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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2002
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-20688
---------------------------------
Datatec Systems, Inc.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
- --------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 Madison Road, Fairfield, NJ 07004
- -------------------------------- ----------------------------
(Address of principal executive (Zip Code)
offices)
(973) 808-4000
------------------------------------------------
Registrant's telephone number, including area code
Check 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 past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subjected to such filing requirements for the past 90
days. Yes /X/ No / /.
The number of shares of Registrant's Common Stock outstanding on July 31, 2002
was 35,688,000.
1
DATATEC SYSTEMS, INC.
FORM 10-Q
THREE MONTHS ENDED JULY 31, 2001
INDEX
-----
PART I: FINANCIAL INFORMATION
Page
Item 1: Consolidated Financial Statements
Balance Sheets at April 30, 2002 and
July 31, 2002 3
Statements of Operations for the three months ended
July 31, 2001 (as restated) and 2002 4
Statements of Comprehensive Income for the
three months ended July 31, 2001 (as restated) and 2002 5
Statements of Cash Flows for the three months ended
July 31, 2001 (as restated) and 2002 6
Notes to Unaudited Consolidated Financial Statements 7 - 10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 20
Item 3: Quantitative and Qualitative Disclosure About Market Risk 20
Item 4: Controls and Procedures 20 - 21
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 6: Exhibits and Reports on Form 8-K 22
Signature Page 23
Certifications 24-25
2
PART I - FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
DATATEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
July 31, 2002
April 30, 2002 (unaudited)
-------------- -----------
ASSETS
- ---------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 49 $ 138
Receivables, net 21,803 25,377
Inventory 3,176 3,200
Prepaid expenses and other current assets 724 727
----------- -----------
Total current assets 25,752 29,442
Property and equipment, net 3,259 3,167
Goodwill, net 2,665 2,665
Other assets 4,170 3,751
----------- -----------
TOTAL ASSETS $ 35,846 $ 39,025
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 17,464 $ 17,278
Accounts payable 7,789 10,222
Accrued and other liabilities 3,742 3,769
Subordinated secured convertible debentures, net of
unamortized discount -- 1,573
----------- ------------
Total current liabilities 28,995 32,842
----------- -----------
LONG-TERM DEBT:
Due to related parties 1,414 1,414
Capital lease obligation 2
Subordinated secured convertible debentures, net of
unamortized discount 1,457 --
----------- -----------
Total long-term debt 2,873 1,414
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value (authorized 75,000,000
shares; issued and outstanding 35,591,000 shares and
35,688,000 shares as of April 30, 2002 and July 31,
2002, respectively) 35 35
Additional paid-in capital 53,532 53,593
Accumulated deficit (49,239) (48,507)
Accumulated comprehensive loss (350) (352)
----------- -----------
Total stockholders' equity 3,978 4,769
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,846 $ 39,025
=========== ===========
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
3
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
(unaudited)
For the Three Months Ended
July 31,
-----------------------------
2001 2002
(As Restated)
------------- -------------
Revenue $ 18,062 $ 23,072
Cost of revenues 12,316 16,546
------------ ------------
Gross profit 5,746 6,526
Selling, general and administrative expenses 6,180 5,054
------------ ------------
Operating income (loss) (434) 1,472
Interest expense (582) (740)
------------ ------------
Income (loss) before minority interest (1,016) 732
Minority interest (170) --
------------ ------------
Net income (loss) ($ 1,186) $ --
============ ============
Earnings (loss) per common share - basic:
Net income (loss) per share $ (0.04) $ 0.02
============ ============
Earnings (loss) per common share - diluted:
Net income (loss) per share $ (0.04) $ 0.02
============ ============
WEIGHTED AVERAGE COMMON SHARES - BASIC 33,844,000 35,672,000
============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES - DILUTED 33,844,000 35,750,000
============ ============
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
4
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(unaudited)
For the Three Months Ended
July 31,
---------------------------------------
2001 2002
(As Restated)
------------- ---------------
Net income (loss) ($1,186) $ 732
Other comprehensive income (loss)-
Foreign currency translation adjustment 2 (2)
------- -------
Comprehensive income (loss) ($1,184) $ 730
======= =======
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
5
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
For the Three Months Ended
July 31,
-----------------------------------
2001 2002
(As Restated)
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,186) $ 732
Adjustments to reconcile net income (loss) to net cash
provided by (used) in operating activities --
Depreciation and amortization 1,229 1,013
Accretion of preferred stock discount 20 116
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,628 (3,574)
Decrease (increase) in inventory 930 (24)
Decrease (increase) in prepaid expenses and other assets 542 13
(Decrease) increase in accounts payable, accrued and
other liabilities (6,672) 2,475
------- -------
Net cash provided by (used) in operating activities (3,509) 751
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (397) (322)
Investment in software development -- (196)
------- -------
Net cash used in investing activities (397) (518)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 3,475 (186)
Net payments of indebtedness (57) (17)
Net proceeds from issuance of common stock/warrant 87 61
------- -------
Net cash provided by (used in) financing activities 3,505 (142)
------- -------
Net effect of foreign currency translation on cash 2 (2)
------- -------
Net increase (decrease) in cash (399) 89
Cash at beginning of period 571 49
------- -------
Cash at end of period $ 172 $ 138
======= =======
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
6
DATATEC SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
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 to support enterprises in the delivery of complex IT
solutions.
(2) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles accepted for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Securities and Exchange Commission ("SEC") Regulation S-X. Accordingly, they do
not include all of the information and footnotes 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 adjustments) considered necessary for fair presentation have
been included. Operating results for the three months ended July 31, 2002 are
not necessarily indicative of the results that may be expected for a full year.
The accompanying financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Datatec's annual
report on Form 10-K for the year ended April 30, 2002.
RESTATEMENT OF FINANCIAL STATEMENTS
During fiscal 2002, the Company determined that it should have included indirect
costs as a component of cost of revenue in its previously issued financial
statements and it identified certain errors in its previously issued financial
statements related to total estimated contract values, total costs incurred with
certain long term contracts and certain accrued and prepaid expenses. As a
result, the Company has restated its previously issued financial statements for
the years ended April 30, 2000 and 2001. As a result, the financial statements
for the quarter ended July 31, 2001 contained herein have been restated. The
Company previously reported a net loss of $1.781 million, or $(0.05) per share
for the quarter ended July 31, 2001. The restatement resulted in the Company
reporting net loss of $2.114 million, or $(0.06) per share for the quarter.
CHANGE IN ACCOUNTING
The Company decided at the beginning of the current fiscal year to change its
method of estimating progress toward completion of its contracts. Under its
previous method, the percentage of direct labor incurred to date to total
estimated direct labor to be incurred on a project was used to determine a
contract's percentage of completion, while under the new method, the percentage
of total costs incurred to date to total estimated costs to be incurred on a
project is used to determine a contract's percentage of completion. In
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," paragraph 27, the financial statements of prior periods have been
adjusted to apply the new method retroactively. The effects of the accounting
change applied retroactively are shown below:
As As
Previously Retroactively
Three months ended July 31, Restated Adjusted
2001:
--------------------------- -------------- --------------
Net Loss ($2.114 million) ($1.186 million)
Net loss per share - basic $(0.06) $(0.04)
Net loss per share - diluted $(0.06) $(0.04)
The balance of the accumulated deficit at April 30, 2002 has been adjusted for
the effect of applying retroactively the new method of accounting, as follows:
April 30, 2002
--------------
Accumulated deficit, as previously reported ($50,938)
Accumulated deficit, as retroactively adjusted ($49,239)
7
(3) EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding for the three months ended July 31, 2001 and 2002. Diluted
earnings per share is calculated using the weighted average number of shares
outstanding plus the incremental shares from assumed conversions of options,
debt and preferred stock for the three months ended July 31, 2001 and 2002.
Outstanding options and warrants have been excluded for the three months ended
July 31, 2001 as their inclusion would have been anti-dilutive for this period.
(4) SHORT-TERM BORROWINGS
In November 2000, the Company replaced its current lender and entered into a
credit line with IBM Credit Corporation. Under the credit line, the Company has
a revolving loan that provides for maximum borrowings of $16.0 million that was
increased from $14.0 million on July 25, 2001. Availability under the revolving
loan is calculated as the sum of 85% of eligible accounts receivable, as
defined, and 35% and 25% of cable and non-cable eligible inventory,
respectively, as defined. The amounts outstanding under the credit line as of
April 30, 2002 and July 31, 2002 were $14.5 million and $14.3 million,
respectively. There were no additional available borrowings, as defined, as of
July 31, 2002. Since July 31, 2002, IBM Credit Corporation has granted the
Company additional availability and increased the maximum amount eligible to be
borrowed as the Company's accounts receivables and inventory have increased. The
revolving loan accrues interest at the prime rate plus 4.25% and matures in
November 2003. However, IBM Credit Corporation has notified the Company that it
does not intend to renew its working capital financing line and term loan beyond
August 1, 2003. As a result, the Company is actively seeking replacement
financing.
The Company also has a $3,000,000 term loan with IBM Credit Corporation that is
due in February 2003 but repayment has been extended to no later than August 1,
2003. The full amount of the term loan was outstanding as of April 30, 2002 and
July 31, 2002. The term loan accrues interest at the prime rate plus 4.25% and,
beginning in August 2002 is payable in monthly installments of principal and
interest of $300,000.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142 "Goodwill and Other
Intangible Assets," (collectively "the Standards"). The Standards require all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, that goodwill no longer be subject to
8
amortization but rather be reviewed periodically for impairment and that other
identifiable intangibles be separated and those with finite lives be amortized
over their useful lives. Goodwill and intangible assets with indefinite lives
must be assessed once a year for impairment, and more frequently if
circumstances indicate a possible impairment. The first step of the two-step
impairment assessment identifies potential impairment and compares the fair
value of the applicable reporting unit with its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying value,
goodwill of the reporting unit is not considered impaired, and the second step
of the impairment test is not necessary. If the carrying value of the reporting
unit exceeds its fair value, the second step of the impairment test shall be
performed to measure the amount of impairment loss, if any. The Company was
required to adopt these provisions on May 1, 2002; however, it elected to early
adopt the Standards on May 1, 2001 as permitted and evaluated the carrying value
of its Goodwill and other intangible assets. Based on its evaluation, which, in
part, was based on certain fair value assumptions, the Company determined that
there is no impairment to its goodwill and other intangible assets. Subsequent
impairment tests will be performed, at a minimum, in the fourth quarter of each
fiscal year, in conjunction with the Company's annual planning process.
The Company was assisted in its measurement of fair value by an independent
valuation firm. The measurement of fair value was based on an evaluation of
future discounted cash flows, public company trading multiples and merger and
acquisition transaction multiples. This evaluation utilized the best information
available in the circumstances, including reasonable and supportable assumptions
and projections. The Company's discounted cash flow evaluation used a range of
discount rates that corresponds to the Company's weighted average cost of
capital. This discount range is consistent with that used for investment
decisions and takes into account the specific and detailed operating plans and
strategies of the reporting unit.
Goodwill is no longer amortized under SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and normal operation of long-lived assets, except for certain
obligations of lessees. The provisions of this Statement are required to be
applied starting with fiscal years beginning after June 15, 2001. The Company
has adopted the new accounting standard on existing long-lived assets during the
quarter ended July 31, 2002. There was no impact on the Company's financial
position or results of operations for the quarter as a result of adopting this
standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This Statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001. The Company has adopted the
new accounting standard on existing long-lived assets during the quarter ended
July 31, 2002. There was no impact on the Company's financial position or
results of operations for the quarter as a result of adopting this standard.
9
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
APB Opinion No. 30. This Statement also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This Statement will be effective for the Company for
the fiscal year ending April 30, 2004. The Company does not believe that
adoption of this Statement will have a material effect on the Company's results
of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 will supercede Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated
with an exit or disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company does not believe that adoption of this Statement will have a
material effect on the Company's results of operations or financial position.
(6) SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid during the three months ended July 31 (in thousands):
2001 2002
------------ ---------
Interest Paid $ 530 $ 500
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition is
based upon and should be read in conjunction with Datatec's Consolidated
Financial Statements and Notes for the year ended April 30, 2002.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements can sometimes be identified by the use of forward-looking words such
as "anticipate," "believe," "estimate," "expect," "intend," "may," "will," and
similar expressions. These statements are based on management's current
expectations and are subject to 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, expected, estimated or projected.
The following factors among others, could cause actual results to differ
materially from those described in the forward-looking statements: changes in
demand for, or in the mix of, Datatec's services; project delays or
cancellations; cost overruns with regard to fixed price projects; competitive
pressures; general economic conditions; Datatec's inability to replace its
current working capital financing line, and other such factors related to
financing, obtaining new projects and delivering its services at targeted
margins.
RESTATEMENT OF FINANCIAL STATEMENTS
During fiscal 2002, the Company determined that it should have included indirect
costs as a component of cost of revenue in its previously issued financial
statements and it identified certain errors in its previously issued financial
statements related to total estimated contract values, total costs incurred with
certain long term contracts and certain accrued and prepaid expenses. As a
result, the Company has restated its previously issued financial statements for
the years ended April 30, 2000 and 2001. As a result, the financial statements
for the quarter ended July 31, 2001 contained herein have been restated. The
Company previously reported a net loss of $1.781 million, or $(0.05) per share
for the quarter ended July 31, 2001. The restatement resulted in the Company
reporting net loss of $2.114 million, or $(0.06) per share for the quarter.
CHANGE IN ACCOUNTING
The Company decided at the beginning of the current fiscal year to change its
method of estimating progress toward completion of its contracts. Under its
previous method, the percentage of direct labor incurred to date to total
estimated direct labor to be incurred on a project was used to determine a
contract's percentage of completion, while under the new method, the percentage
of total costs incurred to date to total estimated costs to be incurred on a
project is used to determine a contract's percentage of completion. In
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," paragraph 27, the financial statements of prior periods have been
adjusted to apply the new method retroactively. The effects of the accounting
change applied retroactively are shown below:
As As
Previously Retroactively
Three months ended July 31, Restated Adjusted
2001:
--------------------------- -------------- --------------
Net Loss ($2.114 million) ($1.186 million)
Net loss per share - basic $(0.06) $(0.04)
Net loss per share - diluted $(0.06) $(0.04)
The balance of the accumulated deficit at April 30, 2002 has been adjusted for
the effect of applying retroactively the new method of accounting, as follows:
April 30, 2002
--------------
Accumulated deficit, as previously reported ($50,938)
Accumulated deficit, as retroactively adjusted ($49,239)
11
RECENT DEVELOPMENTS
SUBORDINATED SECURED CONVERTIBLE DEBENTURES. On April 3, 2002 the Company raised
$2.0 million of financing (less out-of-pocket transaction costs of $0.170
million) to be used for working capital purposes by issuing an aggregate of $2.0
million principal amount of Subordinated Secured Convertible Debentures and
Warrants to purchase an aggregate of 270,000 shares of the Company's common
stock at $1.416 per share. The debentures mature on July 2, 2003 and bear
interest at a rate of 5% per annum. The interest is due quarterly on March 31,
June 30, September 30, and December 31 of each year (with the first interest
payment due and payable on September 30, 2002) and is payable in cash or Common
Stock at the Company's option. The Company recorded a discount of $582,000 in
connection with the issuance of the Debentures. The warrants have been valued at
approximately $291,000, based on the Black Scholes Pricing Model utilizing the
following assumptions: expected life of 5.0 years; volatility of 119 percent,
and risk free borrowing rate of 4.405 percent. This amount has been recorded as
a discount against the debt and will be accreted as interest expense over the
remaining life of the debt. In addition, in accordance with Emerging Issues Task
Force 98-5, an embedded beneficial conversion feature of approximately $291,000
has been recognized as additional paid-in-capital and will be accreted as
additional interest expense over the remaining life of the debt. Through July
31, 2002, $155,000 of the above discounts has been accreted. The Debentures are
secured by all assets of the Company, which security interest is junior to the
security interest granted to the Company's existing senior lender.
The holder of each Debenture is entitled, at its option, to convert at any time
the principal amount of the Debenture or any portion thereof, together with
accrued but unpaid interest, into shares of the Company's Common Stock at a
conversion price for each share of common stock equal to the lower of (a) $1.16
or (b) 100% of the average of the two lowest closing bid prices of the Common
Stock on the principal market during the twenty consecutive trading days ending
with the last trading day prior to the date of conversion. The conversion price
may not be less than the floor price of $0.65, except to the extent that the
Company does not exercise its right to redeem the Debentures.
The agreement with the investors contains a requirement for the Company to have
effected the registration of a sufficient number of shares of its common stock
by July 2, 2002 or incur penalties equal to: (1) 2% of the product obtained by
multiplying the average closing sale price for the immediately preceding 30 day
period times the number of registrable securities the investor holds or may
acquire pursuant to conversion of the Convertible Debenture and the exercise of
Warrants on the last day of the applicable 30 day period (without giving effect
to any limitation on conversion or exercise) and (2) 3% of the product for all
continuing or subsequent registration defaults.
Although the Company filed the required registration statement with the
Securities and Exchange Commission within the required time period, such
registration statement has not yet been declared effective and as such, the
Company is currently in default of its Registration Rights Agreement with the
Debenture holders and is incurring the penalties described herein. Pursuant to
an agreement dated September 27, 2002, the Company has agreed to issue an
aggregate of 60,736 shares of Common Stock to the investors in exchange for the
cancellation of
12
penalties incurred through September 1, 2002. As of July 31, 2002, penalties
under this default amounted to approximately $48,600.
Also, the Debentures contain a provision which reduces the conversion price by
five percent (5%) if the Company's common stock into which the Debenture is
converted is not listed on NASDAQ National Market or NASDAQ Smallcap Market on
the conversion date and will be reduced by an additional five percent (5%) on
such date if the Common Stock is also not listed on the Over-The-Counter
Bulletin Board (without, in either such case, regard to the Floor Price). The
conversion price is subject to further reduction in the event the Company sells
common stock below the applicable conversion price.
SENIOR CREDIT FACILITY. The Company's existing credit facility with IBM Credit
Corporation consists of (i) a $16 million three-year revolving credit facility
and (ii) a $3 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 25-35% of eligible
inventory. Both the revolving line of credit and the term loan bear interest at
prime plus 4.25%. The amounts outstanding under the credit line as of April 30,
2002 and July 31, 2002 were $14.5 million and $14.3 million, respectively. There
were no additional available borrowings, as defined, as of July 31, 2002. Since
July 31, 2002, IBM Credit Corporation has granted the Company additional
availability and increased the maximum amount eligible to be borrowed as the
Company's accounts receivable and inventory have increased.
IBM Credit Corporation has notified the Company that it does not intend to renew
the existing revolving credit facility upon its expiration in November 2003 or
the term loan upon its expiration in February 2003. Such expiration dates will
be extended to August 1, 2003 in the event the Company fails to secure
replacement financing before that date. Accordingly, the Company is in the
process of seeking a replacement for these facilities. Although the Company is
confident that it will be able to refinance this debt, there can be no assurance
that it will be able to do so.
Pursuant to a letter from The Nasdaq Stock Market ("Nasdaq") dated September 6,
2002, the Company received notification from Nasdaq that the Company did not
comply with Nasdaq's minimum stockholder equity requirement. The Company
presented a plan to NASDAQ in which it outlined a strategy for bringing itself
in compliance with NASDAQ's minimum equity requirements. On November 4, 2002,
Nasdaq determined to transfer the listing of the Company's securities to the
Nasdaq SmallCap Market (the "Nasdaq SmallCap"). The transfer to the Nasdaq
SmallCap is conditioned upon the Company filing with the Securities and Exchange
Commission and Nasdaq, on or before November 7, 2002, its Form 10-Q for the
quarter ended July 31, 2002, demonstrating compliance with all requirements for
continued listing on the Nasdaq SmallCap and the successful completion of an
application and review process for listing on the Nasdaq SmallCap. Nasdaq
reserves the right to modify, alter or extend the terms of these conditions to
listing on the Nasdaq SmallCap upon a review of the Company's reported financial
statements.
BUSINESS DESCRIPTION
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"), 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 that they are compatible with the
topology of the network and all legacy systems (hereinafter referred to as
"integration") and (iii) the process of physically installing
13
technology on networks (hereinafter referred to as "installation"). Also, the
Company licenses its software tools through its Global Integration Services
division to organizations with their own installation forces.
The Company utilizes internally developed Web-enabled implementation tools that
differentiate its deployment services. These tools, 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, processes and technology that include:
o The utilization of eDeploy(TM), a Web-based software tool that provides
collaboration capabilities for remote planning and design, communication
capabilities through fax, voice, data, or digital photographs and
monitoring capabilities, ensures that best practices are employed and that
mission critical milestones or timelines are escalated to supervisory
levels if missed by the responsible parties. These features and others are
designed to enhance the speed, accuracy and productivity of the deployment
process.
o The utilization of IW2000 provides automation and mass customization in
the configuration/integration of Computing and Internetworking devices as
well as application and operational software. This automation
significantly reduces labor costs through time savings as well as through
reduced technical skill level requirements.
o Two (2) staging and configuration centers at which the Company carries out
most of its complex integration and configuration processes. By conducting
these activities at Datatec's staging centers, and utilizing, where
applicable, its 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. In this way, customers' operations are minimally disrupted.
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 15 offices and has a field deployment team of
approximately 280 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.
CRITICAL ACCOUNTING POLICIES
The Company's deployment services are generally provided at a fixed contract
price pursuant to purchase orders or other agreements with its customers, while
its software licensing is done on a "per seat" basis over a specified period of
time and its Application Service Provider ("ASP") activities are based on usage.
Services from deployment activities are performed primarily under long-term
contracts, but may be performed under short-term workorders or time and material
arrangements. The Company's typical long-term contract contains multiple
elements designed to track the various services required under the arrangement
with the customer. These elements are used to identify components of progress
billings, but are combined for revenue recognition purposes. The Company
recognizes revenue earned under long-term contracts utilizing the percentage of
completion method of accounting by measuring a contract's percentage of
completion as
14
determined by the percentage of total costs incurred to date to total estimated
costs. Prior to the current fiscal year, the Company determined the percentage
of completion on its long-term contracts by measuring direct labor incurred to
date against total estimated direct labor. In accordance with Accounting
Principles Board Opinion No. 20, "Accounting Changes," paragraph 27, the
financial statements of prior periods have been adjusted to apply the new method
retroactively (see Note 2). Contracts are reviewed at least quarterly and if
necessary, revenue, costs and gross margin are adjusted prospectively for
revisions in estimated total contract value and total estimated contract costs.
Estimated losses are recognized when identified.
Payment milestones differ according to the customer and the type of work
performed. Generally, the Company invoices customers and payments are received
throughout the deployment process and, in certain cases, in advance of work
performed if a substantial amount of up front costs is required. In certain
cases payments are received from customers after the completion of site
installation. However, revenue and costs are only recognized on long-term
contracts to the extent of the contracts' percentage of completion. Unbilled
revenue, which is classified as a current asset, is recorded for the amount of
revenue earned in excess of billings to customers. Deferred revenue is recorded
as a current liability for the amount of billings in excess of revenue earned.
The Company's cost of deployment services consists of four main categories:
labor, materials, project expenses and allocated indirect costs. The Company
estimates progress toward completion of its contracts by applying the percentage
of costs incurred to date to total estimated costs to be incurred on a project.
Direct costs (labor, materials, and project expenses) are charged directly to
projects as they are incurred. Indirect costs, which include amortization of the
eDeploy(TM) software and various other overhead expenses, are then applied to
projects and a gross margin is determined. This enables management to track all
costs associated with delivering services to its customers. Project managers and
other field supervisors manage and are evaluated, in part, on how projects'
actual direct costs compare to their estimated direct costs. Operations
management manages and is evaluated, in part, on how projects' actual gross
margins compare to targeted gross margins.
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, conduits, 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 or materials costs. In addition, indirect costs, such
as software amortization, warehouse expense, material handling costs, etc., are
allocated to projects on bases that reflect management's estimate of absorption
of these costs by each project (generally direct labor hours).
The Company capitalizes certain computer software costs incurred in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Also, the
Company 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." Once
technological feasibility has been established, software development costs are
captured in the Company's job costing system under specific projects related to
the development effort. Costs related to software developed for external use are
amortized using the greater of the ratio that current gross revenue for a
product bears 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.
Amortization of the costs of software used in delivery of the Company's services
is charged to cost of revenue as incurred. Costs related to internal use
software are amortized over a period not to exceed three years.
15
On June 30, 2001, the FASB issued Statements on Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." With the adoption of Statement
142, goodwill is no longer subject to amortization over its estimated useful
life. Rather, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value-based test. Although the new rules are
effective for fiscal years beginning after December 15, 2001, early adoption is
allowed if an entity's fiscal year begins after March 15, 2001. The Company has
elected early adoption and based on its evaluation, which, in part, was based on
certain fair value assumptions, the Company determined that there is no
impairment to its goodwill and other intangible assets. Had early adoption not
been elected, the amortization of goodwill would have been $109,000 for each of
the quarters ended July 31, 2001 and 2002.
RESULTS OF OPERATIONS
The consolidated statements of opertions for the Company for the three months
ended July 31 are summarized below.
2001 2002
----------------------- ---------------------
(AS RESTATED AND AS
RETROACTIVELY ADJUSTED)
$ % $ %
-----------------------------------------------------
Revenue $ 18,062 100.0% $ 23,072 100.0%
Cost of revenues 12,316 68.2% 16,546 71.7%
-----------------------------------------------------
Gross profit 5,746 31.8% 6,526 28.3%
Selling, general and administrative
expenses 6,180 34.2% 5,054 21.9%
-----------------------------------------------------
Operating income (loss) (434) (2.4%) 1,472 6.4%
Interest expense (582) (3.2%) (740) (3.2%)
-----------------------------------------------------
Income (loss) before minority interest (1,016) (5.6%) 732 3.2%
Minority interest (170) (0.9%) -- --
-----------------------------------------------------
Net income (loss)
($ 1,186) (6.5%) $ 732 3.2%
=====================================================
16
REVENUE. Revenue for the three months ended July 31, 2002 and 2001 was $23.1
million and $18.1 million, respectively, representing an increase of 27.7%. The
increase in revenue is attributed primarily to work performed on long-term
contracts entered into during the fourth quarter of fiscal 2002.
GROSS PROFIT. Gross profit for the three months ended July 31, 2002 and 2001
amounted to $6.5 million and $5.7 million, respectively, representing an
increase of 13.6%. Gross profit as a percentage of revenue was 28.3% and 31.8%
for the three months ended July 31, 2002 and 2001, respectively. The decrease in
gross margin is attributed to a higher proportion of the materials component on
contracts previously entered into.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended July 31, 2002 were $5.1
million compared to $6.2 million for the three months ended July 31, 2001. As a
percentage of sales, selling, general and administrative expenses were 21.9% for
the three months ended July 31, 2002 compared to 34.2% for the three months
ended July 31, 2001. The decrease in selling, general and administrative
expenses as a percentage of revenue is attributed to the cost reduction program
initiated by the Company during the fiscal year ended April 30, 2001 which
carried into the three months ended July 31, 2002.
INTEREST EXPENSE. Net interest expense for the three months ended July 31, 2002
was $740,000 compared to $582,000 for the three months ended July 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN MAJOR BALANCE SHEET CLASSIFICATIONS
CURRENT ASSETS. Current assets as of July 31, 2002 and April 30, 2002 amounted
to approximately $29.4 million and $25.8 million, respectively. The increase of
approximately $3.6 million is the result of higher revenue generated during the
quarter ended July 31, 2002, resulting in an increase in accounts receivable and
unbilled receivables of approximately $3.6 million.
CURRENT LIABILITIES. Current liabilities as of July 31, 2002 and April 30, 2002
amounted to approximately $32.8 million and $29.0 million, respectively. The
increase of approximately $3.8 million is attributable primarily to the
reclassification of approximately $1.6 million subordinated secured convertible
debentures to current liabilities as they are due in July 2003, an increase in
accounts payable of approximately $2.4 million primarily related to materials
requirements during the quarter ended July 31, 2002.
17
CASH FLOW. Cash generated from operating activities increased to $0.8 million
for the quarter ended July 31, 2002 as compared to net cash used in operating
activities of $3.5 million for the quarter ended July 31, 2001. The increase is
due primarily to improved results caused by an increase in revenue and a
decrease in selling, general and administrative costs.
Short-term borrowings were reduced by approximately $0.186 million for the
quarter ended July 31, 2002 while cash of approximately $3.5 million was
provided by short-term borrowings for the quarter ended July 31, 2001.
LIQUIDITY
The net income of $0.7 million realized during the quarter ended July 31, 2002
resulted in an easing on the Company's resources. However, the impact of prior
years' losses are still exerting a strain on the Company's cash resources.
Although the Company realized a profit for the most recent two quarters and had
taken dramatic measures to cut costs, the Company's working capital financing
line remains close to its maximum allowable levels and the average days
outstanding of its trade payables have extended beyond normal credit terms
granted by vendors. The Company continues to manage its cash aggressively.
Furthermore, IBM Credit Corporation, the Company's working capital lender, has
notified the Company that it does not intend to renew its working capital
financing line and term loan beyond August 1, 2003. As a result, the Company is
actively seeking replacement financing.
Achievement of its fiscal 2003 operating plan depends upon the timing of work
performed by the Company on existing projects, the ability of the Company to
gain and perform work on new projects, the ability of the Company to maintain
positive relations with its key vendors and the ability of the Company to
replace its current working capital financing line. Multiple project
cancellations, delays in the timing of work performed by the Company on existing
projects, the inability of the Company to gain and perform work on new projects,
or the inability of the Company to replace its current working capital financing
line could have an adverse impact on the Company's liquidity and on its ability
to execute its operating plan.
The Company has taken action to ensure its continuation as a going concern. A
summary of recent events and the Company's completed or planned actions are as
follows:
Demand for the Company's services has increased dramatically and the
backlog of contracted business as of October 25, 2002 was at $74.3 million
and its sales pipeline stood at $190.3 million as of that date.
The Company initiated and completed substantial cost saving measures during
the fiscal years ended April 30, 2001 and 2002 and now has a cost structure
in line with its expected revenue.
As a result of the increase in demand for the Company's services and the
cost reduction measures initiated over the past two years, the Company
achieved profitability during the fourth quarter of fiscal 2002 and the
first quarter of fiscal 2003. It expects to maintain profitability
throughout fiscal 2003.
Management has been seeking to replace its working capital financing line
and raise additional capital to support its growth in business. It is
encouraged by the preliminary response it has received from the financial
community and it expects to raise the necessary financing.
18
The Company was not in compliance with one or more of the financial covenants of
its credit facility as of the quarter ended July 31, 2002. The Company and IBM
Credit Corporation entered into an Acknowledgment, Waiver and Amendment to the
Inventory and Working Capital Financing Agreement as of the end of the quarter.
IBM Credit Corporation has notified the Company that it does not intend to renew
its working capital financing line and term loan beyond August 1, 2003. As a
result, the Company is actively seeking replacement financing.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142 "Goodwill and Other
Intangible Assets," (collectively "the Standards"). The Standards require all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, that goodwill no longer be subject to
amortization but rather be reviewed periodically for impairment and that other
identifiable intangibles be separated and those with finite lives be amortized
over their useful lives. Goodwill and intangible assets with indefinite lives
must be assessed once a year for impairment, and more frequently if
circumstances indicate a possible impairment. The first step of the two-step
impairment assessment identifies potential impairment and compares the fair
value of the applicable reporting unit with its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying value,
goodwill of the reporting unit is not considered impaired, and the second step
of the impairment test is not necessary. If the carrying value of the reporting
unit exceeds its fair value, the second step of the impairment test shall be
performed to measure the amount of impairment loss, if any. The Company was
required to adopt these provisions on May 1, 2002; however, it elected to early
adopt the Standards on May 1, 2001 as permitted and evaluated the carrying value
of its Goodwill and other intangible assets. Based on its evaluation, which, in
part, was based on certain fair value assumptions, the Company determined that
there is no impairment to its goodwill and other intangible assets. Subsequent
impairment tests will be performed, at a minimum, in the fourth quarter of each
fiscal year, in conjunction with the Company's annual planning process.
The Company was assisted in its measurement of fair value by an independent
valuation firm. The measurement of fair value was based on an evaluation of
future discounted cash flows, public company trading multiples and merger and
acquisition transaction multiples. This evaluation utilized the best information
available in the circumstances, including reasonable and supportable assumptions
and projections. The Company's discounted cash flow evaluation used a range of
discount rates that corresponds to the Company's weighted average cost of
capital. This discount range is consistent with that used for investment
decisions and takes into account the specific and detailed operating plans and
strategies of the reporting unit.
Goodwill is no longer amortized under SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and normal operation of long-lived assets, except for certain
obligations of lessees. The provisions of this Statement are required to be
applied starting with fiscal years beginning after June 15, 2001. The Company
has adopted the new accounting
19
standard on existing long-lived assets during the quarter ended July 31, 2002.
There was no impact on the Company's financial position or results of operations
for the quarter as a result of adopting this standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This Statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001. The Company has adopted the
new accounting standard on existing long-lived assets during the quarter ended
July 31, 2002. There was no impact on the Company's financial position or
results of operations for the quarter as a result of adopting this standard.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
APB Opinion No. 30. This Statement also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This Statement will be effective for the Company for
the fiscal year ending April 30, 2004. The Company does not believe that
adoption of this Statement will have a material effect on the Company's results
of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 will supercede Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated
with an exit or disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company does not believe that adoption of this Statement will have a
material effect on the Company's results of operations or financial position.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change in the market risk of financial instruments
since the Company filed its annual report on Form 10-K for the fiscal year ended
April 30, 2002.
ITEM 4: CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
have concluded the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls
20
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
21
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 22, 2000, Petsmart, Inc. filed a complaint against the Company in
the Superior Court of Maricopa County, Arizona. Petsmart has alleged that it has
been damaged by the Company's failure to satisfactorily complete work
contemplated by an agreement between the parties. Damages were unspecified. At a
settlement meeting held on April 17, 2002, discussions were held in which
Petsmart proposed a series of settlement offers under which the Company would
pay damages ranging between $7,000,000 and $8,000,000. In a letter to the
Company dated May 3, 2002, Petsmart proposed settlement offers under which the
Company would pay damages ranging between $5,000,000 and $7,000,000. The Company
believes that it has meritorious defenses to the claims and it intends to defend
this vigorously. Datatec has further counter-claimed against Petsmart for
amounts owing to the Company under the contract.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Exhibits
----------- --------
10.1 Acknowledgment, Waiver and Amendment to Financing
Agreement dated July 30, 2002 by and between the
Company and IBM Credit Corporation.
10.2 Acknowledgment, Waiver and Amendment to Financing
Agreement dated November 5, 2002 by and between
the Company and IBM Credit Corporation.
18.1 Letter from Deloitte & Touche LLP regarding change
in accounting principles.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
b) Reports on Form 8-K
(1) On May 15, 2002, the Company filed with the Securities and
Exchange Commission a Form 8-K/A dated May 15, 2002 amending its
report on Form 8-K filed on April 18, 2002 reporting a change in the
Company's certifying accountant under Item 4 of Form 8-K.
22
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.
DATATEC SYSTEMS, INC.
Date: November 7, 2002 By: /s/ Albert G. Pastino
------------------------------------
Albert G. Pastino
Chief Financial Officer
23
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Isaac J. Gaon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Datatec Systems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
----------------------
/s/ Isaac J. Gaon
---------------------------
Isaac J. Gaon
Chief Executive Officer
24
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Albert G. Pastino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Datatec Systems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
-----------------------
/s/ Albert G. Pastino
-------------------------------------
Albert G. Pastino
Chief Financial Officer
25