UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended May 31, 2008
Commission
file number: 0-32789
EMTEC,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
of incorporation or organization)
|
|
87-0273300
(I.R.S.
Employer Identification
No.)
|
525
Lincoln Drive
5
Greentree Center, Suite 117
Marlton,
New Jersey 08053
(Address
of principal executive offices, including zip code)
(856)
552-4204
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (see
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check one)
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller
reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
As
of
July 10, 2008, there were outstanding 14,849,591 shares of the registrant’s
common stock.
EMTEC,
INC.
FORM
10-Q FOR THE QUARTER ENDED MAY 31, 2008
Table
of
Contents
PART
I – FINANCIAL INFORMATION
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Item
1 - Financial Statements
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Condensed
Consolidated Balance Sheets
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1
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Condensed
Consolidated Statements of Operations
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2
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Condensed
Consolidated Statements of Cash Flows
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3
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Notes
to Condensed Consolidated Financial Statements
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4
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Item
2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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14
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Item
3 – Quantitative and Qualitative Information About Market
Risk
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33
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Item
4T – Controls and Procedures
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34
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PART
II – OTHER INFORMATION
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Item
6 – Exhibits
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35
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SIGNATURES
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36
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PART
I – FINANCIAL INFORMATION
Item
1.
Financial
Statements
EMTEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
May 31, 2008
(Unaudited)
|
|
August 31, 2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,268,626
|
|
$
|
2,251,352
|
|
Receivables:
|
|
|
|
|
|
|
|
Trade,
less allowance for doubtful accounts
|
|
|
19,788,007
|
|
|
28,774,286
|
|
Others
|
|
|
3,690,219
|
|
|
2,756,815
|
|
Inventories,
net
|
|
|
2,411,115
|
|
|
5,021,516
|
|
Prepaid
expenses
|
|
|
501,841
|
|
|
331,062
|
|
Deferred
tax asset - current
|
|
|
685,623
|
|
|
653,820
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
28,345,431
|
|
|
39,788,851
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,006,057
|
|
|
1,308,582
|
|
Other
intangible assets, net
|
|
|
8,364,167
|
|
|
7,432,776
|
|
Goodwill
|
|
|
10,718,346
|
|
|
9,014,055
|
|
Deferred
tax asset - long term
|
|
|
147,930
|
|
|
—
|
|
Restricted
cash
|
|
|
150,000
|
|
|
150,000
|
|
Other
assets
|
|
|
108,743
|
|
|
112,505
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
48,840,674
|
|
$
|
57,806,769
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
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|
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Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
400,066
|
|
$
|
5,847,494
|
|
Accounts
payable
|
|
|
22,154,365
|
|
|
26,578,127
|
|
Current
portion of long term debt - related party
|
|
|
2,645,307
|
|
|
1,280,660
|
|
Income
taxes payable
|
|
|
472,722
|
|
|
9,255
|
|
Accrued
liabilities
|
|
|
3,153,225
|
|
|
4,172,008
|
|
Due
to former stockholders
|
|
|
631,415
|
|
|
631,415
|
|
Customer
deposits
|
|
|
47,131
|
|
|
183,220
|
|
Deferred
revenue
|
|
|
1,165,494
|
|
|
1,362,333
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
30,669,723
|
|
|
40,064,512
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability
|
|
|
2,363,932
|
|
|
1,307,155
|
|
Accrued
liabilities
|
|
|
174,739
|
|
|
—
|
|
Long
term debt - related party
|
|
|
1,159,408
|
|
|
2,745,514
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
34,367,802
|
|
|
44,117,181
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
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|
Common
stock $0.01 par value; 25,000,000 shares authorized;
17,714,180
and 17,249,875 shares issued and 14,849,591 and 14,385,286, outstanding
at
May 31, 2008 and August 31, 2007, respectively
|
|
|
177,142
|
|
|
172,499
|
|
Additional
paid-in capital
|
|
|
20,557,148
|
|
|
20,348,736
|
|
Accumulated
deficit
|
|
|
(665,371
|
)
|
|
(1,235,600
|
)
|
|
|
|
20,068,919
|
|
|
19,285,635
|
|
Less:
treasury stock, at cost, 2,864,589 shares
|
|
|
(5,596,047
|
)
|
|
(5,596,047
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
14,472,872
|
|
|
13,689,588
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
48,840,674
|
|
$
|
57,806,769
|
|
The
accompanying notes are integral parts of these consolidated financial
statements.
EMTEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three months ended May 31,
|
|
Nine months ended May 31
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
38,929,191
|
|
$
|
44,163,067
|
|
$
|
157,637,879
|
|
$
|
150,256,583
|
|
Cost
of revenues
|
|
|
33,233,642
|
|
|
39,493,643
|
|
|
138,326,110
|
|
|
135,176,544
|
|
Gross
profit
|
|
|
5,695,549
|
|
|
4,669,424
|
|
|
19,311,769
|
|
|
15,080,039
|
|
|
|
|
|
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|
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|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
5,348,986
|
|
|
4,787,338
|
|
|
16,025,377
|
|
|
15,890,166
|
|
Management
fee – related party
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
145,834
|
|
Amended
employment agreements and management agreement charges
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,329,800
|
|
Rent
expense – related party
|
|
|
91,439
|
|
|
89,325
|
|
|
270,089
|
|
|
267,975
|
|
Depreciation
and amortization
|
|
|
336,086
|
|
|
297,815
|
|
|
944,100
|
|
|
848,551
|
|
Total
operating expenses
|
|
|
5,776,510
|
|
|
5,174,478
|
|
|
17,239,565
|
|
|
19,482,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(80,961
|
)
|
|
(505,054
|
)
|
|
2,072,204
|
|
|
(4,402,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income – other
|
|
|
(11,144
|
)
|
|
(15,995
|
)
|
|
(77,807
|
)
|
|
(73,910
|
)
|
Interest
expense
|
|
|
180,276
|
|
|
267,120
|
|
|
833,018
|
|
|
830,718
|
|
Other
|
|
|
(256
|
)
|
|
(29
|
)
|
|
(274
|
)
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
(249,837
|
)
|
|
(756,150
|
)
|
|
1,317,267
|
|
|
(5,158,653
|
)
|
Provision
(benefit) for income taxes
|
|
|
(98,055
|
)
|
|
(290,902
|
)
|
|
614,226
|
|
|
(2,030,712
|
)
|
Net
(loss) income
|
|
$
|
(
151,782
|
)
|
$
|
(
465,248
|
)
|
$
|
703,041
|
|
$
|
(3,127,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
0.05
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,519,049
|
|
|
14,385,286
|
|
|
14,519,049
|
|
|
14,385,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,519,049
|
|
|
14,385,286
|
|
|
14,636,249
|
|
|
14,385,286
|
|
The
accompanying notes are integral parts of these consolidated financial
statements.
EMTEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
months ended May 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
703,041
|
|
$
|
(3,127,941
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Income (loss) to Net
|
|
|
|
|
|
|
|
Cash
Provided By (Used In) Operating Activities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
475,491
|
|
|
413,288
|
|
Amortization
related to intangible assets
|
|
|
468,609
|
|
|
435,263
|
|
Deferred
income tax expense (benefit)
|
|
|
461,576
|
|
|
(2,031,400
|
)
|
Stock-based
compensation
|
|
|
213,055
|
|
|
291,868
|
|
Amended
employment agreements and management agreement charges
|
|
|
-
|
|
|
2,329,800
|
|
|
|
|
|
|
|
|
|
Changes
In Operating Assets and Liabilities
|
|
|
|
|
|
|
|
Receivables
|
|
|
10,760,434
|
|
|
4,096,623
|
|
Inventories
|
|
|
2,610,401
|
|
|
(4,837,664
|
)
|
Prepaid
expenses and other assets
|
|
|
(155,753
|
)
|
|
(341,836
|
)
|
Accounts
payable
|
|
|
(4,477,624
|
)
|
|
4,017,139
|
|
Deferred
revenue
|
|
|
(196,839
|
)
|
|
(75,920
|
)
|
Customer
deposits
|
|
|
(136,089
|
)
|
|
(572,118
|
)
|
Income
taxes payable
|
|
|
19,629
|
|
|
(26,424
|
)
|
Accrued
liabilities
|
|
|
(3,315,341
|
)
|
|
(873,500
|
)
|
Deferred
compensation
|
|
|
-
|
|
|
(272,332
|
)
|
Net
Cash Provided By (Used In) Operating Activities
|
|
|
7,430,588
|
|
|
(575,154
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(172,965
|
)
|
|
(502,880
|
)
|
Acquisition
of business, net of cash acquired
|
|
|
(1,751,461
|
)
|
|
-
|
|
Net
Cash Used In Investing Activities
|
|
|
(1,924,426
|
)
|
|
(502,880
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
Net
increase (decrease) in line of credit
|
|
|
(5,447,428
|
)
|
|
2,882,124
|
|
Repayment
of debt
|
|
|
(1,041,460
|
)
|
|
(1,074,643
|
)
|
Net
Cash (Used In) Provided By Financing Activities
|
|
|
(6,488,888
|
)
|
|
1,807,481
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in Cash
|
|
|
(982,726
|
)
|
|
729,447
|
|
Beginning
Cash
|
|
|
2,251,352
|
|
|
917,683
|
|
Ending
Cash
|
|
$
|
1,268,626
|
|
$
|
1,647,130
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
934,016
|
|
$
|
40,457
|
|
Interest
|
|
|
1,198,147
|
|
|
550,456
|
|
Supplemental
Schedule of Non Cash Investing and Financing
Activities
|
|
|
|
|
|
|
|
Acquisition
of Capital Stock of Luceo
|
|
$
|
820,000
|
|
|
-
|
|
The
accompanying notes are integral parts of these consolidated financial
statements.
EMTEC,
INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of
Regulation S-X. Accordingly, they do not include all of the information and
note
disclosures required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
condensed consolidated financial statements. Quarterly results are not
necessarily indicative of results for the full year.
For
further information, refer to the annual financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended August
31, 2007.
2.
General
Description
of Business
Emtec,
Inc., a Delaware Corporation, (the “Company”) is an information technology
(“IT”) company, providing consulting, services and products to commercial,
federal, education, state and local clients. The Company’s areas of specific
practices include communications, data management, enterprise computing, managed
services, storage and data center planning and development. The Company’s client
base is comprised of departments of the United States Federal Government, U.S.
state and local governments, schools and commercial businesses throughout the
United States. The most significant portion of the Company’s revenue is derived
from activities as a reseller of IT products, such as workstations, servers,
microcomputers, and application software and networking and communications
equipment.
On
March
20, 2008, the Company acquired through its subsidiary Emtec Global Services
LLC
(“EGS”), all of the outstanding stock of Luceo, Inc. (“Luceo”) headquartered in
Naperville, IL. Luceo offers a broad range of consulting/contracting services
to
clients throughout the United States including IT project management services,
packaged software implementation, web technologies/client server application
development and support.
With
the
acquisition of Luceo, the Company divides its operating activity into two
operating segments for reporting purposes: Emtec Systems Division (“Systems
Division”) and Emtec Global Services Division (“Global Services Division”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Emtec, Inc. a New Jersey Corporation (“Emtec NJ”),
Emtec Viasub LLC (“Emtec LLC”), Emtec LLC’s wholly owned subsidiary Emtec
Federal, Inc. (“Emtec Federal”), EGS, and EGS’s wholly owned subsidiary Luceo.
Significant intercompany account balances and transactions have been eliminated
in consolidation.
Reclassifications
Certain
reclassifications have been made to prior year balances in order to conform
to
current presentations.
Earnings
Per Share
Basic
earnings (loss) per share amounts are computed by dividing net income (loss)
available to common stockholders (the numerator) by the weighted average shares
outstanding (the denominator), during the period. Shares issued during the
period are weighted for the portion of the period that they were
outstanding.
The
computation of diluted earnings (loss) per share is similar to the basic
earnings (loss) per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if
dilutive options, restricted stock awards and warrants had been exercised as
of
the end of the period. The assumed conversion of options and warrants resulted
in 117,200 additional dilutive shares for the nine months ended May 31, 2008.
Diluted shares consisting of stock options, restricted stock awards and warrants
totaling to 177,640, 47,031 and 67,075 shares were not included in the
calculation of diluted net loss per share for the three months ended May 31,
2008 and May 31, 2007 and nine months ended May 31, 2007, respectively, because
the effect of the inclusion would be anti-dilutive. In addition, outstanding
stock warrants to purchase 1,649,955 and 1,598,365 common shares as of and
for
the periods ended May 31, 2008 and 2007, respectively, were also not included
in
the computation of diluted earnings (loss) per share because the exercise price
was greater than the average market price of the Company’s common shares over
those periods.
Income
Taxes
On
September 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”).
FIN 48 prescribes a recognition threshold that a tax position is required to
meet before being recognized in the financial statements and provides guidance
on de-recognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition issues.
As
a
result of the implementation of FIN 48 on September 1, 2007, the Company
recorded a liability for unrecognized tax obligations of $539,580. In accordance
with FIN 48, the cumulative effect of the change in accounting principle was
required to be treated as an adjustment to opening retained earnings. The
Company’s adoption of FIN 48 resulted in a decrease in retained earnings of
$132,812.
Subsequent
to the initial adoption of FIN 48, our policy is to recognize interest and
penalty expense associated with uncertain tax positions as a component of income
tax expense in the consolidated statements of income. During the three and
nine
months ended May 31, 2008, the Company recorded interest associated with
uncertain tax positions in the accrued liabilities in the amount of $11,467
and
$35,646, respectively, as an increase to current income tax expense.
The
total
liability for unrecognized tax obligations was $539,580 as of May 31, 2008
and,
as noted below, primarily related uncertain tax obligations related to an
ongoing IRS tax audit. The remainder would not affect the provision, and would
be adjusted against either deferred tax assets or goodwill based on the nature
of its origin.
During
the fiscal 2006 year, Emtec Federal, formerly Westwood Computer Corporation
(“Westwood”) was audited by the IRS. The IRS audited the two-predecessor tax
years ended April 16, 2004. With one exception, all tax matters identified
by
the IRS have been settled, with appropriate adjustments recorded in the current
tax expense for the year ended August 31, 2006. The one currently unsettled
matter involves a disagreement with the IRS over the valuation of real property
sold by Westwood to a related party during Westwood’s 2003 fiscal year. The IRS
has asserted that the Company’s property valuation and resulting taxable gain
was understated by $1.5 million, which could result in approximately $521,000
in
federal income tax liability plus potential interest and penalties. Discussions
with the IRS are continuing. The Company has submitted a letter to the IRS
objecting to the IRS’s valuation, explaining the basis for Westwood’s valuation
of the property, and requesting a conference with the Appeals Office of IRS.
While the Company believes that it has adequately supported the valuation of
the
transaction and reported the appropriate income taxes, there can be no assurance
that its valuation will ultimately be accepted by the IRS. It is reasonably
possible that this audit could be completed within the next twelve months with
the Company and the IRS resolving all issues. We estimate a range of reasonably
possible increase or decrease in total unrecognized federal and state income
tax
of approximately $200,000 that could result from a settlement with IRS.
Under
the
provisions of the merger agreement executed in connection with its acquisition
of Westwood, some of the potential liability recorded in connection with the
dispute with the IRS is subject to indemnification coverage by the former owners
of Westwood. As of May 31, 2008, the Company recorded a $341,165 other
receivable on the balance sheet to record this potential recovery under the
indemnification provisions. The accounting effect of recording the $341,165
other receivable was to decrease goodwill by $341,165.
We
conduct business nationally and, as a result, file income tax returns in the
U.S
federal jurisdiction and various state and local jurisdictions. With few
exceptions, we are no longer subject to federal, state or local income tax
examinations for tax returns filed for fiscal years 2002 and prior.
3.
Acquisition
On
March
20, 2008, EGS, Luceo and Sivapatham Natarajan (“Mr. Natarajan”) entered into a
Stock Purchase Agreement, pursuant to which EGS agreed to acquire all of the
outstanding stock of Luceo from Mr. Natarajan for the purchase price that
consists of (i) cash at closing in an aggregate amount equal to $1,795,000;
(ii)
a subordinated promissory note in a principal amount of $820,000 which is
payable in two equal installments of $410,000 each on the 12 month and 18 month
anniversaries of the closing and (iii) contingent payments of additional cash
consideration each year for the next three years on the anniversary of the
closing if certain performance goals are met. The purchase price may be reduced
pursuant to a post-closing working capital adjustment. The acquisition was
funded through borrowings under the Credit Facility with the Lender
.
The
Company accounted for the acquisition under the purchase method, whereby,
amounts were assigned to assets acquired and liabilities assumed based on their
fair values, on the date of the acquisition. Management determined the fair
value of Luceo’s net assets on March 20, 2008 was $1,047,139, which resulted in
an excess purchase price over fair value of net assets acquired of $1,567,861,
which was recognized as goodwill.
The
allocation of purchase price by significant component is as
follows:
Cash
|
|
$
|
215,235
|
|
Trade
receivables
|
|
|
2,093,654
|
|
Other
receivables
|
|
|
272,741
|
|
Prepaid
expenses
|
|
|
7,873
|
|
Customer
relationships
|
|
|
1,300,000
|
|
Noncompete
asset
|
|
|
100,000
|
|
Other
assets
|
|
|
3,390
|
|
Accounts
payable
|
|
|
(53,862
|
)
|
Other
current liabilities
|
|
|
(1,791,282
|
)
|
Income
tax payable
|
|
|
(443,838
|
)
|
Deferred
tax liabilities
|
|
|
(656,773
|
)
|
Fair
value of net assets acquired
|
|
$
|
1,047,139
|
|
Purchase
price
|
|
|
2,615,000
|
|
Excess
purchase price
|
|
$
|
1,567,861
|
|
The
allocation is preliminary and such amounts are subject to adjustments as
additional analysis is performed or obtained from third party sources. $1.3
million was allocated to customer relationships at the acquisition date and
is
being amortized over a period of nine years. $100,000 was allocated to
noncompete asset at the acquisition and is being amortized over a period of
five
years.
The
Company capitalized professional fees of $171,696
that were associated with the acquisition of Luceo.
Unaudited
pro forma condensed results of operations are not included because the effect
of
the acquisition is not material.
4.
Stock Options, Non-Vested Shares and Warrants
Stock
Options
The
Company’s 2006 Stock-Based Incentive Compensation Plan (the “2006 Plan”) was
approved by the stockholders on May 8, 2006. The 2006 Plan authorizes the
granting of stock options to directors and eligible employees. The Company
has
reserved 1,400,000 shares of its common stock for issuance under the 2006 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 stockholders owning more than 10% of
the
Company’s common stock). Options under the 2006 Plan have terms from 7 to 10
years and vest from immediately through a term of 4 years.
The
Company measures the fair value of options on the grant date using the
Black-Scholes option valuation model. The Company estimated the expected
volatility using the Company’s historical stock price data and used historical
exercise and forfeiture behaviors to estimate the options, expected term and
our
forfeiture rate. The risk-free interest rate is based on the U.S. Treasury
zero-coupon yield curve in effect on the grant date. Both expected volatility
and the risk-free interest rate are based on a period that approximates the
expected term.
A
summary
of stock options for the nine months ended May 31, 2008 is as
follows:
For
the Nine Months Ended May 31, 2008
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Term
|
|
Aggregate
Intrinsic Value
|
|
Options
Outstanding -September 1, 2007
|
|
|
396,500
|
|
$
|
1.22
|
|
|
|
|
|
|
|
Options
Granted
|
|
|
32,500
|
|
$
|
0.68
|
|
|
|
|
|
|
|
Options
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options
Forfeited or Expired
|
|
|
(42,500
|
)
|
$
|
1.24
|
|
|
|
|
|
|
|
Options
Outstanding -May 31, 2008
|
|
|
386,500
|
|
$
|
1.17
|
|
|
6.30
years
|
|
$
|
5,200
|
|
Options
Exercisable -May 31, 2008
|
|
|
149,750
|
|
$
|
1.18
|
|
|
7.32
years
|
|
$
|
5,200
|
|
There
were no options granted during the three months ended May 31, 2008.
The
following assumptions were used to value stock options issued during the nine
months ended May 31, 2008:
|
|
Nine Months Ended
|
|
|
|
May 31, 2008
|
|
|
|
|
|
|
Weighted-Average
Fair Value
|
|
$
|
0.53
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
Expected
Volatility
|
|
|
101
|
%
|
Expected
Term
|
|
|
4.87
years
|
|
Expected
Forfeiture Rate
|
|
|
0
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
Risk-Free
Interest Rate
|
|
|
3.27
|
%
|
Non-vested
Stock (Restricted Stock)
During
the fiscal year ended August 31, 2007, the Company granted 459,224 shares of
non-vested (restricted) stock to certain members of senior management and
employees. These non-vested shares vest equally over 4 years. During January
2008, the Company granted 10,331 shares of stock to a member of senior
management team. The fair value of these shares was determined based upon the
quoted closing price of the Company’s stock on the Over-the-Counter Bulletin
Board on the grant date.
A
summary
of non-vested (restricted) shares for the nine months ended May 31, 2008 is
as
follows:
For
the Nine Months Ended May 31, 2008
|
|
Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
Nonvested
- September 1, 2007
|
|
|
456,974
|
|
$
|
1.25
|
|
Granted
|
|
|
10,331
|
|
$
|
1.21
|
|
Vested
|
|
|
(133,763
|
)
|
|
|
|
Forfeited
|
|
|
(3,000
|
)
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
Nonvested
-May 31, 2008
|
|
|
330,542
|
|
$
|
1.24
|
|
Vested
-May 31, 2008
|
|
|
133,763
|
|
$
|
1.26
|
|
Stock-Based
Compensation - Stock Options and Non-vested (Restricted) Stock
Stock-based
compensation costs related to the 2006 Plan totaled $66,980 and $213,055 during
the three months and nine months ended May 31, 2008, respectively. As of May
31,
2008, the Company had recognized a total of $640,092 in compensation cost and
had $294,170 of unrecognized compensation cost related to these instruments.
The
cost is expected to be recognized over a weighted-average period of 4
years.
Warrants
On
August
5, 2005, the Company issued certain stockholders stock warrants that evidence
the obligation of the Company to issue a variable number of shares, in the
aggregate, equal to 10% of then total issued and outstanding shares of the
Company’s common stock, measured on a post-exercise basis, at any date during
the 5-year term of the warrants, which ends August 5, 2010. The aggregate
exercise price of these warrants is fixed at $3,695,752. The exercise
price per warrant will vary based upon the number of shares issuable under
the
warrants. The number of shares issuable under the warrants totaled
1,649,955 and 1,598,365 shares, with an exercise price of $2.24 and $2.31 per
share, as of May 31, 2008 and 2007, respectively. The outstanding stock
warrants were anti-dilutive for the nine months ended May 31, 2008 and 2007,
because the exercise price was greater than the average market price of the
Company’s common shares over such nine-month periods.
5.
Line of Credit
In
December 2006, the Company, Emtec NJ, Emtec LLC, and Emtec Federal
(collectively, the “Borrower”), entered into a Loan and Security Agreement with
De Lage Landen Financial Services, Inc. (the “Lender”) pursuant to which the
Lender provides the Borrower a with a revolving credit loan and floor plan
loan
(the “Credit Facility”). The Credit Facility provides for aggregate borrowings
of the lesser of $32.0 million or 85% of Borrower’s eligible accounts
receivable, plus 100% of unsold inventory financed by the Lender, minus a $5.0
million reserve. The floor plan loan portion of the Credit Facility is for
the
purchase of inventory from approved vendors and for other business purposes.
The
Credit Facility subjects the Borrower to mandatory repayments upon the
occurrence of certain events as set forth in the Credit Facility.
Borrowings
under the Credit Facility bear interest at an annual rate equal to the rate
of
interest published in the “Money Rates” section of the Wall Street Journal minus
0.5% (4.50% as of May 31, 2008) for revolving credit loans. Floor plan loans
do
not bear interest until, and unless, the Borrower is in default, unless a
floorplan loan is unsubsidized, then, such floor plan loan will accrue interest
once made, at the rate agreed to by the parties. Interest on outstanding floor
plan loans accrues at the rate of 2.5% per annum in excess of the interest
rate
published in the “Money Rates” section of the Wall Street Journal. The rate in
effect was 7.50% as of May 31, 2008.
To
secure
the payment of the obligations under the Credit Facility, the Borrower granted
the Lender a security interest in all of Borrower’s assets, including inventory,
equipment, fixtures, accounts, chattel paper, instruments, deposit accounts,
documents, general intangibles, letters of credit rights, and all judgments,
claims and insurance policies.
The
Company had balances of $400,066 and $5.85 million outstanding under the
revolving portion of the Credit Facility, and balances of $616,283 and $2.63
million (included in the Company’s accounts payable) outstanding plus $885,500
and $1.80 million in open approvals under the floor plan portion of the Credit
Facility with the Lender at May 31, 2008 and August 31, 2007, respectively.
Net
availability of $10.43 million and $8.78 million was available under the
revolving portion of the Credit Facility, and $23.67 million and $12.95 million
was available under the floor plan portion of the Credit Facility, as of May
31,
2008 and August 31, 2007, respectively.
As
of May
31, 2008, the Company determined that it was in compliance with its financial
covenants with the Lender.
6.
Concentration of Credit Risk and Significant Clients
Financial
instruments that potentially subject the Company to a concentration of credit
risk consist principally of accounts receivable.
The
Company’s revenues, by client type, are comprised of the following:
|
|
For the Three Months Ended
|
|
|
|
May 31, 2008
|
|
% of Total
|
|
May 31, 2007
|
|
% of Total
|
|
Departments
of the United States Government
|
|
$
|
13,136,567
|
|
|
33.7
|
%
|
$
|
19,408,973
|
|
|
43.9
|
%
|
State
and Local Governments
|
|
|
2,153,215
|
|
|
5.5
|
%
|
|
2,791,328
|
|
|
6.3
|
%
|
Commercial
Companies
|
|
|
15,624,874
|
|
|
40.1
|
%
|
|
13,579,759
|
|
|
30.7
|
%
|
Education
and other
|
|
|
8,014,535
|
|
|
20.6
|
%
|
|
8,383,007
|
|
|
19.0
|
%
|
Total
Revenues
|
|
$
|
38,929,191
|
|
|
100.0
|
%
|
$
|
44,163,067
|
|
|
100.0
|
%
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2008
|
|
% of Total
|
|
May 31, 2007
|
|
% of Total
|
|
Departments
of the United States Government
|
|
$
|
87,990,000
|
|
|
55.8
|
%
|
$
|
86,922,169
|
|
|
57.8
|
%
|
State
and Local Governments
|
|
|
8,133,825
|
|
|
5.2
|
%
|
|
9,559,667
|
|
|
6.4
|
%
|
Commercial
Companies
|
|
|
40,094,684
|
|
|
25.4
|
%
|
|
37,643,792
|
|
|
25.1
|
%
|
Education
and other
|
|
|
21,419,370
|
|
|
13.6
|
%
|
|
16,130,955
|
|
|
10.7
|
%
|
Total
Revenues
|
|
$
|
157,637,879
|
|
|
100.0
|
%
|
$
|
150,256,583
|
|
|
100.0
|
%
|
Gwinnett
County Public School District accounted for approximately $6.0 million or 15.4%,
and $12.82 million or 8.1% of the Company’s total revenues for the three and
nine months ended May 31, 2008. The same customer accounted for approximately
$5.55 million or 12.6% and $8.52 million or 5.7% of the Company’s total revenue
for the three and nine months ended May 31, 2007.
The
Company reviews a customer's credit history before extending credit. The Company
does not require collateral or other security to support credit sales. The
Company provides for an allowance for doubtful accounts based on the credit
risk
of specific customers, historical experience and other identified risks. Trade
receivables are carried at original invoice less an estimate made for doubtful
receivables based on review by management of all outstanding amounts on a
periodic basis. Trade receivables are considered delinquent when payment is
not
received within standard terms of sale, and are charged-off against the
allowance for doubtful accounts when management determines that recovery is
unlikely and the Company ceases its collection efforts.
The
trade
account receivables consist of the following:
|
|
May 31,
|
|
August 31,
|
|
|
|
2008
|
|
2007
|
|
Trade
receivables
|
|
$
|
20,179,144
|
|
$
|
29,165,423
|
|
Allowance
for doubtful accounts
|
|
$
|
(391,137
|
)
|
$
|
(391,137
|
)
|
Trade
receivables, net
|
|
$
|
19,788,007
|
|
$
|
28,774,286
|
|
7.
Accrued Liabilities
Current
accrued liabilities consisted of the following:
|
|
May 31, 2008
|
|
August 31, 2007
|
|
|
|
|
|
|
|
|
|
Accrued
payroll
|
|
$
|
912,445
|
|
$
|
934,517
|
|
Accrued
commissions
|
|
|
413,922
|
|
|
507,317
|
|
Accrued
state sales taxes
|
|
|
165,104
|
|
|
286,158
|
|
Accrued
third party service fees
|
|
|
49,742
|
|
|
115,776
|
|
Other
accrued expenses
|
|
|
1,612,011
|
|
|
2,328,240
|
|
|
|
$
|
3,153,225
|
|
$
|
4,172,008
|
|
Long-term
accrued liabilities consisted of $174,739 in unrecognized tax obligations
recorded as a result of the implementation of FIN 48 on September 1,
2007.
8.
Accumulated deficit
Accumulated
deficit roll-forward for the nine months ended May 31, 2008 consisted of the
following:
|
|
Accumulated
|
|
|
|
Deficit
|
|
Balance
at August 31, 2007
|
|
$
|
(1,235,600
|
)
|
Adoption
of FIN 48 -September 1, 2007
( see footnote 2 Income
Taxes)
|
|
|
(132,812
|
)
|
Net
income for nine months ended May 31, 2008
|
|
|
703,041
|
|
Balance
at May 31, 2008
|
|
$
|
(665,371
|
)
|
9.
Related Party Transactions
The
Company recorded a monthly management fee of approximately $29,166, pursuant
to
the Management Services Agreement (the “Management Services Agreement”) between
DARR Global Holdings, Inc. (“DARR Global”) and Westwood, dated April 16, 2004
through January 31, 2007. On February 5, 2007, in connection with the issuance
of the promissory note to DARR Global, Westwood and DARR Global terminated
the
Management Services Agreement. DARR Global is a management consulting company
100% owned by the Company’s Chairman and Chief Executive Officer. For the nine
months ended May 31, 2007, the Company recorded $145,834, for this management
fee in the accompanying consolidated statements of operations.
One
of
the Company’s facilities is leased under a non-cancelable operating lease
agreement with an entity that is owned by officers of the Company. Rent expense
was $135,000 for each of the nine months ended May 31, 2008 and 2007. The
facilities consist of office and warehouse space totaling 42,480 square feet,
located in Springfield, New Jersey. Management believes the lease payments
are
at or below market rate for similar facilities.
The
Company is occupying approximately 26,000 square feet of office and warehouse
space in a 70,000- square-foot building in Suwannee, GA. This space is leased
from GS&T Properties, LLC, in which certain officers of the Company are
passive investors, owning approximately 20% of the equity interest. The lease
term is for 5 years, with monthly base rent of $15,832. During the three months
ended May 31, 2008 and 2007, the Company recorded expense under this lease
totaling to $46,439 and $44,325, respectively. During the nine months ended
May
31, 2008 and 2007, the Company recorded expense under this lease totaling to
$135,089 and $132,975, respectively.
EgisNova
Corp. is an information technology staffing company, which is owned by the
spouse of the President of Luceo. EgisNova Corp. provides subcontractor services
to Luceo. EgisNova Corp. provided gross services to Luceo totaling $51,481
for
the period from March 20, 2008 through May 31, 2008.
10.
Amended Employment Agreements and Management Agreement
Charges
On
February 5, 2007, in connection with the amended and restated employment
agreements with Keith Grabel and Mary Margaret Grabel, and in connection with
the termination of the Management Services Agreement, Westwood issued
subordinated promissory notes to Mr. Grabel, Mrs. Grabel and DARR Global in
the
principal amount of $671,300, $655,600, and $1,002,900, respectively. The total
principal amount of these notes, equaling $2,329,800, has been recorded as
amended employment agreement and management agreement charges on the
consolidated statements of operations for the nine months ended May 31,
2007.
11.
Segment
Information
The
Company has adopted Statement of Financial Accounting Standard No. 131,
“Disclosure about Segments of an Enterprise and Related Information”. The
Company’s business activities are divided into two business segments, Systems
Division and Global Services Division. Systems Division provides services and
products to commercial, federal, education, state and local clients. Emtec
System’s areas of specific practices include communications, data management,
enterprise computing, managed services, storage and data center planning and
development. Systems Division’s client base is comprised of departments of the
United States Federal Government, U.S. state and local governments, schools
and
commercial businesses throughout the United States. Global Services Division
offers a broad range of consulting/contracting services to clients throughout
the United States including IT project management services, packaged software
implementation, web technologies/client server application development and
extended service maintenance and upgrades. Global Services is comprised
primarily of the business operations acquired through the acquisition of Luceo
on March 20, 2008 therefore no financial activity is reported in this document
for this segment prior to the three and nine months ended May 31, 2008.
Summarized
financial information relating to the Company’s operating segments are as
follows:
|
|
May 31, 2008
|
|
August 31,
|
|
|
|
(Unaudited)
|
|
2007
|
|
Identifiable Assets:
|
|
|
|
|
|
Systems
Division
|
|
|
43,299,475
|
|
|
57,806,769
|
|
Global
Services Division
|
|
|
5,541,199
|
|
|
—
|
|
Total
Assets
|
|
|
48,840,674
|
|
|
57,806,769
|
|
|
|
Three months ended May 31,
|
|
Nine month ended May 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
36,582,591
|
|
|
44,163,067
|
|
|
155,291,279
|
|
|
150,256,583
|
|
Global
Services Division
|
|
|
2,346,600
|
|
|
—
|
|
|
2,346,600
|
|
|
—
|
|
Total
Revenue
|
|
|
38,929,191
|
|
|
44,163,067
|
|
|
157,637,879
|
|
|
150,256,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
5,204,948
|
|
|
4,669,424
|
|
|
18,821,168
|
|
|
15,080,039
|
|
Global
Services Division
|
|
|
490,601
|
|
|
—
|
|
|
490,601
|
|
|
—
|
|
Gross
Profit
|
|
|
5,695,549
|
|
|
4,669,424
|
|
|
19,311,769
|
|
|
15,080,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
(226,688
|
)
|
|
(505,054
|
)
|
|
1,926,477
|
|
|
(4,402,287
|
)
|
Global
Services Division
|
|
|
145,727
|
|
|
—
|
|
|
145,727
|
|
|
—
|
|
Operating
Income (Loss)
|
|
|
(80,961
|
)
|
|
(505,054
|
)
|
|
2,072,204
|
|
|
(4,402,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
155,576
|
|
|
251,496
|
|
|
741,637
|
|
|
756,366
|
|
Global
Services Division
|
|
|
13,300
|
|
|
—
|
|
|
13,300
|
|
|
—
|
|
Interest
and Other Expense (Income)
|
|
|
168,876
|
|
|
251,496
|
|
|
754,937
|
|
|
756,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
(160,611
|
)
|
|
(290,902
|
)
|
|
551,670
|
|
|
(2,030,712
|
)
|
Global
Services Division
|
|
|
62,556
|
|
|
—
|
|
|
62,556
|
|
|
—
|
|
Provision
(Benefit) for Income Taxes
|
|
|
(98,055
|
)
|
|
(290,902
|
)
|
|
614,226
|
|
|
(2,030,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
(221,653
|
)
|
|
(465,648
|
)
|
|
633,170
|
|
|
(3,127,941
|
)
|
Global
Services Division
|
|
|
69,871
|
|
|
—
|
|
|
69,871
|
|
|
—
|
|
Net
Income (Loss)
|
|
|
(151,782
|
)
|
|
(465,648
|
)
|
|
703,041
|
|
|
(3,127,941
|
)
|
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, the unaudited financial statements, including
the
notes thereto, appearing elsewhere in this Quarterly Report on Form
10-Q.
Cautionary
Statement Regarding Forward-Looking Statements
You
should carefully review the information contained in this Quarterly Report
on
Form 10-Q and in other reports or documents that we file from time to time
with
the Securities and Exchange Commission (the “SEC”). In addition to historical
information, this Quarterly Report on Form 10-Q contains our beliefs regarding
future events and 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. We undertake no
obligation to publicly release any revisions to forward-looking statements
after
the date of this report. In evaluating those statements, you should specifically
consider various factors, including the risk factors discussed in our Annual
Report on Form 10-K for the year ended August 31, 2007 and other reports or
documents that we file from time to time with the SEC. 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.
Overview
of Emtec
We
are an
IT company providing consulting, services and products to commercial, U.S.
Federal Government, education, U.S. state and local clients. Our services and
products address the technology needs of our clients including communications,
data management, enterprise computing, managed services, storage and data center
planning and development. Our solutions are crafted to enable our clients to
become more efficient and effective, thereby making them more profitable and
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.
On
March
20, 2008, we acquired through our subsidiary EGS all of the outstanding stock
of
Luceo, headquartered in Naperville, IL. Luceo offers a broad range of
consulting/contracting services to clients throughout the United States, which
specializes in providing IT project management services, packaged software
implementation, web technologies/client server application development and
support.
Our
primary business objective is to become a leading single-source provider of
high
quality and innovative IT consulting, services and products. Through our
strategic partners, we have an expanded array of products and technology
solutions to offer our clients.
Results
of Operations
Comparison
of Three Months Ended May 31, 2008 and May 31, 2007
The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations
for
each of the three months ended May 31, 2008 and 2007.
EMTEC,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three
Months Ended May 31,
|
|
2008
|
|
2007
|
|
Change
|
|
%
|
|
Revenues
|
|
$
|
38,929,191
|
|
$
|
44,163,067
|
|
$
|
(5,233,876
|
)
|
|
-11.9
|
%
|
Cost
of revenues
|
|
|
33,233,642
|
|
|
39,493,643
|
|
|
(6,260,001
|
)
|
|
-15.9
|
%
|
Gross
profit
|
|
|
5,695,549
|
|
|
4,669,424
|
|
|
1,026,125
|
|
|
22.0
|
%
|
Percent
of revenues
|
|
|
14.6
|
%
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
5,348,986
|
|
|
4,787,338
|
|
|
561,648
|
|
|
11.7
|
%
|
Rent
expense – related party
|
|
|
91,439
|
|
|
89,325
|
|
|
2,114
|
|
|
2.4
|
%
|
Depreciation
and amortization
|
|
|
336,086
|
|
|
297,815
|
|
|
38,271
|
|
|
12.9
|
%
|
Total
operating expenses
|
|
|
5,776,510
|
|
|
5,174,478
|
|
|
602,032
|
|
|
11.6
|
%
|
Pecent
of revenues
|
|
|
14.8
|
%
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(80,961
|
)
|
|
(505,054
|
)
|
|
424,093
|
|
|
-84.0
|
%
|
Percent
of revenues
|
|
|
-0.2
|
%
|
|
-1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income – other
|
|
|
(11,144
|
)
|
|
(15,995
|
)
|
|
4,851
|
|
|
-30.3
|
%
|
Interest
expense
|
|
|
180,276
|
|
|
267,120
|
|
|
(86,844
|
)
|
|
-32.5
|
%
|
Other
|
|
|
(256
|
)
|
|
(29
|
)
|
|
(227
|
)
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(249,837
|
)
|
|
(756,150
|
)
|
|
506,313
|
|
|
-67.0
|
%
|
Provision
(benefit) for income taxes
|
|
|
(98,055
|
)
|
|
(290,902
|
)
|
|
192,847
|
|
|
66.3
|
%
|
Net
loss
|
|
$
|
(151,782
|
)
|
$
|
(465,248
|
)
|
$
|
313,466
|
|
|
-67.4
|
%
|
Total
Revenues
Our
total
revenues, by segments, are comprised of the following:
|
|
Three months ended May 31,
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
|
|
|
|
Systems
Division
|
|
|
36,582,591
|
|
|
44,163,067
|
|
Global
Services Division
|
|
|
2,346,600
|
|
|
—
|
|
Total
Revenue
|
|
|
38,929,191
|
|
|
44,163,067
|
|
Systems
Division
Our
Systems Division’s revenues, by client types, are comprised of the
following:
|
|
For the Three Months Ended
|
|
|
|
May 31, 2008
|
|
% of Total
|
|
May 31, 2007
|
|
% of Total
|
|
Departments of
the United States
|
|
|
|
|
|
|
|
|
|
Government
|
|
$
|
13,136,567
|
|
|
35.9
|
%
|
$
|
19,408,973
|
|
|
43.9
|
%
|
State
and Local Governments
|
|
|
2,153,215
|
|
|
5.9
|
%
|
|
2,791,328
|
|
|
6.3
|
%
|
Commercial
Companies
|
|
|
13,278,274
|
|
|
36.3
|
%
|
|
13,579,759
|
|
|
30.7
|
%
|
Education
and other
|
|
|
8,014,535
|
|
|
21.9
|
%
|
|
8,383,007
|
|
|
19.0
|
%
|
Total
Revenues
|
|
$
|
36,582,591
|
|
|
100.0
|
%
|
$
|
44,163,067
|
|
|
100.0
|
%
|
Systems
Division’s revenues decreased $7.58 million, or 17.2%, to $36.58 million for the
three months ended May 31, 2008, compared to $44.16 million for the three months
ended May 31, 2007. This decrease is mainly due to a decrease in our revenues
from Departments of the United States Government.
During
the three months ended May 31, 2008 and 2007, U.S. governmental department
and
agency related revenues represented approximately 35.9% and 43.9% of total
revenues, respectively. These clients include the Department of Defense,
Department of Justice, Department of Homeland Security, Department of Health
and
Human Services, Department of Agriculture, Department of Commerce, and the
General Service Administration. Revenues from these various civilian and
military U.S. governmental departments and agencies decreased by approximately
$6.27 million during the three months ended May 31, 2008 compared with the
three
months ended May 31, 2007. This is mainly due to a decrease in our volume of
business with various civilian and military U.S. governmental departments and
agencies that are existing clients due to ordinary course of business reductions
by these departments and agencies and the delayed timing of certain projects
with these departments and agencies.
We
expect
that federal government business revenues will continue to represent a large
portion of our total revenues as we continue to strive to penetrate wider and
deeper into various civilian and military agencies. We have broadened the number
of multi-year contracts in which we are participating, and in fiscal 2007 we
were one of nine awardees of a U.S. Army contract that contemplates the awardees
participating in government purchases that may approximate $5.0 billion in
the
aggregate for all the awardees over 10 years. Additionally, in fiscal 2007,
we
were awarded a NASA SEWP IV contract under which we will be able to participate
in possible government purchases of IT products and associated services, and
we
continue to bid on new contracts. Furthermore, during the current quarter,
we
were awarded a contract under the Air Force Quarterly Enterprise Buy (“QEB”)
program to provide approximately 70,000 monitors and 1,000 convertible personal
computer tablets. Under a series of delivery orders, we will manage staged
deployments of the systems to various agencies across all United States Air
Force Organizations worldwide over the next several months. The federal business
typically experiences increased activity during the months of August through
November.
The
state
and local government business remains uncertain due to the tight budgetary
pressures within governmental agencies in the State of New Jersey.
Revenues
from various commercial clients decreased by approximately $301,000 during
the
three months ended May 29, 2008, compared with the three months ended May 28,
2007. This decrease is mainly due to a decrease in our ordinary course business
with various existing commercial clients. There is a solid well-established
client base to build upon as we expand our product and service offerings to
existing clients as well as develop new relationships.
During
the three months ended May 31, 2008, revenues from our education business
decreased by approximately $368,000 compared with the three months ended May
28,
2007. This decrease is mainly due to the delayed delivery timing of various
computer roll-out projects which we are currently implementing. The education
business is expected to grow during the upcoming months as we continue to
implement various computer roll-out projects with various school
districts.
We
have
historically not been adversely affected by inflation; technological advances
and competition within the IT industry have generally caused the prices of
the
products we sell to decline, and product life-cycles tend to be short. These
factors require that our growth in unit sales exceed any declines in prices
in
order for us to increase our net sales.
Global
Services Division
Our
Global Services Division’s revenues for period from March 20, 2008 through May
31, 2008, were $2.35 million. Global Services Division consists of revenues
from
our recently acquired subsidiary Luceo.
Gross
Profit
Our
total
gross profit, by segments, is comprised of the following:
|
|
Three months ended May 31,
|
|
|
|
2008
|
|
2007
|
|
Gross
Profit
|
|
|
|
|
|
Systems
Division
|
|
|
5,204,948
|
|
|
4,669,424
|
|
Global
Services Division
|
|
|
490,601
|
|
|
—
|
|
Gross
Profit
|
|
|
5,695,549
|
|
|
4,669,424
|
|
Systems
Division
Aggregate
gross profit for our Systems Division increased $535,524, or 11.5%, to $5.20
million for the three months ended May 31, 2008 as compared to $4.67 million
for
the three months ended May 31, 2007. This increase is primarily attributable
to
various volume and other incentive rebates offered by certain manufactures
and
distributors, certain pricing strategies, and mix of client type that made
up
our Systems Division’s revenue for the three months ended May 31, 2008.
Measured
as a percentage of revenues, our gross profit margin for Systems Division
increased to 14.2% of our Systems Division’s revenues for the three months ended
May 31, 2008 from 10.6% for the three months ended May 31, 2007. This increase
is primarily attributable to pricing strategies, volume incentive rebates
received, the mix of product and services sold, the mix of client type and
higher utilization of our technical engineers during this period.
Factors
that may affect gross profits in the future include changes in product margins,
volume incentive rebates and other incentives offered by various manufacturers,
changes in technical employee utilization rates, the mix of products and
services sold, the mix of client type and the decision to aggressively price
certain products and services.
Global
Services Division
Our
Global Services Division’s gross profit for the period from March 20, 2008
through May 31, 2008, was $490,601. Measured, as a percentage of revenues,
Global Services Division’s gross profit margin was 20.9% of its revenue for the
period from March 20, 2008 through May 31, 2008.
Selling,
General and Administrative Expenses
Systems
Division
Selling,
general and administrative expenses for our Systems Division increased by
$250,119, or 5.2% to $5.04 million for the three months ended May 31, 2008,
compared to $4.79 million for the three months ended May 31, 2007. This increase
in selling, general and administrative expenses for the three months ended
May
31, 2008 is mainly due to an increase in sales commission and bonus expense
by
approximately $182,000, which is directly related to the increase in our gross
profit as discussed in the gross profit section. The remainder of the $68,000
increase includes various categories such as recruiting, investment in building
sales team, administrative bonuses and credit card processing fees.
Global
Services Division
Our
Global Services Division’s selling, general and administrative expenses for the
period from March 20, 2008 through May 31, 2008, were $311,529.
Factors
that may in the future have a negative impact on our selling, general and
administrative expenses to both divisions include costs associated with
marketing and selling activities, potential merger and acquisition related
costs, technological improvement costs, compliance costs associated with SEC
rules and increases in our insurance costs.
Rent
Expense-Related Party
Systems
Division
We
occupy
approximately 42,000 square feet of office and warehouse space in Springfield,
New Jersey. This space is leased from a limited liability company owned by
certain directors and officers and related family members of the Company. The
lease term is through April 2009 with monthly base rent of $15,000. During
the
three months ended May 31, 2008 and 2007, we recorded $45,000 in expense under
this lease.
We
also
occupy approximately 26,000 square feet of office and warehouse space in a
70,000 square foot building in Suwannee, GA. This space is leased from a limited
liability company in which certain officers of our company are passive
investors, owning approximately a 20% equity interest. The lease term is for
5
years with monthly base rent of $15,832. During the three months ended May
31,
2008 and 2007, the Company recorded expense under this lease totaling to $46,439
and $44,325, respectively.
Management
believes the leases noted above are being leased at a rate consistent with
the
market rate.
Depreciation
and Amortization
Systems
Division
Depreciation
and Amortization expense for our Systems Division increased by 1.7%, or $4,925,
to $302,740 for the three months ended May 31, 2008, compared to $297,815 for
the three months ended May 31, 2007. This increase in depreciation expense
is
mainly due to depreciation expense associated with computer equipment purchased
during the fiscal year ended August 31, 2007 and a change in the estimated
life
of the computer equipment purchased during the fiscal year ended August 31,
2007.
Intangible
assets of our Systems Division at May 31, 2008 and August 31, 2007 consisted
of
the value ascribed to customer relationships of $8,661,712 less accumulated
amortization of $1,664,199 and $1,228,936, respectively. The assets ascribed
to
customer relationships are being amortized on a straight-line basis over 13
to
15 years. Amortization expense for our Systems Division was $145,088 for each
of
the three months ended May 31, 2008 and 2007.
Global
Services Division
Intangible
assets of our Global Services Division at May 31, 2008 consisted of the
estimated value ascribed to customer relationships of $1,300,000 less
accumulated amortization of $29,290, and estimated value ascribed to non-compete
of $100,000 less accumulated amortization of $4,056. The assets ascribed to
customer relationships and to non-compete is being amortized on a straight-line
basis over 9 years and over 5 years, respectively. Amortization expense for
our
Global Services Division was $33,346 for the period from March 20, 2008 through
May 31, 2008.
Operating
income (loss)
Systems
Division
Operating
loss for our Systems Division for the three months ended May 31, 2008 decreased
by 55.1%, or $278,366, to $226,688, compared to $505,054 for the three months
ended May 31, 2007. This decrease in operating loss is primarily attributable
to
increased gross profit attributable to various volume and other incentive
rebates offered by certain manufactures and distributors, certain pricing
strategies, and mix of client type that made up our Systems Division’s revenue
for the three months ended May 31, 2008.
Global
Services Division
Our
Global Services Division’s operating income for the period from March 20, 2008
through May 31, 2008, was $145,727.
Interest
expense
Systems
Division
Interest
expense for the Systems Division decreased by 37.5%, or $100,144, to $166,976
for the three months ended May 31, 2008, compared to $267,120 for the three
months ended May 31, 2007. This is primarily attributable to lower average
balance on our line of credit during three months ended May 31, 2008 as compared
to the three months ended May 31, 2007 and a lower average interest rate during
this quarter.
Global
Services Division
Our
Global Services Division’s interest expense for the period from March 20, 2008
through May 31, 2008, was $13,300. This interest expense is related to 8%
subordinated note payable to Mr. Natarajan as part of the acquisition of Luceo.
Provision
for Income Taxes
Systems
Division
We
recorded an income tax benefit for the Systems Division of $160,611 for the
three months ended May 31, 2008 as compared to an income tax benefit of $290,902
for the three months ended May 31, 2007. The effective tax rate was 42%
for the three months ended May 31, 2008 versus 38% for the three months ended
May 31, 2007. The increase in the tax rate was the result of the effect of
permanent differences between our financial statements and income tax
returns.
Global
Services Division
We
recorded an income tax expense for the Global Services Division of $62,556
for
the period from March 20, 2008 through May 31, 2008. The effective tax rate
for
this period was 47.2% due to the permanent difference of approximately
$8,000.
Comparison
of Nine Months Ended May 31, 2008 and May 31, 2007
The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations
for
each of the nine months ended May 31, 2008 and 2007.
EMTEC,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Nine
Months Ended May 31,
|
|
2008
|
|
2007
|
|
Change
|
|
%
|
|
Revenues
|
|
$
|
157,637,879
|
|
$
|
150,256,583
|
|
$
|
7,381,296
|
|
|
4.9
|
%
|
Cost
of revenues
|
|
|
138,326,110
|
|
|
135,176,544
|
|
|
3,149,566
|
|
|
2.3
|
%
|
Gross
profit
|
|
|
19,311,769
|
|
|
15,080,039
|
|
|
4,231,730
|
|
|
28.1
|
%
|
Percent
of revenues
|
|
|
12.3
|
%
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
16,025,377
|
|
|
15,890,166
|
|
|
135,211
|
|
|
0.9
|
%
|
Management
fee – related party
|
|
|
—
|
|
|
145,834
|
|
|
(145,834
|
)
|
|
-100.0
|
%
|
Amended
employment agreements and management agreement charges
|
|
|
—
|
|
|
2,329,800
|
|
|
(2,329,800
|
)
|
|
-100.0
|
%
|
Rent
expense – related party
|
|
|
270,089
|
|
|
267,975
|
|
|
2,114
|
|
|
0.8
|
%
|
Depreciation
and amortization
|
|
|
944,100
|
|
|
848,551
|
|
|
95,549
|
|
|
11.3
|
%
|
Total
operating expenses
|
|
|
17,239,565
|
|
|
19,482,326
|
|
|
(2,242,761
|
)
|
|
-11.5
|
%
|
Pecent
of revenues
|
|
|
10.9
|
%
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
2,072,204
|
|
|
(4,402,287
|
)
|
|
6,474,491
|
|
|
147.1
|
%
|
Percent
of revenues
|
|
|
1.3
|
%
|
|
-2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income – other
|
|
|
(77,807
|
)
|
|
(73,910
|
)
|
|
(3,897
|
)
|
|
5.3
|
%
|
Interest
expense
|
|
|
833,018
|
|
|
830,718
|
|
|
2,300
|
|
|
0.3
|
%
|
Other
|
|
|
(274
|
)
|
|
(442
|
)
|
|
168
|
|
|
-38.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
1,317,267
|
|
|
(5,158,653
|
)
|
|
6,475,920
|
|
|
125.5
|
%
|
Provision
(benefit) for income taxes
|
|
|
614,226
|
|
|
(2,030,712
|
)
|
|
2,644,938
|
|
|
130.2
|
%
|
Net
income (loss)
|
|
$
|
703,041
|
|
$
|
(3,127,941
|
)
|
$
|
3,830,982
|
|
|
122.5
|
%
|
Total
Revenues
Our
total
revenues, by segments, are comprised of the following:
|
|
Nine month ended May 31,
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
155,291,279
|
|
|
150,256,583
|
|
Global
Services Division
|
|
|
2,346,600
|
|
|
—
|
|
Total
Revenue
|
|
|
157,637,879
|
|
|
150,256,583
|
|
Systems
Division
Our
Systems Division’s revenues, by client types, are comprised of the
following:
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2008
|
|
% of Total
|
|
May 31, 2007
|
|
% of Total
|
|
Departments
of the United States Government
|
|
$
|
87,990,000
|
|
|
56.7
|
%
|
$
|
86,922,166
|
|
|
57.8
|
%
|
State
and Local Governments
|
|
|
8,133,825
|
|
|
5.2
|
%
|
|
9,559,668
|
|
|
6.4
|
%
|
Commercial
Companies
|
|
|
37,748,084
|
|
|
24.3
|
%
|
|
37,643,793
|
|
|
25.1
|
%
|
Education
and other
|
|
|
21,419,370
|
|
|
13.8
|
%
|
|
16,130,956
|
|
|
10.7
|
%
|
Total
Revenues
|
|
$
|
155,291,279
|
|
|
100.0
|
%
|
$
|
150,256,583
|
|
|
100.0
|
%
|
Systems
Division’s revenues increased $5.03 million, or 3.4%, to $155.29 million for the
nine months ended May 31, 2008, compared to $150.26 million for the nine months
ended May 31, 2007. This increase is primarily attributable to an overall
increase in our customers’ IT spending particularly with Departments of the
United States Government and education business.
During
the nine months ended May 31, 2008 and 2007, U.S. governmental department and
agency related revenues represented approximately 56.7% and 57.8% of total
revenues, respectively. These clients include the Department of Defense,
Department of Justice, Department of Homeland Security, Department of Health
and
Human Services, Department of Agriculture, Department of Commerce, and the
General Service Administration. Revenues from various civilian and military
U.S.
governmental departments and agencies increased by approximately $1.07 million
during the nine months ended May 31, 2008 compared with the nine months ended
May 31, 2007. This is primarily attributable to a large computer hardware sale
to the Department of the Air Force of approximately $15.36 million and Federal
Bureau of Prisons of approximately $11.01 million during the nine months ended
May 31, 2008. These two customers accounted for approximately $2.06 million
and
$239,000, respectively, for the nine months ended May 31, 2007.
The
state
and local government business remains uncertain due to the tight budgetary
pressures within governmental agencies in the State of New Jersey.
Revenues
from various commercial customers increased by approximately $104,000 during
the
nine months ended May 31, 2008 compared with the nine months ended May 31,
2007.
This increase is primarily attributable to an overall increase in our commercial
customers’ IT spending during this period.
During
the nine months ended May 31, 2008, revenues from our education business
increased to approximately $21.41 million from $16.13 million for the nine
months ended May 31, 2007. This increase was primarily attributable to various
computer roll-out projects we began to implement in May 2007 which were
completed during the quarter ended November 30, 2007. The education business
is
expected to improve during the upcoming months as we continue to implement
various computer roll-out projects with various school districts.
Global
Services Division
Our
Global Services Division’s revenues for period from March 20, 2008 through May
31, 2008, were $2.35 million. Global Services Division consists of revenues
from
our recently acquired company Luceo.
Gross
Profit
Our
total
gross profit, by segments, is comprised of the following:
|
|
Nine month ended May 31,
|
|
|
|
2008
|
|
2007
|
|
Gross
Profit
|
|
|
|
|
|
|
|
Systems
Division
|
|
|
18,821,168
|
|
|
15,080,039
|
|
Global
Services Division
|
|
|
490,601
|
|
|
—
|
|
Gross
Profit
|
|
|
19,311,769
|
|
|
15,080,039
|
|
Systems
Division
Aggregate
gross profit for the Systems Division increased $3.74 million, or 24.8%, to
$18.82 million for the nine months ended May 31, 2008 as compared to $15.08
million for the nine months ended May 31, 2007. This increase is primarily
attributable to an increase in revenues as discussed in the Total Revenues
section, an increase in our services gross profit attributable to higher
utilization of our engineers, various computer roll-out projects in our
education business which we completed during this period, and various volume
incentive rebates and other incentives offered by certain manufacturers. We
also
receive special pricing rebates from various manufacturers. The application
of
the special pricing rebates to gross profit is also impacted by the price to
a
customer, the cost to purchase the product and the size of the applicable
special pricing rebate.
Measured
as a percentage of revenues, our gross profit margin for the Systems Division
increased to 12.1% of total revenues for the nine months ended May 31, 2008
from
10.0% for the nine months ended May 31, 2007. This increase is primarily
attributable to pricing strategies, volume incentive rebates received, the
mix
of product and services sold, the mix of client type and higher utilization
of
our technical engineers during this period.
Global
Services Division
Our
Global Services Division’s gross profit for the period from March 20, 2008
through May 31, 2008, was $490,601. Measured, as a percentage of revenues,
Global Services Division’s gross profit margin was 20.9% of its revenue for the
period from March 20, 2008 through May 31, 2008.
Selling,
General and Administrative Expenses
Systems
Division
Selling,
general and administrative expenses for the Systems Division decreased by
$176,318, or 1.1% to $15.71 million for the nine months ended May 31, 2008,
compared to $15.89 million for the nine months ended May 31, 2007. This decrease
in selling, general and administrative expenses for the nine months ended May
31, 2008 is primarily attributable to following: merger and acquisition related
costs expensed during the nine months ended May 31, 2008 which were
approximately $137,000 compared with $678,116 incurred during the nine months
ended May 31, 2008; stock compensation expense related to the issuance of stock
options and non-vested stock which was $213,055 for the nine months ended May
31, 2008 compared with $291,868 for the nine months ended May 31, 2007;
severance costs of approximately $242,000 which were incurred during the nine
months ended May 31, 2007; and office consolidation costs of approximately
$125,000 which were incurred during the nine months May 31, 2007.
Excluding
the above listed decreases, our selling, general and administrative expenses
for
the Systems Division would have increased by approximately $810,000 for the
nine
month ended May 31, 2008 compared with the nine months ended May 31, 2007.
This
increase in selling, general and administrative expenses for the nine months
ended May 31, 2008 is mainly due to an increase in sales commission and bonus
expense by approximately $738,000, which is directly related to the increase
in
our gross profit as discussed in the gross profit section. The remainder of
$71,000 increase includes various categories such as recruiting, investment
in
building sales team, administrative bonuses, credit card processing fees, and
other.
Global
Services Division
Our
Global Services Division’s selling, general and administrative expenses for the
period from March 20, 2008 through May 31, 2008, were $311,529.
Management
Fee-Related Party
Systems
Division
The
Management Services Agreement was terminated on February 5, 2007. Under the
terms of the agreement, DARR Global Holdings, Inc. (“DARR Global”), a related
party, charged the Company a monthly management fee of $29,167.
Rent
Expense-Related Party
Systems
Division
We
occupy
approximately 42,000 square feet of office and warehouse space in Springfield,
New Jersey. This space is leased from a limited liability company owned by
certain directors and officers and related family members of the Company. The
lease term is through April 2009 with monthly base rent of $15,000. During
the
nine months ended May 31, 2008 and 2007, we recorded $135,000 in expense under
this lease.
We
also
occupy approximately 26,000 square feet of office and warehouse space in a
70,000 square foot building in Suwannee, GA. This space is leased from a limited
liability company in which certain officers of our company are passive
investors, owning approximately a 20% equity interest. The lease term is for
5
years with monthly base rent of $15,832. During the nine months ended May 31,
2008 and 2007, the Company recorded expense under this lease totaling to
$135,089 and $132,975, respectively.
Management
believes the leases noted above are being leased at a rate consistent with
the
market rate.
Depreciation
and Amortization
Systems
Division
Depreciation
and Amortization expense for the Systems Division increased by 7.3%, or $62,203,
to $910,754 for the nine months ended May 31, 2008, compared to $848,551 for
the
nine months ended May 31, 2007. This increase in depreciation expense is mainly
due to depreciation expense associated with computer equipment purchased during
the fiscal year ended August 31, 2007 and a change in the estimated life of
the
computer equipment purchased during the fiscal year ended August 31, 2007.
Intangible
assets of the Systems Division at May 31, 2008 and August 31, 2007 consisted
of
the value ascribed to customer relationships of $8,661,712 less accumulated
amortization of $1,664,199 and $1,228,936, respectively. The assets ascribed
to
customer relationships are being amortized on a straight-line basis over 13
to
15 years. Amortization expense of the Systems Division was $435,263 for each
of
the nine months ended May 31, 2008 and 2007.
Global
Services Division
Intangible
assets of the Global Services Division at May 31, 2008 consisted of the
estimated value ascribed to customer relationships of $1,300,000 less
accumulated amortization of $29,290, and estimated value ascribed to non-compete
of $100,000 less accumulated amortization of $4,056. The assets ascribed to
customer relationships and to non-compete is being amortized on a straight-line
basis over 9 years and over 5 years, respectively. Amortization expense for
the
Global Services Division was $33,346 for the period from March 20, 2008 through
May 31, 2008.
Operating
income (loss)
Systems
Division
Operating
income for the Systems Division increased $6.33 million, to $1.93 million for
the nine months ended May 31, 2008, compared to operating loss of $4.40 million
for the nine months ended May 31, 2007. This increase in operating income is
primarily attributable to reasons discussed in the sections above including
increased revenues; increased gross profit; decreased selling, general and
administrative expenses; and the non-recurrence of charges in the nine months
ended May 31, 2008 that were incurred in the nine months ended May 31, 2007
as a
result of the amended employment agreements and management agreement entered
into during the nine months ended February 28, 2007
Global
Services Division
Our
Global Services Operating income for the period from March 20, 2008 through
May
31, 2008, was $145,727.
Interest
expense
Systems
Division
Interest
expense for the Systems Division decreased by 1.3%, or $11,000, to $819,718
for
the nine months ended May 31, 2008, compared to $830,718 for the nine months
ended May 31, 2007. This is primarily attributable to lower average balance
on
our line of credit during nine months ended May 31, 2008 as compared to the
three months ended May 31, 2007 and a lower average interest rate during this
period.
Global
Services Division
Our
Global Services Division’s interest expense for the period from March 20, 2008
through May 31, 2008, was 13,300. This interest expense is related to 8%
subordinated note payable to Mr. Natarajan as part of the acquisition of Luceo.
Provision
for Income Taxes
Systems
Division
We
recorded an income tax expense for the Systems Division of $551,670 during
the
nine months ended May 31, 2008 as compared to income tax benefit of $2.03
million for the nine months ended May 31, 2007. The effective tax rate for
the Systems Division was 47% for the nine months ended May 31, 2008 versus
an
effective tax rate of 39% for the nine months ended May 31, 2007. The higher
current tax rate was primarily the result of FIN 48 interest expense recorded
in
the current period classified as income taxes, a tax benefit shortfall from
stock compensation grants in the current period that increased income tax
expense and the effect of permanent differences between our financial statements
and income tax returns.
Global
Services Division
We
recorded an income tax expense for the Global Services Division of $62,556
for
the period from March 20, 2008 through May 31, 2008. The effective tax rate
for
the Global Services Division for this period was 47.2%.
Recently
Issued Accounting Standards
Fair
Value Measurements
In
September 2006, the Financial Accounting Standard Board (“FASB’) issued
Statement of Financial Accounting Standard No. 157,
Fair
Value Measurements
(“SFAS
No. 157”). This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any
new
fair value measurements, but provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value.
This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those years.
The
standard is effective for the Company as of the beginning of its first fiscal
year beginning after November 15, 2007, or September 1, 2008. On November 14,
2007, the FASB voted for a proposed deferral of a portion of SFAS No. 157.
The
Company does not expect adoption of SFAS No. 157 to have a material impact
on
its financial statements.
Fair
Value Option for Financial Assets and Liabilities
In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159,
The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115
(“SFAS
No. 159”). SFAS No. 159 provides all entities with an option to report selected
financial assets and liabilities at fair value. The objective of SFAS No. 159
is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in earnings caused by measuring related assets and
liabilities differently without having to apply the complex provisions of hedge
accounting. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 does not eliminate disclosure requirements included in other
accounting standards. The standard is effective for the Company as of the
beginning of its first fiscal year beginning after November 15, 2007, or
September 1, 2008. The Company is currently reviewing the impact of SFAS No.
159
on our financial statements.
Noncontrolling
Interests in Consolidated Financial Statements
In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
Amendment of ARB 51, (“SFAS 160”).” This statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon
its
adoption, effective as of the beginning of the Company’s fiscal 2010,
noncontrolling interests will be classified as equity in the Company’s financial
statements and income and comprehensive income attributed to the noncontrolling
interest will be included in the Company’s income and comprehensive income. The
provisions of this standard must be applied retrospectively upon adoption.
The
Company does not currently expect that the adoption of this pronouncement will
have any effect on its financial statements since all of its existing
subsidiaries are wholly owned.
Business
Combinations
In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “
Business
Combinations
”
(“SFAS
141(R)”). SFAS 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures the assets acquired,
liabilities assumed, and any noncontrolling interest in the acquire. The
provisions of SFAS 141(R) are effective for our business combinations occurring
on or after June 1, 2009.
Liquidity
and Capital Resources
Cash
at
May 31, 2008 of $1.27 million represented a decrease of $982,726 from $2.25
million at August 31, 2007. We are a net borrower; consequently, we believe
our
cash balance must be viewed along with the available balance on our line of
credit. Borrowings under our line of credit at May 31, 2008 decreased to
approximately $400,000 from $5.85 million at August 31, 2007. As of May 31,
2008, our net working capital (defined as the excess of our current assets
over
our current liabilities) was approximately $2.05 million less than it was at
August 31, 2007. The decrease in working capital is mainly due to the increase
in current liabilities associated with the acquisition of Luceo. The purchase
price for the acquisition of Luceo consisted of cash paid at closing in an
aggregate amount of $1,795,000, which was funded through the borrowings under
the Credit Facility and the issuance of a subordinated promissory notes in
a
principal amount of $820,000 which is payable in two equal installments of
$410,000 each on the 12 month and 18 month anniversaries of the closing.
In
addition, the decrease in working capital is also due to payments made on the
various notes payable totaling to approximately $1.03 million and change in
the
classification of the $1.1 million, 8% subordinated note payable to DARR
Westwood LLC from long term debt to current portion of long term debt. These
decreases in working capital were offset by our positive operating income of
$2.07 million for the nine months ended May 31, 2008.
In
December 2006, the Company, Emtec NJ, Emtec LLC, and Emtec Federal
(collectively, the “Borrower”), entered into a Loan and Security Agreement with
De Lage Landen Financial Services, Inc. (the “Lender”) pursuant to which the
Lender provides the Borrower a with a revolving credit loan and floor plan
loan
(the “Credit Facility”). The Credit Facility provides for aggregate borrowings
of the lesser of $32.0 million or 85% of Borrower’s eligible accounts
receivable, plus 100% of unsold inventory financed by the Lender, minus a $5.0
million reserve. The floor plan loan portion of the Credit Facility is for
the
purchase of inventory from approved vendors and for other business purposes.
The
Credit Facility subjects the Borrower to mandatory repayments upon the
occurrence of certain events as set forth in the Credit Facility.
Borrowings
under the Credit Facility bear interest at an annual rate equal to the rate
of
interest published in the “Money Rates” section of the Wall Street Journal minus
0.5% (4.50% as of May 31, 2008) for revolving credit loans. Floor plan loans
do
not bear interest until the Borrower is in default, unless a floorplan loan
is
unsubsidized, then, such floor plan loan will accrue interest once made, at
the
rate agreed to by the parties. Interest on outstanding floor plan loans accrues
at the rate of 2.5% per annum in excess of the interest rate published in the
“Money Rates” section of the Wall Street Journal (7.50% as of May 31, 2008).
To
secure
the payment of the obligations under the Credit Facility, the Borrower granted
the Lender a security interest in all of Borrower’s assets, including inventory,
equipment, fixtures, accounts, chattel paper, instruments, deposit accounts,
documents, general intangibles, letters of credit rights, and all judgments,
claims and insurance policies.
In
addition, the Lender and Avnet, Inc., one of our trade creditors, entered into
an intercreditor agreement in which the Lender agreed to give Avnet a first
lien
position on all future unbilled service maintenance billings and which provides
that, as regards to Avnet, all debt obligations to the Lender are accorded
priority.
As
of May
31, 2008, we had an outstanding balance of $400,066 under the revolving portion
of the Credit Facility and $616,283 of outstanding (included in the Company’s
accounts payable) balances plus $885,500 in open approvals under the floor
plan
portion of the Credit Facility with Lender. As of May 31, 2008, we had net
availability of $10.43 million under the revolving portion of the Credit
Facility and net availability of $23.67 million under the floor plan portion
of
the Credit Facility.
As
of May
31, 2008, the Company determined that it was in compliance with its financial
covenants with the Lender.
As
of May
31, 2008, we had open term credit facilities with our primary trade vendors,
including aggregators and manufacturers, of approximately $29.20 million with
outstanding principal of approximately $17.40 million. Under these lines, we
are
typically obligated to pay each invoice within 30-45 days from the date of
such
invoice. These credit lines could be reduced or eliminated without notice and
this action could have a material adverse affect on our business, result of
operations, and financial condition.
Capital
expenditures of $172,964 during the nine months ended May 31, 2008 related
primarily to the purchase of computer equipment for internal use, furniture
and
a delivery truck for our Georgia location. We anticipate our total capital
expenditures for our fiscal year ending August 31, 2008 will be approximately
$600,000, of which approximately $350,000 will be for the upgrade of our
organizational computer system and the remaining $250,000 will primarily be
for
the purchase of computer equipment for internal use, furniture, delivery trucks
and leasehold improvements.
We
anticipate that our primary sources of liquidity in fiscal year 2008 will be
cash generated from operations, trade vendor credit and cash available to us
under our Credit Facility. Our future financial performance will depend on
our
ability to continue to reduce and manage operating expenses as well as our
ability to grow revenues. Any loss of clients, whether due to price competition
or technological advances, will have an adverse affect on our revenues. Our
future financial performance could be negatively affected by unforeseen factors
and unplanned expenses. See “Forward Looking Statements” and “Business - Risk
Factors” discussed in our Annual Report on Form 10-K for the year ended August
31, 2007.
We
have
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, trade vendor credit and bank
borrowings should be sufficient to meet our current operating cash requirements
through the next twelve months. However, there can be no assurance that all
of
the aforementioned sources of cash can be realized.
Critical
Accounting Policies
Our
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
SEC
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, rebates, and income taxes.
Revenue
Recognition
We
recognize revenue from the sales of products when risk of loss and title passes
which is upon client acceptance.
Revenue
from the sale of warranties and support service contracts is recognized on
a
straight-line basis over the term of the contract, in accordance with Financial
Accounting Standards Board Technical Bulleting No. 90-1,
Accounting
for Separately Priced Extended Warranty and Product Maintenance
Contracts
(“FTB
90-1”).
We
may
also enter into sales arrangements with clients that contain multiple elements.
We recognize revenue from sale arrangements that contain both products and
manufacturer warranties in accordance with Emerging Issues Task Force (EITF)
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” based on the
relative fair value of the individual components. The relative fair value of
individual components is based on historical sales of the components sold
separately.
Product
revenue represents sales of computer hardware and pre-packaged software. These
arrangements often include software installations, configurations, and imaging,
along with delivery and set-up of hardware. We follow the criteria contained
in
EITF 00-21 and Staff Accounting Bulletin 104 (“SAB 104”) in recognizing revenue
associated with these transactions. We perform software installations,
configurations and imaging services at our locations prior to the delivery
of
the product. Some client arrangements include “set-up” services performed at
client locations where our personnel perform the routine tasks of removing
the
equipment from boxes, and setting up the equipment at client workstations by
plugging in all necessary connections. This service is usually performed the
same day as delivery. Revenue is recognized on the date of acceptance, except
as
follows:
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§
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In
some instances, the “set-up” service is performed after date of delivery.
We recognize revenue for the “hardware” component at date of delivery when
the amount of revenue allocable to this component is not contingent
upon
the completion of “set-up” services and, therefore, our client has agreed
that the transaction is complete as to the “hardware” component. In
instances where our client does not accept delivery until “set-up”
services are completed, we defer all revenue in the transaction until
client acceptance occurs.
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§
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There
are occasions when a client requests a transaction on a “bill & hold”
basis. We follow the SAB 104 criteria and recognize revenue from
these
sales prior to date of physical delivery only when all the criteria
of SAB
104 are met. We do not modify our normal billing and credit terms
for
these customers. The customer is invoiced at the date of revenue
recognition when all of the criteria have been
met.
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We
have
experienced minimal customer returns. Since all eligible products must be
returned to us within 30 days from the date of the invoice, we reduce the
product revenue and cost of goods in each accounting period based on the actual
returns that occurred in the next 30 days after the close of the accounting
period.
Service
and consulting revenue include time billings based upon billable hours charged
to clients, fixed price short-term projects, hardware maintenance contracts,
and
manufacturer support service contracts. These contracts generally are task
specific and do not involve multiple deliverables. Revenues from time billings
are recognized as services are delivered. Revenues from short-term fixed price
projects are recognized using the proportionate performance method by
determining the level of service performed based upon the amount of labor cost
incurred on the project versus the total labor costs to perform the project
because this is the most readily reliable measure of output. Revenues from
hardware maintenance contracts are recognized ratably over the contract period.
Revenues
from manufacturer support service contracts where the manufacturer is
responsible for fulfilling the service requirements of the client are recognized
immediately on their contract sale date. Manufacturer support service contracts
contain cancellation privileges that allow our clients to terminate a contract
with 90 days written notice. In this event, the client 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 client cancellations of any significance during our most
recent 3-year history and do not expect cancellations of any significance in
the
future.
Trade
Receivables
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the inability of our clients 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 clients 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.
Inventories
Inventory
is stated at the lower of average cost or market. Inventory is entirely finished
goods purchased for resale and consists of computer hardware, computer software,
computer peripherals and related supplies. We provide an inventory reserve
for
products we determine are obsolete or where salability has deteriorated based
on
management’s review of products and sales.
Goodwill
and Intangible Assets
We
have
adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other
Intangible Assets” (“SFAS 142”). As a result, amortization of goodwill was
discontinued. 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. We test goodwill and indefinite-lived assets for impairment
at
least annually (on June 1) in accordance with SFAS 142.
Intangible
assets at May 31, 2008 and August 31, 2007 consisted of the value ascribed
to
customer relationships and noncompete assets. The assets ascribed to customer
relationships are being amortized on a straight-line basis over 9 to 15 years.
The assets ascribed to noncompete assets are being amortized on a straight-line
basis over 5 years. Intangible assets are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may
not
be recoverable in accordance with Statement of Financial Accounting Standards
No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Recoverability of long-lived assets is assessed by a comparison of the carrying
amount to the estimated undiscounted future net cash flows expected to result
from the use of the assets and their eventual disposition. If estimated
undiscounted future net cash flows are less than the carrying amount, the asset
is considered impaired and a loss would be recognized based on the amount by
which the carrying value exceeds the fair value of the asset.
Rebates
Rebates
are recorded in the accompanying consolidated statements of income as a
reduction of the cost of revenues in accordance with Emerging Issues Task Force
Abstract No. 02-16,
Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from
a
Vendor
(EITF
02-16).
Income
Taxes
Income
taxes are accounted for under an asset and liability approach that requires
the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been recognized in our financial statements
or
tax returns. In estimating future tax consequences, we generally consider all
expected future events other than the enactment of changes in tax laws or rates.
A valuation allowance is recognized if, on weight of available evidence, it
is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
Item
3.
Quantitative and Qualitative Information About Market Risk
We
do not
engage in trading market risk sensitive instruments and do not purchase hedging
instruments or “other than trading” instruments that are likely to expose us to
market risk, whether interest rate, foreign currency exchange, commodity price
or equity price risk. We have issued no debt instruments, entered into no
forward or future contracts, purchased no options and entered into no swaps.
Our
primary market risk exposures are those of interest rate fluctuations. A change
in interest rates would affect the rate at which we could borrow funds under
our
revolving credit facility. Our balance on the line of credit at May 31, 2008
was
approximately $400,000. Assuming no material increase or decrease in such
balance, a one percent change in the interest rate would change our interest
expense by approximately $4,000 annually.
Item
4T.
Controls and Procedures
(a)
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 defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of May 31,
2008. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures
including the accumulation and communication of disclosures to the Company’s
Chief Executive Officer and Chief Financial Officer as appropriate to allow
timely decision regarding required disclosure, were effective to provide
reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the SEC. It should be noted that the design of any system of controls
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving the
stated goals under all potential future conditions, regardless of how remote.
(b)
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 May 31, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II
–
OTHER INFORMATION
Item
6.
Exhibits
Exhibit
10.1
–
Stock
Purchase Agreement by and among Emtec Global Services LLC, Luceo, Inc. and
Sivapatham Natarajan dated March 20, 2008, incorporated herein by reference
to
Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed March 26, 2007.
Exhibit
21.1
- List
of Subsidiaries.
Exhibit
31.1
- Rule
13a-14(a)/15d-14(a) Certification of Dinesh R. Desai, Principal Executive
Officer, of Emtec, Inc. dated
July 14,
2008
.
Exhibit
31.2
- Rule
13a-14(a)/15d-14(a) Certification of Stephen C. Donnelly, Principal Financial
Officer, of Emtec, Inc. dated July 14, 2008.
Exhibit
32.1
-
Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
Emtec, Inc. dated July 14, 2008.
Exhibit
32.2
-
Section 1350 Certificate of Stephen C. Donnelly, Principal Financial Officer,
of
Emtec, Inc. dated July 14, 2008.
Exhibit
99.1
–
Subordinated Promissory Note dated March 20, 2008 issued by Emtec Global
Services, LLC in favor of Sivapatham Natarajan.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
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EMTEC,
INC.
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By:
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/s/
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DINESH
R. DESAI
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Dinesh
R. Desai
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Chairman
and Chief
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Executive
Officer
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(Principal
Executive Officer)
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By:
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/s/
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STEPHEN
C. DONNELLY
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Stephen
C. Donnelly
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Chief
Financial Officer
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(Principal
Financial Officer)
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Date:
July 14, 2008
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