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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, 1998
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.)
20C COMMERCE WAY, TOTOWA, NJ 07512-1154
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 890-4800
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.001 par value Boston Stock Exchange
Preference Share Purchase Rights Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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, 1998 was approximately $101,735,000. 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, 1998 was 29,084,342.
The information required by Part III is incorporated by reference to a
definitive proxy statement to be filed by the Registrant not later than August
28, 1998 pursuant to Regulation 14A.
1
TABLE OF CONTENTS
PART I PAGE #
- ------ ------
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 24
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure 51
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management 52
Item 13. Certain Relationships and Related Transactions 52
PART IV
- -------
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 53
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. (the "Company" or "Datatec") is in the
business of providing rapid and accurate technology deployment services. The
Company markets its services to Fortune 2000 customers and other large systems
manufacturers, systems integrators, independent software vendors and
telecommunications carriers (collectively, "Technology Providers") in the United
States and Canada. The Company's deployment services include the following: (i)
the process of "customizing" network devices such as routers, switches, servers,
workstations to meet the specific needs of the user (hereinafter referred to as
"configuration"), (ii) the process of ensuring that devices installed on a
network 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 utilizes an implementation model to provide its
deployment services, which allows the Company to efficiently deliver high
quality and cost effective large-scale technology deployment solutions for
Fortune 2000 companies and other Technology Providers in the United States and
Canada. The components of the Company's implementation model include the
following:
o The utilization of a proprietary software tool, the Integrator's
Workbench Product SeriesTM ("Integrator's Workbench"), that enhances
the accuracy of the deployment process and significantly reduces the
completion time and labor costs for most complex deployment
projects.
o The employment of a field deployment team throughout the United
States and Canada that is capable of delivering complex
technologies, which include computing platform, cabling, and
infrastructure.
3
o The application of five staging and configuration centers, to
conduct numerous installation activities including receipt and
tracking of project components, assembly, testing, verification,
documentation and configuration and integration of hardware and
software components. By conducting these activities at the Company's
staging centers, and utilizing, where applicable, the Company's
Integrator's Workbench software tools, the Company is able to
prepare and roll-out project components so that they arrive at a
customer site in a "plug and play" state.
The Company operates out of 15 offices and has a field deployment
team of approximately 450 people, allowing it to conduct multiple simultaneous
large-scale deployments for Fortune 2000 end-user customers and Technology
Providers across the United States and Canada. The Company's deployment
capabilities further permit Technology Providers to enhance the "absorption" of
their products in the marketplace onto increasingly complex networks and
information technology ("IT") environments.
In January 1998, the Company changed its name from Glasgal
Communications, Inc. to Datatec Systems, Inc. The Company is incorporated in
Delaware and its stock is traded on the Nasdaq Small-Cap Market under the symbol
"DATC". The Company maintains its executive offices at 20C Commerce Way, Totowa,
New Jersey, 07512. Its telephone number is (973) 890-4800. The Company's website
can be located at www.datatec.com.
DATATEC'S DEPLOYMENT SOLUTIONS
The Company's management believes that the market for deployment
services will continue to rapidly increase. 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, large
end-users need to maximize their return on technology investments. The speed of
the deployment is a critical factor in improving these fundamental ratios.
The dynamics creating an increasing strong demand for Datatec's
software-enabled deployment offerings include the following:
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.
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 Technologies are becoming increasingly complex, which makes them extremely
difficult and costly to 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.
4
Datatec is positioned to address the demand for configuring,
integrating and installing workstations, servers, routers, and switches onto
networks through its software-enabled process and methodology. Through proper
utilization of its Integrator's Workbench tools and the Company's proprietary
software-enabled processes and methodologies, many labor-intensive deployment
services are being automated thereby increasing the Company's effective yield
and profitability.
INTEGRATOR'S WORKBENCH
The Company's Integrator's Workbench is an object oriented suite of
design and productivity tools that run on distributed computing platforms using
Microsoft's Windows 95 and Windows NT operating systems. The Integrator's
Workbench software tools function as a master repository for the collection and
management of all the design and configuration information and rules that are
learned during the execution of the Company's deployment services. The
Integrator's Workbench collects and organizes project-specific information
through user-friendly prompts and organizes it into object oriented databases
that are easily manipulated for the purposes of system configuration and
documentation. As most of these results are generated using software routines
and commands, use of the Integrator's Workbench significantly decreases the time
and costs of the Company's deployment projects.
The benefits provided by software-enabling Datatec's deployment
processes include the following:
o REDUCTION IN LABOR COSTS AND INCREASED PRODUCTIVITY. Typical time
reductions achieved by using Datatec's software-enabled process range
between 40% and 90%. For example, the typical router that takes between
forty-five minutes and one hour to configure and document manually is
reduced to five minutes using the Company's software-enabled process. The
software-enabled process further reduces the Company's costs to complete
deployment projects by using fewer high priced engineers. Accordingly,
Datatec can reduce the prices for deployment services without compromising
margins. In addition, projections of task times becomes significantly more
accurate as these tasks become less dependent on human intervention and
increasingly automated. As a result of the utilization of the
software-enabled process, Datatec significantly reduces the risk of cost
overruns for its clients.
o THE ABILITY TO LEVERAGE TECHNICAL SKILLS. Highly complex technical
solutions can be deployed using less technical people, as the knowledge is
resident in the software. 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.
Because of the methodologies employed at Datatec's configuration centers,
products arrive at a client's site in a "plug and play" state. The
Company's field deployment force are fully equipped to address computing,
cabling or electrical tasks associated with a technology deployment. As a
result, it usually takes only one visit to a site to complete the
installation.
5
o A HIGHER DEGREE OF ACCURACY IN THE CONFIGURATION AND INTEGRATION PROCESS
LEADS TO VIRTUAL "PLUG AND PLAY" INSTALLATIONS. The automated process
eliminates the risk of input mistakes, which account for a significant
portion of errors during the configuration and integration processes. As a
result of such automation, highly complex and fully customized devices
convert into "plug and play" products for the Company's deployment teams.
This process saves significant time in the configuration and integration
processes, as well as the installation process. It also significantly
reduces time spent on rework, which is normally provided at the Company's
expense, and reduces disruption at the clients operation, which is often
associated with the implementation of new technology.
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 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 or in one of the Company's configuration centers.
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"). In fiscal 1998, NDD accounted for
approximately $4.2 million of the Company's net sales. Since the inception of
this program in June 1997, the Company has received approximately $12 million in
orders for this product offering.
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:
6
o Migration to a new desktop operating system;
o Migration to a new server operating system;
o Rollout of a new or upgraded application suite;
o Introducing Internet services; and
o Upgrading the network infrastructure.
TRM was launched in April 1998 and is the primary solution
supporting the Company's new relationship with Microsoft Corporation
("Microsoft"). While no revenues were generated from this solution in fiscal
1998, in the first two months of fiscal 1999 orders for $2 million have been
received and are expected to be provided within twelve months.
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 a new technology.
Infrastructure improvement could include one or all of 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 Datatec 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 objective is to be the premier technology deployment
provider to Fortune 2000 customers as well as large technology providers. To
achieve this objective, the Company is pursuing the following strategies:
o Continuing to invest in the research and development of automated tools
and the improvement of its processes and methodologies;
0 Creating strong long-term relationships with end-user customers and
technology providers, thereby providing a source for repeatable business;
0 Engaging its salesforce to support the selling efforts of its strategic
partners like Cisco and Microsoft;
7
o Supplementing its organic growth with strategic acquisitions where it can
leverage its tools and processes and methodology to significantly increase
the gross margins of the acquired company's deployment revenues and expand
geographic coverage.
SALES AND MARKETING
The Company's marketing efforts are focused towards organizations
that require 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 geographic dispersion. The areas of Company's business
focus in the IT market is shown below:
[This page contains a chart depicting typical project activities]
The Company has two sales forces comprised of 38 national account
managers. The direct sales division is dedicated to bringing solutions to
end-users while the indirect division provides solutions to Technology
Providers. Both sales teams follow a rigorous methodology called "The Datatec
Relationship Cycle" (the "DRC"), which has been instrumental in creating
long-term relationships with the Company's customers. The DRC consists of the
following five stages: (i) initiation, (ii) definition, (iii) testing, (iv)
rollout, and (v) feedback. process has enabled the Company to monitor and
improve customer satisfaction.
There is significant interaction between the various departments in
the Company to bring optimal solutions to its customers. The Company's sales
functions work as a team with the Professional Services division who, in turn,
work closely with the software development division to provide the most cost
effective solutions to our customers. The chart below shows how the process
works within the organization to bring optimal solutions to its customers.
8
[This page contains a graphical depiction of the Company's solution
setting forth the elements of the Company's implementation model]
CUSTOMERS
The Company performs deployment services directly to a variety of
end-user customers across a broad range of industries. The Company also delivers
its services to end-users through indirect customers that utilize the Company's
deployment services on a project-by-project basis. The Company's customers
include:
DIRECT INDIRECT
------ --------
American Stores Company Bell Atlantic Network Integration, Inc.
Beneficial Management Corporation Cisco Systems, Inc.
Blockbuster Entertainment Inc. Diebold Incorporated
The Chubb Corporation Electronic Data Systems Corporation
Federated Department Stores IBM Global Services
Lowe's Companies, Inc.
Pizza Hut, Inc.
Regions Financial Corporation
Starbucks Corporation
Toys "R" Us, Inc.
Walgreen Co.
The Company utilizes a customer relationship cycle to monitor and
improve customer satisfaction. The Company has several large repeat customers
and believes that significant opportunities exist to expand its customer
relationships and to leverage its
9
existing customers. The Company will continue to emphasize customer satisfaction
and seek ways to improve service in order to generate increased repeat business.
During each of the past two fiscal years, sales of the Company's
services to a limited number of customers have accounted for a substantial
percentage of the Company's total net sales. For the years ended April 30, 1998
and 1997, the Company's 15 largest customers accounted for approximately 51.8%
and 61.5% of the Company's net sales. For the year ended April 30, 1997,
Federated Department Stores, Inc. and Lowe's Companies, Inc. accounted for
approximately 11.7% and 10.1% respectively, of the Company's total net sales.
This concentration of customers can cause the Company's net sales 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. 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 and potential future customers, many of
which internally design, integrate and deploy their own technologies for their
particular needs. The Company, however, knows of no other company who currenlty
offers rapid IT deployment services 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. The Company believes that, because of the
rapid pace of technological change in the software market, legal protection for
its Integrator's Workbench software tools will be a less significant factor in
the Company's future success than the knowledge, ability and experience of the
Company's employees, the frequency of enhancements and the ability of the
Company to satisfy its customers.
10
EMPLOYEES
As of April 30, 1998, the Company had approximately 750 full-time
employees. Of these full-time employees, approximately 450 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.
11
ITEM 2. PROPERTIES
----------
The Company's corporate headquarters is located in Totowa, New
Jersey. The headquarters leased office space of 19,245 square feet also houses
the Company's New York/New Jersey office. In addition to its headquarters
building, the Company leases throughout the United States approximately 80,277
square feet of space in 13 locations for its sales and field operations and
configuration centers. The Company also leases an aggregate of approximately
17,110 square feet of space in one location in Canada.
ITEM 3. LEGAL PROCEEDING
----------------
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
12
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's Common Stock is currently traded on the Nasdaq Small
Cap Market ("Nasdaq") under the symbol "DATC". The Company's Common Stock
commenced listing on Nasdaq on May 3, 1994. The following table sets forth the
high and low sale prices on Nasdaq for the periods indicated.
HIGH LOW
---- ---
May 3, 1996 - July 31, 1996...................... $11 5/8 $5 7/8
August 1, 1996 - October 31, 1996................ $8 7/8 $4 3/4
November 1, 1996 - January 31, 1997............. $6 3/8 $4
February 1, 1997 - April 30, 1997................ $6 $2 54/64
May 3, 1997 - July 31, 1997...................... $5 5/8 $2 3/4
August 1, 1997 - October 31, 1997................ $8 7/16 $3 7/8
November 1, 1997 - January 31, 1998............. $7 1/8 $3 3/32
February 1, 1998 - April 30, 1998................ $6 3/4 $3 1/2
On July 24, 1998, the closing sale price for the Company's Common
Stock as reported on Nasdaq was $4 17/32. As of June 30, 1998, there were
approximately 200 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 the Datatec Industries' shareholders for Federal (and
some state) income tax liabilities arising from Datatec Industries' 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
the bank include a restriction prohibiting the payment of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
During the fiscal year ended April 30, 1998, the following
securities were sold by the Company without registration under the Securities
Act. Except as otherwise indicated, the securities were sold by the Company in
reliance upon the exemption provided by Section 4(2) of the Securities Act,
among others, on the basis that such transactions did not involve any public
offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
In June 1997, Ralph Glasgal purchased 160,000 shares of Common Stock
for an aggregate purchase price of $620,000.
13
In July 1997, Direct Connect International Inc. purchased 130,000
shares of Common Stock from the Company for an aggregate purchase price of
$500,000.
In July 1997, the Company sold an aggregate of 565,000 shares of
Common Stock in a private placement to six accredited investors, at a purchase
price of $3.875 per share. The Company paid a placement fee to Brookehill
Equities, Inc. in an amount equal to 10% of the gross proceeds in connection
with the transaction.
In August 1997, January 1998 and April 1998, the Company issued an
aggregate of 631,000 shares to Frank Brosens and Tinicum Investors upon
conversion of convertible notes in an aggregate principal amount of $2,000,000.
In September 1997, the Company issued an aggregate of 50,000 shares
of Common Stock to Mason Carter in exchange for 100,000 shares of Common Stock
of Datatec Industries.
In May 1998, the Company entered into a financing arrangement with
Shepherd Investments International, Ltd. ("Shepherd") and Stark International
("Stark") pursuant to which it issued 300 shares of Series E Convertible
Preferred Stock (the "Preferred Stock") for an aggregate purchase price of
$3,000,000. The Company issued to Shepherd and Stark currently exercisable
warrants to purchase an aggregate of 90,000 shares of Common Stock at a per
share exercise price of $6.29, which expire in April 2001. In connection with
the offering, the Company (i) paid a placement fee to Reedland Capital Partners
equal to 5% of the gross proceeds, and (ii) issued currently exercisable
warrants to Reedland Capital Partners to purchase an aggregate of 75,000 shares
of Common Stock at a per share exercise price of $6.29, which expire in April
2003.
14
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table sets forth the selected financial data of the
Company for, and at the end of (i) the year ended December 31,1993, (ii) the
four months ended April 30, 1993 and 1994 and (iii) the years ended April 30,
1995, 1996, 1997 and 1998.
The Company changed its fiscal year-end from December 31 to April 30
on May 2, 1994. The financial data presented below for, and at the end of, the
four-month period ended April 30, 1993, has been derived from the unaudited
consolidated financial statements of the Company. In the opinion of management,
the financial data includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data.
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 FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31, APRIL 30, APRIL 30,
------------ ------------------------ -----------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA: 1993 1993 1994 1995 1996 1997 1998
------------ ---------- ------------ ----------- ------------ ----------- -----------
Net Sales $50,629 $13,795 $16,332 $55,876 $59,169 $59,481 $76,804
Operating Income 13,244 2,299 1,191 3,204 (4,248) 1,538 517
Net income (loss) from continuing 12,316 2,040 1,081 2,596 (5,149) 702 (968)
operations
Discontinued Operations (6,491) (1,700) (2,600) (4,989) (8,046) (5,662) (518)
Extraordinary item -- -- -- -- (223) (a) -- --
Net Income (loss) $ 5,825 $ 340 $(1,519) $(2,393) $(13,418) $(4,960) $(1,486)
====== ====== ====== ====== ======= ====== ======
Income (Loss) Per Share - Basic:
Income (loss) from continuing $ .14 $ (.28) $ .03 $ (.04)
operations
Discontinued Operations (.27) (.44) (.27) (.02)
Extraordinary Item -- (.01) -- --
----------- ------------- ------------ -----------
Net Loss Per Share $ (.13) $ (.73) $ (.24) $ (.06)
====== ======= ====== ======
Income (Loss) Per Share - Diluted:
Income (loss) from continuing
operations $ .14 $ (.28) $ .03 $ (.04)
Discontinued Operations (.27) (.44) (.24) (.02)
Extraordinary Item -- (.01) --
------------- ------------- ------------ -----------
Net Loss Per Share $ (.13) $ (.73) $ (.21) $ (.06)
============= ============= ============ ===========
Average common and common equivalent
shares - Basic 16,181,000 18,354,000 21,151,000 26,451,000
=========== ============= ============ ===========
Average common and common equivalent
shares - Diluted 17,981,000 18,354,000 23,557,000 26,451,000
=========== ============= ============ ===========
(a) Write off of unamortized deferred financing fees as a result of the early extinguishment of debt.
15
DECEMBER 31, APRIL 30,
------------- --------------------------------------------------------------------
1993 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working Capital (deficiency) $ 5,447 $ 1,442 $ 444 $ (585) $ (7,664) $ (2,957) $ 1,472
Total Assets 13,877 13,103 17,665 22,334 23,494 27,804 40,063
Long-term debt 1,057 2,170 2,509 3,642 2,338 5,001 2,415
Total shareholders'
equity (deficit) 6,893 1,761 4,768 1,967 (3,706) (2,000) 12,718
16
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. Utilizing five regional staging and
configuration centers and its own field deployment team of approximately 450
people operating out of 15 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
end-user 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, a systems integrator with a focus on
installation services.
Since the acquisition of Datatec Industries 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.
17
The Company's current business represents a substantial change from
the Company's historical line of business. Consequently, the Company's
historical results of operations do not reflect combined operations relating to
its current business for a significant period of time and such results may not
be indicative of the Company's future results of operations.
The Company's deployment services are generally provided at a fixed
contract price pursuant to purchase orders or other written agreements with its
customers. Although certain traditional customers of Datatec Industries continue
to order services through oral agreements, the Company is in the process of
changing its procedure to assure that in the future, where possible, all
services will be provided under written agreements or purchase orders.
The Company generally invoices its customers for its services after
installation is completed at each customer site, and recognizes revenue relating
to such site at the time invoices are issued. The Company recognizes revenue on
certain long-term contracts on the percentage of completion basis. The Company
defers certain deployment costs such as engineering, planning and project
management costs and amortizes such costs as it recognizes revenue from such
projects. The Company's cost of services consists of three main categories:
labor, materials and project expense. 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 uses percentage of completion accounting for certain
contracts with a long-term duration.
As of April 30, 1998, the Company has net operating loss
carryforwards for Federal tax purposes of approximately $11 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, 1998,
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. The Signatel, HH and Datatec Industries acquisitions have been
accounted for as pooling of interests and the financial information for all
periods represents the combined results of all companies. The acquisition of
CASI was accounted for as a purchase and the operations of CASI have been
included from the date of acquisition. In addition, the Company decided to
discontinue its business of distributing data communications equipment in June
1997. As a result of the Company's discontinuance of this business, all
18
financial information has been restated to reflect such operations as
discontinued in all periods presented.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1998 AND 1997
NET SALES. Net sales for the year ended April 30, 1998 were $76.8
million compared to $59.5 million for the year ended April 30, 1997,
representing an increase of 29.1%. The increase is the result of increased
demand for the Company's deployment services.
GROSS PROFIT. Gross profit for the year ended April 30, 1998 was
$29.6 million compared to $22.3 million for the year ended April 30, 1997. Gross
profit as a percentage of net sales was 38.5% for the year ended April 30, 1998
compared to 37.5% for the year ended April 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the year ended April 30, 1998 were $29.1 million
compared to $20.8 million for the year ended April 30, 1997, representing an
increase of 39.9%. As a percentage of net sales, selling, general and
administrative expenses represented 37.7% for the year ended April 30, 1998 and
34.8% for the year ended April 30, 1997. The increase in selling, general and
administrative expense is the result of the Company's continued investment in
supporting its ability to sell and deliver software enabled rapid deployment
services. The Company's expense structure enables it to provide nationwide
deployment capabilities to its clients and believes that it is now capable of
supporting significantly higher sales volumes without proportionate cost
increases.
INTEREST EXPENSE. Interest expense for the year ended April 30, 1998
was $1.9 million, compared to $1.2 million for the year ended April 30, 1997.
The weighted average outstanding debt for the year ended April 30, 1998 was
$14.5 million compared to $12.8 million for year ended April 30, 1997. For the
year ended April 30, 1998 interest expense of $201,000 related to the
amortization of deferred financing fees associated with the Company's credit
facility.
INCOME TAXES. The income tax benefit of $400,000 in 1998 relates to
the Company's ability to sell its state income tax net operating loss
carryforwards as a result of recent changes in the New Jersey tax law. The
Company has provided a tax benefit as a result of its review of the new tax law
and its expected ability to realize the benefits of such state net operating
loss carryforwards
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1997 AND 1996
NET SALES. Net sales for the year ended April 30, 1997 were $59.5
million compared to $59.2 million for the year ended April 30, 1996,
representing an increase of approximately 0.5%. During the year, the Company
acquired two businesses, and discontinued its data communications equipment
business at year-end. These changes had a negative impact of sales during the
period.
GROSS PROFIT. Gross profits for the year ended April 30, 1997 were
$22.3 million compared to $25.0 million for the year ended April 30, 1996. Gross
profit as a percentage
19
of net sales was 37.5% for the year ended April 30, 1997 compared to 42.2% for
the year ended April 30, 1996. The decrease in gross profit margin was primarily
attributable to a lack or working capital. During the year, the Company
experienced delays in receiving materials, incurred additional costs in
delivering materials on a rush basis and was less efficient in delivering its
services to customers as a result of delays caused by a lack of working capital.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended April 30, 1997 were $20.8 million
compared to $29.2 million for the year ended April 30, 1996, representing 34.9%
and 49.4% of net sales, respectively. Included in the year ended April 30, 1996
is a restructuring charge of $6.8 million recorded by Datatec Industries. In
April 1995, Datatec Industries began an expansion plan which included the
addition of a marketing group, additional salespeople, equipment and several new
facilities including a new headquarters. In April 1996, Datatec Industries
realized the expansion plan was overaggressive and began taking corrective
actions. Datatec Industries relocated its headquarters facility to smaller, less
expensive offices, and sold certain furniture and fixtures associated with the
old headquarters facility.
INTEREST EXPENSE. Interest expense for the year ended April 30, 1997
was $1.2 million compared to $938,000 for the year ended April 30, 1996,
representing an increase of 23.1%. This increase was attributed to a write off
and amortization of defined financing fees associated with the Company's credit
facility that was replaced on March 1, 1997, as well as a 0.25% increase in
interest rates.
INCOME TAXES. Income taxes for the year ended April 30, 1997 were
$111,000 compared to a benefit of $37,000 for the year ended April 30, 1996. The
income taxes of $111,000 represent taxes on income of HH prior to its
acquisition by the Company on July 31, 1996. The benefit of $37,000 represents a
foreign tax benefit recorded by Signatel.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1996 AND 1995
NET SALES. Net sales for the year ended April 30, 1996 were $59.2
million compared to $55.9 million for the year ended April 30, 1995,
representing an increase of 5.9%.
GROSS PROFIT. Gross profits for the year ended April 30, 1996 were
$25.0 million compared to $23.3 million for the year ended April 30, 1995. Gross
profit as a percentage of net sales was 42.2% for 1996 and 41.6% for 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended April 30, 1996 were $29.2 million
compared to $20.1 million for the year ended April 30, 1995, representing 49.4%
and 39.5% of net sales, respectively. The Company began an expansion program in
late 1995 and incurred a substantial portion of the additional costs of such
expansion during fiscal 1996. During April 1996, the Company realized the
expansion plan was overaggressive and took action
20
to restructure its business. Included in the year ended April 30, 1996 are $6.8
million of restructuring changes. These restructuring changes included projected
cash outflows for personnel severance and facilities consolidation as well as
write-downs of certain of the Company's long-lived assets.
INTEREST EXPENSE. Interest expense for the year ended April 30, 1996
was $938,000 compared to $495,000 for the year ended April 30, 1995,
representing an increase of 89.5%. This increase was due to a significant
increase in the average borrowing outstanding to fund increases in receivables
and inventory.
INCOME TAXES. The Company reported an income tax benefit of $37,000
for the year ended April 30, 1996 compared to an income tax provisions of
$112,000 for the year ended April 30, 1995. The benefit resulted from a benefit
reported by the Company's subsidiary, Signatel. The income tax provision
represents a state income tax provision for Datatec Industries. During the year
ended April 30, 1995, Datatec Industries was taxes as a Subchapter "S"
corporation and provided for state income taxes in those states that did not
recognize Subchapter "S" status.
BACKLOG
- -------
Backlog for the Company's services as of July 1, 1998 totaled $45.5
million compared to $38.0 million as of July 1, 1997. Backlog consists of
purchase orders, written agreements and oral 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, 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, 1998 were $317,000 compared
to $1.1 million as of April 30, 1997.
During 1998, cash used by operations was $8.6 million compared to
1997 cash usage of $11.2 million. A significant use of cash resulted from a $6.2
million increase in accounts receivable.
Cash used for investing activities during 1998 were $3.1 million
compared to $1.3 million in 1997. The Company used $2.4 million for capital
expenditures, primarily computer equipment. During the year the Company
significantly upgraded its internal
21
computing and communications environment. The Company also used approximately
$.7 million to acquire the remaining 20% of Computer-Aided Software Integration,
Inc. In addition to the cash paid, the Company entered into a note payable for
approximately $1.8 million.
Cash provided by financing activities for the year ended April 30,
1998 was $10.9 million compared to $11.5 million for the year ended April 30,
1997. In 1998, warrant holders exercised approximately 2.7 million warrants
resulting in net proceeds to the Company of $9.7 million. In private equity
placements the Company issued 855,000 shares of common stock for net proceeds of
$3.1 million.
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, 1998 approximately $8.9 million was outstanding under the revolving credit
facility and $1.6 million was outstanding under the term loan.
As of April 30, 1998, the Company had working capital of $1.5
million compared to a working capital deficiency of $3.0 million at April 30,
1997. The improvement in working capital is attributable to the above mentioned
equity offering and loans.
As of April 30, 1998, the Company had net operating loss
carryforwards for income tax purposes of $11 million to offset future taxable
income. Such net operating loss carryforwards expire at various dates through
2013.
The Company believes it has adequate liquidity and resources to
sustain current operations for the next twelve (12) months.
IMPACT OF THE YEAR 2000 ISSUE
Many computer systems and software products currently in use by
businesses and government organizations are coded to accept two digits, rather
than four, to specify the year. Such computer systems and software products will
be unable to properly interpret dates beyond the year 1999, which could lead to
business disruptions (the "Year 2000 Issue"). As a result, in less than two
years, computer systems and/or software used by many companies may need to be
upgraded to properly interpret dates beyond 1999. The Company's technical
personnel are in the process of assessing the impact of the Year 2000 Issue on
the Company's products.
Based on a recent assessment of its internal computer systems, the
Company determined that it will be required to modify or replace portions of its
internal software so that its computer systems will properly utilize dates
beyond December 31, 1999. The
22
Company is in the process of performing its Year 2000 modifications and expects
to have its internal computer systems year 2000 compliant by the end of 1999. If
such modifications are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. The total
cost of the program is being funded through operating cash flows. Costs
associated with the purchase of new software will be capitalized. The total cost
associated with the required modifications and conversions is not expected to be
material to the Company's consolidated results of operations and financial
position.
INFLATION
In the opinion of management, inflation has not had a material
adverse effect on its results of operations.
23
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 . . . . . . . . . . . . . . . . . .25
Consolidated Balance Sheets as of April 30, 1997 and 1998 . . . . . . . . . 26
Consolidated Statements of Operations for the years ended April 30, 1996,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended April 30, 1996, 1997 and 1998 . . . . . . . . . . . . 28
Consolidated Statements of Cash Flows for the years ended
April 30, 1996, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . . . 29
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .30
SCHEDULES
---------
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . 50
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.
24
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 (formerly Glasgal Communications,
Inc.) as of April 30, 1997 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended April 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Datatec
Systems, Inc. and subsidiaries as of April 30, 1997 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles.
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 27, 1998
25
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30,
--------------------------------------
1997 1998
--------------------------------------
ASSETS
- ----------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,135,000 $ 317,000
Accounts receivable, less allowances for doubtful
accounts of $520,000 and $305,000, respectively,
in 1997 and 1998 11,289,000 18,106,000
Inventory (Note 1) 2,134,000 3,118,000
Prepaid expenses and other current
assets (Note 1) 1,446,000 3,433,000
Net assets from discontinued operations (Note 5)
4,816,000 501,000
------------ ------------
Total current assets 20,820,000 25,475,000
Property and equipment, net
(Notes 1, 4 and 7) 3,634,000 6,012,000
Goodwill, net (Notes 1 and 2) 1,680,000 3,975,000
Other Assets (Notes 1 and 9) 1,670,000 4,601,000
------------ ------------
Total assets $ 27,804,000 $ 40,063,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings (Note 6) $ 11,675,000 $ 10,759,000
Current portion of long-term
debt (Note 7) 850,000 1,063,000
Accounts payable 5,415,000 7,085,000
Accrued liabilities 5,331,000 3,882,000
Other current liabilities 506,000 1,214,000
------------ ------------
Total current liabilities 23,777,000 24,003,000
------------ ------------
Due to related parties (Note 10) 1,026,000 927,000
------------ ------------
Long-term debt (Note 7) 5,001,000 2,415,000
------------ ------------
Commitments and contingencies (Note 12)
Shareholders' equity (deficit) (Notes 1, 8 and 15)
Preferred stock, $.001 par value (4,000,000 -- --
shares authorized, no shares issued and outstanding)
Common stock, $.001 par value (authorized 75,000,000
shares; issued and outstanding 23,661,000 and
29,007,000 shares as of April 30, 1997 and 1998,
respectively) (Notes 8, 15 and 16) 24,000 29,000
Additional paid-in capital 10,341,000 26,603,000
Accumulated deficit (12,080,000) (13,566,000)
Cumulative translation adjustment (285,000) (348,000)
------------ ------------
Total shareholders' equity (deficit) (2,000,000) 12,718,000
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 27,804,000 $ 40,063,000
============ ============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
APRIL 30,
----------------------------------------------------------
1996 1997 1998
--------------- -------------------- ---------------
Net Sales (Note 1) $ 59,169,000 $ 59,481,000 $ 76,804,000
Cost of sales 34,217,000 37,159,000 47,208,000
------------ ------------ ------------
Gross Profit 24,952,000 22,322,000 29,596,000
Selling, general and administrative expenses
(Notes 5, 12 and 13) 29,200,000 20,784,000 29,079,000
------------ ------------ ------------
Operating income (4,248,000) 1,538,000 517,000
Other Income -- 430,000 --
Interest Expense (Notes 5 and 6) (938,000) (1,155,000) (1,885,000)
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes (5,186,000) 813,000 (1,368,000)
Provision (benefit) for income taxes (Notes 1&9) (37,000) 111,000 (400,000)
------------ ------------ ------------
Income (loss) from Continuing Operations (5,149,000) 702,000 (968,000)
Discontinued Operations (Note 5):
Loss from operations (5,762,000) (4,709,000) (518,000)
Provision for future losses (2,284,000) (953,000) --
------------ ------------ ------------
Loss Before Extraordinary Item (13,195,000) (4,960,000) (1,486,000)
Extraordinary Item (223,000) -- --
------------ ------------ ------------
Net Loss $(13,418,000) $ (4,960,000) $ (1,486,000)
============ ============ ============
INCOME (LOSS) PER SHARE - BASIC (Note 3):
Income (loss) from continuing operations $ (.28) $ .03 $ (.04)
Discontinued operations (.44) (.27) (.02)
Extraordinary item (.01) -- --
------------ ------------ ------------
NET LOSS PER SHARE - BASIC $ (.73) $ (.24) (.06)
============ ============ ============
INCOME (LOSS) PER SHARE - DILUTED:
Income (loss) from continuing operations $ (.28) .03 $ (.04)
Discontinued operations (.44) (.24) (.02)
Extraordinary item (.01) -- --
------------ ------------ ------------
NET LOSS PER SHARE - DILUTED $ (.73) $ (.21) $ (.06)
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - BASIC 18,354,000 21,151,000 26,451,000
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - DILUTED 18,354,000 23,557,000 26,451,000
============ ============ ============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
27
Datatec Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 8)
Preferred Stock Common Stock
---------------------------------------------------
Issued Additional
---------- ---------- -------------------------- Paid-in capital
Shares Dollars Shares Dollars Preferred
---------- ---------- -------------- ---------- -----------
Balance at April 30, 1995 - $ - 15,799,000 $ - $ -
========== ========== ============== ========== ===========
Distributions to S Corporation Shareholders
Private placement offering of common stock and
warrants and bridge financing (Note 7) 443,000
Public offering of common stock
and warrants (Note 7) 3,566,000
Acquisition and cancellation of
common stock (13,000)
Common stock issued for options exercised 189,000
Change in par value of common stock (Note 14) 20,000
Private placement offering of common stock (Note 2) 313,000 -
Stock issued for business acquisition (Note 2) 44,000 -
Net loss
Effect of exchange rate changes
---------- ---------- -------------- ---------- -----------
Balance at April 30,1996 - - 20,341,000 $ 20,000 -
---------- ---------- -------------- ---------- -----------
Distributions to S Corporation Shareholders
Issuance of preferred stock (Note 7) 350,000 6,562,000
Conversion of preferred stock into common stock (Note 7) (350,000) 2,500,000 3,000 (6,562,000)
Exercise of warrants and options 649,000 1,000
Conversion of accounts payable into common stock (Note 7) 171,000
Conversion from S corporation status to C corporation
Net loss
Effect of exchange rates changes
---------- ---------- -------------- ---------- -----------
Balance at April 30, 1997 - - 23,661,000 24,000 -
========== ========== ============== ========== ===========
Exercise of warrants and options 3,860,000 4,000
Private placement offering of common stock 855,000 1,000
Conversion of long-term debt into common stock 631,000 -
Net income
Effect of exchange rates changes
---------- ---------- -------------- ---------- -----------
Balance at April 30, 1998 - $ - 29,007,000 $ 29,000 $ -
========== ========== ============== ========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
Additional Retained Cumulative Total
Paid-in capital Earnings Translation Shareholders'
Common (Deficit) Adjustment Equity
--------------- --------------- ------------ ---------------
>
Balance at April 30, 1995 $ 2,974,000 $ (1,006,000) $ (98,000) $ 1,870,000
=============== =============== ============ ===============
Distributions to S Corporation Shareholders (667,000) (667,000)
Private placement offering of common stock and
warrants and bridge financing (Note 7) 579,000 579,000
Public offering of common stock
and warrants (Note 7) 6,535,000 (50,000) 6,485,000
Acquisition and cancellation of
common stock (27,000) (27,000)
Common stock issued for options exercised 123,000 123,000
Change in par value of common stock (Note 14) (20,000) -
Private placement offering of common stock (Note 2) 1,207,000 1,207,000
Stock issued for business acquisition (Note 2) 291,000 291,000
Net loss (13,418,000) (13,418,000)
Effect of exchange rate changes (149,000) (149,000)
--------------- --------------- ------------ ---------------
Balance at April 30,1996 $ 11,662,000 $ (15,141,000) $ (247,000) $ (3,706,000)
--------------- --------------- ------------ ---------------
Distributions to S Corporation Shareholders (837,000) (837,000)
Issuance of preferred stock (Note 7) 6,562,000
Conversion of preferred stock into common stock (Note 7) 6,559,000 -
Exercise of warrants and options 429,000 430,000
Conversion of accounts payable into common stock (Note 7) 549,000 549,000
Conversion from S corporation status to C corporation (8,858,000) 8,858,000 -
Net loss (4,960,000) (4,960,000)
Effect of exchange rates changes (38,000) (38,000)
--------------- --------------- ------------ ---------------
Balance at April 30, 1997 $ 10,341,000 $ (12,080,000) $ (285,000) $ (2,000,000)
=============== =============== ============ ===============
Exercise of warrants and options 11,021,000 11,025,000
Private placement offering of common stock 3,079,000 3,080,000
Conversion of long-term debt into common stock 2,162,000 2,162,000
Net loss (1,486,000) (1,486,000)
Effect of exchange rates changes (63,000) (63,000)
--------------- --------------- ------------ ---------------
Balance at April 30, 1998 $ 26,603,000 $ (13,566,000) $ (348,000) $ 12,718,000
=============== =============== ============ ===============
28
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED
------------------------------------------
APRIL 30,
1996 1997 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $(13,418,000) $ (4,960,000) $ (1,486,000)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 1,114,000 1,200,000 2,090,000
Extraordinary item 223,000 -- --
Changes in operating assets and liabilities net of
effects from purchase of CASI
(Increase) decrease in accounts
receivable, net 1,860,000 (3,819,000) (6,817,000)
(Increase) decrease in inventory (378,000) 1,104,000 (984,000)
(Increase) decrease in prepaid expenses and other
assets
2,044,000 (940,000) (2,787,000)
(Increase) decrease in net assets from discontinued operations (777,000) (1,590,000) 327,000
Increase (decrease) in accounts payable, accrued
liabilities and other
3,661,000 (2,169,000) 1,093,000
------------ ------------ ------------
Net cash used in
Operating activities (5,671,000) (11,174,000) (8,564,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (725,000) (1,349,000) (2,404,000)
Net cash used for CASI acquisition (705,000) -- (670,000)
Advances to CASI (1,135,000) -- --
------------ ------------ ------------
Net cash used in investing activities (2,565,000) (1,349,000) (3,074,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 8,337,000 3,338,000 (2,749,000)
Net proceeds (Payments) of indebtedness (5,103,000) 958,000 (374,000)
Net Proceeds from Common Stock/Warrant issuances 7,772,000 6,992,000 14,105,000
Net proceeds from related parties -- 1,026,000 (99,000)
Distributions to Shareholders (667,000) (837,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 10,339,000 11,477,000 10,883,000
------------ ------------ ------------
Net effect of foreign currency translation on cash (149,000) (38,000) (63,000)
------------ ------------ ------------
Net (decrease) increase in cash 1,954,000 (1,084,000) (818,000)
CASH AT BEGINNING OF PERIOD 265,000 2,219,000 1,135,000
------------ ------------ ------------
CASH AT END OF PERIOD $ 2,219,000 $ 1,135,000 $ 317,000
============ ============ ============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
29
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------------------
Business--
Datatec Systems, Inc. (formerly Glasgal Communications, Inc.),
(the "Company"), and its subsidiaries are in the business of
providing software-enabled technical configuration,
integration and implementation services (see Note 5).
Basis of Presentation--
The consolidated financial statements include the accounts of the
Company and its subsidiaries. These consolidated financial
statements include, for all periods presented, the accounts of
all companies acquired under the pooling of interests method
of accounting (see Note 2). All intercompany accounts and
transactions have been eliminated.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As reflected in the consolidated financial
statements, the Company has sustained recurring net losses and
operating cash flow deficits. During fiscal 1997, the Company
completed two acquisitions which have substantially increased
business operations. The integration of these operations
resulted in significant cash requirements. As a consequence,
the Company has had to rely primarily on private placements of
equity to fund its working capital requirements.
Subsequent to April 30, 1998, the Company raised net proceeds of
approximately $2,350,000 in a private equity placement of
preferred stock (see Note 8). Although there can be no
assurance that additional funds will be obtained, if needed,
management believes that its fiscal 1999 operating plan is
attainable and, together with the funds received from the
private placement subsequent to April 30, 1998, will provide
sufficient funds to enable the Company to meet its debt
service and working capital requirements.
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
30
estimates. During 1998, the Company credited operations in the
amount of $1,200,000, representing the reversal of certain
accruals no longer deemed necessary.
Revenue Recognition--
Revenues from configuration, integration and installation
services are recognized as the services are provided.
Precontract Costs--
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, 1997
and 1998, approximately $980,000 and $1,810,000, respectively,
of such costs are included in other current assets.
Cash and Cash Equivalents--
The Company considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Included in other assets is $210,000 and $132,000 of
restricted cash as of April 30, 1997 and 1998, respectively.
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 software costs 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
utilizing the straight-line method over the economic lives of
the related products, not to exceed three years. Approximately
$300,000 and $780,000 of capitalized software costs are
included in other assets in the accompanying consolidated
financial statements as of April 30, 1997 and 1998,
respectively.
Goodwill--
Goodwill is amortized on a straight-line basis over 10 years.
31
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 (see Note 14).
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. Income statement 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 separate component of shareholders' equity (deficit).
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).
32
Reclassifications--
Certain prior year amounts have been reclassified to conform to
the current year financial statement presentation.
(2) MERGERS AND ACQUISITIONS:
-------------------------
Computer-Aided Software Integration, Inc.--
On April 24, 1996, the Company acquired 80% of the common stock
of Computer-Aided Software Integration, Inc. (CASI), a company
that develops and licenses software products, in exchange for
$500,000 and 44,260 shares of common stock of the Company
valued at $6.57 per share based on the average trading price
of the Company's common stock for several days before and
after the date of the acquisition agreement. The acquisition
was accounted for as a purchase.
In connection with this transaction, the Company completed a
private placement offering in March 1996 of 312,500 shares of
common stock. The net proceeds of the private placement
offering, $1,207,000, were used to acquire 80% of the issued
and outstanding shares of common stock of CASI, and to provide
CASI with working capital.
In March 1998, the Company acquired the remaining 20% of CASI for
$2,414,000. As part of the purchase price the Company issued a
convertible note due June 15, 1998 for $1,833,000 (see Note
6). This note was paid in full subsequent to year-end. In
connection with the purchase, the Company entered into a
two-year non-compete agreement with the minority shareholder.
Consideration for the non-compete agreement was $77,000.
HH Communications, Inc.--
On July 31, 1996, the Company acquired all of the issued and
outstanding shares of HH Communications, Inc. (HH), a systems
integrator, in exchange for 1,500,000 shares of its common
stock. The transaction has been accounted for as a pooling of
interests.
Datatec Industries, Inc. --
On October 31, 1996, the Company acquired 98.5% of the issued and
outstanding shares of Datatec Industries, Inc., an implementor
of information communications networks, in exchange for
4,000,000 shares of its common stock. The transaction has been
accounted for as a pooling of interests. The remaining 1.5% of
Datatec Industries, Inc. was acquired for 50,000 shares of
common stock on August 27, 1997.
33
(3) EARNINGS PER SHARE:
-------------------
The Company has adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") which
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:
1996 1997 1998
---------------------- -------------------- ------------------
NUMERATOR:
Basic & Diluted-
Income (loss) from continuing operations ($5,149,000) $ 702,000 ($968,000)
Discontinued operations (8,046,000) (5,662,000) (518,000)
Extraordinary item (223,000) -- --
---------------------- -------------------- ------------------
Net loss - Basic and Diluted ($13,418,000) ($4,960,000) (1,486,000)
====================== ==================== ==================
DENOMINATOR:
Weighted average number of common
shares outstanding - Basic 18,354,000 21,151,000 26,451,000
Incremental shares from assumed
Conversions of options and debt -- 2,406,000
---------------------- -------------------- ------------------
Weighted average number of common shares
and common share equivalents- Diluted 18,354,000 23,557,000 26,451,000
====================== ==================== ==================
Earnings per share - Basic:
Income (loss) from continuing operations ($0.28) $0.03 ($0.04)
Discontinued operations (0.44) (0.27) (0.02)
Extraordinary item (0.01) -- --
---------------------- -------------------- ------------------
Net loss ($0.73) ($0.24) ($0.06)
====================== ==================== ==================
Earnings per share - Diluted:
Income (loss) from continuing operations ($0.28) $0.03 ($0.04)
Discontinued operations (0.44) (0.24) (0.02)
Extraordinary item (0.01) --
---------------------- -------------------- ------------------
Net loss ($0.73) ($0.21) ($0.06)
====================== ==================== ==================
34
In 1996 and 1998, approximately 2,661,000 and 4,339,000,
respectively, of outstanding options have been excluded from
the computation of diluted EPS because to do so would have
been antidilutive for those periods. In 1997, the dilutive
effect of outstanding options have been included in the
computation of diluted EPS because the Company negotiated
earnings from continuing operations.
Subsequent to year-end, the Company issued 300 shares of Series
E Cumulative Convertible Preferred Stock in a private
placement (see Note 8). The preferred shares convert to
common stock at various conversion rates, as defined. The
impact of these shares, had they been converted to common
stock, would have been immaterial to the basic and diluted
earnings per share calculations.
(4) PROPERTY AND EQUIPMENT:
-----------------------
The following is a summary of property and equipment--
APRIL 30,
------------------------
1997 1998
----------- -----------
Equipment $ 977,000 $ 1,955,000
Computer Equipment 3,158,000 4,661,000
Furniture, fixtures and leasehold improvements 2,444,000 4,135,000
----------- -----------
6,579,000 10,751,000
Less--Accumulated depreciation and amortization
2,945,000 4,739,000
----------- -----------
Property and equipment, net $ 3,634,000 $ 6,012,000
=========== ===========
(5) DISCONTINUED OPERATIONS:
------------------------
Prior to fiscal 1997, the Company had primarily been a
distributor of data communications equipment. Commencing with
the Company's acquisition of Signatel in October 1994, the
Company revised its business strategy to expand its
implementation of information communication network services.
The acquisition of Datatec Industries, Inc. and CASI (see Note
2) enabled the Company to transition from predominantly a
reseller of data communications network equipment to an open
systems integrator, providing software enabled configuration,
deployment and implementation services. The acquisition of HH
(see Note 2), a systems integrator, provided the Company the
opportunity to introduce these services to HH's premier
customers.
After several months of assimilating the Datatec Industries, Inc.
acquisition and repositioning its services, the Company, in
June 1997, with the concurrence of its Board of Directors,
discontinued its data communications equipment distribution
business. The Company is no longer a distributor of data
communications equipment and will only honor its existing
commitments. Accordingly, as of April 30, 1996,
35
1997 and 1998, the Company has reflected this business as a
discontinued operation in the accompanying consolidated
statements of operations.
Revenues from such operations were $43,033,000, $35,178,000 and
$3,386,000 for the years ended April 30, 1996, 1997 and 1998,
respectively. Included in net assets from discontinued
operations as of April 30, 1998 is a 10-year mortgage
agreement with a bank, with an outstanding balance as of April
30, 1998 of $974,000, and an interest rate of 8.05% per annum.
Beginning in the year 2002, the interest rate is subject to
adjustment, as defined.
The net loss of this business during 1998, in excess of
provisions for future losses recorded in 1997, was $518,000
and is reflected as loss from discontinued operations.
As of April 30, 1996, Datatec Industries, Inc. had discontinued
its international distribution operations, which sold computer
hardware, and its Shoppertrak division, which developed and
sold a proprietary system that provided shopper traffic
information. The loss from operations in 1996 was
approximately $2,218,000 and the provision for future losses
was approximately $2,284,000 as of April 30, 1996, all of
which was utilized in 1997. Revenues relating to these
operations were approximately $14,000,000 in 1996.
(6) 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 at 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 $8,866,000 was outstanding as of April 30,
1998. The amount of additional available borrowings, as
defined, was $1,028,000 as of April 30, 1998. The revolving
loan accrues interest at the prime rate plus 0.75% (9.25% at
April 30, 1998) and matures on March 16, 2000.
Included in short-term borrowings is $1,833,000 due to the
minority shareholder of CASI. The note bears interest at 10%
per annum. On May 1, 1998 the Company repaid the note plus
accrued interest.
36
(7) LONG-TERM DEBT:
- --- ---------------
Long term debt consists of the following:
April 30,
---------------------------------------
1997 199