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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from ________ to ________
Commission File No. 000-20688
DATATEC SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
- ----------------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
23 Madison Road, Fairfield NJ 07004
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 808-4000
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.001 par value Nasdaq National Market System
Preference Share Purchase Rights Nasdaq National Market System
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates at June 30, 2000 was approximately $178,926,000. For purposes of
computing such market value, the Registrant has deemed as affiliates only
executive officers, directors and their affiliates.
The total number of shares of Common Stock of the Registrant outstanding at June
30, 2000 was 33,492,303.
1
TABLE OF CONTENTS
Part I Page #
- ------ ------
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 21
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure 46
Part III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management 55
Item 13. Certain Relationships and Related Transactions 58
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports 59
on Form 8-K
2
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements. Factors that may cause such differences include, but
are not limited to, competition, technological advances and availability of
managerial personnel. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Datatec Systems, Inc. undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
PART I
Item 1. Business
The Company
Datatec Systems, Inc. and its subsidiaries (the "Company" or "Datatec") are in
the business of providing rapid and accurate technology deployment services and
licensing software tools, designed to accelerate the delivery of complex
Information Technology (IT) solutions for Technology Providers and Enterprises.
The Company markets its services primarily to large Original Equipment
Manufacturers (OEM's), systems integrators, independent software vendors,
telecommunications carriers and service providers (collectively, "Technology
Providers") as well as to a select number of Fortune 2000 customers in the
United States and Canada. The Company's deployment services include the
following: (i) the process of "customizing" internetworking devices such as
routers and switches, and computing devices such as servers and workstations to
meet the specific needs of the user (hereinafter referred to as
"configuration"), (ii) the process of integrating these hardware devices as well
as integrating operational and application software on a network to ensure they
are compatible with the topology of the network and all legacy systems
(hereinafter referred to as "integration"), and (iii) the physical process of
installing technology on networks (hereinafter referred to as "installation").
The Company licenses its software tools through its subsidiary, eDeploy.com,
Inc., and has established a new subsidiary, Global Integration Services, for its
proposed entry into Europe.
The Company utilizes web-enabled implementation tools that were
internally developed to provide its deployment services. These, together with
its proprietary processes, allow the Company to rapidly and efficiently deliver
high quality and cost effective large-scale technology deployment solutions to
its clients, which it does primarily on a fixed time/fixed cost basis. The
components of the Company's implementation model are made up of a combination of
people, process and tools, that include:
o The utilization of a web-based software tool, eDeploy(TM), that
provides pricing, assessment, design and project management
automation and enhances the speed and accuracy of the deployment
process. The automation also significantly reduces the labor costs
and technical skills required to accomplish most complex deployment
projects.
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o The utilization of Integrators Workbench and Router Central process
and software that provide automation and mass customization in the
configuration / integration of computing and internetworking devices
as well as application and operational software.
o The Company carries out most of its complex integration and
configuration process within five (5) Configuration Centers situated
throughout the United States and one (1) in Canada. By conducting
these activities at the Company's staging centers, and utilizing,
where applicable, the Company's software tools, the Company is able
to prepare and rollout project components so that they arrive at a
customer site in a "plug and play" state.
o A field deployment force capable of delivering all types of complex
technologies due to the "plug and play" nature of the Company's
"configuration/integration" process.
The Company operates out of 18 offices and has a field deployment
team of approximately 334 people, allowing it to conduct multiple, simultaneous
large-scale deployments across the United States and Canada. The Company's
deployment capabilities further enable Technology Providers to rapidly increase
the "absorption" of their products in the marketplace onto what are increasingly
complex networks and "IT" environments.
The Company is incorporated in Delaware and its stock is traded on the Nasdaq
National Market System under the symbol "DATC". The Company maintains its
executive offices at 23 Madison Road, Fairfield, New Jersey 07004. Its telephone
number is (973) 808-4000. The Company's website can be located at
www.datatec.com. The Company's subsidiary, eDeploy.com, Inc. maintains its
headquarters at 12345 W. Alameda Parkway, Suite 208, Lakewood, Colorado 80228.
Its telephone number is (303) 987-3499. eDeploy.com's website can be located at
www.eDeploy.com.
Datatec's Deployment Solutions
Technology Providers need to improve the "absorption" or "time to
market" of their products to maximize return on sales, as well as return on
product development costs. In addition, end-users need to maximize their return
on technology investments especially when one considers the rapid obsolescence
factor, which aggravates returns if the time to deploy new technology is not
minimized. The speed and accuracy of deployment is a critical factor in
improving these fundamental ratios.
The dynamics that are creating an increasing demand for the
Company's software-enabled deployment offerings include the following:
o Independent analysts suggest that the global configuration and deployment
market is valued at approximately $70 billion and growing at approximately
17% per annum. This market is highly fragmented and to the best of the
Company's knowledge there are no other companies that have focused their
entire business model on this market space. The need for a company devoted
to providing alternative solutions for deployment services becomes clear
when one considers that despite the speed of technology innovation over
the past decade, the way in which technology is deployed has remained
relatively constant over the same period. It is therefore not surprising
that deployment has become a bottleneck and a major restraint to growth
for Technology Providers.
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o Due to shorter product life cycles, hardware manufacturers and software
vendors alike must find ways to rapidly bring their products to market or
face losing market share. The Company has shown a capability of reducing
the time to deploy by between 40% and 80%.
o By significantly reducing the "time to market", technology providers and
users benefit from improved return on sales and return on investment,
respectively.
o In order to maintain a competitive edge in the market, corporations are
constantly looking to become more efficient and technology has become a
major source of competitive advantage. Speed of deployment has therefore
become vital.
o Due to the utilization of software tools, error rates are significantly
reduced, thereby increasing customer satisfaction and efficiency.
o Technologies are becoming increasingly complex, which makes them extremely
difficult and costly to the implement, especially without tools and
methodologies. Given the downsizing of many IT departments and their
preoccupation with core operations, companies are increasingly looking to
outsource the deployment of new technologies.
o Technology companies are today launching new products at an ever faster
rate. The problem is that due to inadequate level of skilled resources
there is a lack of capacity to assimilate these new products rapidly in
the market. The skill gap that exists is widening every year and so
without automation, the problem will persist. The Company's software tools
bring a level of automation to the process that reduces the level of
skills required to perform complex technology implementations. The Company
can therefore recruit from a less costly and larger pool of resources.
eDeploy.com
The eDeploy(TM) solution is a compelling and unique mix of flexible
tools, project logistics, process mapping/automation and connected, virtual
"communities" of users and participants. Leveraging the core benefits of new-era
IT applications and platforms, the solution improved process, controls,
monitoring and best practices to complex IT deployments thereby significantly
increasing efficiencies and reducing costs.
The application platform is designed to be open and standards-based,
and can easily integrate with a wide variety of other existing business systems
including back office applications, management and support platforms and process
automation tools. The eDeploy(TM) solution is generally accessed via an Internet
web browser connection.
At its highest level, eDeploy(TM) has been grouped into five
discreet application sets that can be combined to provide workflow continuum and
to more effectively integrate with an organization's existing platforms and
applications solutions. Each application module and associated tool, leverages
related project information and integrates seamlessly with one another. The five
modules that make up eDeploy(TM) are:
o Bid & Proposal Engine
In practice, the Bid and Proposal Engine prompts users through a series of
simple instructions that feed the project assessment tools. The user is left
with a detailed proposal, scope of work, work
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estimates, pricing and contract draft. The Statement of Work ("SOW") and other
deliverables provide a digital "baseline" for other eDeploy(TM) modules. This
application has proven to reduce sales lead times by up to 90% and truly
leverages an organization's professional resources by maximizing their ability
to quickly and accurately respond to complex opportunity assessment.
o Preparation & Design
This module organizes the collection of data from site and equipment surveys,
creates a gap analysis and drives to a fully designed and ready to implement
project plan. This module provides the user with tools to feed project and
equipment specific configuration files that construct the base for its
automated configuration solution sets. Once confirmed, this module provides a
backdrop for access to other eDeploy modules that organize a project. The
module provides a base information flow for project contacts, site
information, schedules and begins the project manual process. This approach
institutionalizes the proven best practices for successful project
fulfillment, and feeds other modules for project deployment steps.
o Configuration & Integration (Integrators' Workbench)
eDeploy.com's automated configuration tools load software on any manner of
desktop-based servers, PCs, applications or operating systems as well as
complex internetworking/multiservices equipment including routers, switches
and IP telephony devices. These automated tools reduce configuration time by
50% to 90% compared with other manual and semi-automatic approaches and
prepare these devices for easy to complete, plug and play installations. These
tools are available through the eDeploy.com web-based Extranet site and can be
used either onsite or via multi-disciplinary configuration centers.
o Deployment Management
This module builds the base for managing information flow for equipment
shipments, completion schedules, configuration files, quality tracking and
related customer satisfaction statistics. eDeploy.com has an innovative
"dashboard" report that consolidates all the many steps and report formats
into a single "at a glance" report for the project managers to assess project
progress.
o Transition & Maintenance
Once deployed, this module organizes as-built drawings and digitized images
and maintenance reports, installed equipment serial numbers, and creates the
configuration database for future reference. eDeploy.com provides on-line
product registration information, and becomes a source for on-site
configuration rebuilds for update or maintenance purposes.
In the hands of any Technology Provider, including the Company, the software
tools provide support in their endeavors to:
o Shorten time to market for new product introductions;
o Create a fast unified, efficient and accurate end-user pricing methodology;
o Obtain real time, secure feedback from its channel;
o Provide their channel opportunities to propose and bid on leads with minimal
resource and at high speed; o Provide the channel with a well proven and an
implementation process that provides for "best practices".
Other benefits provided by eDeploy(TM) to technology providers, as well as
end-users, include the following:
6
o Planning, monitoring and executing complex technology implementations. The
integrated applications allow users to better manage the myriad of
personnel issues, customer needs, and logistics that all need to be
properly coordinated to ensure success.
o Reduction in labor costs and increased productivity and efficiency.
Typical time reductions achieved by using software-enabled process range
between 40% and 80%, while efficiency improvements can reach over 200%.
o The ability to leverage technical skills. Highly complex technical
solutions can be deployed using less technical people. This is of
particular importance in the IT market, where the increasing demand for
experienced highly skilled engineers is placing constraints on the
availability of such resources.
o A higher degree of accuracy in the deployment process increases customer
satisfaction through a combination of process, tools and people.
Technologies can be more accurately and speedily deployed thereby
increasing customer satisfaction. In a recent project, the utilization of
eDeploy(TM) was the major reason for increasing customer satisfaction from
a "D" to a "B" in less than three months.
Datatec's Software-Enabled Service Offerings
The Company has created the following distinct branded solutions
targeted towards specific market needs: (i) Network Device Deployment; (ii)
Computing Device Deployment; (iii) Technology Refresh & Migration; and (iv) Site
Readiness & Infrastructure.
Network Device Deployment ("NDD"). NDD is the software-enabled
process for staging, configuring, integrating and installing new communication
devices such as routers and switches. Client's can select to outsource one or
all of the above functions. They can also choose to carry out the first three
processes within their own manufacturing, staging or integration facilities
using Integrator's Workbench. In the past year, the Company believes it has
moved this offering from the proof of concept stage to an offering with strong
demand and general market acceptance. NDD is the primary solution supporting the
Company's relationship with Cisco Systems, Inc. ("Cisco").
Computing Device Deployment ("CDD"). CDD is the software-enabled
process for staging, configuring, integrating and installing new computing
devices such as servers, workstations and laptops. Clients ship products to one
of the Company's configuration centers for processing. However, before the
deployment process can commence, significant pre-deployment time is spent in
engineering, designing, software customization and data collection to ensure
rapid and error free deployment. The Company has identified CDD as a major
opportunity for growth.
Technology Refresh & Migration ("TRM"). TRM projects apply the
Company's methodology and configuration automation tools to decrease the time
and complexity of upgrading a clients existing IT infrastructure and equipment
on-site. Typical TRM projects may include one or in some cases all of the
following:
o Migration to a new desktop operating system;
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o Migration to a new server system;
o Rollout of a new or upgraded application suite;
o Introducing Internet services; and
o Upgrading the network infrastructure.
Site Readiness and Infrastructure ("SRI"). A major technology migration or
upgrade within an organization often first requires an overhaul of the Company's
physical infrastructure. The Company has significant experience and expertise in
ensuring a site is fully capable of accepting new technology. Infrastructure
improvement could include one or all the following:
o Data Communications Cabling;
o Telecommunications Cabling;
o Power Cabling; and
o Physical/Structural Pathway Modification.
One primary reason why organizations choose the Company for their
deployment is because it can carry out all the attendant functions to implement
technology without recourse to sub-contractors. The same project team
responsible for infrastructure is capable of installing routers, workstations
and servers as well as migrating operating systems within the most complex
enterprise environments.
Strategy
The Company's mission is to see its processes and methodologies
which are encapsulated in its software tools become the defacto standard for
technology deployment. The strategy is to achieve this by providing software
enabled services as well as licensing software to large Technology Providers and
certain Fortune 2000 companies. In support of this strategy the Company is
engaged in the following activities:
o Continuing to invest in the research and development of automated tools
through its separate subsidiary, eDeploy.com, Inc.;
o Creating strong long-term relationships with Technology Providers, thereby
providing a source for repeatable business;
o Engaging its salesforce to support the selling efforts of its strategic
partners like Cisco, IBM, Hewlett Packard and Cabletron;
o Supplementing its organic growth with strategic acquisitions where it can
leverage its tools and processes and methodology to significantly enhance
the gross margins and quality of the acquired company's revenues and expand
its geographic coverage.
8
Sales and Marketing
The Company's marketing efforts are focused towards projects
requiring more complex solutions from a technical, geographic dispersion, or
time sensitive point of view. In the Company's experience, more complex,
multi-site deployments have significantly less competitive pressures, and
generate higher proposal close rates and gross margins than deployments with
less complexity and/or less geographic dispersion.
Over the past several years, the Company's sales force of 30 account
managers worked directly with large Enterprise Customers and built a solid
business foundation on its ability to provide rapid technology deployment
services. The Company's service offerings have improved the return on investment
for these enterprise customers by providing People, Process and Tools to greatly
reduce the time for deployment projects with quality, speed, accuracy and value.
Given the growth of the internet economy, the Company has over the
past several years focused on creating relationships with OEM (original
equipment manufactures) and SP (Service Providers). These market segments are in
need of resources and processes to facilitate the assimilation of new
technologies in their respective market space. By accelerating the absorption of
technologies, the Company improves the return on sales for these partners.
This strategy has helped establish a new identity for the Company as
it forms significant relationships with global OEMs and major integrators. These
relationships have in turn provided additional leverage for access and identity
in the market space that heretofore the Company's sales force was unable to
penetrate.
Clients
The Company performs deployment services directly to a variety of
enterprise clients across a broad range of industries. The Company also delivers
its services to end-users through Technology Providers that utilize the
Company's deployment services on a project-by-project basis. The Company's
clients include:
Enterprise - Direct Technology Providers - Indirect
- ------------------- -------------------------------
CitiGroup, Inc. Automated Data Processing, Inc.
Federated Department Stores, Inc. Bell Atlantic Network Integration, Inc.
Lowe's Companies, Inc. Cisco Systems, Inc.
Office Depot, Inc. Computer Sciences Corporation
Starbucks Corporation Diebold Incorporated
State Farm Mutual Automobile Electronic Data Systems Corporation
Insurance Company
The Chubb Corporation IBM Global Services
The Home Depot, Inc. MCI Worldcom, Inc.
Toys "R" Us, Inc. Qwest Communications International Inc.
Walgreen Co.
During each of the past three fiscal years, revenues from the
Company's services to a limited number of customers have accounted for a
substantial percentage of the Company's total revenues. For the years ended
April 30, 2000, 1999 and 1998, the Company's 15 largest customers accounted for
approximately 73%, 57%, and 52% of the Company's revenues. For the year ended
April 30, 2000, Lowe's Companies, Inc. accounted for approximately 19% of the
Company's revenues. For
9
the year ended April 30, 1999, Cisco Systems, Inc. accounted for approximately
10% of the Company's revenues. For the year ended April 30, 1998, there were no
customers who accounted for more then 10% of the Company's revenues. This
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter-to-quarter, based on the requirements of its customers
and the timing of delivery of services.
Competition
The Company competes with a number of other companies involved in
the design, installation, integration and servicing of computer networking
technologies, as well as companies that develop software tools to automate the
technology implementation process. The IT deployment market is highly fragmented
and characterized by a small number of very large organizations that carry out a
significant amount of deployment and a large number of small companies that in
turn carry out small amounts of deployment. In addition to direct competition,
the Company faces indirect competition from its existing customers, many of whom
internally design, integrate and deploy their own technologies. The Company,
however, knows of no other company that offers rapid IT deployment services or
software tools designed to support the delivery of complex IT solutions as their
primary business focus.
Intellectual Property
The Company relies on a combination of trade secrets, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its software developers, and when
obtainable, enters into non-disclosure agreements with its suppliers,
distributors and others so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will prove sufficient to deter misappropriation of the
Company's technologies or that the Company's competitors will not independently
develop non-infringing technologies that are substantially similar to or
superior to the Company's technology.
Employees
As of April 30, 2000, the Company had approximately 720 full-time
employees. Of these full-time employees, approximately 284 are employed under
contracts with the International Brotherhood of Electrical Workers and the
International Brotherhood of Electrical Workers Local 1430.
The success of the Company depends in large part upon its ability to
attract and retain qualified employees, particularly senior management, systems
engineering personnel and sales personnel. The competition for such employees is
intense. There can be no assurance that the Company will be successful in
attracting or retaining any employees. Any failure by the Company to retain
qualified senior management, systems engineering personnel and sales personnel
could materially adversely affect the Company's business, operating results, and
financial condition. The Company believes its relationship with its employees is
satisfactory.
10
Item 2. Properties
The Company's corporate headquarters is located in Fairfield, New
Jersey. The headquarters leased office space of 36,000 square feet also houses
the Company's New York/New Jersey office as well as one of the Company's six
configuration centers. In addition to its headquarters building, the Company
leases throughout the United States approximately 252,000 square feet of space
in 16 locations for its sales and field operations and configuration centers.
The Company also leases an aggregate of approximately 7,000 square feet of space
in one location in Canada.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings which
individually or in the aggregate, is believed to be material to the Company's
business.
11
Item 4. Submission of Matters to a Vote of Security Holders
On April 18, 2000, the Company held the Annual Meeting of
Shareholders (the "Meeting"), whereby the shareholders approved (i) the election
of six (6) directors; (ii) the approval of the adoption of the Company's 2000
Stock Option Plan; and (iii) the ratification of the appointment of Arthur
Andersen LLP as the Company's independent public accountants for the fiscal year
ending April 30, 2000. The vote on such matters was as follows:
1. Election of Directors
Total Vote
Total Vote of Each Withheld From
Nominee Each Nominee
Isaac Gaon 24,983,359 781,725
William J. Adams, Jr. 25,699,691 65,393
Thomas Berry 25,699,781 65,303
Frank P. Brosens 25,700,491 64,593
Robert Friedman 25,484,030 281,054
David Milch 25,700,291 64,793
2. The approval of the Company's 2000 Stock Option Plan:
For 7,314,117
Against 1,321,711
Abstaining 72,842
Broker Non-Votes 17,056,414
3. Appointment of Arthur Andersen LLP as the Company's independent public
accountants:
For 25,692,401
Against 38,648
Abstaining 34,035
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently traded on the Nasdaq
National Market System ("Nasdaq") under the symbol "DATC". The Company's Common
Stock commenced listing on the Nasdaq Smallcap Market on May 3, 1994. The
following table sets forth the high and low sale prices on the Nasdaq Smallcap
Market for the periods indicated.
High Low
---- ---
May 1, 1998 - July 31, 1998................... $6 3/8 $3 13/16
August 1, 1998 - October 31, 1998............. $4 3/16 $1 7/8
November 1, 1998 - January 31, 1999.......... $5 3/16 $2 9/16
February 1, 1999 - April 30, 1999............. $41/2 $21/4
May 1, 1999 - July 31, 1999................... $4 1/16 $2 9/32
August 1, 1999 - October 31, 1999............. $3 13/16 $2 9/32
November 1, 1999 - January 31, 2000.......... $9 5/8 $2 1/16
February 1, 2000 - April 30, 2000............. $19 $4 11/16
On June 30, 2000, the closing sale price for the Company's Common
Stock as reported on the Nasdaq Smallcap Market was $5 5/8. As of June 30,
2000, there were approximately 201 holders of record of the Company's Common
Stock.
The Company has not paid any cash dividends on its Common Stock
since its inception, other than distributions to shareholders in amounts
sufficient to reimburse Datatec Industries, Inc. shareholders for Federal (and
some state) income tax liabilities arising from Datatec Industries, Inc. former
status as an "S" corporation. The Company currently intends to retain any
earnings for use in the business and does not anticipate paying any dividends to
its shareholders in the foreseeable future. The Company's loan agreements with
its lender include a restriction prohibiting the payment of dividends.
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Item 6. Selected Financial Data
The following table sets forth the selected financial data of the
Company for, and at the end of the years ended April 30, 1996, 1997, 1998, 1999
and 2000.
The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto appearing elsewhere herein.
Year Ended
April 30,
(in thousands, except share and per share data)
Statement of Operations Data: 1996 1997 1998 1999 2000
----------- ----------- ------------- ------------- ---------
Revenues $ 59,169 $59,481 $ 76,804 $93,751 $ 95,148
Operating income (loss) (4,248) 1,538 517 1,662 47
Income (loss) from continuing operations (5,149) 127 (1,218) (191) (1,633)
Discontinued operations (8,046) (5,662) (2,768) (315) --
Extraordinary item (see change) (223) (a) -- -- -- --
Net loss $(13,418) $ (5,535) $(3,986) $ (506) $ (1,633)
============ ============= =============== =============== ============
Income (loss) per share - Basic and Diluted:
Income (loss) from continuing operations $ (.28) $ (.09) $ (.05) $ (.01) $ (.05)
Discontinued operations (.44) (.27) (.10) (.01) --
Extraordinary item (.01) -- -- -- --
------------ ------------- --------------- --------------- ------------
Net loss per share $ (.73) $ (.36) $ (.15) $ (.02) $ (.05)
============ ============= =============== =============== ============
Average common and common equivalent shares
- Basic and Diluted 18,354,000 21,151,000 26,451,000 29,517,000 31,541,000
============ ============= =============== =============== ============
(a) Write off of unamortized deferred financing fees as a result of the early
extinguishment of debt.
April 30,
---------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $(7,664) $(2,957) $ 1,022 $ 2,297 $16,158
Total assets 23,494 27,804 37,813 40,603 55,062
Long-term debt 2,338 4,751 2,415 607 226
Total shareholders' equity (deficit) (3,706) (1,750) 10,468 14,729 21,045
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act. Such statements reflect the
Company's current views with respect to future events and financial performance
and are subject to certain risks, uncertainties, and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated in such forward-looking statements.
Overview
The Company is in the business of providing rapid and accurate
technology deployment services and licensing software tools to support
Technology Providers and Enterprises in the delivery of complex IT solutions.
Utilizing six regional staging and configuration centers and its own field
deployment team of approximately 334 people operating out of 18 offices, the
Company conducts multiple simultaneous large scale deployments for organizations
throughout the United States and Canada. The Company believes its consistent,
rapid deployment model enables its Enterprise customers to accelerate the
assimilation of networking technologies into their organizations and allows its
Technology Providers to enhance the "absorption" of their products in the
marketplace.
The Company was established in 1975 as a regional distributor of
data communications equipment. Through fiscal 1991, the Company expanded
geographically by opening 14 new offices within the United States. Beginning in
1991, the Company began redirecting its efforts to become a systems integrator
providing complete computer networking systems and integration services. In
October 1994, the Company acquired Signatel Ltd. ("Signatel"), a Canadian
systems integrator, which expanded the Company's geographic scope to include
four offices in Canada.
Over the course of fiscal 1995 and early fiscal 1996, the Company
continued to encounter, and was greatly impacted by, the trend of declining
profitability in data communications equipment sales. As a result, the Company
decided to accelerate the process of transitioning from the business of
distributing data communications equipment to its current business of providing
deployment services. In April 1996, the Company acquired Computer-Aided Software
Integration, Inc. ("CASI"), the developer of the Integrator's Workbench - a
suite of software tools to aid in the automation of configuration and
integration. In July 1996, the Company acquired HH Communications, Inc. ("HH"),
a systems integrator with an expertise in routing technologies. In October 1996,
the Company acquired Datatec Industries, Inc., a systems integrator with a focus
on installation services.
Since the acquisition of Datatec Industries, Inc. in October 1996,
the Company has transitioned its business to providing rapid deployment
services. In June 1997, the Company discontinued its data communications
equipment distribution business.
During fiscal 1999 the Company began expanding its development of
software tools to incorporate several new applications in addition to its
Integrators Workbench and has incorporated them into a new product, eDeploy(TM).
As previously mentioned in Item 1., these applications include: Bid and
Proposal, Preparation and Design, Configuration and Integration,
15
Deployment Management and Transition and Maintenance. In light of potential
conflicts between the licensing of eDeploy(TM) and providing deployment
services, the Company merged the activities of developing, marketing, selling
and managing the licensing of its software into its CASI subsidiary. The Company
then changed the name of CASI to eDeploy.com, Inc (eDeploy.com).
The Company's deployment services are generally provided at a fixed
contract price pursuant to purchase orders or other written agreements with its
customers.
Revenues from deployment services, including configuration,
integration and installation under short-term workorders are recognized as the
services are provided. On long-term deployment service contracts the Company
recognizes revenue on a percentage of completion basis. The Company recognizes
revenue from licensing its software in accordance with Statement of Position
97-2 "Software Revenue Recognition". The Company also recognizes revenue as an
Application Service Provider (ASP). Under this scenario, the Company does not
license the software, but provides access to the software that is being hosted
by eDeploy.com. For this access, eDeploy.com bills its customers and recognizes
this revenue over the period of access.
The Company's cost of deployment services consists of three main
categories: labor, materials, and project expenses. Labor consists of salaries
and benefits of the Company's field installation force as well as staging and
configuration personnel. The materials category includes all materials used in
the installation process such as connectors, wall plates, conduit, and data and
electrical cable. Project expenses include travel and living expenses for the
installation teams, equipment rentals and other costs that are not labor related
or materials.
The Company capitalizes certain computer software costs incurred by
eDeploy.com, Inc. in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". The Company also capitalizes certain costs of computer
software developed or obtained for internal use in accordance with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". These costs are amortized over a period not to
exceed three years.
As of April 30, 2000, the Company has net operating loss
carryforwards for Federal tax purposes of approximately $16 million. United
States tax rules limit the amount of net operating loss that companies may
utilize in any one-year in the event of cumulative changes in ownership over a
three-year period in excess of 50%. The Company has completed several financings
since the effective date of these rules and does not believe that its ability to
utilize its net operating loss carryforwards is limited as of April 30, 2000,
although ownership changes in future periods may pose limitations of the
Company's use of net operating loss carryforwards. These carryforwards are
subject to review and possible adjustment by the Internal Revenue Service.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere herein.
16
Results of Operations
Comparison of Fiscal Years Ended April 30, 2000 and 1999
Revenues. Revenues for the year ended April 30, 2000 were $95.1
million compared to $93.8 million for the year ended April 30, 1999,
representing an increase of 1.4%. Deployment Services revenues increased by less
than 1% from $93.8 million in 1999 to $94.1 million in 2000. Growth in revenue
was negatively impacted by customer Y2k concerns and the associated "lock
downs", as well as a shift in the Company's sales/marketing strategy. This
shift, has increased the level of focus on the indirect sale. Revenues from
Technology Providers increased 22.5% from $19.8 million in 1999 to $24.2 million
in 2000. Revenues from Enterprise customers decreased by 5.5% from $74.0 million
in 1999 to $69.9 million in 2000. eDeploy.com revenue increased from $0 in 1999
to $1.1 million in 2000. These revenues represent ASP access and other fees.
Gross profit. Gross profit for the year ended April 30, 2000 was
$34.8 million compared to $32.8 million for the year ended April 30, 1999. Gross
profit percentage was 36.5% for the year ended April 30, 2000 compared to 35.0%
for the year ended April 30, 1999. Deployment Services cost of revenues
decreased by 1% from $61.0 million in 1999 to $60.4 million in 2000. Gross
profit as a percentage of sales increased from 34.9% in 1999 to 35.7% in 2000.
The improved gross profit is the result of several factors, including improved
information systems for project management and the termination of certain low
margin customers at the end of 1999. All costs and expenses of eDeploy are
reflected as selling, general and administrative.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 2000 were $34.7 million
compared to $31.1 million for the year ended April 30, 1999, representing an
increase of 11.7%. As a percentage of revenues, selling, general and
administrative expenses represented 36.5% for the year ended April 30, 2000
compared to 33.1% for the year ended April 30, 1999. Deployment Services
selling, general and administrative expenses increased by 6.1% from $29.8
million in 1999 to $31.7 million in 2000 and as a percentage of revenues,
increased from 31.8% in 1999 to 33.7% in 2000. The increase in selling, general
and administrative expenses in absolute dollars is primarily due to increased
facility costs, salary and benefit costs and one time travel related costs.
eDeploy.com selling, general and administrative expenses increased by 144% from
$1.3 million in 1999 to $3.1 million in 2000. The increase is the result of
eDeploy.com's growth and emergence in 2000 as a stand-alone company. Increases
in salary and benefits were the primary contributors to the increase as
eDeploy.com builds out its infrastructure to develop, market and manage the
licensing of its software.
Interest expense. Interest expense for the year ended April 30, 2000
was $1.7 million, compared to $1.9 million for the year ended April 30, 1999.
The decrease is primarily attributable to reduced average debt balances for the
year.
Income Taxes. A valuation allowance has been provided to offset
deferred tax assets as realization is presently not more likely than not.
Comparison of Fiscal Years Ended April 30, 1999 and 1998
17
Revenues. Revenues for the year ended April 30, 1999 were $93.8
million compared to $76.8 million for the year ended April 30, 1998,
representing an increase of 22.1%. Deployment Services revenues increased by
23.9% from $75.7 million in 1998 to $93.8 million in 1999. The Company has seen
increased demand for its services from both its direct Enterprise clients and
its indirect Technology Provider clients, including its strategic partners.
Revenues from the Company's indirect clients increased by 109%, while revenues
to direct Enterprise clients increased by 9%. Over the past two years the
Company has devoted significant efforts to developing strategic relationships
with Technology Providers. eDeploy.com revenue was $0 in 1999 compared to $1.1
million in 1998. In 1998, the Company licensed it Integrators Workbench Product
Series(TM) software to one customer for $1.1million.
Gross profit. Gross profit for the year ended April 30, 1999 was
$32.8 million compared to $29.6 million for the year ended April 30, 1998. Gross
profit percentage was 35.0% for the year ended April 30, 1999 compared to 38.5%
for the year ended April 30, 1998. Deployment Services cost of revenue increased
by 33.5% from $45.7 million in 1998 to $61.0 million in 1999. Deployment
Services gross profits as a percentage of sales decreased from 37.6% in 1998 to
34.9% in 1999. The gross profit for the year was negatively impacted by lower
than anticipated gross margins in the third quarter. Gross profit for the third
quarter of 1999 was 31% compared to 40% for the third quarter of 1998. The third
quarter gross profit in fiscal 1999 was impacted by lower than anticipated
revenue volume in the quarter and project management control issues with a
couple of major projects.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 1999 were $31.1 million
compared to $30.3 million for the year ended April 30, 1998, representing and
increase of 2.6%. As a percentage of revenues, selling, general and
administrative expenses were 33.1% for the year ended April 30, 1999 and 39.5%
for the year ended April 30, 1998. Deployment Services selling general and
administrative expenses increased by 2.8% from $29.0 million in 1998 to $29.8
million. eDeploy.com selling, general and administrative expenses were constant
at $1.3 million in 1998 and 1999.
Reversal of reserves deemed unnecessary. During the year ended April
30, 1998, the Company, as a result of assessing its previous history related to
sales tax audit adjustments, reversed approximately $1.2 million of sales tax
reserves it no longer deemed necessary.
Interest expense. Interest expense for the year ended April 30, 1999
was $1.9 million compared to $2.1 million for the year ended April 30, 1998. The
decrease is the result of lower average debt outstanding. Non-cash interest
expense of $250,000 was recognized in 1998 related to the accretion of the
discount on certain debt securities.
Income taxes. The income tax benefit of $400,000 in 1998 relates to
the Company's expected ability to realize the benefits of net operating loss
carryforwards.
Backlog
Backlog for the Company's services as of July 1, 2000 and July 1,
1999 totaled $59.0 million. Backlog consists of purchase orders and written
agreements with customers for which a customer has scheduled the provision of
services within the next 12 months. Orders included in backlog may be canceled
or rescheduled by customers without penalty. A variety of conditions,
18
both specific to the individual customer and generally affecting the customer's
industry, may cause customers to cancel, reduce or delay orders that were
previously made or anticipated. The Company cannot assure the timely replacement
of canceled, delayed or reduced orders. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could
materially adversely affect the Company's business, financial condition, and
results of operations. Backlog should not be relied upon as indicative of the
Company's revenues for any future period.
Liquidity and Capital Resources
Cash and cash equivalents at April 30, 2000 were $10,077,000
compared to $234,000 as of April 30, 1999. The increase in cash represents net
proceeds from certain financing activities during the year.
During fiscal 2000, cash used by operations was $4,502,000 compared
to 1999 cash usage of $460,000. Cash used by operations funded increases in
receivables, inventory, and software development. During the year receivables
increased by $3.2 million, resulting from an increase in days sales outstanding
from 58 to 63 days as well as an increase of $2.5 million attributable to
revenue earned under percentage of completion accounting that had not been
billed. During the year, the value of projects where the Company is using
percentage of completion increased by 80%. Inventory increased by $1.9 million
to $5.1 million as of April 30, 2000. The increase has two components, the first
was planned, and the second was not. In the first case, in working with its key
suppliers the Company was able to secure price concessions and extended terms
for requisitioning certain materials ahead of schedule. These materials are the
type of materials used in the Deployment Services business everyday. The second
factor, resulting in increased inventory levels, was materials purchased for a
certain project scheduled for deployment in the fourth quarter of 2000 that was
delayed. The last component of cash used in operations is the cash used to fund
capitalized software development costs. Capitalized software development costs
increased by $2.2 million for the year ending April 30, 2000. These capitalized
costs relate both to the development effort of eDeploy(TM) as well as software
developed for internal use.
Cash used for investing activities during 2000 was $2.3 million
compared to $1.3 million in 1999. During the year the Company continued to
upgrade its internal computing and communications environment, to improve
operational efficiencies as well as execute its year 2000 compliance plan.
Cash provided by financing activities for the year ended April 30,
2000 was $16.6 million compared to $1.7 million for the year ended April 30,
1999. During fiscal 2000, the Company issued 2.5 million shares of common stock,
as a result of the exercise of warrants, stock options, and pursuant to the
Company's Employee Stock Purchase Plan. Net proceeds from these issuances was
$8.0 million. In April 2000, the Company's subsidiary, eDeploy.com entered into
a Preferred Stock Purchase Agreement with Cisco Systems, Inc. Net proceeds from
this transaction were $9.6 million. The investment by Cisco Systems, Inc. was in
Preferred Stock of the Company's subsidiary, accordingly, the investment has
been reflected as minority interest in the accompanying Consolidated Financial
Statements. (See note 8, to Consolidated Financial Statements.) In 1999, the
Company completed two private equity placements. During May 1998, the Company
issued 300 shares of convertible preferred stock for net proceeds of $2.3
million. During February 1999, the Company issued 533,334 shares of common stock
for
19
proceeds of $2.0 million. The Company issued approximately 230,000 shares of
common stock under its Employee Stock Purchase Plan and stock option plans for
net proceeds of $0.6 million. These cash inflows were offset by payments of
indebtedness of $3.2 million. In 1998, warrant holders exercised approximately
2.7 million warrants resulting in net proceeds to the Company of $9.7 million.
Also, in 1998, the Company issued 855,000 shares of common stock for net
proceeds of $3.1 million from private equity placements.
In March 1997, the Company replaced existing credit facilities with
a $17 million credit facility consisting of (i) a $15 million three year
revolving credit facility and (ii) a $2 million three year term loan payable in
monthly installments of principal and interest. The borrowings under the
revolving line of credit are based on a formula of 85% of eligible receivables
and 50% of eligible inventory. The revolving line of credit bears interest at
prime plus .75% and the term loan bears interest at prime plus 1.5%. As of April
30, 2000 approximately $9.9 million was outstanding under the revolving credit
facility and $0.4 million was outstanding under the term loan. The credit
facility was extended through March 2001 under its existing terms. As of April
30, 2000, the amount of additional available borrowings, as defined, was $1.0
million.
As of April 30, 2000, the Company had working capital of $16.2
million compared to working capital of $2.3 million at April 30, 1999. The
improvements in working capital are due to the financing activities during the
year.
As of April 30, 2000, the Company had net operating loss
carryforwards for income tax purposes of approximately $16 million to offset
future taxable income. Such net operating loss carryforwards expire at various
dates through 2020.
The Company believes it has adequate liquidity and resources to
sustain current operations for the next twelve-(12) months.
Inflation
In the opinion of management, inflation has not had a material
adverse effect on its results of operations.
20
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statements Schedules
Consolidated Financial Statements
Page
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets as of April 30, 1999 and 2000 . . . . . . . . .23
Consolidated Statements of Operations for the years ended April 30, 1998,
1999 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Consolidated Statements of Comprehensive Loss for the years
ended April 30, 1998, 1999 and 2000. . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Changes in Shareholders' Equity [Deficit]
for the years ended April 30, 1998, 1999 and 2000 . . . . . . . . . . . .26
Consolidated Statements of Cash Flows for the years ended
April 30, 1998, 1999 and 2000. . . . . . . . . . . . . . . . . . . . . . .27
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 28
Schedules
Schedule II - Valuation and Qualifying Accounts . . . . . . . . .46
Schedules other than the one listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the consolidated financial statements or related notes.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Datatec Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datatec Systems,
Inc. (a Delaware corporation) and subsidiaries as of April 30, 1999 and 2000 and
the related consolidated statements of operations, comprehensive loss, changes
in shareholders' equity [deficit] and cash flows for each of the three years in
the period ended April 30, 2000. These consolidated financial statements and
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Datatec Systems, Inc. and
subsidiaries as of April 30, 1999 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2000, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Roseland, New Jersey ARTHUR ANDERSEN LLP
July 17, 2000
22
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
1999 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 234,000 $10,077,000
Receivables, net (Note 3) 20,661,000 23,849,000
Inventory (Note 1) 3,252,000 5,129,000
Prepaid expenses and other current assets (Note 1) 3,308,000 1,301,000
Net assets from discontinued operations (Note 17) 447,000 --
------------- ------------
Total current assets 27,902,000 40,356,000
Property and equipment, net (Notes 1, 4 & 6) 5,200,000 5,169,000
Goodwill, net (Note 1) 3,539,000 3,102,000
Other assets (Note 1) 4,300,000 6,435,000
------------- ------------
Total assets $40,941,000 $55,062,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 5) $ 8,623,000 $ 9,070,000
Current portion of long-term debt (Note 6) 1,783,000 776,000
Accounts payable 9,943,000 9,480,000
Accrued and other liabilities 3,866,000 3,482,000
Due to related parties (Note 10) 1,390,000 1,390,000
------------- ------------
Total current liabilities 25,605,000 24,198,000
------------- ------------
Long-term debt (Note 6) 607,000 226,000
------------- ------------
Commitments and contingencies (Note 12)
Minority interest -- 9,593,000
Shareholders' equity (Notes 1, 8 & 11):
Preferred stock, $.001 par value (4,000,000 shares
authorized, 300 shares issued and 120 outstanding as of
April 30, 1999) -- --
Common stock, $.001 par value (authorized 75,000,000
Shares; issued and outstanding 30,489,000 and 30,000 33,000
33,413,000 shares as of April 30, 1999 and 2000,
respectively) (Notes 8 & 11)
Additional paid-in capital 34,317,000 42,268,000
Accumulated deficit (19,275,000) (20,908,000)
Accumulated comprehensive loss (343,000) (348,000)
------------- ------------
Total shareholders' equity 14,729,000 21,045,000
------------- ------------
Total liabilities and shareholders' equity $ 40,941,000 $ 55,062,000
============= ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
23
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
April 30,
-----------------------------------------------------
1998 1999 2000
---- ---- ----
Revenues (Note 1) $76,804,000 $93,751,000 $95,148,000
Cost of revenues 47,208,000 60,993,000 60,381,000
------------ ---------- ----------
Gross profit 29,596,000 32,758,000 34,767,000
Selling, general and administrative expenses 30,279,000 31,096,000 34,720,000
Reversal of reserves deemed unnecessary (1,200,000) -- --
------------ ---------- ----------
Operating income 517,000 1,662,000 47,000
Interest expense (Notes 5 and 6) (2,135,000) (1,853,000) (1,680,000)
------------ ---------- ----------
Loss before benefit for income taxes (1,618,000) (191,000) (1,633,000)
Benefit for income taxes (Notes 1& 9) (400,000) -- --
------------ ---------- ----------
Loss from continuing operations (1,218,000) (191,000) (1,633,000)
Discontinued operations (Note 17):
Loss from operations (2,768,000) (315,000) --
------------ ---------- ----------
Net loss $ (3,986,000) $ (506,000) $(1,633,000)
============ ========== ==========
LOSS PER SHARE - BASIC AND DILUTED (Note 2):
Loss from continuing operations $ (.05) $ (.01) $ (.05)
Discontinued operations (.10) (.01) --
------------ ---------- ----------
NET LOSS PER SHARE - BASIC AND DILUTED $ (.15) $ (.02) $ (.05)
============ ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES - BASIC AND DILUTED 26,451,000 29,517,000 31,541,000
============ ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
24
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended
April 30,
------------------------------------------------------
1998 1999 2000
---- ---- ----
Net loss ($3,986,000) ($506,000) ($1,633,000)
Other comprehensive income (loss) -
Foreign currency translation adjustment (63,000) 5,000 (5,000)
----------- --------- -----------
Comprehensive loss ($4,049,000) ($501,000) ($1,638,000)
=========== ========= ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
25
Datatec Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 8)
Additional Paid-
Preferred Stock Common Stock in Capital
Shares Dollars Shares Dollars Preferred
-----------------------------------------------------------------------------
Balance at April 30, 1997 23,661,000 $ 24,000 $ -
Exercise of warrants and options 3,860,000 4,000
Private placement offerings of common stock 855,000 1,000
Conversion of long-term debt into common 631,000
stock
Net loss
Effect of exchange rate changes
--------- --------- ---------- --------- ---------
Balance at April 30, 1998 29,007,000 29,000 -
Issuance of preferred stock (Note 8) 300 - 2,337,000
Exercise of warrants and options 40,000 -
Private placement offering of common stock 533,000 -
(Note 8)
Issuance of common stock under Employee Stock
Purchase Plan (Note 11) 190,000 -
Conversion of preferred stock into common (180) - 719,000 1,000 (1,402,000)
stock (Note 8)
Net loss
Effect of exchange rate changes
--------- --------- ---------- --------- ---------
Balance at April 30, 1999 120 30,489,000 30,000 935,000
Exercise of warrants and options 2,263,000 2,000
Issuance of common stock under Employee Stock
Purchase Plan (Note 11) 188,000 -
Conversion of preferred stock into common (120) - 473,000 1,000 (935,000)
stock (Note 8)
Net loss
Effect of exchange rate changes
--------- ---------- ---------- --------- ---------
Balance at April 30, 2000 - $ - 33,413,000 $33,000 $ -
========= ========== ========== ========= =========
Accumulated Total
Additional Paid-in Accumulated Comprehensive Shareholders'
Capital Common Deficit Loss Equity (Deficit)
---------------------------------------------------------------------------
Balance at April 30, 1997 $13,294,000 $(14,783,000) $(285,000) $ (1,750,000)
Exercise of warrants and options 11,021,000 11,025,000
Private placement offerings of common stock 3,079,000 3,080,000
Conversion of long-term debt into common 2,162,000
stock 2,162,000
Net loss (3,986,000) (3,986,000)
Effect of exchange rate changes (63,000) (63,000)
----------- ----------- --------- -----------
Balance at April 30, 1998 29,556,000 (18,769,000) (348,000) 10,468,000
Issuance of preferred stock (Note 8) 2,337,000
Exercise of warrants and options 75,000 75,000
Private placement offering of common stock 1,854,000 1,854,000
(Note 8)
Issuance of common stock under Employee Stock
Purchase Plan (Note 11) 496,000 496,000
Conversion of preferred stock into common 1,401,000 -
stock (Note 8)
Net loss (506,000) (506,000)
Effect of exchange rate changes 5,000 5,000
----------- ----------- --------- -----------
Balance at April 30, 1999 33,382,000 (19,275,000) (343,000) 14,729,000
Exercise of warrants and options 7,543,000 7,545,000
Issuance of common stock under Employee Stock
Purchase Plan (Note 11) 409,000 409,000
Conversion of preferred stock into common 934,000 -
stock (Note 8)
Net loss (1,633,000) (1,633,000)
Effect of exchange rate changes (5,000) (5,000)
----------- ----------- --------- -----------
Balance at April 30, 2000 $42,268,000 $(20,908,000) $ (348,000) $21,045,000
=========== ============ ========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
26
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
April 30,
1998 1999 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,986,000) $ (506,000) $ (1,633,000)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 2,090,000 2,723,000 3,702,000
Impairment of long-lived asset -- 315,000 --
Accretion of debt discount 250,000 -- --
Changes in operating assets and liabilities net of effects
from acquisitions
Increase in receivables, Net (6,817,000) (2,555,000) (3,188,000)
Increase in inventory (984,000) (134,000) (1,877,000)
Increase in prepaid expenses and other assets (537,000) (1,620,000) (1,106,000)
(Increase) decrease in net assets from discontinued
operations
327,000 (310,000) 447,000
Increase (decrease) in accounts payable, accrued
liabilities and other
1,093,000 1,627,000 (847,000)
---------- ---------- ----------
Net cash used in operating activities (8,564,000) (460,000) (4,502,000)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,404,000) (1,291,000) (2,256,000)
Net cash used for CASI acquisition (670,000) -- --
---------- ---------- ----------
Net cash used in investing activities (3,074,000) (1,291,000) (2,256,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments proceeds from short-term borrowings (2,749,000) (2,136,000) 447,000
Net payments of indebtedness (374,000) (1,088,000) (1,388,000)
Net proceeds from stock issuances 14,105,000 4,887,000 7,954,000
Net increase (decrease) in due to related parties (99,000) -- --
Net proceeds from preferred stock offering of subsidiary -- -- 9,593,000
---------- ---------- ----------
Net cash provided by financing activities 10,883,000 1,663,000 16,606,000
---------- ---------- ----------
Net effect of foreign currency translation on cash (63,000) 5,000 (5,000)
---------- ---------- ----------
Net increase in cash (818,000) (83,000) 9,843,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 ,135,000 317,000 234,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 317,000 $ 234,000 $10,077,000
========== ========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
27
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies:
Business--
Datatec Systems, Inc. (the "Company"), and its subsidiaries are
in the business of providing rapid and accurate technology
deployment services and licensing software tools to support
Technology Providers and Enterprises in the delivery of
complex IT solutions.
During fiscal year 2000, the Company changed the name of its CASI
subsidiary to eDeploy.com, Inc., (eDeploy.com). eDeploy.com
develops, markets and manages the licensing of its software
tools to support Technology Providers and Enterprises in the
delivery of complex IT solutions. The Company utilizes these
software tools in its delivery of complex IT solutions to its
customers. (See Note 7).
Basis of Presentation--
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of Estimates--
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Revenue Recognition--
Revenues from configuration, integration and deployment services
under short-term workorders are recognized as the services are
provided. The Company recognizes revenue utilizing percentage
of completion accounting for long-term contracts. Revisions in
estimated profits are made in the period in which the
circumstances requiring the revision become known. Provisions,
if any, are made currently for anticipated losses on
uncompleted contracts.
The Company may enter into certain contracts to sell software.
Revenue from such contracts are recognized in accordance with
Statement of Position No. 97-2, "Software Revenue
Recognition".
28
Precontract Costs--
During fiscal 1998 and 1999, precontract costs incurred in
connection with defining and clarifying technical requirements
and designing technical solutions related to executed
contracts are deferred and amortized as the services are
provided. As of April 30, 1998 and 1999, approximately
$1,810,000 and $1,622,000, respectively, of such costs are
expensed as incurred and are included in other current assets.
Commencing in fiscal year 2000, precontract costs are included
in the calculation of percentage completion accounting.
Cash and Cash Equivalents--
The Company considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment--
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed using the straight-line and declining balance
methods over the estimated useful lives or lease terms of the
related assets, whichever is shorter.
Capitalized Software Costs--
The Company capitalizes certain computer software costs, which
include product enhancements, after technological feasibility
has been established, in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". These costs are amortized using the greater of the
ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for the
product or a maximum of three years using the straight line
method beginning when the products are available for general
release to customers. Approximately $2,295,000 and $3,571,000
of net capitalized software costs are included in other assets
in the accompanying consolidated financial statements as of
April 30, 1999 and 2000, respectively. These costs relate to
the software developed by eDeploy.com (See note 7).
Amortization expense of capitalized software costs for the
years ended April 30, 1998, 1999 and 2000 was $118,000,
$133,000 and $577,000 respectively.
Goodwill--
Goodwill is amortized on a straight-line basis over 10 years.
29
Long-Lived Assets--
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets" requires, among other
things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset
may not be fully recoverable. The amount of impairment of
goodwill would be determined as part of the long-lived asset
grouping being evaluated. The Company does not believe that
any such changes have occurred.
Income Taxes--
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"). Certain
transactions are recorded in the accounts in a period
different from that in which these transactions are reported
for income tax purposes. These transactions, as well as other
temporary differences between the basis in assets and
liabilities for financial reporting and income tax purposes,
result in deferred income taxes.
Foreign Currency Translation--
The local currency of the Company's foreign subsidiary is its
functional currency. Assets and liabilities of the Company's
foreign subsidiary are translated into US dollars at the
current exchange rate. Statement of operations accounts are
translated at the average rate of exchange prevailing during
the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included as
a component of accumulated comprehensive loss included in
shareholders' equity.
Stock Based Compensation--
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") requires that an
entity account for employee stock-based compensation under a
fair value based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee
stock-based compensation arrangements using the intrinsic
value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees". The Company
continues to account for employee stock-based compensation
using the intrinsic value based method and is required to make
pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting under SFAS 123
had been applied (see Note 11).
30
Internal Use Software--
In accordance with Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1) the Company capitalizes certain costs
of computer software developed or obtained for internal use.
During the years ended April 30, 1999 and 2000, approximately
$681,000 and $1,240,000 of costs were capitalized and are
included in other assets in the accompanying balance sheet.
These costs relate to the design and installation of internal
use software developed for the Company's job costing and other
systems and will be amortized over a period not to exceed
three years. Approximately $29,000 and $351,000 of
amortization expense was incurred during the years ended April
30, 1999 and 2000 respectively. The Company has expensed those
costs, which were incurred during the preliminary, and post
implementation phases.
Comprehensive Income (Loss)--
Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income", establishes standards for
reporting and displaying of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set
of general-purpose financial statements. The components of
other comprehensive income (loss) consists primarily of
foreign currency translation adjustments.
Reclassifications --
Certain prior year amounts have been reclassified to conform to
the current year financial statement presentation.
(2) Earnings Per Share:
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128") requires the presentation of basic
earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS"). Basic EPS is calculated by dividing
income available to common shareholders by the weighted
average number of shares of common stock outstanding during
the period. Diluted EPS is calculated by dividing income
available to common shareholders by the weighted average
number of common shares outstanding for the period adjusted to
reflect potentially dilutive securities.
In accordance with SFAS 128, the following table reconciles net
loss and share amounts used to calculate basic and diluted
earnings per share:
31
1998 1999 2000
---------------------- -------------------- --------------------
Numerator:
Basic and Diluted-
Loss from continuing operations ($1,218,000) ($191,000) ($1,633,000)
Discontinued operations (2,768,000) (315,000) --
---------------------- -------------------- --------------------
Net loss - Basic and Diluted ($3,986,000) ($506,000) ($1,633,000)
====================== ==================== ====================
Denominator:
Weighted average number of common
Shares outstanding - Basic and Diluted 26,451,000 29,517,000 31,541,000
====================== ==================== ====================
Earnings per share - Basic and Diluted:
Loss from continuing operations ($0.05) ($.01) ($.05)
Discontinued operations (0.10) (.01) --
---------------------- -------------------- --------------------
Net loss ($0.15) ($.02) ($.05)
====================== ==================== ====================
In 1998, 1999 and 2000, approximately 1,642,000, 1,547,000 and
1,506,000 respectively, of outstanding options and warrants
have been excluded from the computation of diluted EPS as
their inclusion would have been anti-dilutive for those
periods.
(3) Receivables
As of April 30, receivables consist of the following --
1999 2000
---- ----
Billed accounts receivable, including unbilled amounts under
short-term completed work orders $15,591,000 $16,142,000
Revenues in excess of amounts billed under percentage of
completion accounting 5,396,000 7,943,000
Allowance for doubtful accounts (326,000) (236,000)
----------- -----------
Receivables, net $20,661,000 $23,849,000
=========== ======= ====
(4) Property and equipment:
The following is a summary of property and equipment--
April 30,
-------------------------------
1999 2000
---- ----
Equipment $ 2,225,000 $ 2,821,000
Computer equipment 5,551,000 6,830,000
Furniture, fixtures and leasehold improvements 4,268,000 4,649,000
------------ ------------
12,044,000 14,300,000
Less--Accumulated depreciation and amortization 6,844,000 9,131,000
------------ ------------
Property and equipment, net $ 5,200,000 $5,169,000
============ ============
The estimated useful lives of these assets are:
Expected Useful Lives
Equipment 5 years
Computer Equipment 3 to 5 years
Furniture, Fixtures and Leasehold improvements 7 years
32
(5) Short-term borrowings:
The Company has a revolving loan agreement that provides for
maximum borrowings of $15,000,000. Availability under the
revolving loan is calculated as the sum of 85% of eligible
accounts receivable, as defined, and 50% of the cost or
wholesale market value of eligible inventory, as defined.
Approximately $9,870,000 was outstanding as of April 30,
2000. The amount of additional available borrowings, as
defined, was $968,000 as of April 30, 2000. The revolving
loan accrues interest at the prime rate plus 0.75% (9.75% at
April 30, 2000) and matures on March 17, 2001. Although the
revolving loan agreement requires that the Company maintain
compliance with a senior debt coverage ratio, a total debt
coverage ratio and EBITDA, as defined, the lender has waived
such non-compliance at April 30, 2000.
(6) Long-Term Debt:
Long-term debt consists of the following:
April 30,
---------------------------------
1999 2000
---- ----
New Jersey EDA Note (a) $ 445,000 $ 311,000
Term note (b) 1,195,000 394,000
Capital leases 750,000 297,000
------------- -------------
Total debt 2,390,000 1,002,000
Less - current maturities (1,783,000) (776,000)
------------ -------------
Long-term debt, net of current maturities $ 607,000 $ 226,000
============ ============
(a) The Company had previously entered into a $1,320,000 loan
agreement with the New Jersey Economic Development Authority
("NJEDA"). The loan provides for monthly payments of principal
and interest through June 1, 2002. Monthly principal payments
range from $9,000 to $14,000. Interest is based on a floating
rate equal to the variable rate borne by the NJEDA Economic
Growth Bonds. As of April 30, 2000 the interest rate was 3.8%.
The loan is secured by the assets acquired with the loan
proceeds.
(b)The term note bears interest at a variable rate equal to the
prime rate plus 1.5% (10.5% at April 30, 2000) and is payable
monthly. The principal is payable in monthly installments and
matures in March 2001. The term note is collateralized by
certain assets, as defined.
The scheduled repayments of long-term debt are as follows:
2001 776,000
2002 213,000
2003 13,000
33
(7) eDeploy.com, Inc.
In April 2000, eDeploy.com entered into a Series A
Preferred Stock Purchase Agreement, an Investors Rights Agreement
(collectively the Agreements) and a Software Tool License and
Development Agreement (License) with Cisco Systems, Inc. (Cisco).
Under the Agreements, Cisco purchased 100,000 shares of eDeploy.com
Series A Mandatorily Redeemable Convertible Preferred Stock
(Preferred Stock) for $100 per share (Original Issue Price), which
amount has been recorded as minority interest in the accompanying
April 30, 2000 balance sheet. Dividends are payable quarterly at the
rate of 6% and the Preferred Stock has a liquidation preference in
an amount equal to the original issuance price per share. The holder
of the preferred stock may require eDeploy.com to redeem all or a
portion of the preferred stock at the original issuance price, plus
any accrued but unpaid dividends, at any time after 5 years from the
date of issuance.
In the event of a Buy-Out Event, as defined, eDeploy.com
shall redeem each share of preferred stock for consideration equal
to the Buy-Out Redemption Price, as defined. In the event of a
Qualified IPO, each share of preferred stock shall be automatically
converted into a number of shares of common stock of eDeploy.com
equal to the original issue price, plus all accrued but unpaid
dividends, divided by a price ranging from 80% to 60% of the
Qualified IPO Price, as defined. Also in April 2000, the Company
entered into the Exchange Agreement with Cisco, pursuant to which,
in the event of a Parent Buy-Out Event (as defined), each share of
the preferred stock will be automatically exchanged for shares of
the Company's common stock determined by dividing the original issue
price plus accrued but unpaid dividends by the lesser of $8.00,
subject to adjustment as defined, or the Parent Buy-Out
Consideration, as defined.
The License requires a license fee of $1,000,000 to be
paid in accordance with the completion of specified events, as
defined, and provides for specified offsetting re-bills and credits,
as defined. eDeploy.com will grant Cisco a perpetual, non-exclusive,
non-transferable, worldwide license for the permitted purpose, as
defined. As of April 30, 2000, no portion of the license fee has
been recognized.
In April 2000, eDeploy.com entered into an agreement
with NCR Corporation for the license of eDeploy(TM) software for a
license fee of $1,000,000. eDeploy.com will grant NCR a perpetual,
non-exclusive, non-transferable right to the use of the Products, as
defined. As of April 30, 2000, no portion of the license fee has
been recognized.
(8) Shareholders' equity:
Preferred Stock--
In May 1998, the Company issued 300 shares of Series E Cumulative
Convertible Preferred Stock. The net proceeds from this
issuance were approximately $2,350,000. In connection with the
transaction, the Company issued warrants to purchase 165,000
shares of common stock at $6.29. The Series E Cumulative
Convertible Preferred Stock is convertible into
34
common stock at the lesser of $6.29 or the average of the
closing bid prices selected by the holder for 2 days during
the 10 days immediately prior to the conversion date (the
"Floating Conversion Price"). The fair market value on the
date of grant approximated the Floating Conversion Price.
During fiscal 1999, 180 shares of the Series E Cumulative
Convertible Preferred Stock were converted into 718,860 shares
of common stock. During fiscal 2000, the remaining 120 shares
of preferred stock were converted into 473,124 shares of
common stock.
Common Stock--
During fiscal 1998, the Company, through private placement equity
offerings, issued 855,000 shares of common stock for net
proceeds of approximately $3,080,000.
In February 1999, the Company, through a private placement equity
offering, issued 533,334 shares of common stock for net
proceeds of approximately $1,854,000.
Warrants--
The following table is a summary and status of warrants issued by
the Company:
Outstanding Warrants
------------------------------------------
Number Weighted Average
of Warrants Exercise Price
----------- ---------------
April 30, 1997 4,178,150 $4.20
Exercises 2,743,290) $3.75
---------- ------
April 30, 1998 1,434,860 $5.06
Grants 165,000 $6.29
Cancellations (12,360) $3.75
---------- ------
April 30, 1999 1,587,500 $5.20
Exercises (695,000) $4.97
Cancellations (202,500) $4.99
---------- ------
April 30, 2000 690,000 $5.50
========== ======
Outstanding Warrants
---------------------------------------------
Weighted Average
Range of Exercise Prices Number Warrants Contractual Life Weighted Average
of Warrants Exercisable (in years) Exercise Price
- ------------------------- ------------- ------------- ---------------- ------------------------
$5.00 - $5.99 525,000 525,000 1.79 $5.25
>$5.99 165,000 165,000 1.91 $6.29
------------- ------------- ------------------------
Total 690,000 690,000 $5.50
============= ============= ========================
35
(9) Income Taxes:
The following are the major components of the provision (benefit)
for income taxes as of April 30, -
1998 1999 2000
---- ---- ----
Current-
Federal $ -- $ (65,000) $(555,000)
State (400,000) (12,000) (98,000)
Foreign 0 -- --
------------- ---------- ----------
(400,000) (77,000) (653,000)
------------- ---------- ----------
Deferred-
Federal -- 65,000 555,000
State -- 12,000 98,000
Foreign -- -- --
-----