UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended: January 31, 1998
----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 0-20688
-------------------------------
Datatec Systems, Inc.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20C Commerce Way, Totowa, NJ 07512
- ------------------------------- --------------------
(Address of principal executive (Zip Code)
offices)
(973) 890-4800
---------------------------------------
Registrant's telephone number, including area code
Check whether the Registrant (1) has filed all reports required to be filed by
Section 12 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subjected to such filing requirements for the past 90
days. Yes /X/ No / /.
The number of shares of Registrant's Common Stock outstanding on January 31,
1998 was 28,630,070.
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
NINE MONTHS ENDED JANUARY 31, 1998
INDEX
PART I: FINANCIAL INFORMATION
PAGE
----
Item 1: Consolidated Financial Statements
Balance Sheets at January 31, 1998 and
April 30, 1997 3
Statements of Operations for the three months ended
January 31, 1998 and 1997 4
Statements of Operations for the nine months ended
January 31, 1998 and 1997 5
Statements of Cash Flows for the nine months ended
January 31, 1998 and 1997 6
Notes to Unaudited Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 11
Item 6: Exhibits and Reports of Form 8-K 13
2
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
--------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,135 $ 120
Accounts receivable, net 11,289 14,273
Inventory 2,134 3,321
Prepaid expenses and other current assets 1,446 3,215
Net assets from discontinued operations 4,816 3,020
----------- --------------
Total current assets 20,820 23,949
PROPERTY AND EQUIPMENT, net 3,634 4,993
GOODWILL 1,680 1,540
OTHER ASSETS 1,670 2,295
----------- -------------
Total assets $ 27,804 $ 32,777
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings $ 11,675 $ 4,351
Current portion of long-term
obligations 850 890
Accounts payable 5,415 7,629
Accrued liabilities 5,331 2,756
Other current liabilities 506 555
----------- -------------
Total current liabilities 23,777 16,181
----------- -------------
DUE TO RELATED PARTIES 1,026 801
----------- --------------
LONG-TERM OBLIGATIONS 5,001 2,976
----------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred Stock -- --
Common Stock 24 29
Additional paid-in capital 10,341 25,906
Accumulated deficit (12,080) (12,768)
Cumulative translation adjustment (285) (348)
----------- ------------
Total shareholders' equity (deficit) (2,000) 12,819
----------- ------------
Total liabilities and shareholders' equity (deficit) $ 27,804 $ 32,777
=========== ============
</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these balance sheets.
3
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Net Sales $ 12,973 $ 17,954
Cost of Sales 8,329 10,729
----------- --------------
Gross Profit 4,644 7,225
Selling, general and administrative expenses 4,613 7,179
----------- --------------
Operating income 31 46
Interest expense, net 208 350
----------- --------------
Income (loss) before taxes (177) (304)
Provision (benefit) for income taxes (14) --
----------- --------------
Income (loss) from continuing operations (163) (304)
Discontinued operations (2,106) (443)
----------- ---------------
Net loss $ (2,269) $ (747)
=========== ===============
Income (loss) per share:
Continuing operations $ (.01) $ (.01)
Discontinued operations (.10) (.02)
------------ ---------------
Net income (loss) per share $ (.11) $ (.03)
============ ===============
Weighted average outstanding common shares 21,031,000 28,431,000
============ ===============
</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these statements.
4
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Net Sales $ 45,162 $ 56,078
Cost of Sales 27,528 34,091
----------- ---------
Gross Profit 17,634 21,987
Selling, general and administrative expenses 13,832 20,877
----------- ---------
Operating income 3,802 1,110
Interest expense, net 802 1,355
----------- ---------
Income (loss) before taxes 3,000 (245)
Provisions for income taxes 111 --
----------- ---------
Income (loss) from continuing operations 2,889 (245)
Discontinued operations (3,733) (443)
----------- ---------
Net income (loss) $ (844) $ (688)
=========== =========
Income (loss) per share:
Continuing operations $ .14 $ (.01)
Discontinued operations (.18) (.02)
=========== ==========
Net income (loss) $ (.04) (.03)
=========== ==========
Weighted average outstanding common shares 20,738,000 25,693,000
=========== ===========
</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these statements.
5
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JANUARY 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (loss) $ (844) $ (688)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,050 1,451
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,451) (2,984)
(Increase) decrease in inventory 101 (1,187)
(Increase) decrease in prepaid expenses and other assets (230) (2,510)
(Increase) decrease in assets held for sale or disposition (858) 237
Increase (decrease) in accounts payable,
accrued and other liabilities (1,346) (218)
-------- --------
Net cash used in operating activities (3,578) (5,899)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,419) (994)
------- --------
Net cash used in investing activities (1,419) (994)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net (2,949) (7,324)
Net proceeds (payments) of indebtedness 158 (811)
Proceeds from issuance of stock 6,924 14,076
Distribution to stockholders (587) --
------- --------
Net cash provided by financing activities 3,546 5,941
------- --------
Net effect of foreign currency translation (77) (63)
------- --------
Net increase (decrease) in cash (1,528) (1,015)
CASH AT BEGINNING OF PERIOD 2,219 1,135
------- --------
CASH AT END OF PERIOD $ 691 $ 120
======= ========
</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these statements.
6
<PAGE>
DATATEC SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(1) Business
Datatec Systems, Inc. (the "Company" or "Datatec"), and its
subsidiaries are in the business of providing configuration, integration and
rapid deployment services for the implementation of complex computer networking
and connectivity systems.
(2) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and transactions have
been eliminated.
The accompanying unaudited consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
consistent with those applied in, and should be read in conjunction with, the
audited financial statements for the year ended April 30, 1997. The interim
financial information is unaudited, but reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. The results for the
three and nine months ended January 31, 1998 are not necessarily indicative of
results expected for the full fiscal year.
(3) Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which
makes certain changes to the manner in which earnings per share is reported. The
Company adopted this standard for the quarter ended January 31, 1998.
The Company has outstanding options, warrants and convertible notes
that could potentially dilute basic earnings per share in the future. These
items were not included in the computation of diluted earnings per share for the
periods presented as they would have been antidilutive.
(4) Debt
The Company's credit facility requires the Company to comply with
certain financial and non-financial convenants. As of January 31, 1998, the
Company was not in compliance with certain covenants and is in the process of
obtaining waivers.
7
<PAGE>
(5) Supplemental Disclosure of Cash Flows
1997 1998
------------ -----------
Interest Paid $ 978 $ 1,097
Supplemental disclosures of non-cash investing and financing activities
In August and December of 1997, holders of convertible notes
converted a total of $1,400 of principal plus accrued and unpaid interest into
459,000 shares of common stock.
(6) Subsequent Events
In March 1998, the Company acquired the outstanding minority
interest of its subsidiary Computer-Aided Software Integration, Inc. for $2,414.
As part of the purchase price the Company issued a convertible note due June 15,
1998 for $1,833. The note bears interest at 10% per annum and if not paid by
June 15, 1998 or if an event of default occurs prior to June 15, 1998, the note
may be converted into common stock at a discount to the then current market
price.
8
<PAGE>
DATATEC SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
(in thousands, except share and per share data)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 1998
Net sales for the three and nine months ended January 31, 1998 were
$17,954 and $56,078, respectively, compared to $12,973 and $45,162, respectively
for the three and nine months ended January 31, 1997. This represents an
increase of 38.4% and 24.2% for the three and nine months ended January 31,
1998, respectively. The December holidays fall within the Company's third
quarter and usually have a significant negative impact on sales. This negative
impact is the result of the Company's retail customers reducing their purchases
from the Company during their peak selling periods. Historically, the retail
industry has represented between 50% and 60% of the Company's sales. The
increase in sales for the three months ended January 31, 1998 is the result of
several factors: more focused efforts on the selling of rapid configuration and
deployment services, increased non-retail sales and a better matching of
revenues and expenses on certain long-term contracts. In the nine months ended
January 31, 1998, the Company's backlog of services to be delivered in the next
twelve months increased by $18,700 or 52.3%.
Gross profits for the three and nine months ended January 31, 1998
were $7,225 and $21,987, respectively, compared to $4,644 and $17,634 in the
three and nine months ended January 31, 1997. Gross profits as a percentage of
net sales were 40.2% and 39.2% for the three and nine months ended January 31,
1998 compared to 35.8% and 39.0% for the three and nine months ended January 31,
1997. The increase in gross margin is the result of a change in the sales mix in
favor of more complex deployment services.
Selling, general and administrative expenses for the three and nine
months ended January 31, 1998 were $7,179 and $20,877 compared to $4,613 and
$13,832 for the three and nine months ended January 31, 1997. The increase in
selling, general and administrative is partly attributable to an increase in
infrastructure costs, including personnel to support the Company's migration to
the more complex service business.
Net interest expense for the three and nine months ended January 31,
1998 was $350 and $1,355, respectively, compared to $208 and $802 for the three
and nine months ended January 31, 1997. This increase in interest expense is
primarily attributable to an increase in the average debt outstanding for the
period and the amortization of deferred financing fees incurred in connection
with securing the Company's senior credit facility.
9
<PAGE>
The loss from discontinued operations for the three months ended
January 31, 1998 was $443 representing additional expenses related to the
disposal and discontinuance of the Company's distribution of data communications
equipment business. This business was discontinued in June 1997.
The Company's net loss for the three and nine months ended January
31, 1998 was $747 and $688 respectively, compared to a net loss of $2,269 and
$844 for the three and nine months ended January 31, 1997.
FINANCIAL POSITION
In March 1997, the Company entered into a $17,000 senior credit
facility to replace two of its existing credit facilities. The senior credit
facility consists of a $15,000 revolving line of credit and a $2,000 term loan.
The senior credit facility is supported by accounts receivable and inventory as
well as other assets of the Company, has a term of three years and bears
interest at prime plus three quarters of one percent (3/4%) and prime plus one
and one-half percent (1 1/2%) on the line of credit and term loan, respectively.
Availability under the revolving line of credit is calculated using a formula of
85% of eligible accounts receivable and 50% of eligible inventory. The $15,000
revolving line of credit represents an increase of approximately $4,000 over the
revolving line of credit it replaced. The Company's credit facility requires the
Company to comply with certain financial and non-financial convenants. As of
January 31, 1998, the Company was not in compliance with certain covenants and
is in the process of obtaining waivers.
The Company's shareholders' equity as of January 31, 1998 increased
by approximately $14,819 to $12,819, compared to a deficit of $2,000 as of April
30, 1997. The increase in shareholders' equity (deficit) is primarily the result
of three different types of transactions. The Company completed two private
placements during the nine months ended January 31, 1998, totaling 855,000
shares of common stock and $3,100. Convertible noteholders converted $1,400
principal notes plus accrued interest into 459,000 shares of common stock. In
October 1997, holders of redeemable warrants purchased approximately 2,743,000
shares of common stock at $3.75 per share.
The Company's working capital improved from a deficiency of $2,957
at April 30, 1997 to a working capital of $7,768 at January 31, 1998.
10
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on December 22,
1997 (the "Annual Meeting").
(b) Ralph Glasgal, Isaac Gaon, Christopher Carey, Thomas Berry, Robert
Friedman, David Milch and Joseph Salvani were elected as directors
of the Company to serve until the next annual meeting of
stockholders or until their successors are elected and qualified. No
other director's term of office continued after the Annual Meeting.
(c) (1) Election of Directors
Number of Number of
Votes For Votes Withheld
--------- --------------
Ralph Glasgal 23,181,448 44,334
Isaac Gaon 23,181,448 44,334
Christopher Carey 23,181,448 44,334
Thomas Berry 23,178,448 47,334
Robert Friedman 23,178,448 47,334
David Milch 23,179,448 46,334
Joseph Salvani 23,179,448 46,334
(2) Approval of an amendment to the Company's Certificate of
Incorporation to change the name of the Company from "Glasgal Communications,
Inc." to "Datatec Systems, Inc."
Number of Number of Number of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
23,152,680 52,664 20,438
(3) Approval of an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock from thirty-eight million (38,000,000) shares to seventy-nine
million (79,000,000) shares and the ratification of a modification of a
conditional right of Direct Connect International, Inc. to purchase shares of
the Company's Common Stock:
Number of Number of Number of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
13,530,130 318,334 47,434
(4) Ratification and approval of the sale of certain shares of the
Company's Common Stock to Ralph Glasgal:
Number of Number of Number of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
13,052,810 301,084 47,459
11
<PAGE>
(5) Approval of the Company's 1998 Employee Stock Purchase Plan:
Number of Number of Number of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
22,430,872 122,029 31,238
(6) Ratification of the appointment of Arthur Andersen LLP as
independent public accountants for the Company for the year ending April 30,
1998:
Number of Number of Number of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
23,187,180 28,964 9,638
12
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION - CONTINUED
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Statement of Earnings (Loss) Per Share
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K
(1) The Company filed a Form 8-K dated January 12, 1998 reporting
an Item 5 event in connection with its change of name and
ticker symbols.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATATEC SYSTEMS, INC.
REGISTRANT
Date: March 17, 1998 By: /s/ James M. Caci
---------------------------------
James M. Caci
Chief Financial Officer and Duly
Authorized Officer
14
EXHIBIT 11.1
GLASGAL COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
January 31, 1998 January 31, 1997
---------------- ----------------
Earnings (loss) per share
Income (loss) from continuing $ (245) $ 2,889
operations
Discontinued operations (443) (3,733)
--------- ---------
Net income $ (688) $ (844)
---------- --------
Weighted average number of shares 25,693 20,738
outstanding
Assumed issuances under exercise of 0 0
---------- -------
stock options and warrants
Weighted average and common stock
equivalents 25,693 20,738
---------- --------
Income (loss) from continuing (0.01) $0.14
operations
Discontinued operations per share (0.02) (0.18)
Net income (loss) per share $ (0.03) $ (0.04)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF JANUARY 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 14,675
<ALLOWANCES> (402)
<INVENTORY> 3,321
<CURRENT-ASSETS> 23,949
<PP&E> 12,530
<DEPRECIATION> (7,537)
<TOTAL-ASSETS> 32,777
<CURRENT-LIABILITIES> 16,181
<BONDS> 0
<COMMON> 29
0
0
<OTHER-SE> 12,790
<TOTAL-LIABILITY-AND-EQUITY> 32,777
<SALES> 56,078
<TOTAL-REVENUES> 56,078
<CGS> 34,091
<TOTAL-COSTS> 34,091
<OTHER-EXPENSES> 20,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,355
<INCOME-PRETAX> (245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (245)
<DISCONTINUED> (443)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (688)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
