Membership Agreement, dated April 30, 2001, between Citrix Systems, Inc. and Registrant(3) 10.12 U.S. Systems Integrator Agreement, dated December 22, 1999, between Cisco System, Inc. and Registrant.(3) 10.13 Sun Microsystem, Inc. Channel Agreement, dated February 1, 2000, between Sun Microsystems, Inc. and Emtec, Inc. (6) 10.14 Loan and Security Agreement, dated November 21, 2001, by and between Fleet Capital Corporation and Registrant.(4) 10.15 Agreement for Wholesale Financing, dated November 21, 2001, by and between IBM Credit Corporation and Registrant.(4) 10.16 Subordination Agreement, dated as of the 21st day of November, 2001, among Registrant, MRA Systems, Inc. dba GE Access and Fleet Capital Corporation.(4) 10.17 Intercreditor Agreement, dated as of November 21, 2001, between Fleet Capital Corporation and Ingram Micro Inc. and accepted by Registrant.(4) 10.18 Asset Acquisition Agreement dated December 5, 2001 by and between Devise Associates, Inc. and Registrant.(5) 10.19 Lease Agreement dated January 9, 2002 between Registrant and Vandergrand Properties Co., L.P., for New York, New York facility.(9) 10.20 Lease Agreement dated March 1, 2002 between Registrant and G. F. Florida Operating Alpha, Inc., for Jacksonville, Florida facility.(9) 10.21 Lease Agreement dated August 1, 2002 between Registrant and Fazzone and Zima, for Cheshire, CT facility.(10) 10.22 Lease Agreement dated November 15, 2002 between Registrant and Hamilton Transit Corporate Center, for warehouse facility in Trenton, New Jersey.(10) 10.23 Asset Acquisition Agreement dated August 12, 2002 by and between Acentra Technologies, Inc. and Registrant.(7) 10.24 Asset Acquisition Agreement dated August 31, 2002 by and between Turnkey Computer Systems, Inc. and Registrant.(8) 10.25 Assignment of State of New Jersey Contract from Acentra Technologies, Inc. to the Registrant.(7) 10.26 Remarketer/Integrator Agreement dated August 15, 2002 between Dell Marketing L.P. and the Registrant.(7) 10.27 Lease Agreement dated June 1, 2004 between Registrant and Hamilton Transit Corporate Center, for office space in Trenton, New Jersey. -36- Exhibit No. Description - ----------- ----------- 10.28 Lease Agreement dated May 20, 2004 between Registrant and Facstore, for office space in Cranford, New Jersey. 10.29 1996 Stock Option Plan, as amended in 1999(2) 14.1 Code of Ethics 31.1 Rule 13a-14(a)/15 d-14(a) Certification of John P. Howlett, Principal Executive Officer, of Emtec, Inc. dated July 14, 2004. 31.2 Rule 13a-14(a)/15 d-14(a) Certification of Sam Bhatt, Principal Financial Officer, of Emtec, Inc. dated July 14, 2004. 32.1 Section 1350 Certificate of John P. Howlett, Principal Executive Officer, of Emtec, Inc. dated July 14, 2004. 32.2 Section 1350 Certificate of Sam Bhatt, Principal Financial Officer, of Emtec, Inc. dated July 14, 2004. 21.1 Subsidiaries(2) (1) Previously filed as an exhibit to Registrant's Current Report on Form 8-K dated January 17, 2001, filed on January 31, 2001, and incorporated herein by reference. (2) Previously filed as an exhibit to Registrant's Registration Statement on Form 10 filed on May 21, 2001, and incorporated herein by reference. (3) Previously filed as an exhibit to Amendment No. 1 to Registration Statement on Form 10, filed on July 12, and incorporated herein by reference. (4) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated November 21, 2001, filed on November 26, 2001, and incorporated herein by reference. (5) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated December 5, 2001, filed on December 20, 2001, and incorporated herein by reference. (6) Previously filed as an exhibit to Registrant's Form 10-K dated March 31, 2001, filed on July 12, 2001, and incorporated herein by reference. (7) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated August 12, 2002 filed on August 26, 2002, and incorporated herein by reference. (8) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated August 31, 2002 filed on September 13, 2002, and incorporated herein by reference. (9) Previously filed as an exhibit to Registrant's Form 10-K dated March 31, 2002, filed on June 30, 2002, and incorporated herein by reference. (10) Previously filed as an exhibit to Registrant's Form 10-K dated March 31, 2003, filed on July 15, 2003, and incorporated herein by reference. -37- (b) Reports on Form 8-K filed during the quarter ended March 31, 2004: Form 8-K filed on February 19, 2004, required by Item 12 of the Form 8-K, Result of Operations and Financial Condition. Form 8-K filed on April 1, 2004, required by Item 5 of the Form 8-K, Other Events and Required FD Disclosure. Form 8-K filed on June 28, 2004, required by Item 12 of the Form 8-K, Result of Operations and Financial Condition. -38- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Emtec, Inc. 572 Whitehead Road, Bldg.# 1 Trenton, New Jersey 08619 We have audited the accompanying consolidated balance sheets of Emtec, Inc. as of March 31, 2004 and 2003 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Emtec, Inc. at March 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective April 1, 2002, the Company changed its method for accounting for goodwill and other intangible assets by adopting Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Baratz & Associates, P.A. Marlton, New Jersey June 4, 2004 -39- EMTEC, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2004 AND 2003
2004 2003 ----------- ----------- Assets Current Assets Cash and cash equivalents $ 4,792 $ 1,792,101 Receivables: Trade, net 15,206,972 14,553,124 Others 289,445 476,682 Inventories 1,599,166 2,881,868 Prepaid expenses 396,313 462,827 Deferred tax assets 186,368 34,954 ----------- ----------- Total Current Assets 17,683,056 20,201,556 Property and equipment, net 387,073 1,190,851 Investment in geothermal power unit, net 569,960 611,519 Deferred tax assets 103,813 105,201 Intangible assets 118,198 176,632 Other assets 46,512 48,825 ----------- ----------- Total Assets $18,908,612 $22,334,584 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -40- EMTEC, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2004 AND 2003
2004 2003 ----------- ----------- Liabilities and Shareholders' Equity Current Liabilities Line of credit $ 2,308,416 $ 8,203,290 Accounts payable 9,295,882 8,199,792 Customer deposits 332,667 488,127 Income tax payable 279,397 25,781 Accrued liabilities 2,529,885 1,449,126 Deferred revenues 853,393 1,321,013 ----------- ----------- Total Current Liabilities 15,599,640 19,687,129 Deferred revenue 714,573 757,023 Deferred tax liability 25,924 51,945 ----------- ----------- Total Liabilities 16,340,137 20,496,097 ----------- ----------- Shareholders' Equity Common stock, $.01 par value; 25,000,000 shares authorized; 7,380,498 and 7,080,498 shares issued and outstanding at March 31, 2004 and 2003 73,805 70,805 Additional paid-in capital 2,294,805 2,210,805 Retained Earnings (accumulated deficit) 199,865 (443,123) ----------- ----------- Total Shareholders' Equity 2,568,475 1,838,487 ----------- ----------- Total Liabilities and Shareholders' Equity $18,908,612 $22,334,584 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -41- EMTEC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002 ------------ ----------- ----------- Revenues: Procurement services $ 82,184,744 $75,943,230 $50,813,243 Service and consulting 17,986,564 16,140,896 11,654,978 Geothermal 190,346 175,902 187,978 ------------ ----------- ----------- Total Revenues 100,361,654 92,260,028 62,656,199 ------------ ----------- ----------- Cost of Revenues: Procurement services 74,282,388 67,525,430 44,832,526 Service and consulting 11,497,465 11,915,844 7,693,460 Geothermal 108,782 72,476 63,083 ------------ ----------- ----------- Total Cost of Revenues 85,888,635 79,513,750 52,589,069 ------------ ----------- ----------- Gross Profit: Procurement services 7,902,356 8,417,800 5,980,717 Service and consulting 6,489,099 4,225,052 3,961,518 Geothermal 81,564 103,426 124,895 ------------ ----------- ----------- Total Gross Profit 14,473,019 12,746,278 10,067,130 ------------ ----------- ----------- Operating Expenses: Selling, general and administrative 13,376,048 12,574,667 8,995,255 Termination costs -- -- 21,746 Interest 328,296 160,803 210,305 Loss on impairment, Goodwill -- 254,894 -- E-Business costs -- -- 617,220 ------------ ----------- ----------- Total Operating Expenses 13,704,344 12,990,364 9,844,526 ------------ ----------- ----------- Income (Loss) Before Income Tax 768,675 (244,086) 222,604 Income tax expense (benefit) 125,687 (32,615) 5,632 ------------ ----------- ----------- Net Income (Loss) $ 642,988 $ (211,471) $ 216,972 ============ =========== =========== Net Income (Loss) Per Share {Basic And Diluted} $ 0.09 $ (0.03) $ 0.03 Weighted Average Number Of Shares Outstanding: Basic 7,380,498 7,080,498 7,080,498 Diluted 7,483,549 7,123,831 7,081,398
The accompanying notes are an integral part of these consolidated financial statements. -42- EMTEC, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Retained Common Stock Additional Earnings Accumulated Total ------------------- Paid-In (Accumulated Comprehensive Shareholders' Shares Amount Capital Deficit) (Loss) Income Equity --------- ------- ---------- ------------ ------------- ------------- Balance, April 1, 2001 7,080,498 70,805 2,210,805 (448,624) (5,458) 1,827,528 ---------- Net income for the year 216,972 216,972 Unrealized gain on marketable securities 5,458 5,458 --------- ------- ---------- --------- ------- ---------- Total Comprehensive Income 222,430 ---------- Balance, March 31, 2002 7,080,498 $70,805 $2,210,805 $(231,652) $ -- $2,049,958 Net loss for the year (211,471) (211,471) --------- ------- ---------- --------- ------- ---------- Balance, March 31, 2003 7,080,498 $70,805 $2,210,805 $(443,123) $ -- $1,838,487 ---------- Stock issued as payment for services 300,000 3,000 4,000 87,000 Net income for the year 642,988 642,988 --------- ------- ---------- --------- ------- ---------- Balance, March 31, 2004 7,380,498 $73,805 $2,294,805 $ 199,865 $ -- $2,568,475 ========= ======= ========== ========= ======= ==========
The accompanying notes are an integral part of these consolidated financial statements. -43- EMTEC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002 ----------- ----------- ----------- Cash Flows From Operating Activities Net income (loss) for the year $ 642,988 $ (211,471) $ 216,972 Adjustments to Reconcile Net Income (Loss) To Net Cash Provided By (Used In) Operating Activities Depreciation and amortization 605,309 590,293 548,007 Impairment Charges 462,915 254,894 -- Deferred income tax (benefit) expense (176,047) (78,907) 13,693 Stock issued as payment for services 87,000 -- -- Changes In Operating Assets and Liabilities Decrease in marketable securities -- -- 292,346 (Increase) decrease in receivables (466,611) (8,444,852) 6,677,082 Decrease (Increase) in inventories 1,282,702 (1,791,919) (70,235) Decrease (Increase) in prepaid expenses 66,515 (74,520) (88,537) Decrease (Increase) in other assets 2,313 (903) 5,289 Increase (decrease) in accounts payable 1,096,092 1,589,955 (674,788) (Decrease)Increase in customer deposits (155,460) 242,740 42,185 Increase in income tax payable 253,616 23,694 -- Increase (decrease)in accrued liabilities 1,080,759 686,931 (261,361) (Decrease)Increase in deferred revenues (510,070) 438,150 (101,389) ----------- ----------- ----------- Net Cash Provided By(Used In) Operating Activities 4,272,021 (6,775,915) 6,599,264 ----------- ----------- ----------- Cash Flows From Investing Activities Purchases of equipment (164,456) (1,003,962) (142,624) Additional investment in geothermal unit -- (64,978) (56,822) Acquisition of a business segment -- (100,000) (409,945) ----------- ----------- ----------- Net Cash Used In Investing Activities (164,456) (1,168,940) (609,391) ----------- ----------- ----------- Cash Flows From Financing Activities Net (decrease) increase in line of credit (5,894,874) 8,203,290 (6,535,405) Payment of related party debt -- (19,000) -- ----------- ----------- ----------- Net Cash (Used In) Provided By Financing Activities (5,894,874) 8,184,290 (6,535,405) ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (1,787,309) 239,435 (545,532) Beginning Cash and Cash Equivalents 1,792,101 1,552,666 2,098,198 ----------- ----------- ----------- Ending Cash and Cash Equivalents $ 4,792 $ 1,792,101 $ 1,552,666 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -44- EMTEC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2004, 2003 AND 2002 1. Organization and Summary of Significant Accounting Policies Emtec (OTC: ETEC) is a systems integrator focused on providing technology solutions that enable our customers to effectively use and manage their data to grow their businesses. Our areas of specialization in IT services include enterprise computing, data communications, data access, network design, enterprise backup and storage consolidation, managed services and staff augmentation. Emtec's solutions are crafted to enable our customers to become more efficient and effective, thereby giving them a competitive advantage. Our customers are primarily Fortune 2000 companies, state and local government, local school districts, and other large and mid-sized companies located principally in the New York/New Jersey Metropolitan area and the Southeastern United States. Our commercial business is generally with customers with annual revenues ranging from $50 million to $500 million. We service our customer base from leased facilities in New Jersey, New York, Georgia, and Florida. The Company, was formed on April 1, 1995, as a result of the 1995 and 1996 mergers of three information technology companies that were originally founded between 1980 and 1983. Principles of Consolidation The consolidated financial statements include the accounts of the issuer and its wholly owned subsidiary. Intercompany transactions and balances have been eliminated in consolidation. Use of Estimates Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives of long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. Revenue Recognition The Company recognizes revenues based upon Staff Accounting Bulletin #101 (SAB 101). SAB 101 states that revenue recognition cannot occur until the earnings process is complete, evidenced by an agreement between the Company and the customer, there has been delivery and acceptance, collectibility is probable, and pricing is fixed and determinable. If significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Procurement services represent sales of computer hardware and prepackaged software. Revenue from consulting and -45- support service contracts are recognized ratably over the contract or service period. Revenues from manufacturer support service contracts where the manufacturer is responsible for fulfilling the service requirements of the customer are recognized immediately at their contract sale date. The Company believes that net revenue reporting for manufacturer support service contracts is more appropriate. Thus the Company has adopted net revenue reporting for manufacturer support service contracts starting with the fiscal year ended March 31, 2003 and has reclassified contract costs from the year ended March 31, 2002 as an offset to revenue to conform to the current presentation. Cash Equivalents Cash equivalents include items almost as liquid as cash with maturity periods of three months or less when purchased. The carrying amount of cash and cash equivalents approximates fair value. Trade Receivables The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and management's evaluation of periodic aging of the accounts. Other Receivables Other receivables represent rebates, price protection receivables and amounts due from vendors for purchase returns made in the ordinary course of business. Concentration of Credit Risk The Company provides its services to a wide variety of commercial, governmental and institutional customers. Financial instruments which potentially subject the Company to concentrations of credit risk are cash (and cash equivalents) and trade receivables. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, does not require collateral from its customers. The Company has not experienced significant credit losses. The Company maintains deposit accounts with reputable financial institutions; at times, such deposits may exceed Federal Depository Insurance Limits. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Cost is based on standard costs generated principally by the most recent purchase prices. The Company provides an inventory reserve for obsolescence and deterioration based on management's review of products and sales. Property and Equipment Property and equipment are stated at original cost. Depreciation and amortization for financial accounting purposes are computed using the straight line method over the estimated lives of the respective assets. Accelerated methods of depreciation are used for tax purposes. Property and equipment along with their components are as follows: -46-
Original Cost ------------------------- Estimated Life March 2004 March 2003 (Years) ----------- ----------- -------------- Computer equipment $ 3,643,052 $ 3,559,185 3 Furniture and fixtures 357,845 321,670 5 Leasehold improvements 244,847 200,435 5 Vehicles 80,984 80,984 2 ----------- ----------- Total Property and Equipment $ 4,326,728 $ 4,162,274 Less: accumulated depreciation and amortization (3,939,655) (2,971,423) ----------- ----------- Net book value $ 387,073 $ 1,190,851 =========== ===========
Maintenance and repair costs are charged to expense as incurred. The cost and accumulated depreciation relating to property and equipment retired or otherwise disposed of are eliminated from the accounts and any resulting gains or losses are credited or charged to income. Valuation of Long Lived Assets The Company evaluates the recoverability of its long-lived assets (other than intangibles and deferred tax assets) in accordance with Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"(SFAS No. 144). Long-lived assets are reviewed for impairment under SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted net cash flows attributable to such assets. Impairment, if any, is recognized in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. Goodwill and Intangible Assets Goodwill is the excess of the purchase price over the fair value of the net assets acquired in a business combination accounted for under the purchase method. Beginning April 1, 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS 142), goodwill and indefinite-lived assets are no longer amortized, but instead tested for impairment at least annually. Intangible assets that have finite useful lives are amortized over their useful lives. Income Taxes Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than the enactment of changes in tax laws or rates. A valuation allowance is recognized if, on weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Advertising Costs Advertising and marketing costs are charged to expense as incurred. -47- Advertising and marketing expenses for the years ended March 31, 2004, 2003 and 2002 were $370,800, $492,481, and $306,271, respectively. Stock-Based Compensation The Company did not change to the fair value based method of accounting for stock-based employees' compensation. Accordingly, the adoption of SFAS No. 148 did not affect the Company's financial condition or results of operations. However,SFAS No. 148 requires that information be provide as if the Company had accounted for employee stock options under the fair value method of this statement, including disclosing proforma information regarding net income (loss) and earnings (loss) per share. The Company accounts for stock based compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company stock at the date of grant over the amount an employee must pay to acquire the stock. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. Reclassifications Certain reclassifications have been made to prior years balances in order to conform to current presentations. Earnings (Loss) Per Share Basic earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average shares outstanding during the reporting period. Diluted earnings (loss) per share are computed similar to basic earnings (loss) per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. 2. Acquisitions On August 31, 2002, the Company acquired all of the customer contracts and certain assets of Turnkey Computer Systems, Inc. of Clifton, NJ. The purchase price will be paid over a two-year period and will be based on an earning share derived from the customer contracts transferred from Turnkey to Emtec. On December 15, 2003, the Company and Turnkey have finalized the earning share for the twelve months ended August 31, 2003. Total earning share for the twelve months ended August 31, 2003 was $150,019. The Company had adequately accrued and charged the potential earning share payout to that period's earnings. The second earning share will be calculated at the end of twelve months ended on August 31, 2004. On August 12, 2002, the Company acquired certain assets of Acentra Technologies, Inc., including the assignment of the State of New Jersey computer supply and services contract. The Company paid a net purchase price of $165,607 in cash to be allocated under the purchase method as follows: Assignment of State of NJ Contract $ 100,000 Inventory 326,798 Equipment 22,715 Advance payment amount from customers (283,906) --------- Net Purchase Price $ 165,607 =========
-48- 3. Trade Receivables The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and management's evaluation of periodic aging of the accounts. Trade accounts receivable consists of followings:
March 31, 2004 March 31, 2003 -------------- -------------- Trade Receivable $15,570,374 $14,793,971 Allowance for doubtful accounts (363,402) (240,847) ----------- ----------- Trade Receivable, net $15,206,972 $14,553,124 ----------- -----------
4. Inventories The components of inventories at March 31, are as follows:
2004 2003 ---------- ---------- Hardware, software and accessories $2,151,818 $3,221,904 Service parts 169,899 131,167 ---------- ---------- 2,321,717 3,353,071 Less inventory reserve 722,551 471,203 ---------- ---------- $1,599,166 $2,881,868 ========== ==========
Appropriate consideration has been given to deterioration, obsolescence and other factors in evaluating net realizable value. 5. Financing Arrangements On November 21, 2001, the Company entered into a $10.0 million revolving credit facility with Fleet Capital Corporation, formerly Summit Business Capital Corporation ("Fleet") under which the Company may borrow on 85% of its eligible trade receivables. Interest on outstanding loans under the revolving credit facility with Fleet was charged monthly at a fluctuating rate per annum equal to 0.25% above the prime rate and, at the Company's option, interest on up to 50% of the outstanding loans may be charged at libor plus 2.75%. The Fleet revolving credit facility is collateralized by a lien upon and security interest in substantially all of the Company assets. Since current credit facilities with two of the Company's primary trade vendors (GE Access and Ingram Micro.) were also collateralized by substantially all of the Company's assets, Fleet, GE Access and Ingram Micro have entered into intercreditor agreements, which provide that as regards to these vendors, debt obligations to Fleet are accorded priority. On November 21, 2001, the Company also entered into a Wholesale Financing Security Agreement with IBM. This credit facility, which is collateralized by a $750,000 letter of credit from Fleet in favor of IBM, affords the Company up to a like amount of credit to purchase products floored by IBM Global Financing. On January 9, 2002, Fleet issued a $250,000 letter of credit in favor of the Company's landlord for the Company's New York City office, as a security deposit for the building lease. On July 1, 2003, Fleet also issued a $250,000 letter of credit in favor of Selective Insurance Corporation, as collateral for the performance bond issued to The City of Philadelphia, one -49- of the Company's customers. The maximum credit facility is reduced by the outstanding letters of credit. On October 17, 2003, the Company and Fleet executed an amendment to loan and security agreement under which the Company may borrow on 80% of its eligible trade receivables up to $10 million. Interest on outstanding loans was charged monthly at a fluctuating rate per annum equal to 2.00% above the prime rate. The lending agreement contains financial covenants that require the Company to maintain a maximum leverage ratio, a minimum debt ratio, and a minimum EBITDA(earnings before interest, taxes, depreciation and amortization expense). On April 16, 2004, the Company and Fleet executed another amendment to the loan and security agreement which permits the Company to obtain a surety bond line from an insurance company up to a $1 million. This amendment reduced the interest rate from 2.00% above the prime rate to 1.00% above the prime rate. As of March 31, 2004 the Company is in compliance with all its financial covenants. At March 31, 2004, the Company had a $2,308,416 outstanding balance under the credit facility and an unused line of $6,441,584. 6. Intangible Assets The Company adopted SFAS No. 142, effective April 1, 2002. As a result, amortization of goodwill was discontinued in 2003. Amortization expense for the year ended March 31, 2002 amounted to $13,158. The Company performed its initial goodwill impairment test as of April 1, 2002 and another impairment test as of March 31, 2003. Based on the impairment test performed as of March 31, 2003, the goodwill of $254,894 associated with the acquisition of Devise Associates, Inc. was determined to be fully impaired and charged to earnings. This determination was based upon the operating and cash flow losses of this business unit since the January 9, 2002 acquisition date and budgeted fiscal 2004 operating and cash flow losses for this business unit. The Company found no impairment of its remaining goodwill of $109,107 for the year ended March 31, 2004. The Company was assigned a contract to supply computer hardware and services to the State of New Jersey in the August 12, 2002 acquisition of Acentra Technologies, Inc. This contract was valued at $100,000 in the acquisition. Amortization expense of $ 54,545 and $36,364 was expensed in fiscal years ended March 31, 2004 and 2003, respectively, based upon the current contract term that ends at May 2004. The contract is subject to annual renewals. In May of 2004, the State of New Jersey extended the contract term through December 2004. The net carrying value for this contract amounted to $9,091 and $ 63,636 at March 31, 2004 and 2003, respectively. 7. Property and Equipment The Company estimates the useful lives of property and equipment in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The majority of our equipment is depreciated over three years. The estimated useful lives are based on the historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to -50- occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be accelerated, resulting in the recognition of increased depreciation and amortization expense in future periods. The Company evaluates the recoverability of its long-lived assets (other than intangibles and deferred tax assets) in accordance with Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"(SFAS No. 144). Long-lived assets are reviewed for impairment under SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted net cash flows attributable to such assets. Impairment, if any, is recognized in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. The Company invested $687,000 for the purchase of computer hardware, software and consulting services for its Network Operations Center to enhance its offerings in Managed Services during fiscal year ended March 31, 2003. The company originally intended to depreciate these assets over 36 months based on the original projections of the future undiscounted net cash flows. To date the company has seen modest sales success in its managed services offerings. The company performed impairment test of these assets as of December 31, 2003 and March 31, 2004. The company compared its original projections of the future undiscounted cash flows with actual performance, and reviewed its current sales pipeline. Based on these impairment tests, the Company recorded an impairment charge of 223,858 and $239,057 for three months ended December 31, 2003, and March 31, 2004, respectively. The total impairment charge of $462,915 was classified as general and administrative expense during the twelve months ended March 31, 2004. The net book value of this asset after impairment charge was $0. 8. Income Tax Expense (Benefit) Deferred income taxes reflect the net tax effects of (a) temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) net operating loss carryforwards (when available). Income tax expense (benefit) consisted of the following for the years ended March 31:
2004 2003 2002 --------- -------- -------- Continuing Operations Current taxes Federal $ 199,294 $ 9,883 $(21,143) State and local 102,440 36,409 13,082 --------- -------- -------- 301,734 46,292 (8,061) Deferred taxes Federal (137,092) (61,616) 10,827 State and local (38,955) (17,291) 2,866 --------- -------- -------- (176,047) (78,907) 13,693 --------- -------- -------- Net Income Tax Expense (Benefit) $ 125,688 $(32,615) $ 5,632 ========= ======== ========
Reconciliation of the U.S. statutory income tax rate to our effective tax rate is as follows:
2004 2003 2002 --------- -------- -------- Expected tax expense (benefit) at statutory rates $ 261,350 $(82,989) $ 73,225 Effect of state taxes, net 63,486 19,118 15,883 Valuation allowances (212,138) 23,927 (92,158) Permanent differences 12,989 7,329 8,682 --------- -------- -------- Actual Income Tax Expense/ (Benefit) $ 125,687 $(32,615) $ 5,632 ========= ======== ========
-51- Significant items comprising the Company's deferred tax assets and liability at March 31, are as follows:
2004 2003 --------- --------- Deferred Tax Assets Differences between book and tax basis: Trade receivables $ 145,143 $ 96,195 Inventories 298,477 198,088 Property and equipment 172,715 -- Accrued liabilities 22,301 55,259 Intangible Assets 86,817 93,604 Net Operating loss carryforwards -- 372,590 --------- --------- 725,451 815,736 Less Valuation Allowance (435,271) (675,581) --------- --------- Net Deferred Tax Assets $ 290,181 $ 140,155 ========= ========= Deferred Tax Liability Differences between book and tax basis:: Investment in geothermal power unit $ 25,924 $ 45,617 Property and equipment -- 6,328 --------- --------- Total Deferred Tax Liability $ 25,924 $ 51,945 ========= =========
At March 31, 2004 and 2003 the Company recorded a valuation allowance against its deferred tax assets, as stated in the above table, reducing those assets to amounts which, conservatively, are more likely than not to be realized. Federal and state net operating loss carryforwards approximated $850,000 and $1,050,000 respectively at March 31, 2003. The federal net operating losses carried forward were utilized in their entirety in 2004 to reduce current federal income taxes payable. State of New Jersey tax losses available to be carried forward as of March 31, 2004 approximated $1,160,000 and expire at various dates through 2010. 9. Major Customers Major customers approximated 57%, 44%, and 23% of the Company's net revenues in the years 2004, 2003 and 2002 respectively. Major customer revenues are as follows:
% Of Total Revenues Customers ------------------- -------------------------------- 31% The State of New Jersey Contract 16% Gwinnett County Public Schools 10% Duval County Public Schools --- 2004 57% === 20% Gwinnett County Public Schools 15% The State of New Jersey Contract 9% Duval County Public Schools === 2003 44% === 14% Gwinnett County Public Schools 9% Tiffany & Company --- 2002 23% ===
-52- Another major customer purchased manufacturer support service contracts from the Company. Net revenues associated with these contracts accounted for approximately 6.22%, 10.78%, and 0% of the Company's gross profit for the year ended March 31, 2004, 2003, and 2002, respectively. While the Company believes its relationship with these customers will continue, there can be no assurance that sales to these customers will continue at all or at the same level. 10. Fair Value of Financial Instruments The following methods and assumptions were used to estimate fair value of financial instruments at balance sheet date: Short-term financial instruments (cash equivalents, receivables, payables, customer deposit and accrued liabilities) - cost approximates fair value because of the short maturity period. Line of credit - cost approximates fair value because of the short interest-reset period. 11. 401(k) Plan The Company sponsors a 401(k) plan for all employees with at least 6 months of service and who are at least 20 years of age. Eligible employees may contribute 2% to 15% of their annual compensation to the plan. The Company matches 25% of the first 6% of employee plan contributions and may contribute additional amounts at the Company's discretion. Participants are vested 20% for each year of service and are fully vested after 6 years. Company contributions to the plan were $86,436, $119,911, and $84,707 for the years ended March 31, 2004, 2003, and 2002, respectively. 12. Stock Option Plan The Company's 1996 Stock Option Plan (the Plan) (amended in 1999) authorizes the granting of stock options to directors and eligible employees. The Company has reserved 1,000,000 shares of its common stock for issuance under the Plan at prices not less than 100% of the fair value of the Company's common stock on the date of grant (110% in the case of shareholders owning more than 10% of the Company's common stock). The Black-Scholes option pricing model has been used to determine the fair value of options granted subsequent to January 17, 2001. Option activity is summarized as follows: -53- For the year ended March 31, 2002: Options Outstanding - April 1, 2001 465,259 Options granted 82,746 Options exercised -- Options forfeited or expired (166,677) -------- Options outstanding - March 31, 2002 381,328 For the year ended March 31, 2003: Options granted 180,000 Options exercised -- Options forfeited or expired (99,900) -------- Options outstanding - March 31, 2003 461,428 For the year ended March 31, 2004: Options granted -- Options exercised -- Options forfeited or expired (46,200) -------- Options outstanding- March 31, 2004 415,228 ========
Information with respect to stock options outstanding and exercisable at March 31, 2004 is as follows: Options Outstanding and Exercisable
Outstanding Weighted Avg. Remaining as of 3/31/04 Life in Years Exercise Price - ------------- ----------------------- -------------- 219,228 1.0 $1.00 30,000 2.7 $0.55 136,000 3.5 $0.29 30,000 3.7 $0.44
SFAS No. 123 requires pro forma disclosure under the fair value method of net income (loss) and income (loss) per share when stock options are granted to employees and directors. The fair value for options was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The weighted average fair value of options granted in 2004, 2003, and 2002 and the assumptions used in estimating fair value under the Black-Scholes model are as follows:
2004 2003 2002 ---- ----- ----- Estimated weighted average values of options granted $n/a $0.24 $0.17 ==== ===== =====
-54- Principal assumptions in applying the Black-Scholes valuation model: Expected life, in years n/a 2.50 2.50 Risk-free interest rate n/a 3.01% 2.96% Expected volatility n/a 1.54 1.72 Expected dividend yield n/a 0.00% 0.00%
For purposes of pro forma disclosures, the estimated fair value of options granted to employees and directors is amortized to expense over the options' vesting period and the pro forma expense is adjusted for the effect of income taxes. Had the Company adopted FASB Statement No. 123 in lieu of APB No. 25, the Company's net income (loss) and income (loss) per share would have been the pro forma amounts indicated below:
2004 2003 2002 ---------- ---------- ---------- Net income (loss) as reported $ 642,988 $ (211,471) $ 216,972 Less: Stock-based compensation under SFAS 123 -- 21,473 8,933 ---------- ---------- ---------- Pro forma net income (loss) $ 642,988 $ (232,944) $ 208,039 Per share amounts -basic and diluted: Pro forma net income (loss) per share $ 0.09 $ (0.03) $ 0.03 Net income (loss) per share as reported $ 0.09 $ (0.03) $ 0.03 Shares used in calculation of pro forma per shares amounts: basic 7,380,498 7,080,498 7,080,498 diluted 7,483,549 7,123,831 7,081,398
13. Termination Costs Termination costs of $0 (2004), $0 (2003), and $21,746 (2002) were paid to former Company executives. 14. Commitments and Contingencies Leases: The Company leases offices, warehouse facilities, vehicles and office equipment under noncancellable operating leases. Future minimum lease payments under such leases are as follows:
Fiscal Years - ------------- 2005 $ 538,543 2006 445,744 2007 323,811 2008 293,536 Thereafter 72,657 ---------- Total $1,674,291 ==========
-55- Aggregate rent expense for offices and warehouse facilities amounted to $1,066,962, $920,893, and $590,347 for the years ended March 31, 2004, 2003, and 2002, respectively. Aggregate rent expense for vehicles and office equipment amounted to $71,903, $118,026, and $243,444 for the years ended March 31, 2004, 2003, and 2002, respectively. Litigation: In March 2002,a lawsuit was filed against the Company by a competitor seeking damages of an unspecified amount. The competitor is alleging that the Company illegally interfered with customer relationships of the competitor. At this time, the outcome of this litigation cannot be determined. There has been no change to this litigation matter in last twelve months. The lawsuit is still in the discovery phase. 15. Supplemental Cash Flow Information Cash paid for interest and income taxes were as follows:
2004 2003 2002 --------- --------- --------- Interest $328,296 $160,803 $246,287 Income Taxes $ 50,341 $ 17,128 $ 13,082
16. Segment Information The Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information,". The Company's business activities are considered to be in two business segments, our Information Technology Division and our Geothermal Division. Our Information Technology division provides a comprehensive range of information technology products, services and solutions to a broad base of commercial and governmental customers. Our Geothermal division is engaged in activities designed to identify and acquire geothermal oil and gas leases in the Western United States. Geothermal revenues are primarily derived from royalty payments from these leases as well as the applicable portion of geothermal steam revenues sold to PacifiCorp on a prepayment basis. The following is financial information relating to the operating segments:
Years Ended March 31: ---------------------------------------- 2004 2003 2002 ------------ ----------- ----------- Revenues Information Technology $100,171,308 $92,084,126 $62,468,221 Geothermal 190,346 175,902 187,978 ------------ ----------- ----------- Total Revenues $100,361,654 $92,260,028 $62,656,199 ============ =========== =========== Interest Expense Information Technology 328,296 160,803 210,305 Geothermal -- -- -- ------------ ----------- ----------- Total Interest Expense $ 328,296 $ 160,803 $ 210,305 ============ =========== ===========
-56- Depreciation and Amortization Information Technology 563,751 555,223 523,174 Geothermal 41,558 35,070 24,833 ------------ ----------- ----------- Total Depreciation and Amortization $ 605,309 $ 590,293 $ 548,007 ============ =========== =========== Operating Income/(Loss) Information Technology 741,432 (306,750) 138,802 Geothermal 27,243 62,664 83,802 ------------ ----------- ----------- Net Segment Operating Income/(Loss) 768,675 (244,086) 222,604 Income Tax Expense (Benefit) 125,687 (32,615) 5,632 ------------ ----------- ----------- Net Income (Loss) $ 642,988 $ (211,471) $ 216,972 ============ =========== ===========
Identifiable Assets: - -------------------- As of March 31: 2004 2003 ------------ ----------- Information Technology 18,338,652 21,723,065 Geothermal 569,960 611,519 ----------- ----------- Total Assets $18,765,945 $22,334,584 =========== ===========
17. Investment in Geothermal Power Unit The investment in Geothermal Power Unit (Unit) represents a 5.49% working interest in the Roosevelt Hot Springs geothermal power unit. The net investment in the unit amounted to $569,960, and $611,519 including accumulated amortization of $379,037, and $337,478 at March 31, 2004, and 2003, respectively. An agreement is in place to sell all of the steam from the Unit through 2023 to PacifiCorp, which has constructed the Blundell power plant to utilize the steam. This agreement, entered into in 1993, included an advance payment. The remaining unamortized deferred revenue attributable to the 1993 advance payment in the amount of $714,573 is reported as a non-current liability at March 31, 2004 and will be recognized into income ratably through 2023. PacifiCorp pays the revenue to the operator who allocates 5.49% share to the Company and remits the gross amount on a monthly basis. The Company pays its proportionate share of operating and maintenance expenses to the operator of the Unit on a monthly basis as well. 18. Quarterly Financial Information - (Unaudited)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ----------- ----------- ----------- ----------- ------------ 2004 ----------- Revenues $28,480,340 $25,814,554 $24,666,464 $21,400,296 $100,361,654 Gross Profit 3,703,583 3,297,982 3,823,744 3,647,710 14,473,019 Net Income (Loss) $ 357,891 $ (138,948) $ 320,326 $ 103,719 $ 642,988 Per share: {Basic and Diluted} $ .05 $ (.02) $ .04 $ .01 $ .09 2003 ----------- Revenues $19,709,104 $24,466,189 $22,539,888 $25,544,847 $ 92,260,028 Gross Profit 3,115,305 3,183,756 2,308,341 4,138,876 12,746,278 Net Income (Loss) $ 114,255 $ 122,456 $ (767,026) $ 318,844 $ (211,471) Per share: {Basic and Diluted} $ .02 $ .02 $ (0.11) $ .04 $ (.03)
-57- 19. Accounts Receivable and Inventory Allowances The following table provides information regarding accounts receivable and inventory valuation allowance activity for the three years ended March 31, 2004.
Allowances ---------------------- Accounts Receivable Inventory ---------- --------- Balance, April 1, 2001 $ 432,890 $ 391,183 Charged to costs and expenses 55,917 76,062 Write-offs (336,205) (15,530) --------- --------- Balance, March 31, 2002 $ 152,602 $ 451,715 Charged to costs and expenses 88,245 23,536 Write-offs (--) (4,048) --------- --------- Balance, March 31, 2003 $ 240,847 $ 471,203 Charged to costs and expenses 165,054 251,348 Write-offs (42,499) (--) --------- --------- Balance, March 31, 2004 $ 363,402 $ 722,551 ========= =========
-58- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 14, 2004 EMTEC, INC. By: /s/ John P. Howlett ---------------------------------- John P. Howlett Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - ------------------------- ----------------------------------- -------------- /s/John P. Howlett Chairman and July 14, 2004 - ------------------------- Chief Executive Officer John P. Howlett /s/Sam Bhatt Vice President-Finance July 14, 2004 - ------------------------- (Principal Financial Officer) Sam Bhatt (Principal Accounting Officer) /s/Ronald A. Seitz President, Chief Operating Officer, July 14, 2004 - ------------------------- and Director Ronald A. Seitz Director - ------------------------- Frank Jerd /s/George F. Raymond Director July 14, 2004 - ------------------------- George F. Raymond -59- STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as............................... 'TM' The section symbol shall be expressed as................................. 'SS' EX-10 2 ex10-27.txt EXHIBIT 10.27 EXHIBIT 10.27 Commercial Lease THIS LEASE made as of June 1, 2004 between Hamilton Transit Corporate Center (HTCC), of 572 Whitehead Road, Trenton, NJ 08619 (the "Landlord") and Emtec, Inc., of 817 Eastgate Drive, Mount Laurel, NJ 08054 (the "Tenant"). IN CONSIDERATION of the mutual covenants contained herein, the Landlord and Tenant hereby agree as follows: ARTICLE 1 INTERPRETATION 1.1 Definitions. In this Lease the following terms shall have the following meanings: "Additional Rent" means all other amounts payable by the Tenant to the Landlord or to be discharged as Rent under this Lease; "Building" means the building #1 (consisting of 16,000sq.ft. of office space) located on the Land, including all alterations and additions thereto and replacements thereof. The cabling that runs throughout the building along with the existing racking and termination hardware will remain the property of the Landlord. Of the installed fiber optic and copper telephone cabling, the Landlord reserves the right to use 6 strands of fiber along with 6 pairs of copper that run between buildings 1,2 and 5 of 572 Whitehead Road; "Commencement Date" means June 1, 2004; "Event of Default" means an event referred to in Section 10.2; "Land" means the land known municipally as 572 Whitehead Road, Trenton, NJ 08619 and legally described as same; "Lease" means this lease and any Schedules attached hereto, which are referred to in this lease, and every executed instrument, which by its terms amends, modifies or supplements this lease; "Lease Year" means each successive periods of twelve (12) calendar months during the Term ending on an anniversary of the Commencement Date; provided that if the Landlord deems it necessary for the Landlord's accounting purposes, the Landlord may by written notice to the Tenant specify another day on which each subsequent lease year is to commence and in such event, the appropriate adjustments shall be made accordingly; "Leased Premises" means the Property and the Building; "Minimum Rent" means for each Lease Year, the amounts set out hereunder:
-------------------------------------------- Year of Aggregate Annual Monthly Minimum Term Minimum Rent Rent -------------------------------------------- Year 1 $139,200.00 $11,600.00 Year 2 $139,200.00 $11,600.00 --------------------------------------------
*The above charges are for rent at $8.70/sq.ft., which includes .20/sq.ft. for the proportionate share of Real Estate Taxes. "Occupancy Date" means March 1, 2004; "Permitted Use" means the business of office / storage and any and all uses ancillary thereto; "Rent" means the aggregate of all amounts payable by the Tenant to the Landlord under this Lease; Page 2 "Term" means a period of Two (2) Years, commencing on the Commencement Date or any renewal period hereunder; "Termination Date" means May 31, 2006, unless earlier terminated as provided in this Lease; "Value Taxes" means all goods and services taxes, sale taxes, value-added taxes, and any other taxes imposed on the Landlord with respect to this Lease, the services provided hereunder or the Rent. ARTICLE 2 GRANT OF LEASE AND GENERAL COVENANTS 2.1 Grant. The Landlord hereby leases to the Tenant and the Tenant hereby leases from the Landlord the Leased Premises, to have and to hold during the Term, subject to the terms and conditions of this Lease. 2.2 Landlord's General Covenants. The Landlord covenants with the Tenant: (a) for quiet enjoyment of the Leased Premises; and (b) to observe and perform all the covenants and obligations of the Landlord herein. 2.3 Tenant's General Covenants. The Tenant covenants with the Landlord: (a) to pay Rent; and (b) to observe and perform all the covenants and obligations of the Tenant herein. ARTICLE 3 TERM AND POSSESSION 3.1 Term. The Term of this Lease shall begin on the Commencement Date and end on the Termination Date unless terminated earlier as provided in this Lease. As of May 31, 2005, Emtec may downsize from 16,000sq.ft. with a maximum of 8,000sq.ft. eliminated. If a downsize were to occur, Emtec would consolidate its operations either into the first and second floor of the red brick section or the first and second floor of the metal section. After May 31, 2006 either Tenant or Landlord may terminate this lease upon sixty (60) days written notice to the other party. 3.2 Possession of Leased Premises. Notwithstanding the Term, the Tenant shall have occupancy of the Leased Premises from and after the Occupancy Date to the Termination Date, during which period the Tenant shall pay all Rent, other than Minimum Rent, and shall observe and perform all the covenants and obligations of the Tenant herein. ARTICLE 4 RENT 4.1 Rent. The Tenant shall pay to the Landlord as Rent for the Leased Premises the aggregate of: (a) Minimum Rent in respect of each year of the Term or renewal terms as the case may be, payable in advance and without notice or demand in monthly installments commencing on the Commencement Date; and (b) Additional Rent at the times and in the manner provided in this Lease or, if not so provided, as reasonably required by the Landlord. If the Commencement Date is not the first day of a calendar month, Rent for the period from the Commencement Date to the first day of the next calendar month shall be pro-rated on a Page 3 per diem basis and paid on the Commencement Date and thereafter all subsequent monthly installments of Rent shall be paid in advance on the first day of each calendar month. 4.2 Net Lease. It is the intent of the Landlord and the Tenant that this Lease shall be fully net to the Landlord, provided that the Tenant shall not be responsible for costs and expenses expressly excluded by the terms of this Lease, and including but not limited to the following: (a) mortgage payments of capital or interest on any mortgage affecting the Leased Premises; (b) any income taxes of the Landlord, except to the extent that such income taxes are imposed in lieu of real property taxes; (c) any ground rental; (d) any structural repairs or replacements; and (e) any expenditures with respect to the Leased Premises, which are of a capital nature. 4.3 Payment of Rent. One (1) month security deposit is required. All amounts payable by the Tenant to the Landlord pursuant to this Lease shall be deemed to be Rent and shall be payable and recoverable as Rent in the manner herein provided and the Landlord shall have all rights against the Tenant for default in any such payment as in the case of arrears of rent. Except as provided in Section 8.1, Rent shall be paid to the Landlord in lawful money of the United States of America, without deduction or set-off, at the address of the Landlord or to such other person or such other address as the Landlord may from time to time designate in writing. The Tenant's obligation to pay Rent shall survive the expiration of earlier termination of this Lease. ARTICLE 5 USE AND OCCUPATION 5.1 Use of Leased Premises. The Tenant shall use the Leased premises only for the Permitted Use and shall not use or permit to be used the Leased Premises or any part thereof for any other purpose or business or by any persons other than the Tenant. 5.2 Compliance with Laws. The Tenant shall comply with present and future laws, regulations and orders relating to the occupation or use of the Leased Premises, the condition of the leasehold improvements, equipment and other property of the Tenant therein, the making by the Tenant of any repairs, changes or improvements and the conduct of business in the Leased Premises. 5.3 Prohibited Uses. The Tenant shall not commit, cause or permit any nuisance or any waste or injury to or in or about the Leased Premises, or to any of the leasehold improvements, merchandise or fixtures therein, or conduct any use or manner of use causing annoyance to any person. Without limiting the generality of the foregoing, the Tenant shall not use or permit the use of any portion of the Leased Premises for any dangerous, illegal, noxious, odorous or offensive trade, business or occurrence or other use contrary to the provisions of this Lease. The Tenant shall keep the Leased Premises free of debris or anything of a dangerous, noxious, odorous or offensive nature or which could create an environmental or a fire hazard (through undue load on electrical circuits or otherwise) or undue vibration, heat or noise. 5.4 Hazardous Use. The Tenant shall not do, omit to do or permit to be done anything which will cause or shall have the effect of causing the cost of the Landlord's insurance in respect of the Leased Premises to be increased at any time during the Term or any policy of insurance on or relating to the Leased Premises to be subject to cancellation. Without waiving the foregoing prohibition, the Landlord may demand and the Tenant shall pay to the Landlord upon demand, the amount of any increase in the cost of insurance caused by anything so done or omitted to be done. The Tenant shall forthwith upon the Landlord's request comply with the requirements of the Landlord's insurers, cease any activity complained of and make good Page 4 any circumstance which has caused any increase in insurance premiums or the cancellation of any insurance policy. If any policy of insurance in respect of the Leased Premises is cancelled or becomes subject to cancellation by reason of anything so done or omitted to be done, the Landlord may without prior notice terminate this Lease and re-enter the Leased Premises. 5.5 Signage. The Tenant shall, with the Landlord's prior written approval, not to be unreasonably withheld, be permitted to install and exhibit sign(s) identifying the Tenant and the Tenant's business activities on the Leased Premises. Subject to requirements of existing municipal by-laws, such sign(s) are to be installed and maintained at the Tenant's own expense. 5.6 Rules and Regulations. The Landlord shall be entitled from time to time to make reasonable rules and regulations for the operation, maintenance, safety, and use of the Leased Premises and the Tenant shall comply with such rules and regulations and shall cause its servants, agents, employees, customers, invitees and licensees to comply with such rules and regulations. 5.7 Toxic or Hazardous Substances. The Tenant at present agrees to neither store, spill or bring onto the premises any material which is considered a hazardous substance as defined by the Industrial Site Recovery Act, N.J.S.A. 13:1K-6, et seq. and the regulations promulgated thereunder other than substances ordinarily used in offices in quantities typically found in offices. Tenant is not currently utilizing any material that is considered a hazardous substance other than substances ordinarily used in offices in quantities typically found in offices. In the event of a change in technology so that Tenant is required in the future to utilize hazardous substances, Tenant will notify Landlord and obtain Landlord's consent, which consent will not be unreasonably withheld. In the event of Tenant in the future utilizing a hazardous substance as defined by the Industrial Site Recovery Act, Tenant hereby agrees to indemnify and hold Landlord harmless with respect to said hazardous substance and the use thereof and further agrees to comply with any and all regulations concerning industries who use such hazardous substances. In the event this clause is violated, Tenant shall immediately, upon the request of Landlord, the State or any Department thereof, remove said substance and restore the premises to an ISRA free condition from the violation within five (5) days of said notice at Tenant's sole cost and expense. Tenant agrees to indemnify and hold Landlord harmless with respect to any financial liability imposed upon Landlord for Tenant's violations of the within paragraph. An uncured violation of this paragraph shall give Landlord an immediate right to possession. In the event evidence of such compliance is not delivered to the Landlord prior to the surrender of the premises by the Tenant to the Landlord, it is understood and agreed that the Tenant shall be liable to pay to the Landlord an amount equal to two times the rent then in effect, pro rated on a monthly basis, together with all applicable additional rent from the date of such surrender until such time as evidence of compliance with ISRA has been delivered to the Landlord and together with any costs and expenses incurred by Landlord enforcing Tenant's obligations under this paragraph. Evidence of compliance, as used herein, shall mean a letter of non-applicability issued by the New Jersey Department of Environmental Protection or an approved negative declaration or a clean-up plan which has been fully implemented and approved by the New Jersey Department of Environmental Protection. Tenant is not deemed to be responsible for nor does Tenant assume any responsibility for any hazardous or toxic substances which may be present at the premises upon the commencement of the lease. Landlord represents to Tenant that there has been a full ISRA compliance done by Goodall Rubber Company Inc., Landlord's predecessor in title, and to the best of Landlord's knowledge, there are no hazardous substances or hazardous waste present at the premises. Landlord agrees to indemnify and hold Tenant harmless with respect to any loss, liability, cost or expense which Tenant may sustain by reason of the presence at the commencement of the lease of any such hazardous substance or hazardous waste. ARTICLE 6 RIGHTS AND OBLIGATIONS OF THE LANDLORD Page 5 6.1 Operation of Leased Premises. The Tenant shall assume full responsibility for the operation and maintenance of the Leased Premises and for the repair or replacement of all fixtures or chattels, where such repair or replacement is less than $7,500 per occurrence, located therein or thereon. The Landlord shall have no responsibility whatsoever, with respect to maintenance, repairs or replacement, except as provided in Section 6.2 herein, provided that if the Tenant fails to do so, the Landlord may at its sole option upon 14 days prior written notice and without any obligation to the Tenant elect to perform such maintenance, repairs or replacement as the Landlord may reasonably deem necessary or desirable. In so doing, the Landlord shall not be liable for any consequential damage, direct or indirect to any person or property, including, but without restricting the generality of the foregoing, damages for a disruption of the business of the Tenant and damage to, or loss of, the goods, chattels and equipment and other property of the Tenant nor shall any reduction or disruption of services be construed as a breach of the Landlord's covenants or as an eviction of the Tenant, or release of the Tenant from any obligation under this Lease provided that the Tenant's business is not unreasonably interfered with. 6.2 Access by Landlord. The Tenant shall permit the Landlord to enter the Leased Premises at any time outside normal business hours in case of an emergency and otherwise during normal business hours where such will not unreasonably disturb or interfere with the Tenant's use of the Leased Premises or operation of its business, to examine, inspect and show the Leased Premises for purposes of leasing, sale or financing, to provide services or make repairs, replacements, changes or alterations as provided for in this Lease and to take such steps as the Landlord may deem necessary for the safety, improvement or preservation of the Leased Premises. The Landlord shall, whenever possible, consult with or give reasonable notice to the Tenant prior to entry but no such entry shall constitute an eviction or a breach of the Landlord's covenant for quiet enjoyment or entitle the Tenant to any abatement of Rent. The Tenant shall also permit the Landlord, its employees and agents, at any time during the six (6) months prior to the expiry or termination of this Lease to enter the Leased Premises for the purpose of showing it to any such persons as may be desirous of purchasing or leasing the Leased Premises. ARTICLE 7 TENANT'S RESPONSIBILITIES 7.1 Tenant's Obligations. In connection with the Leased Premises, the Tenant hereby agrees that it shall be responsible for the following throughout the Term: (a) Insurance - The Tenant hereby agrees to defend and save the Landlord harmless and indemnify it from all injury, loss, claims or damage (including attorney's fees and disbursements incurred by the Landlord in conducting an investigation and preparing for and conducting a defense) to any person or property arising from, relating to or in any way connected with the use or occupancy of the premises or the conduct or operation of the Tenant's business. To maintain with responsible companies approved by the Landlord: (1) Comprehensive general liability insurance against all claims, demands or actions for injury to or death of person or property to the limit of not less than $1,000,000.00 per occurrence and $2,000,000.00 in the aggregate per occurrence and/or in the aggregate including products liability and independent contractor's coverage with broad form endorsement arising from, related to or in any way connected from the conduct and operation of the Tenant's business in the Premises or caused by actions or omissions to act where there is as duty to act of the Tenant, its agents, servants and contractors, which insurance shall name the Landlord, its agents, servants, employees, contractors, licensees and invitees as additional insured's. Tenant will additionally be required to provide a $1,000,000.00 umbrella policy over and above the comprehensive liability. (2) If there is a boiler or major refrigeration equipment or pressure object or other similar equipment in the Premises, steam boiler, air conditioning and Page 6 machinery insurance written on broad form basis to the limit of $500,000.00. (3) Fire insurance with extended coverage, vandalism, malicious mischief, sprinkler leakage and flood endorsements attached as the Landlord reasonably may from time to time approve or require covering all fixtures and equipment, stock in trade, furniture, furnishings, improvements or betterments installed or made by the Tenant in, on or about the Premises to the extent of at least 100% of their replacement values without deduction for depreciation but in any event, in applicable policies. Tenant will also be responsible for building replacement coverage in the event of loss for not less than $1,120,000.00 based on $70.00/sqft. replacement cost. (4) Workmen's compensation, disability and such other similar insurance covering all persons employed in connection with the Tenant's work and with respect to whom, death or bodily injury claims could be asserted against the Tenant, Landlord or the Premises. (5) Rental income insurance payable to the Landlord as loss payee in case of loss caused by a casualty against which insurance is required hereunder with respect to the twelve (12) month period following any casualty. All of said insurance shall be in form and with deductibles (not greater than $1,000.00 deductible) satisfactory to the Landlord and shall provide that it shall not be subject to cancellation, termination or change except after at least thirty (30) days' prior written notice to the Landlord. In the case of boiler and machinery insurance and rental income insurance, the policy (ies) shall cover the Landlord as an additional insured and loss payee. All policies required pursuant to this Paragraph or duly executed duplicates of same shall be deposited with the Landlord not less than ten (10) days prior to the day the Tenant begins its work and upon renewals of said policies not less than fifteen (15) days prior to the expiration of the terms of such coverage. All such policies shall be delivered with satisfactory evidence of the payment of the premium thereof. The Landlord and Tenant mutually agree that with respect to any loss which is covered by insurance then being carried by them respectively or required to be carried, the party carrying or required to carry such insurance and suffering said loss releases the other of and from any and all claims with respect to such loss, and they further mutually agree that their respective insurance companies shall have no right of subrogation against the other on account thereof. In the event that an extra premium is payable by either party as a result of these provisions, the other party shall reimburse the party paying such premium the amount of such extra premium. If at the written requirement of the other party this release and non-subrogation provision is waived, then the obligation of reimbursement shall cease for such period of time as such waiver shall be effective, but nothing contained in this Paragraph shall be deemed to modify or otherwise affect releases elsewhere herein contained of either party from liability for claims. All public liability, property damage and other casualty insurance policies obtained by the Tenant pursuant to this subparagraph shall be written as primary insurance and not contributing with separate coverage which the Landlord may carry, shall name the Landlord as an additional insured and shall contain cross-liability endorsements. If the Tenant fails to comply with this paragraph, the Landlord shall have the right to obtain any such insurance and to pay the premiums therefore and in such event, the entire amount of such premiums shall be immediately due and payable by the TENANT to the LANDLORD. Landlord additionally will obtain comprehensive general liability insurance covering the entire site. Tenant hereby agrees to pay to Landlord as and for additional rent, twenty percent (20%) of the annual premium for said policy. Said payments to be made within fifteen (15) days of Landlord's submission of the bill to Tenant. (b) Utilities - to promptly pay and discharge all charges, rates, assessments and levies for water, gas, electric, sewer, annual sprinkler inspection charge and all other utilities supplied to or consumed in the Leased Premises. Page 7 (c) Taxes - to pay a proportionate share of Real Estate Taxes. The proportionate share equates to .20/sqft, which is included in the rental rate indicated in Article 1.1. (d) Heating and Cooling - to pay and discharge as Rent the cost of all heating, cooling, ventilating and air conditioning required in the Leased Premises and the cost of all repairs, replacements and improvements to the heating, ventilating, air conditioning and other service and utility systems; (e) Maintenance - to maintain the Leased Premises and all improvements therein in good order and condition; including but not limited to, maintenance of lighting fixtures, cleaning of carpets, indoor paint, bathrooms, alarms and any interior renovations. To provide all landscaping, gardening and snow removal. To keep the Leased Premises in a clean condition and remove from the Leased Premises at its expense all debris and garbage; (f) Repairs - to perform all repairs to and make all replacements of fixtures, systems, facilities, equipment, machinery, leasehold improvements and plate glass in the Leased Premises as may be necessary up to $7,500.00 per occurrence; and (g) All Other Expenses - to pay all other expenses of every nature incurred in connection with the maintenance and operation of the Leased Premises. 7.2 Payment of Costs. The Tenant shall pay all of the costs and expenses associated with the Tenant's obligations directly to the appropriate party as they come due and shall, at the Landlord's request, provide the Landlord with copies of receipts or other proof acceptable to the Landlord that such costs have been paid. If the Tenant fails to perform any obligation under this Lease or to pay any costs and expenses as set out herein, the Landlord may at its sole option and discretion, on seven (7) days written notice to the Tenant, perform such obligation or pay such amounts on behalf of the Tenant and the Tenant shall forthwith upon receipt of an invoice therefor reimburse the Landlord for the cost of such action or the amount of such payment. 7.3 Leasehold Improvements. The Tenant may install in the Leased Premises its usual fixtures and personal property in a proper manner; provided that no installation or repair shall interfere with or damage the mechanical or electrical systems or the structure of the Leased Premises. If the Tenant is not then in default hereunder, the fixtures and personal property installed in the Leased Premises by the Tenant may be removed by the Tenant from time to time in the ordinary course of the Tenant's business or in the course of reconstruction, renovation or alteration of the Leased Premises by the Tenant, provided that the Tenant promptly repairs at its own expense any damage to the Leased Premises resulting from the installation and removal reasonable wear and tear excepted. The Tenant shall, if required by the Landlord, remove any Leasehold Improvements or fixtures from the Leased Premises upon the termination of this Lease. 7.4 Alterations by Tenant. The Tenant may from time to time at its own expense make changes, additions and improvements to the Leased Premises to better adapt the same to its business, provided that any change, addition or improvement shall be made only after obtaining written consent of the Landlord, such consent not to be unreasonably withheld and shall be carried out in a good and workmanlike manner and only by persons selected by the Tenant and reasonably approved in writing by the Landlord. If any such changes, additions or improvements require alterations to the exterior walls, roof, or other structural components of the Leased Premises or modification to the heating, ventilation or air conditioning systems in the Leased Premises, the Tenant shall be solely responsible for the cost of such modifications and the Landlord hereby reserves the right to perform any such work at the expense of the Tenant provided that the cost of such work to the Tenant is reasonable in the circumstance. 7.5 Liens. The Tenant shall pay promptly when due all costs for work done or caused to be done by the Tenant in the Leased Premises which could result in any lien or encumbrance on the Landlord's interest in the property, shall keep the title to the property and every part thereof Page 8 free and clear of any lien or encumbrance in respect of the work and shall indemnify and hold harmless the Landlord against any claim, loss, cost, demand and legal or other expense, whether in respect of any lien or otherwise, arising out of the supply of materials, services or labor for the work. 7.6 Notify Landlord. The Tenant shall immediately notify the Landlord of any accidents or defect in the Leased Premises or any systems thereof, and as well of any matter or condition, which may cause injury or damage to the Leased Premises, or any person or property located therein. ARTICLE 8 DAMAGE AND DESTRUCTION 8.1 Damage and Destruction. If during the Term the Leased Premises or any part thereof shall be damaged by fire, lightning, tempest, structural defects or acts of God or by any additional perils from time to time defined and covered in the standard broad-coverage fire insurance policy carried by the Tenant on the Leased Premises, the following provisions shall apply: (a) If as a result of such damage the Leased Premises are rendered partially unfit for occupancy by the Tenant, the Rent shall abate in the proportion that the part of the Leased Premises rendered unfit for occupancy by the Tenant is of the whole of the Leased Premises. If the Leased Premises are rendered wholly unfit for occupancy by the Tenant, the Rent shall be suspended until the Leased Premises have been rebuilt and repaired or restored. (b) Notwithstanding subsection (a) above, if in the opinion of the Landlord's architect or engineer given within 60 business days of the happening of damage, the Leased Premises shall be incapable of being rebuilt, repaired, or restored with reasonable diligence within 180 days after the occurrence of the damage then either the Landlord or the Tenant may, at its option, terminate this Leased by notice in writing to the other given within 15 days of the giving of the opinion of the Landlord's architect or engineer. If notice is given by the Landlord or Tenant under this Section, then this Lease shall terminate from the date of such damage and the Tenant shall immediately surrender the Leased Premises and all interest therein to the Landlord and the Rent shall be apportioned and shall be payable by the Tenant only to the date of the damage and the Landlord may thereafter re-enter and repossess the Leased Premises. (c) If the Leased Premises are capable with reasonable diligence of being rebuilt, repaired or restored within 180 days of the occurrence of such damage, then the Landlord shall proceed to rebuild, restore or repair the Leased Premises with reasonable promptness within 180 days plus any additional period due to delay caused by strikes, lock-outs, slow-downs, shortages of material or labor, acts of God, acts of war, inclement weather or other occurrences which are beyond the reasonable control of the Landlord, and the Rent shall abate in the manner provided for in subsection (a) above until the Leased Premises have been rebuilt, repaired or restored; provided that nothing in this Section shall in any way be deemed to affect the obligation of the Tenant to repair, maintain, replace or rebuild the Leased premises as otherwise provided by the terms of this Lease. ARTICLE 9 CONDEMNATION 9.1 Condemnation. If the land and premises leased herein, or of which the leased premises are a part, or any portion thereof, shall be taken under eminent domain or condemnation proceedings, or if suit or other action shall be instituted for the taking or condemnation thereof, or if in lieu of any formal condemnation proceedings or actions, the Landlord shall grant an option to purchase and or shall sell and convey the said premises or any portion thereof, to the governmental or public authority, agency, body or public utility, seeking to take said land and premises or any portion thereof, then this lease, at the option of the Landlord, shall terminate, and the term hereof shall end as of such date as the Landlord shall fix by notice in writing: and the Tenant shall have no claim or right to claim or be Page 9 entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation proceedings; and all rights of the Tenant to damages, if any, other than the right to prosecute its own claim for personal property and trade fixtures as well as its moving expenses are hereby assigned to the Landlord. The Tenant agrees to execute and deliver any instruments, at the expense of the Landlord, as may be deemed necessary or required to expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other public authority, agency, body or public utility seeking to take or acquire the said lands and premises or any portion thereof. The Tenant covenants and agrees to vacate the said premises, remove all the Tenant's personal property therefrom and deliver up peaceable possession thereof to the Landlord or to such other party designated by the Landlord in the aforementioned notice. Failure by the Tenant to comply with any provisions in this clause shall subject the Tenant to such costs, expenses, damages and losses as the Landlord may incur by reason of the Tenant's breach hereof. ARTICLE 10 INDEMNITY 10.1 Indemnity. The Tenant shall indemnify and save harmless the Landlord and its agents and employees from any and all liabilities, damages, costs, claims, suits or actions growing or arising out of: (d) any breach, violation or non-performance of any covenant, condition or agreement in this Lease set forth and contained on the part of the Tenant to be fulfilled, kept, observed and performed; (e) any damage to property while the property is in or about the Leased Premises; and (f) any injury to person or persons including death resulting at any time therefrom occurring in or about the Leased Premises. 10.2 Limitation of Landlord's Liability. The Landlord and its agents and employees shall not be liable for any damage to the Leased Premises or any property located therein caused by any latent defect or by steam, water, rain or snow which may leak into, issue or flow from any part of the Leased Premises or from the water, steam, sprinkler or drainage pipes or plumbing works of the same or from any other place or from any damage caused by or attributable to the condition or arrangement of any electrical or other wiring or for any damage caused by anything done or omitted to be done by any person or for damage caused by interruption or failure of any service or utility or for damage however caused to merchandise, stock in trade, books, records, files, money, securities, negotiable instruments, papers or other valuables. 10.3 Survival of Obligations and Indemnities. All obligations of the Tenant, which arise during the Term pursuant to this Lease and which have not been satisfied and the indemnities, and other obligations of the Tenant contained in Section 9.1 shall survive the expiration or other termination of this Lease. ARTICLE 11 DEFAULT 11.1 Interest and Costs. If Rent is not paid within ten (10) days of the date the same is due, the Tenant shall pay monthly to the Landlord interest at five percent (5%) of the amount to have been paid for each month or part of month upon any default in payment of Rent until the same is fully paid and satisfied. The Tenant shall indemnify the Landlord against all costs and charges reasonably incurred in enforcing payment of Rent hereunder and in obtaining possession of the Leased Premises should the same be necessary. 11.2 Events of Default. Each of the following events shall constitute an event of default (an "Event of Default"): Page 10 (g) all or any part of the Rent hereby reserved is not paid when due and upon written notice by the Landlord default continues for five (5) days after notice thereof; or (h) the Term or any goods, merchandise, stock in trade, chattels or equipment of the Tenant is seized or is taken or exigible in execution or in attachment or if a writ of execution is issued against the Tenant or if a creditor takes possession thereof; or (i) the Tenant or any person or corporation bound to perform the obligations of the Tenant hereunder either as guarantor or indemnifier or as one of the parties constituting the Tenant takes any steps or suffers any order to be made for its winding-up or other termination of its corporate existence or becomes insolvent or commits an act of bankruptcy or becomes bankrupt or takes the benefit of any statute that may be in force for bankrupt or insolvent debtors or becomes involved in voluntary or involuntary winding-up proceedings or if a receiver or receiver/manager shall be appointed for the business, property, affairs or revenues of the Tenant or such person or corporation; or (j) the Tenant makes a bulk sale of its goods or moves or commences, attempts or threatens to move its goods, chattels and equipment out of the Leased Premises (other than in the normal course of its business) or ceases to conduct business from the Leased Premises for in excess of 14 days; or (k) the Tenant fails to observe, perform and keep each and every of the covenants, agreements and conditions herein contained to be observed, performed and kept by the Tenant and persists in the failure after 10 days notice by the Landlord requiring the Tenant to remedy, correct, desist or comply (or if any breach would reasonably require more than 10 days to rectify, unless the Tenant commences rectification within the 10 day notice period and thereafter promptly and effectively and continuously proceeds with the rectification of the breach). 11.3 Remedies on Default. Upon the occurrence of one or more Events of Default, the Landlord may, at its option, and in addition to and without prejudice to all rights and remedies of the Landlord available to it either by any other provision of this Lease or by statute or the general law: (l) be entitled to the full amount of the current month's and the next three months' installments of Rent which shall immediately become due and payable and the Landlord may immediately distrain for the same, together with any arrears then unpaid; (m) without notice or any form of legal process, forthwith re-enter upon and take possession of the Leased Premises or any part thereof in the name of the whole and re-let the Leased Premises or any part thereof on behalf of the Tenant or otherwise as the Landlord sees fit and remove and sell the Tenant's merchandise, stock in trade, goods, chattels and trade fixtures therefrom, any rule of law or equity to the contrary notwithstanding; (n) seize and sell such goods, chattels and equipment of the Tenant as are in the Leased Premises and may apply the proceeds thereof to all Rent to which the Landlord is then entitled under this Lease. Any such sale may be effected by public auction or otherwise, and either in bulk or by individual item, all as the Landlord in its sole discretion may decide; (o) terminate this Lease by leaving upon the Leased Premises ten (10) days prior written notice of the termination, and termination shall be without prejudice to the Landlord's right to damages; it being agreed that the Tenant shall pay to the Landlord as damages the loss of income of the Landlord to be derived from the Leased Premises for the unexpired portion of the Term had it not been terminated, provided that the Landlord shall not be entitled in any event to receive any damages greater than those damages the Landlord would be entitled to receive at law; or Page 11 (p) re-enter into and upon the Leased Premises or any part thereof in the name of the whole and repossess and enjoy the same as of the Landlord's former estate, anything herein contained to the contrary notwithstanding; and the Tenant shall pay to the Landlord forthwith upon demand all expenses of the Landlord in re-entering, terminating, re-letting, collecting sums due or payable by the Tenant or realizing upon assets seized including tenant inducements, leasing commissions, legal fees on a solicitor and client basis and all disbursements and the expense of keeping the Leased Premises in good order, and preparing the same for re-letting. 11.4 Waiver. If the Landlord shall overlook, excuse, condone or suffer nay default, breach or non-observance by the Tenant of any obligation hereunder, this shall not operate as a waiver of the obligation in respect of any continuing or subsequent default, breach or non-observance and no such waiver shall be implied but shall only be effected if expressed in writing. 11.5 Waiver of Exemption and Redemption. Notwithstanding anything contained in any statute now or hereafter in force limiting or abrogating the right of distress, none of the Tenant's goods, merchandise, stock in trade, chattels or trade fixtures on the Leased Premises at any time during the Term shall be exempt from levy by distress for Rent in arrears, and upon any claim being made for exemption by the Tenant or on distress being made by the Landlord, this agreement may be pleaded as an estoppel against the Tenant in any action brought to test the right to the levying upon any such goods as are named as exempted in any such statute, the Tenant hereby waiving all and every benefit that could or might have accrued to the Tenant under and by virtue of any such statute but for this Lease. The Tenant hereby expressly waives any and all rights of redemption and relief from forfeiture granted by or under any present or future laws in the event of the Tenant being evicted or dispossessed for any cause, or in the event of the Landlord obtaining possession of the Leased Premises, by reason of the violation by the Tenant of any of the terms or conditions of this Lease or otherwise. ARTICLE 12 ASSIGNMENT AND TRANSFERS 12.1 No Assignment By Tenant. The Tenant shall not assign, sublet, pledge or transfer this Lease or any interest therein or in any way part with possession of all or any part of the Leased Premises, or permit all or any part of the Leased Premises to be used or occupied by any other person without the Landlord's prior written consent, which consent may not be unreasonably withheld. The Tenant shall be permitted to assign this lease without prior consent of the Landlord to an associated corporation, a parent or wholly owned subsidiary of the Tenant or to a corporation which results from the reorganization, consolidation, amalgamation or merger of the Tenant, provided that any such assignment or any transfer, or transfers, or other dealing with any of the shares of the Tenant, which taken alone or together have the effect of changing control of the Tenant, shall be deemed to be an assignment of this Lease which requires the prior approval of the Landlord as set out herein. 12.2 Sale, Conveyance and Assignment by the Landlord. Nothing in this Lease shall restrict the right of the Landlord to sell, convey, assign, pledge or otherwise deal with the Leased Premises subject only to the rights of the Tenant under this Lease. A sale, conveyance or assignment of the Leased Premises by the Landlord shall operate to release the Landlord from liability from and after the effective date thereof in respect of all of the covenants, terms and conditions of this Lease, express or implied, except as they may relate to the period prior to the effective date, and only to the extent that the Landlord's successor assumes the Landlord's obligations under the Lease and the Tenant shall thereafter look solely to the Landlord's successor in interest and to this Lease. 12.3 Subordination. This Lease is and shall be subject and subordinate in all respects to any and all mortgages (including deeds of trust and mortgage) now or hereafter placed on the Leased Premises and all advances thereunder, past, present and future and to all renewals, modifications, consolidations, replacements and extensions thereof. The Tenant agrees to execute promptly after request therefor an instrument of subordination as may be requested. Page 12 ARTICLE 13 SURRENDER AND OVERHOLDING 13.1 Surrender. Upon the expiration or other termination of the Term, the Tenant shall immediately quit and surrender possession of the Leased Premises and all leasehold improvements in substantially the condition in which the Tenant is required to maintain the Leased Premises excepting only reasonable wear and tear, and upon surrender, all right, title, and interest of the Tenant in the Leased Premises shall cease. It is understood that the Landlord has the right to remove and sell or otherwise dispose of any leasehold improvements, chattels, equipment or any other property of the Tenant left on the Leased Premises by the Tenant after the termination of this Lease, and to retain the proceeds thereof, and the Tenant shall pay to the Landlord upon written demand all of the costs incurred by the Landlord in connection therewith. 13.2 Overholding. If the Tenant continues to occupy the Leased Premises after the expiration or other termination of the Term without any further written agreement, the Tenant shall be a monthly tenant at an Minimum Rent equal to two times the Minimum Rent paid by the Tenant immediately prior to the expiration or other termination of the Term but subject to all other provisions in this Lease to the extent that the same are applicable to a month to month tenancy, and a tenancy from year to year shall not be created by implication of law. Nothing contained in this Section shall preclude the Landlord from exercising all of its rights set out in this Lease including, without limitation, the taking of any action for recovery or possession of the Leased Premises. ARTICLE 14 GENERAL 14.1 Entire Agreement. There is no promise, representation or undertaking by or binding upon the Landlord except such as are expressly set forth in this Lease, and this Lease including the Schedules contains the entire agreement between the parties hereto. 14.2 Registration. The Tenant agrees not to register this Lease. If the Tenant wishes to register a notice of this Lease, the Landlord agrees to execute at the expense of the Tenant, an acknowledgement or short form of lease sufficient for such purpose, which shall preserve the confidentiality of the Rent and other financial terms of this Lease. The Tenant shall at its own expense, upon expiration or earlier termination of the Term, discharge any registration made against the Leased Premises providing notice of its interest in the Lease. 14.3 Notice. Any notice required or contemplated by any provision of this Lease shall be given in writing and shall be sufficiently given if mailed by registered mail or delivered or if sent by telecopy or similar form of immediate transmission and if to the Landlord, delivered to the address set out on page 1 and if to the Tenant, personally (or to a partner or officer of the Tenant if the Tenant is a firm or corporation) or delivered to the Leased Premises (whether or not the Tenant has departed from, vacated or abandoned the same). Any notice shall be deemed to have been received five postal delivery days after the date of mailing or on the day following the date of delivery or sending. If it is reasonably anticipated that mail service may be disrupted, notice must be delivered or sent by telecopy or other form of immediate transmission. 14.4 Relationship of Parties. Nothing contained in this Lease shall create any relationship between the parties hereto other than that of Landlord and Tenant. 14.5 Governing Law. This Lease shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New Jersey. 14.6 Amendment or Modification. No amendment, modification or supplement to this Lease shall be valid or binding unless put out in writing and executed by the Landlord and the Tenant. Page 13 14.7 Force Majeure. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent tot he period of such delay. 14.8 Severability. All of the provisions of this Lease are to be construed as covenants and agreements. If any provision of this Lease is illegal or unenforceable, it shall be considered separate and severable from the remaining provisions of this Lease, which shall remain in force and be binding as thought he provision had never been included. 14.9 Captions and Headings. The captions and headings contained in this Lease are for convenience of reference only and are not intended to limit, enlarge or otherwise affect the interpretation of the Articles, Sections or parts thereof to which they apply. 14.10 Interpretation. Wherever necessary or appropriate in this Lease, the plural shall be interpreted as singular, the masculine gender as feminine or neuter and vice versa and when there are two or more parties bound by the Tenant's covenants herein contained their obligations shall be joint and several. 14.11 Time of the Essence. Time shall be of the essence hereof. 14.12 Successors and Assigns. Subject to specific provisions contained in this Lease to the contrary, this Lease shall enure to the benefit of and be binding upon the successors and assigns of the Landlord and the heirs, executors and administrators and the permitted successors and assigns of the Tenant. 14.13 Consent Not Unreasonably Withheld. For greater clarity and except as otherwise specifically provided, whenever consent or approval of Landlord or Tenant is required under the terms of this Lease, such consent or approval shall not be unreasonably withheld or delayed. If either party withholds any consent or approval such party shall on written request deliver to the other a written statement giving the reasons therefor. 14.14 Net Lease. The Tenant acknowledges and agrees that it is intended that this Lease is a completely carefree net lease to the Landlord, except as herein set out, that the Landlord is not responsible during the term for any costs, charges, expenses or outlays of any nature whatsoever arising from or related to the Leased Premises, or the use and occupancy thereof, or the business carried on therein, and the Tenant shall pay all charges, impositions, costs and expenses of every nature and kind relating to the Leased Premises except as expressly herein set out. IN WITNESS WHEREOF the Landlord and the Tenant have executed this Lease as of the date first set forth above. /s/ /s/ Peter Horvath - ------------------------------------ ---------------------------------------- Witness Peter A. Horvath President Hamilton Transit Corporate Center /s/ /s/ John Howlett - ------------------------------------ ---------------------------------------- Witness John Howlett President Emtec, Inc. EX-10 3 ex10-28.txt EXHIBIT 10.28 EXHIBIT 10.28 LEASE, made the twentieth day of May, 2004 BETWEEN Facstore having offices located at 354 North Avenue East, Cranford, NJ 07016, herein designated as the Landlord, AND EMTEC, INC. having offices located at 572 Whitehead Road, Trenton, NJ 08619, herein designated as the Tenant; WITNESSETH THAT, the Landlord does hereby lease to the Tenant and the Tenant does hereby rent from the Landlord, the following described premises: the portion of the second floor of 354 North Avenue, Cranford, NJ, 07016 consisting of two private offices and all of the open area containing modular workstations; the modular workstations shall remain, but Tenant may, at its expense, bring in its own furniture and modular workstations to replace the existing units; Tenant may, at its own expense, upgrade the Toshiba telephone system; Tenant shall be entitled to joint occupancy with Landlord of the conference room, kitchen, bathrooms, and common areas located on the second floor for a term commencing on June 1, 2004, and ending on May 31, 2005 (subject to the renewal option set forth in paragraph 15th). This Lease shall be on and subject to the following terms 1st: The Tenant covenants and agrees to pay to the Landlord, as gross rent for and during the term hereof, the sum of $34,800 in the following manner: which shall be payable in monthly installments of $2,900 due on the first of the calendar month to which it relates. Said rent shall be inclusive of all charges, including without limitation, utilities, insurance, real estate taxes, maintenance, repair costs and operating expenses. 2nd: The Tenant shall take good care of the premises; at the end or other expiration of the term hereof, Tenant shall deliver up the rented premises in good order and condition, wear and tear from a reasonable use thereof, and damage by the elements not resulting from the neglect or fault of the Tenant, excepted. The Tenant shall neither encumber nor obstruct the sidewalks, driveways, yards, entrances, hallways and stairs. 3rd: The Tenant, at Tenant's own cost and expense, shall obtain or provide and keep in full force, during the term hereof, general public liability insurance, insuring against any and all liability or claims of liability arising out of, occasioned by or resulting from any accident or otherwise in or about the leased premises, for injuries to any person or persons, for limits of not less than $1,000,000 for injuries to one person and $1,000,000 for injuries to more than one persons in any one accident or occurrence, and for loss or damage to the property of any person or persons, for not less than $1,000,000. The policy or policies of insurance shall be of a company or companies authorized to do business in this State and shall be delivered to the Landlord, together with evidence of the payment of the premiums therefor, not less than five 1 days prior to the commencement of the term hereof 4th: Landlord shall maintain casualty insurance on the premises and its personal property and fixtures insuring same for full replacement value. Landlord hereby waives any right of recovery against Tenant with respect to any casualty to the premises and shall use its best efforts to obtain a waiver of subrogation in favor of Tenant with respect to said casualty insurance. Tenant shall be responsible for insuring Tenant's personal property located on the Premises. Tenant shall use its best efforts to obtain a waiver of subrogation in favor of Landlord with respect to said insurance. 5th: This Lease, and all rights of Tenant under the Lease, are and shall be subject and subordinate to all mortgages now or hereafter affecting the premises, and to all mortgages which now or hereafter may affect the premises, and to any renewals, modifications, consolidations, replacements or extensions thereof, provided, however, that such subordination shall be subject to Landlord obtaining from each mortgage holder or other lienholder a non-disturbance agreement in form and content reasonably satisfactory to both Tenant and such mortgagee or other lienholder, which shall provide that for so long as Tenant continues to pay the rent reserved in the Lease and is otherwise in compliance with the terms and provisions of the Lease, such mortgagee or lienholder shall not disturb the rights of possession of Tenant in the premises as set forth in the Lease, notwithstanding any foreclosure or exercise of power of sale or proceeding in lieu thereof affecting the premises. 6th: If the premises shall be partially damaged by fire, the elements or other casualty, the Landlord shall repair the same as speedily as practicable, but the Tenant's obligation to pay the rent hereunder shall not cease. If, in the reasonable opinion of the Landlord, the premises be so extensively and substantially damaged as to render them untenantable, then the rent shall cease until such time as the premises shall be made tenantable by the Landlord. However, if, in the reasonable opinion of the Landlord, the premises be totally destroyed or so extensively and substantially damaged as to require practically a rebuilding thereof, then the rent shall be paid up to the time of such destruction and then and from thenceforth this Lease shall come to an end. 7th: The Tenant agrees to permit the Landlord and the Landlord's agents, employees or other representatives to show the premises to persons wishing to rent or purchase the same, and Tenant agrees that on and after two months next preceding the expiration of the term hereof, the Landlord or the Landlord's agents, employees or other representatives shall have the right to place notices on the front of said premises or any part thereof, offering the premises for rent or for sale; and the Tenant hereby agrees to permit same to remain thereon without hindrance or molestation. 8th: Any equipment, fixtures, goods or other property of the Tenant, not removed by the Tenant upon termination of this lease, or upon any quitting, vacating or abandonment of the premises by the Tenant, or upon the Tenant's eviction, shall be considered as abandoned and the Landlord shall have the right, without any notice to the Tenant, to sell or otherwise dispose of the same, at the expense of the Tenant, and shall not be accountable to the Tenant for any part of the proceeds of such sale, if any. 9th: The Landlord shall not be liable for any damage or injury which may be sustained by 2 the Tenant or any other person, as a consequence of the failure, breakage, leakage or obstruction of the water, plumbing, steam, sewer, waste or soil pipes, roof, drains, leaders, gutters, valleys, downspouts or the like or of the electrical, gas, power, conveyor, refrigeration, sprinkler, airconditioning or heating systems, elevators or hoisting equipment; or by reason of the elements; or resulting from the carelessness, negligence or improper conduct on the part of any other tenant or of the Landlord or the Landlord's or any other tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or successors; or attributable to any interference with, interruption of or failure, beyond the control of the landlord, of any services to be furnished or supplied by the Landlord. 10th: All notices required under the terms of this lease shall be given and shall be complete by mailing such notices by certified or registered mail, return receipt requested, to the address of the parties as shown at the head of this lease, or to such other address as may be designated in writing, which notice of change of address shall be given in the same manner. 11th: The Landlord covenants and represents that the Landlord is the owner of the premises herein leased and has the right and authority to enter into, execute and deliver this lease; and does further covenant that the Tenant on paying the rent and performing the conditions and covenants herein contained, shall and may peaceably and quietly have, hold and enjoy the leased premises for the term aforementioned. 12th: This lease contains the entire contract between the parties. 13th: The Tenant has this day deposited with the Landlord the sum of $2,900 as security for the payment of the rent hereunder and the full and faithful performance by the Tenant of the covenants and conditions on the part of the Tenant to be performed. Said sum shall be returned to the Tenant, with interest, after the expiration of the term hereof provided that the Tenant has fully and faithfully performed all such covenants and conditions and is not in arrears in rent. During the term hereof, the Landlord may, if the Landlord so elects, have recourse to such security, to make good any default by the Tenant, in which event the Tenant shall, on demand, promptly restore said security to its original amount. Liability to repay said security to the Tenant shall run with the reversion and title to said premises, whether any change in ownership thereof be by voluntary alienation or as the result of judicial sale, foreclosure or other proceedings, or the exercise of a right of taking or entry by any mortgagee. The Landlord shall assign or transfer said security, for the benefit of the Tenant, to any subsequent owner or holder of the reversion or title to said premises, in which case the assignee shall become liable for the repayment thereof as herein provided, and the assignor shall be deemed to be released by the Tenant from all liability to return such security. This provision shall be applicable to every alienation or change in title and shall in no wise be deemed to permit the Landlord to retain the security after termination of the Landlord's ownership of the reversion or title. The Tenant shall not mortgage, encumber or assign said security without the written consent of the Landlord. 14th: Tenant shall not, without the written consent of the Landlord (which shall not be unreasonably withheld), assign, mortgage or hypothecate this lease, nor sublet or sublease the premises or any part thereof. 15th: Tenant shall have one option for the right to renew and extend the Term of this Lease for an additional period of one year beyond the expiration of the Lease. Tenant must notify Landlord of its exercise of this renewal option by no later than March 31, 2005. The 3 monthly rent for the renewal term shall be equal to $2900 multiplied by a fraction, the numerator of which is the Index (as hereafter defined) as of April 30, 2005, and the denominator of which is the Index as of April 30, 2004. The term "Index" as used herein shall mean the Revised Consumer Price Index for Urban Wage Earners and Clerical Workers for New York - Northeastern New Jersey as presently published by the United States Bureau of Labor Statistics or such index as is subsequently substituted therefor. If the Index or its publication shall be discontinued and no substitution therefor shall be published, the Landlord and Tenant shall agree upon a substitute index or formula which then reflects the relative comparable value of the dollar. 16th: In all references herein to any parties, persons, entities or corporations the use of any particular gender or the plural or singular number is intended to include the appropriate gender or number as the text of the within instrument may require. All the terms, covenants and conditions herein contained shall be for and shall inure to the benefit of and shall bind the, respective parties hereto, and their heirs, executors, administrators, personal or legal representatives, successors and assigns. 17th: Tenant agrees to pay the landlord's broker commission in the amount of $2,088. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, or caused these presents to be signed by their proper corporate officers and their proper corporate seal to be hereto affixed, the day and year first above written. Signed, Sealed and Delivered in the presence of or attested by: Facstore, Landlord By: /s/ Linda Schram, Authorized Party ------------------------------------ EMTEC, INC., Tenant By: /s/ John Howlett, Authorized Party ------------------------------------ 4 EX-14 4 ex14-1.txt EXHIBIT 14.1 EXHIBIT 14.1 July 14, 2004 CODE OF ETHICS Emtec, Inc. expects all of its employees, including its principal executive officer, principal financial officer and principal accounting officer, as well as the members of its board of directors, to act in accordance with the highest standards of personal and professional integrity in all aspects of their activities, to comply with all applicable laws, rules and regulations, to deter wrongdoing and abide by other policies and procedures adopted by Emtec that govern the conduct of its employees and directors. This Code of Ethics is intended to supplement any other policies and procedures adopted by Emtec. You agree to: (a) Engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (b) Take all reasonable measures to protect the confidentiality of non-public information about Emtec and its subsidiaries and their customers obtained or created in connection with your activities and to prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process; (c) Produce full, fair, accurate, timely, and understandable disclosure in reports and documents that Emtec and its subsidiaries files with, or submits to, the Securities and Exchange Commission and other regulators and in other public communications made by Emtec and its subsidiaries; (d) Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations of which Emtec or its subsidiaries is a member; and (e) Promptly report any possible violation of this Code of Ethics to Mr. George F. Raymond, an independent member of Emtec's board of directors. You are prohibited from directly or indirectly taking any action to fraudulently influence, coerce, manipulate or mislead Emtec's or its subsidiaries' independent public auditors for the purpose of rendering the financial statements of Emtec or its subsidiaries misleading. You understand that you will be held accountable for your adherence to this Code of Ethics. Your failure to observe the terms of this Code of Ethics may result in disciplinary action, up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for you, your supervisors and/or Emtec. If you have any questions regarding the best course of action in a particular situation, you should promptly contact Mr. George F. Raymond, an independent member of Emtec's board of directors. You may choose to remain anonymous in reporting any possible violation of this Code of Ethics. EX-31 5 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 I, John P. Howlett, certify that: 1. I have reviewed this annual report on Form 10-K of Emtec, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter the registrant's fourth quarter in the case of an annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 14, 2004 /s/ JOHN P. HOWLETT ---------------------------------------- John P. Howlett Chairman, and Chief Executive Officer (Principal Executive Officer) EX-31 6 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 I, Sam Bhatt, certify that: 1. I have reviewed this annual report on Form 10-K of Emtec, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter the registrant's fourth quarter in the case of an annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 14, 2004 /s/ SAM BHATT ---------------------------------------- Sam Bhatt Vice President - Finance (Principal Financial Officer) EX-32 7 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Emtec, Inc. (the "Company") on Form 10-K for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John P. Howlett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 'SS' 1350, as adopted pursuant to 'SS' 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John P. Howlett. Chief Executive Officer July 14, 2004 EX-32 8 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Emtec, Inc. (the "Company") on Form 10-K for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Sam Bhatt, Vice President of Finance and Operations of the Company, certify, pursuant to 18 U.S.C. 'SS' 1350, as adopted pursuant to 'SS' 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Sam Bhatt Vice President of Finance July 14, 2004 -----END PRIVACY-ENHANCED MESSAGE-----