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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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.
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(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
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(State of Incorporation) (I.R.S. Employer Identification No.)
20C Commerce Way, Totowa, NJ 07512-1154
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(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 and Nasdaq Small-Cap
Market
Preference Share Purchase Rights Boston Stock Exchange and Nasdaq Small-Cap
Market
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 July 30, 1999 was approximately $99,374,159. 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 July
30, 1999 was 31,160,389.
TABLE OF CONTENTS
Part I Page #
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 16
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 52
Part III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management 59
Item 13. Certain Relationships and Related Transactions 60
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 61
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FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements. Factors that may cause such differences include, but
are not limited to, competition, technological advances and availability of
managerial personnel. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Datatec Systems, Inc. undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that arise
after the date hereof.
PART I
Item 1. Business
The Company
Datatec Systems, Inc. and 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. 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 is expecting to begin generating revenues from
licensing its e-Deploy.com(TM) web-based software tool through its subsidiary
called e-Deploy.com, Inc. during fiscal 2000.
The Company utilizes a software-enabled 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 primarily on a fixed time/fixed cost basis. The components of the
Company's implementation model include the following:
o The utilization of a proprietary web-based software tool,
e-Deploy.com(TM), which includes the Integrator's Workbench Product
SeriesTM ("Integrator's Workbench"), that provides pricing,
assessment, design and project management automation and enhances
the speed and accuracy of the deployment process. The automation
also significantly reduces the labor costs and technical skills
required to accomplish most complex deployment projects.
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o The employment of a field deployment team throughout the United
States and Canada that is capable of delivering complex
technologies, which include computing platforms, cabling, and
infrastructure.
o The application of five staging and configuration centers, to
conduct numerous 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 19 offices and has a field deployment
team of approximately 390 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.
The Company is incorporated in Delaware and its stock is traded on
the Nasdaq Small-Cap Market under the symbol "DATC" and the Boston Stock
Exchange under the symbol "DAT". 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 that are creating an increasing 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
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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.
Datatec is positioned to address the demand for configuring,
integrating and installing workstations, servers, routers, switches and the
latest multi-service devices onto networks through its software-enabled process
and methodology. Through proper utilization of its e-Deploy.com and Integrator's
Workbench tools, 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. In the past
few months, some of Datatec's end-user customers have expressed an interest in
licensing Datatec's e-Deploy automated tools and processes to use as a framework
for helping them plan, monitor and manage complex IT deployment implementations.
In addition, Datatec's Technology Provider clients are also expressing interest
in the software as it allows them to more easily define, develop and deliver IT
solutions to their own customers and end users.
e-Deploy.com
The e-Deploy solution is a compelling and unique mix of flexible
tools, project logistics, process mapping/automation and connected, virtual
"communities" of users and participants. Leveraging the core benefits of new-era
IT applications and platforms, the solution combines the functionality of a
full-featured customer relationship management ("CRM") application with the
process framework, but includes the "just in time" information value of an
enterprise resource planning ("ERP") application.
The application platform is designed to be open and standards-based,
and can easily integrate with a wide variety of other existing business systems
including back office applications, management and support platforms and process
automation tools. The e-Deploy solution is generally accessed via an Internet
web browser connection.
At its highest level, e-Deploy has been grouped into five discreet applications
sets that can be combined to provide workflow continuum and to more effectively
integrate with an organization's existing platforms and applications solutions.
Each application module and associated tool, leverages related project
information and integrates seamlessly with one another. The five modules that
make up e-Deploy are:
o Bid & Proposal Engine
In practice, the Bid and Proposal Engine prompts users through a series of
simple instructions
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that feed the project assessment tools. The user is left with a detailed
proposal, scope of work, work estimates, pricing and contract draft. The
Statement of Work ("SOW") and other deliverables provide a digital "baseline"
for other e-Deploy.com modules. This application has proven to reduce sales lead
times by up to 90% and truly leverages an organization's professional resources
by maximizing their ability to quickly and accurately respond to complex
opportunity assessment.
o Preparation & Design
This section organizes the collection of data from site and equipment surveys,
creates a gap analysis and drives to a fully designed and ready to implement
project plan. e-Deploy provides the user with tools to feed project and
equipment specific configuration files that construct the base for its
automated configuration solution sets. Once confirmed, this module provides a
backdrop for access to other e-deploy tools that organize a project. The tool
set provides a base information flow for project contacts, site information,
schedules and begins the project manual process. This approach
institutionalizes the proven e-Deploy to successful project fulfillment, and
feeds other modules for project deployment steps.
o Configuration & Integration (Integrators' Workbench)
e-Deploy's automated configuration tools load software on any manner of
desktop-based servers, PCs, applications or operating systems as well as
complex internetworking/multiservices equipment including routers, switches
and IP telephony devices. These automated tools reduce configuration time by
50% to 90% compared with other manual and semi-automatic approaches and
prepare these devices for easy to complete, plug and play installations. These
tools are available through the e-Deploy.com web-based Extranet site and can
be used either onsite or via multi-disciplinary configuration centers.
o Deployment Management
This module builds the base for managing information flow for equipment
shipments, completion schedules, configuration files, quality tracking and
related customer satisfaction statistics. e-Deploy.com has an innovative
"dashboard" report that consolidates all the many steps and report formats
into a single "at a glance" report for the project managers to assess project
progress.
o Transition & Maintenance
Once deployed, this module organizes as-built drawings and digitized images
and maintenance reports, installed equipment serial numbers, and creates the
configuration database for future reference. e-Deploy.com provides on-line
product registration information, and becomes a source for on-site
configuration rebuilds for update or maintenance purposes.
In the hands of any Technology Provider, including Datatec, the software tools
provide support in their endeavors to:
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o Shorten time to market for new product introductions;
o Create a fast unified, efficient and accurate end-user pricing
methodology;
o Obtain real time, secure feedback from its channel;
o Provide their channel opportunities to propose and bid on leads with
minimal resource and at high speed;
o Provide the channel with a well-proven and accepted implementation
process.
Other benefits provided by e-Deploy technology providers, as well as
end-users, include the following:
o Planning, monitoring and executing complex technology implementations. The
integrated applications of e-Deploy allows users to better manage the
myriad of personnel, issues, customer needs, and logistics that all need
to be properly coordinated to ensure success.
o Reduction in labor costs and increased productivity. 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 become 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.
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.
-7-
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").
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. TRM was launched in April 1998 and is the primary solution supporting
the Company's new relationship with Microsoft Corporation ("Microsoft"). Typical
TRM projects may include one or in some cases all of the following:
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.
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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 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 mission is to see its processes and methodologies
become the defacto standard for technology deployment. The strategy is to
achieve this by both providing direct services to end-users and by providing
resources or licensing its software to Fortune 2000 customers and large
Technology Providers who utilize the tools to deploy technology using their own
resources. The Company is also pursuing the following strategies:
o Continuing to invest in the research and development of automated
tools through a separate subsidiary called e-Deploy.com, Inc.;
o Creating strong long-term relationships with end-user clients and
Technology Providers, thereby providing a source for repeatable
business;
o Engaging its salesforce to support the selling efforts of its
strategic partners like Cisco, IBM and Microsoft, as well as selling
to direct end-user clients;
o Supplementing its organic growth with strategic acquisitions where
it can leverage its tools and processes and methodology to
significantly enhance the gross margins and quality of the acquired
company's revenues and expand 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.
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The Company has two sales forces comprised of 40 individuals. The
direct sales division is dedicated to bringing full solutions to end-users while
the indirect division provides solutions to Technology Providers in the form of
either resources or process via the Company's web-based tools. 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 clients. The DRC consists of the following five stages: (i)
initiation, (ii) definition, (iii) testing, (iv) rollout, and (v) feedback. This
process has enabled the Company to monitor and improve client satisfaction.
There is significant interaction between the various departments in
the Company to bring optimal solutions to its clients. 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 clients.
Clients
The Company performs deployment services directly to a variety of
end-user clients across a broad range of industries. The Company also delivers
its services to end-users through indirect clients that utilize the Company's
deployment services on a project-by-project basis. The Company's clients
include:
Direct Indirect
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American Stores Company Automated Data Processing, Inc.
Blockbuster Entertainment Inc. Bell Atlantic Network Integration, Inc.
Federated Department Stores, Inc. Cisco Systems, Inc.
Lowe's Companies, Inc. Computer Sciences Corporation
Office Depot, Inc. Diebold Incorporated
Regions Financial Corporation Electronic Data Systems Corporation
Starbucks Corporation IBM Global Services
The Chubb Corporation
The Home Depot, Inc.
Toys "R" Us, Inc.
Walgreen Co.
The Company utilizes the DRC to monitor and continually improve
client satisfaction. The Company has several large repeat clients and believes
that significant opportunities exist to expand its client relationships and
leverage its existing client base. The Company will continue to emphasize client
satisfaction and seek ways to improve service in order to generate increased
repeat business.
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During each of the past three 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 revenues. For the years ended April 30, 1999,
1998 and 1997, the Company's 15 largest customers accounted for approximately
57.3%, 51.8% and 61.5% of the Company's revenues. For the year ended April 30,
1999 Cisco Systems, Inc. accounted for approximately 10.3% of the Company's
revenues. For the year ended April 30, 1998, there were no customers who
accounted for more then 10% of the revenues. 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 revenues.
This concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter-to-quarter, based on the requirements of its customers
and the timing of delivery of services.
Competition
The Company competes with a number of other companies involved in
the design, installation, integration and servicing of computer networking
technologies, as well as companies that develop software tools to automate the
technology implementation process. The IT deployment market is highly fragmented
and characterized by a small number of very large organizations that carry out a
significant amount of deployment and a large number of small companies that in
turn carry out small amounts of deployment. In addition to direct competition,
the Company faces indirect competition from its existing customers, many of whom
internally design, integrate and deploy their own technologies. The Company,
however, knows of no other company that offers rapid IT deployment services or
software tools designed to support the delivery of complex IT solutions as their
primary business focus.
Intellectual Property
The Company relies on a combination of trade secrets, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its software developers, and when
obtainable, enters into non-disclosure agreements with its suppliers,
distributors and others so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will prove sufficient to deter misappropriation of the
Company's technologies or that the Company's competitors will not independently
develop non-infringing technologies that are substantially similar to or
superior to the Company's technology.
Employees
As of April 30, 1999, the Company had approximately 750 full-time
employees. Of these full-time employees, approximately 390 are employed under
contracts with the International Brotherhood of Electrical Workers and the
International Brotherhood of Electrical Workers Local 1430.
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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.
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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 186,767
square feet of space in 17 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 Proceedings
The Company is not a party to any legal proceedings which
individually or in the aggregate, is believed to be material to the Company's
business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently traded on the Nasdaq
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
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May 1, 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
May 1, 1998 - July 31, 1998................. $6 3/8 $3 13/16
August 1, 1998 - October 31, 1998........... $4 6/32 $1 7/8
November 1, 1998 - January 31, 1999........ $5 6/32 $2 9/16
February 1, 1999 - April 30, 1999........... $4 1/2 $2 1/4
On July 30, 1999, the closing sale price for the Company's Common
Stock as reported on Nasdaq was $3.625. As of July 30, 1999, there were
approximately 199 holders of record of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock
since its inception, other than distributions to shareholders in amounts
sufficient to reimburse Datatec Industries, Inc. shareholders for Federal (and
some state) income tax liabilities arising from Datatec Industries, Inc. former
status as an "S" corporation. The Company currently intends to retain any
earnings for use in the business and does not anticipate paying any dividends to
its shareholders in the foreseeable future. The Company's loan agreements with
the bank include a restriction prohibiting the payment of dividends.
Recent Sales of Unregistered Securities
During the fiscal year ended April 30, 1999, 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 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
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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. As of April 30, 1999, 180 shares of the preferred stock
had been converted into 718,860 shares of common stock. Subsequent to April 30,
1999, the remaining 120 shares of preferred stock were converted into 473,124
shares of common stock.
In February 1999, the Company sold an aggregate 533,334 shares of
common stock in a private placement to accredited investors, at a purchase price
of $3.75 per share.
-15-
Item 6. Selected Financial Data
The following table sets forth the selected financial data of the
Company for, and at the end of the years ended April 30, 1995, 1996, 1997, 1998
and 1999.
The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto appearing elsewhere herein.
Year Ended
April 30,
-----------------------------------------------------------------------------------
(in thousands, except share and per share data)
Statement of Operations Data: 1995 1996 1997 1998 1999
-------------- --------------- --------------- --------------- ------------
Revenues $ 55,876 $ 59,169 $ 59,481 $ 76,804 $ 93,751
Operating income 3,204 (4,248) 1,538 517 1,662
Income (loss) from continuing operations 2,596 (5,149) 127 (1,218) (191)
Discontinued operations (4,989) (8,046) (5,662) (2,768) (315)
Extraordinary item -- (223)(a) -- -- --
Net income (loss) $ $ (2,393) $(13,418) $ (5,535)(b) $ (3,986) $ (506)
============== =============== =============== =============== ============
Income (loss) per share - Basic:
Income (loss) from continuing operations $ .16 $ (.28) $ (.09) (b) $ (.05) $ (.01)
Discontinued operations (.31) (.44) (.27) (.10) (.01)
Extraordinary item -- (.01) -- -- --
============== =============== =============== =============== ============
Net loss per share $ (.15) $ (.73) $ (.36) (b) $ (.15) $ (.02)
============== =============== =============== =============== ============
Income (loss) per share - Diluted:
Income (loss) from continuing operations $ .14 $ (.28) $ (.09) $ (.05) $ (.01)
Discontinued operations (.27) (.44) (.27) (.10) (.01)
Extraordinary item -- (.01) -- -- --
-------------- --------------- --------------- --------------- ------------
Net loss per share $ (.13) $ (.73) $ (.36) $ (.15) $ (.02)
============== =============== =============== =============== ============
Average common and common equivalent
shares - Basic 16,181,000 18,354,000 21,151,000 26,451,000 29,517,000
=============== =============== ============= ============== ============
Average common and common equivalent
shares - Diluted 17,981,000 18,354,000 21,151,000 26,451,000 29,517,000
=============== =============== ============= ============= ============
(a) Write off of unamortized deferred financing fees as a result of the early
extinguishment of debt.
(b) The net loss applicable to common shareholders has been increased by
$2,128,000, representing the non-cash accretion of the discount on convertible
preferred securities.
April 30,
----------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $(585) $(7,664) $(2,957) $ 1,022 $ 2,297
Total assets 22,334 23,494 27,804 37,813 40,603
Long-term debt 3,642 2,338 4,751 2,415 607
Total shareholders'
equity (deficit) 1,967 (3,706) (1,750) 10,468 14,729
-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 and licensing software tools to support
enterprises in the delivery of complex IT solutions. Utilizing five regional
staging and configuration centers and its own field deployment team of
approximately 390 people operating out of 19 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, Inc., a systems integrator with a focus
on installation services.
Since the acquisition of Datatec Industries, Inc. in October 1996,
the Company has transitioned its business to providing rapid deployment
services. In June 1997, the Company discontinued its data communications
equipment distribution business.
During fiscal 1999 the Company began expanding its development of
software tools to incorporate several new applications in addition to its
Integrators Workbench and has incorporated them into a new product named
e-Deploy.com. As previously mentioned in Item 1., these applications include:
Bid and Proposal, Preparation and Design, Deployment Management and Transition
and Maintenance. In light of potential conflicts between the licensing of
e-Deploy.com and providing deployment services, the Company formed a new
subsidiary in July 1999. This new subsidiary is focused on the development,
marketing and licensing of e-Deploy.com. The subsidiary is incorporated in
Delaware under the name e-Deploy.com, Inc..
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.
-17-
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, Inc.
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.
During fiscal 1999, the Company adopted Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The new standard provides guidance as to whether certain costs of
computer software developed or obtained for internal use should be capitalized
or expensed. In accordance with this new standard, the Company has capitalized
$681,000 of costs during fiscal 1999.
During 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities". The new standard amends previous guidance from the AICPA
that permitted capitalization of start-up costs and requires these costs to be
expensed as incurred. The Company will adopt the new standard in the first
quarter of fiscal 2000. Had the Company adopted the new standard as of April 30,
1999 the net loss of $506,000 for the year ended April 30, 1999 would have been
increased by $1,622,000 for the effect of the write-off of pre-contract costs
which were previously capitalized (see Note 1 to the Consolidated Financial
Statements).
As of April 30, 1999, the Company has net operating loss
carryforwards for Federal tax purposes of approximately $14 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, 1999,
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, Inc. 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 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, 1999 and 1998
Revenues. Revenues for the year ended April 30, 1999 were $93.8
million compared to $76.8 million for the year ended April 30, 1998,
-18-
representing an increase of 22.1%. The Company has seen increased demand for its
services from both its direct end-user clients and its indirect clients,
including its strategic partners. Revenues from the Company's indirect clients
increased by 109%, while revenues to direct end-user clients increased by 9%.
Over the past two years the Company has devoted significant efforts to
developing strategic relationships with Technology Providers. The three most
significant relationships to date include Cisco Systems, Inc., IBM and
Microsoft, Inc. Revenue from these relationships has increased from $4.9 million
in fiscal 1998 to $13.2 million in fiscal 1999.
Gross profit. Gross profit for the year ended April 30, 1999 was
$32.8 million compared to $29.6 million for the year ended April 30, 1998. Gross
profit percentage was 35.0% for the year ended April 30, 1999 compared to 38.5%
for the year ended April 30, 1998. The gross profit for the year was negatively
impacted by lower than anticipated gross margins in the third quarter. Gross
profit for the third quarter of 1999 was 31% compared to 40% for the third
quarter of 1998. The third quarter gross profit in fiscal 1999 was negatively
impacted by lower than anticipated revenue volume in the quarter and project
management control issues with a couple of major projects .
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 1999 were $31.1 million
compared to $30.3 million for the year ended April 30, 1998, representing an
increase of 2.7%. As a percentage of revenues, selling, general and
administrative expenses were 33.1% for the year ended April 30, 1999 and 39.5%
for the year ended April 30, 1998.
Reversal of reserves deemed unnecessary. During the year ended April
30, 1998, the Company, as a result of assessing its previous history related to
sales tax audit adjustments, reversed approximately $1.2 million of sales tax
reserves it no longer deemed necessary.
Interest expense. Interest expense for the year ended April 30, 1999
was $1.9 million compared to $2.1 million for the year ended April 30, 1998.
Non-cash interest expense of $250,000 was recognized in 1998 related to the
accretion of the discount on certain debt securities.
Income taxes. The income tax benefit of $400,000 in 1998 relates to
the Company's 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, 1998 and 1997
Revenues. Revenues 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.
-19-
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 percentage was 38.5% for the year ended April 30, 1998 compared to 37.5%
for the year ended April 30, 1997. Gross profit for 1998 was not impacted by
tight liquidity.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 1998 were $30.3 million
compared to $20.8 million for the year ended April 30, 1997, representing an
increase of 45.7%. As a percentage of revenues, selling, general and
administrative expenses represented 39.5% for the year ended April 30, 1998 and
34.8% for the year ended April 30, 1997. The increase in selling, general and
administrative expenses 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.
Reversal of reserves deemed unnecessary. During the year ended April
30, 1998, the Company, as a result of assessing its previous history related to
sales tax audit adjustments, reversed approximately $1.2 million of sales tax
reserves it no longer deemed necessary.
Other Income. Other income for the year ended April 30, 1997 was
primarily related to gains realized from the sales of certain fixed assets.
There were no such gains realized during the year ended April 30, 1998.
Interest expense. Interest expense for the year ended April 30, 1998
was $2.1 million, compared to $1.7 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. Non-cash interest expense of $575,000 and $250,000 was recognized in
1997 and 1998, respectively, related to the accretion of the discount on certain
debt securities.
Income taxes. The income tax benefit of $400,000 in 1998 relates to
the Company's 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.
Backlog
Backlog for the Company's services as of July 1, 1999 totaled $59.0
million compared to $45.5 million as of July 1, 1998. 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.
Certain traditional customers of Datatec Industries, Inc. continue to order
services through oral agreements, the Company is in the process of changing its
procedures to assure that in the future, all services will be provided under
written agreements or purchase orders. 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.
-20-
Liquidity and Capital Resources
Cash and cash equivalents at April 30, 1999 were $234,000 compared
to $317,000 as of April 30, 1998.
During 1999, cash used by operations was $460,000 compared to 1998
cash usage of $8.6 million. The Company was able to improve its operating cash
flow due in large part to improved working capital management including
improvements in accounts receivable days sales outstanding and improved
operating profitability.
Cash used for investing activities during 1999 was $1.3 million
compared to $3.1 million in 1998. During the year the Company continued to
upgrade its internal computing and communications environment, to improve
operational efficiencies as well as execute its year 2000 compliance plan.
Cash provided by financing activities for the year ended April 30,
1999 was $1.7 million compared to $10.9 million for the year ended April 30,
1998. In 1999, the Company completed two private equity placements. During May
1998, the Company issued 300 shares of convertible preferred stock for net
proceeds of $2.3 million. During February 1999, the Company issued 533,334
shares of common stock for proceeds of $2.0 million. The Company issued
approximately 230,000 shares of common stock under its Employee Stock Purchase
Plan and stock option plans for net proceeds of $0.6 million. These cash inflows
were offset by payments of indebtedness of $3.2 million. In 1998, warrant
holders exercised approximately 2.7 million warrants resulting in net proceeds
to the Company of $9.7 million. Also, in 1998, the Company issued 855,000 shares
of common stock for net proceeds of $3.1 million from private equity placements.
In March 1997, the Company replaced existing credit facilities with
a $17 million credit facility consisting of (i) a $15 million three year
revolving credit facility and (ii) a $2 million three year term loan payable in
monthly installments of principal and interest. The borrowings under the
revolving line of credit are based on a formula of 85% of eligible receivables
and 50% of eligible inventory. The revolving line of credit bears interest at
prime plus .75% and the term loan bears interest at prime plus 1.5%. As of April
30, 1999 approximately $8.6 million was outstanding under the revolving credit
facility and $1.2 million was outstanding under the term loan. As of April 30,
1999, the amount of additional available borrowings, as defined, was $1.3
million.
As of April 30, 1999, the Company had working capital of $2.3
million compared to a working capital of $1.0 million at April 30, 1998.
Included in current liabilities, as of April 30, 1999, is a term note of $1.2
million with the Company's primary lender which matures in April 2000. Although
there can be no assurance, it is the Company's intention to refinance the
existing term loan. The improvements in working capital are due to the equity
offering during the year, improved profitability and improved working capital
management.
As of April 30, 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $14 million to offset
future taxable income. Such net operating loss carryforwards expire at various
dates through 2014.
The Company believes it has adequate liquidity and resources to
sustain current operations for the next twelve (12) months.
-21-
Impact of the Year 2000 Issue
The "Year 2000 Issue" arises because many computer hardware and
software systems use only two digits to represent the year. As a result, these
systems and programs may not process dates beyond 1999, which may cause errors
in information or systems failures. Assessments of the potential effects of the
Year 2000 issues vary markedly among different companies, governments,
consultants, economists and commentators, and it is not possible to predict what
the actual impact may be. Given this uncertainty, the company recognizes the
need to remain vigilant and is continuing its analysis, assessment, conversion
and contingency planning for the various Year 2000 issues, across its business.
The Company's Year 2000 initiatives are focused primarily on three
areas of potential impact: internal information technology (IT) systems;
internal non-IT systems, including services and embedded chips (controllers);
and the readiness of significant third parties with whom the Company has
material business relationships. The Company expects to implement successfully
the systems and programming changes necessary to address Year 2000 internal IT
and non-IT readiness issues.
The Company estimates that at the conclusion of its various Year
2000 efforts, including conversion, testing and contingency planning, it will
-22-
have spent a total of approximately $1.2 million over a multi-year period.
Although the Company believes its efforts will be successful, any failure or
delay could result in the disruption of business and have an adverse effect on
future results of operations or financial condition.
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, 1998 and 1999 . . . . . . . . . .26
Consolidated Statements of Operations for the years ended April 30, 1997,
1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Consolidated Statements of Comprehensive Loss for the years
ended April 30, 1997, 1998 and 1999. . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended April 30, 1997, 1998 and 1999 . . . . . . . . . . . . .29
Consolidated Statements of Cash Flows for the years ended
April 30, 1997, 1998 and 1999. . . . . . . . . . . . . . . . . . . . . . . .30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 51
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 as of April 30, 1998 and 1999 and
the related consolidated statements of operations, comprehensive loss, changes
in shareholders' equity (deficit) and cash flows for each of the three years in
the period ended April 30, 1999. 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, 1998 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1999, 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
August 9, 1999
-25-
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
1998 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 317,000 $ 234,000
Accounts receivable, less allowance for doubtful
accounts of $305,000 and
$326,000 in 1998 and 1999, respectively 18,106,000 20,661,000
Inventory (Note 1) 3,118,000 3,252,000
Prepaid expenses and other current assets (Note 1) 2,983,000 2,970,000
Net assets from discontinued operations (Notes 1 & 15) 501,000 447,000
------------ ------------
Total current assets 25,025,000 27,564,000
Property and equipment, net (Notes 1, 4 & 6) 6,012,000 5,200,000
Goodwill, net (Notes 1 & 2) 3,975,000 3,539,000
Other assets (Notes 1 & 8 ) 2,801,000 4,300,000
------------ ------------
Total assets $ 37,813,000 $ 40,603,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIaBILITIES:
Short-term borrowings (Note 5) $ 10,759,000 $ 8,623,000
Current portion of long-term debt (Note 6) 1,063,000 1,783,000
Accounts payable 7,085,000 9,943,000
Accrued and other liabilities 5,096,000 3,866,000
Due to related parties (Note 9) -- 1,052,000
------------ ------------
Total current liabilities 24,003,000 25,267,000
------------ ------------
Due to related parties (Note 9) 927,000
------------
------------
Long-term debt (Note 6) 2,415,000 607,000
------------ ------------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 1, 7 & 13):
Preferred stock, $.001 par value (4,000,000 shares
authorized, 300 shares issued and 120 outstanding
as of April 30, 1999) -- --
Common stock, $.001 par value (authorized
75,000,000 shares; issued and outstanding
29,007,000 and 30,489,000 shares as of April 30,
1998 and 1999, respectively) (Notes 7 & 13) 29,000 30,000
Additional paid-in capital 29,556,000 34,317,000
Accumulated deficit (18,769,000) (19,275,000)
Accumulated comprehensive loss (348,000) (343,000)
------------ ------------
Total shareholders' equity 10,468,000 14,729,000
------------ ------------
Total liabilities and shareholders' equity $ 37,813,000 $ 40,603,000
============ ============
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,
------------------------------------------------------------------------
1997 1998 1999
---- ---- ----
Revenues (Note 1) $ 59,481,000 $ 76,804,000 $ 93,751,000
Cost of revenues 37,159,000 47,208,000 60,993,000
------------ ------------ ------------
Gross profit 22,322,000 29,596,000 32,758,000
Selling, general and administrative expenses 20,784,000 30,279,000 31,096,000
Reversal of reserves deemed unnecessary (Note 1) -- (1,200,000) --
------------ ------------ ------------
Operating income 1,538,000 517,000 1,662,000
Other income 430,000 -- --
Interest expense (Notes 5 and 6) (1,730,000) (2,135,000) (1,853,000)
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes 238,000 (1,618,000) (191,000)
Provision (benefit) for income taxes (Notes 1 & 8)
111,000 (400,000) --
------------ ------------ ------------
Income (loss) from continuing operations
127,000 (1,218,000) (191,000)
Discontinued operations (Note 15):
Loss from operations
(4,709,000) (2,768,000) (315,000)
Provision for future losses
(953,000) -- --
============ ============ ============
Net loss
$ (5,535,000) $ (3,986,000) $ (506,000)
============ ============ ============
INCOME (LOSS) PER SHARE - BASIC AND DILUTED (Note 3):
Income (loss) from continuing operations
$ (.09) $ (.05) $ (.01)
Discontinued operations
(.27) (.10) (.01)
============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
$ (.36) $ (.15) $ (.02)
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - BASIC AND DILUTED
21,151,000 26,451,000 29,517,000
============ ============ ============
-27-
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
For the Years Ended
April 30,
------------------------------------------------------------------------
1997 1998 1999
---------------------- --------------------- --------------------
Net loss ($5,535,000) ($3,986,000) ($ 506,000)
Other comprehensive income (loss) -
Foreign currency translation adjustment (38,000) (63,000) 5,000
----------- ----------- -----------
Comprehensive loss ($5,573,000) ($4,049,000) ($ 501,000)
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-28-
Datatec Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 7)
Preferred Stock Common Stock
-------------------------------------------------------- Additional
Paid-in Capital
Shares Dollars Shares Dollars Preferred
------------ ------------- ------------- ------------- --------------
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
Amount allocated to warrant
and beneficial conversion feature
on convertible debt and equity
securities (Note 7) - - - - 2,128,000
Conversion of preferred stock into
common stock (Note 7) (350,000) 2,500,000 3,000 (8,690,000)
Exercise of warrants and options 649,000 1,000
Conversion of accounts payable into
common stock 171,000
Conversion from S corporation status
to C corporation
Net loss
Effect of exchange rate changes
------------ ------------- ------------- ------------- --------------
Balance at April 30, 1997 - - 23,661,000 24,000 -
Exercise of warrants and options 3,860,000 4,000
Private placement offerings of common stock 855,000 1,000
Conversion of long-term debt into common stock 631,000
Net loss
Effect of exchange rate changes
------------ ------------- ------------- ------------- --------------
Balance at April 30, 1998 - - 29,007,000 29,000 -
Issuance of preferred stock (Note 7) 300 - 2,337,000
Exercise of warrants and options 40,000 -
Private placement offering of
common stock (Note 7) 533,000 -
Issuance of common stock under
Employee Stock
Purchase Plan (Note 10) 190,000 -
Conversion of preferred stock into
common stock (Note 7) (180) - 719,000 1,000 (1,402,000)
Net loss
Effect of exchange rate changes
------------ ------------- ------------- ------------- --------------
Balance at April 30, 1999 120 $ - 30,489,000 $ 30,000 $ 935,000
============ ============= ============= ============= ==============
Additional Accumulated Accumulated Total
Paid-in Capital Deficit Comprehensive Shareholders'
Common Loss Equity (Deficit)
----------------- --------------- -------------- ----------------
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
Amount allocated to warrant
and beneficial conversion feature
on convertible debt and equity
securities (Note 7) 825,000 (2,128,000) 825,000
Conversion of preferred stock into
common stock (Note 7) 8,687,000 -
Exercise of warrants and options 429,000 430,000
Conversion of accounts payable into
common stock 549,000 549,000
Conversion from S corporation status
to C corporation (8,858,000) 8,858,000 -
Net loss (5,535,000) (5,535,000)
Effect of exchange rate changes (38,000) (38,000)
----------------- --------------- -------------- --------------
Balance at April 30, 1997 13,294,000 (14,783,000) (285,000) (1,750,000)
Exercise of warrants and options 11,021,000 11,025,000
Private placement offerings of common stock 3,079,000 3,080,000
Conversion of long-term debt into common stock 2,162,000 2,162,000
Net loss (3,986,000) (3,986,000)
Effect of exchange rate changes (63,000) (63,000)
----------------- --------------- -------------- --------------
Balance at April 30, 1998 29,556,000 (18,769,000) (348,000) 10,468,000
Issuance of preferred stock (Note 7) 2,337,000
Exercise of warrants and options 75,000 75,000
Private placement offering of
common stock (Note 7) 1,854,000 1,854,000
Issuance of common stock under
Employee Stock
Purchase Plan (Note 10) 496,000 496,000
Conversion of preferred stock into
common stock (Note 7) 1,401,000 -
Net loss (506,000) (506,000)
Effect of exchange rate changes 5,000 5,000
----------------- --------------- -------------- ==============
Balance at April 30, 1999 $ 33,382,000 $ (19,275,000) $ (343,000) $ 14,729,000
================= =============== ============== =============-
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-29-
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
April 30,
-------------------------------------------------------------
1997 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,535,000) $ (3,986,000) $ (506,000)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 1,200,000 2,090,000 2,723,000
Impairment of long-lived asset -- -- 315,000
Accretion of debt discount 575,000 250,000 --
Changes in operating assets and liabilities net of
effects from acquisitions
Increase in accounts receivable (3,819,000) (6,817,000) (2,555,000)
Increase (decrease) in inventory 1,104,000 (984,000) (134,000)
Increase in prepaid expenses and other assets (940,000) (537,000) (1,620,000)
(Increase) decrease in net assets from discontinued
operations (1,590,000) 327,000 (310,000)
Increase (decrease) in accounts payable, accrued
liabilities and other (2,169,000) 1,093,000 1,627,000
------------ ------------ ------------
Net cash used in operating activities (11,174,000) (8,564,000) (460,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,349,000) (2,404,000) (1,291,000)
Net cash used for CASI acquisition -- (670,000) --
------------ ------------ ------------
Net cash used in investing activities (1,349,000) (3,074,000) (1,291,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 3,338,000 (2,749,000) (2,136,000)
Net proceeds (payments) of indebtedness 958,000 (374,000) (1,088,000)
Net proceeds from stock issuances 6,992,000 14,105,000 4,887,000
Net proceeds from related parties 1,026,000 (99,000) --
Distributions to shareholders (837,000) -- --
------------ ------------ ------------
Net cash provided by financing activities 11,477,000 10,883,000 1,663,000
------------ ------------ ------------
Net effect of foreign currency translation on cash (38,000) (63,000) 5,000
------------ ------------ ------------
Net decrease in cash (1,084,000) (818,000) (83,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,219,000 1 ,135,000 317,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 1,135,000 $ 317,000 $ 234,000
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-30-
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies:
Business--
Datatec Systems, Inc. (the "Company"), and its subsidiaries are
in the business of providing rapid and accurate technology
deployment services and licensing software tools to support
enterprises in the delivery of complex IT solutions (see Note
15).
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 and its wholly owned subsidiaries (see Note 2).
All intercompany accounts and transactions have been
eliminated.
Use of Estimates--
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Revenue Recognition--
Revenues from configuration, integration and deployment services
are recognized as the services are provided. The Company
recognizes revenue utilizing percentage of completion
accounting for long-term contracts. Revisions in estimated
profits are made in the period in which the circumstances
requiring the revision become known. Provisions, if any, are
made currently for anticipated losses on uncompleted
contracts.
The Company may enter into certain contracts to sell software.
Revenue from such contracts are recognized in accordance with
Statement of Position No. 97-2, "Software Revenue
Recognition".
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, 1998
and 1999, approximately $1,810,000 and $1,622,000,
respectively, of such costs are included in other current
assets.
-31-
Cash and Cash Equivalents--
TheCompany considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Other assets includes $132,000 of restricted cash as of April
30, 1998 and 1999, related to a certificate of deposit for the
Company's EDA note.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment--
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed using the straight-line and declining balance
methods over the estimated useful lives or lease terms of the
related assets, whichever is shorter.
Capitalized Software Costs--
The Company capitalizes certain computer software costs, which
includes product enhancements, 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
software products, not to exceed three years. Approximately
$780,000 and $2,295,000 of net capitalized software costs are
included in other assets in the accompanying consolidated
financial statements as of April 30, 1998 and 1999,
respectively. Amortization expense of capitalized software
costs for the year ended April 30, 1997, 1998 and 1999 was $0,
$118,000 and $133,000 respectively.
Goodwill--
Goodwill is amortized on a straight-line basis over 10 years.
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.
-32-
Subsequent to year-end, the Company sold property it owned that
was included in net assets from discontinued operations as of
April 30, 1999. The sale resulted in a writedown of $315,000,
which has been reflected as a loss from discontinued
operations for the year ended April 30, 1999 (see Note 15).
Income Taxes--
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"). Certain
transactions are recorded in the accounts in a period
different from that in which these transactions are reported
for income tax purposes. These transactions, as well as other
temporary differences between the basis in assets and
liabilities for financial reporting and income tax purposes,
result in deferred income taxes.
Foreign Currency Translation--
The local currency of the Company's foreign subsidiary is its
functional currency. Assets and liabilities of the Company's
foreign subsidiary are translated into US dollars at the
current exchange rate. Statement of operations accounts are
translated at the average rate of exchange prevailing during
the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included as
a component of accumulated comprehensive loss included in
shareholders' equity.
Stock Based Compensation--
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") requires that an
entity account for employee stock-based compensation under a
fair value based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee
stock-based compensation arrangements using the intrinsic
value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees". The Company
continues to account for employee stock-based compensation
using the intrinsic value based method and is required to make
pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting under SFAS 123
had been applied (see Note 10).
-33-
Internal Use Software--
During 1999, the Company adopted Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
certain costs of computer software developed or obtained for
internal use be capitalized or expensed as incurred. During
the year ended April 30, 1999, approximately $681,000 of costs
were capitalized under SOP 98-1 and are reflected in other
assets in the accompanying balance sheet. These costs relate
to the design and installation of internal use software
developed for the Company's job costing and other systems and
will be amortized over a period not to exceed three years.
Approximately $29,000 of amortization expense was incurred
during the year ended April 30, 1999. The Company has
expensed, in accordance with SOP 98-1, those costs which were
incurred during the preliminary and post implementation
phases.
Recent Accounting Pronouncements--
During 1998, the American Institute of Certified Public
Accountant's ("AICPA") issued Statement of Position ("SOP")
98-5 "Reporting on the Costs of Start-up Activities". The new
standard amends previous guidance from the AICPA that
permitted capitalization of start-up costs in certain
industries and requires that all nongovernmental entities
expense the costs of start-up activities as those costs are
incurred. Under the SOP, the term "start-up" has been broadly
defined to include pre-operating, pre-opening and organization
activities. Companies must adopt the new standard in fiscal
years beginning after December 15, 1998. At adoption, a
company must record a cumulative effect of a change in
accounting principle to write off any unamortized start-up
costs that existed as of the beginning of the fiscal year in
which the SOP is adopted and an operating expense for those
costs which were incurred and capitalized since the beginning
of the fiscal year and adoption of the SOP.
The Company has decided to adopt the new standard in the first
quarter of fiscal 2000. Had the Company adopted the new
standard as of April 30, 1999 the net loss of $506,000 for the
year ended April 30, 1999 would have increased by $1,622,000
for the effect of the write-off of pre-contract costs which
were previously capitalized.
Comprehensive Income (Loss)--
Effective May 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and
displaying of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The components of other
comprehensive income consists primarily of foreign currency
translation adjustments.
-34-
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
$705,000, including expenses, 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 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
5). This note was paid in full on May 1, 1998. 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.
-35-
Presented below are the individual entity and combined financial
information, after giving effect to classifying certain
segments of the Company's business as discontinued operations.
Datatec Systems, Inc. HH Datatec Industries Combined
------------------------ -------------- --------------------- ------------------
For the year ended April 30, 1997
Net Sales $ 4,835,000 $ - $ 54,646,000 $ 59,481,000
Income (loss) from Continuing Operations (301,000) - 428,000 127,000
Loss from Discontinued Operations (5,267,000) (395,000) - (5,662,000)
Net income (loss) (5,568,000) (395,000) 428,000 (5,535,000)
The combined results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in
effect for the entire periods presented. In addition, the
combined results are not intended to be a projection of future
results and do not reflect any synergies that might be
achieved from operations.
(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:
-36-
1997 1998 1999
---- ---- ----
Numerator:
Basic and Diluted-
Income (loss) from continuing operations $ 127,000 ($ 1,218,000) ($ 191,000)
Less: preferred dividends (Note 7) (2,128,000) -- --
------------ ------------ ------------
Loss available for common shareholders (2,001,000) (1,218,000) (191,000)
Discontinued operations (5,662,000) (2,768,000) (315,000)
------------ ------------ ------------
Net loss - Basic and Diluted ($ 7,663,000) ($ 3,986,000) ($ 506,000)
============ ============ ============
Denominator:
Weighted average number of common
shares outstanding - Basic 21,151,000 26,451,000 29,517,000
Incremental shares from assumed
conversions of options and debt -- -- --
------------ ------------ ------------
Weighted average number of common shares
and common share equivalents- Diluted 21,151,000 26,451,000 29,517,000
============ ============ ============
Earnings per share - Basic and Diluted:
Income (loss) from continuing operations ($ 0.09) ($ 0.05) ($ .01)
Discontinued operations (0.27) (0.10) (.01)
------------ ------------ ------------
Net loss ($ 0.36) ($ 0.15) ($ .02)
============ ============ ============
In 1997, 1998 and 1999, approximately 2,406,000, 1,642,000, and
1,547,000 respectively, of outstanding options and warrants
have been excluded from the computation of diluted EPS as
their inclusion would have been antidilutive for those
periods.
-37-
(4) Property and equipment:
The following is a summary of property and equipment--
April 30,
1998 1999
Equipment $ 1,955,000 $ 2,225,000
Computer equipment 4,661,000 5,551,000
Furniture, fixtures and leasehold improvements 4,135,000 4,268,000
----------- -----------
10,751,000 12,044,000
Less--Accumulated depreciation and amortization
4,739,000 6,844,000
----------- -----------
Property and equipment, net $ 6,012,000 $ 5,200,000
=========== ===========
-38-
(5) Short-term borrowings:
The Company has a revolving loan agreement that provides for
maximum borrowings of $15,000,000. Availability under the
revolving loan is calculated as the sum of 85% of eligible
accounts receivable, as defined, and 50% of the cost or
wholesale market value of eligible inventory, as defined.
Approximately $8,623,000 was outstanding as of April 30,
1999. The amount of additional available borrowings, as
defined, was $1,290,000 as of April 30, 1999. The revolving
loan accrues interest at the prime rate plus 0.75% (8.5% at
April 30, 1999) and matures on March 16, 2000.
Included in short-term borrowings, as of April 30, 1998 is
$1,833,000 due to the minority shareholder of CASI. The note
bore interest at 10% per annum. On May 1, 1998 the Company