SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended APRIL 30, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________________ to _________________________
Commission file number 000-20688
DATATEC SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2914253
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
20C Commerce Way, Totowa, New Jersey 07512-1154
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (973) 890-4800
Securities registered under Section 12(b) of the Exchange Act:
================================================================================
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------
Common Stock, $.001 par value Boston Stock Exchange
- --------------------------------------------------------------------------------
Preference Share Purchase Rights Boston Stock Exchange
================================================================================
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
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 Common Stock held by
non-affiliates at June 30, 1998 was approximately $101,735,000. For purposes of
computing such market value, the Registrant has deemed as affiliates only
executive officers, directors and their affiliates.
The total number of shares of the Registrant's Common Stock outstanding
at June 30, 1998 was 29,084,342.
The information required by Part III is incorporated by reference to a
definitive proxy statement filed by the Registrant on August 28, 1998 pursuant
to Regulation 14A.
<PAGE>
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this "Amendment") is being filed
in order to amend Item 8 of Part II and Item 14 of Part IV of the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
July 29, 1998. The purpose of this Amendment is to correct the disclosure set
forth under "Basis of Presentation" in Note 1 to the consolidated financial
statements and to make certain corrections of grammar and other clerical errors
that were contained in Item 8. Except as specifically identified above the
disclosures set forth herein do not differ from those in Item 8 of the original
filing. Item 14 is also hereby amended solely to reflect the replacement of the
Consent of the Registrant's independent public accountants, Arthur Andersen LLP,
included as Exhibit 23.1 to this Amendment which is necessitated by the
above-described corrections to the audited financial statements included in
amended and restated Item 8.
PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements and Financial Statements Schedules
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . 25
Consolidated Balance Sheets as of April 30, 1997 and 1998 . . . . . . . . . 26
Consolidated Statements of Operations for the years ended April 30, 1996,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended April 30, 1996, 1997 and 1998 . . . . . . . . . . . . 28
Consolidated Statements of Cash Flows for the years ended
April 30, 1996, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . . . 29
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 30
SCHEDULES
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . 49
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.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Datatec Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datatec Systems,
Inc. (a Delaware corporation) and subsidiaries (formerly Glasgal Communications,
Inc.) as of April 30, 1997 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended April 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Datatec
Systems, Inc. and subsidiaries as of April 30, 1997 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
-----------------------
Roseland, New Jersey ARTHUR ANDERSEN LLP
July 27, 1998
25
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
1997 1998
---- ----
ASSETS
CURRENT ASSETS:
- ---------------
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 1,135,000 $ 317,000
Accounts receivable, less allowances for doubtful
accounts of $520,000 and $305,000, respectively, in
1997 and 1998.
18,106,000
11,289,000
Inventory (Note 1) 2,134,000 3,118,000
Prepaid expenses and other current
assets (Note 1) 1,446,000 3,433,000
Net assets from discontinued operations (Note 5)
4,816,000 501,000
------------ -------------
Total current assets 20,820,000 25,475,000
Property and equipment, net
(Notes 1, 4 and 7) 3,634,000 6,012,000
Goodwill, net (Notes 1 & 2) 1,680,000 3,975,000
Other Assets (Notes 1 & 9 ) 1,670,000 4,601,000
------------- -------------
Total assets $ 27,804,000 $ 40,063,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEFICIT)
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings (Note 6) $ 11,675,000 $ 10,759,000
Current portion of long-term
debt (Note 7) 850,000 1,063,000
Accounts payable 5,415,000 7,085,000
Accrued liabilities 5,331,000 3,882,000
Other current liabilities 506,000 1,214,000
------------- -------------
Total current liabilities 23,777,000 24,003,000
------------- -------------
Due to related parties (Note 10) 1,026,000 927,000
------------- -------------
Long-term debt (Note 7) 5,001,000 2,415,000
------------- -------------
Commitments and contingencies (Note 12)
Shareholders' equity (deficit) (Notes 1, 8 & 15):
Preferred stock, $.001 par value (4,000,000 shares
authorized, no shares issued and outstanding) - -
Common stock, $.001 par value (authorized 75,000,000
shares; issued and outstanding 23,661,000 and
29,007,000 shares as of April 30, 1997 and 1998,
respectively) (Notes 8, 15 and 16) 24,000 29,000
Additional paid-in capital 10,341,000 26,603,000
Accumulated deficit (12,080,000) (13,566,000)
Cumulative translation adjustment (285,000) (348,000)
-------------- --------------
Total shareholders' equity (deficit) (2,000,000) 12,718,000
-------------- -------------
Total liabilities and shareholders' equity (deficit) $ 27,804,000 $ 40,063,000
============= =============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
APRIL 30,
------------------------------------------------------------------------
1996 1997 1998
---------------------- -------------------- ---------------------
<S> <C> <C> <C>
Net sales (Note 1) $ 59,169,000 $ 59,481,000 $76,804,000
Cost of sales 34,217,000 37,159,000 47,208,000
---------------------- -------------------- ---------------------
Gross profit 24,952,000 22,322,000 29,596,000
Selling, general and administrative expenses
(Notes 12 & 14) 29,200,000 20,784,000 29,079,000
---------------------- -------------------- ---------------------
Operating income (4,248,000) 1,538,000 517,000
Other income -- 430,000 --
Interest expense (Notes 5 and 6) (938,000) (1,155,000) (1,885,000)
---------------------- -------------------- ---------------------
Income (loss) before provision (benefit) for
income taxes (5,186,000) 813,000 (1,368,000)
Provision (benefit) for income taxes (Notes 1&
9) (37,000) 111,000 (400,000)
---------------------- -------------------- ---------------------
Income (loss) from continuing operations (5,149,000) 702,000 (968,000)
Discontinued operations (Note 5):
Loss from operations (5,762,000) (4,709,000) (518,000)
Provision for future losses (2,284,000) (953,000) --
---------------------- -------------------- ---------------------
Loss before extraordinary item (13,195,000) (4,960,000) (1,486,000)
Extraordinary item (223,000) -- --
====================== ==================== =====================
Net loss $ (13,418,000) $ (4,960,000) $ (1,486,000)
====================== ==================== =====================
INCOME (LOSS) PER SHARE - BASIC (Note 3):
Income (loss) from continuing operations $ (.28) $ .03 $ (.04)
Discontinued operations (.44) (.27) (.02)
Extraordinary item (.01) ---
====================== ==================== =====================
NET LOSS PER SHARE - BASIC $ (.73) $ (.24) $ (.06)
====================== ==================== =====================
INCOME (LOSS) PER SHARE - DILUTED (NotE 3):
Income (loss) from continuing operations $ (.28) $ .03 $ (.04)
Discontinued operations (.44) (.24) (.02)
Extraordinary item (.01) -- --
====================== ==================== =====================
NET LOSS PER SHARE - DILUTED
$ (.73) $ (.21) $ (.06)
====================== ==================== =====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - BASIC 18,354,000 21,151,000 26,451,000
====================== ==================== =====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - DILUTED 18,354,000 23,557,000 26,451,000
====================== ==================== =====================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
27
<PAGE>
Datatec Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 8)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------------------------------
Issued Additional
---------- ---------- -------------------------- Paid-in capital
Shares Dollars Shares Dollars Preferred
---------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1995 - $ - 15,799,000 $ - $ -
========== ========== ============== ========== ===========
Distributions to S Corporation Shareholders
Private placement offering of common stock and
warrants and bridge financing (Note 8) 443,000
Public offering of common stock
and warrants (Note 8) 3,566,000
Acquisition and cancellation of
common stock (13,000)
Common stock issued for options exercised 189,000
Change in par value of common stock (Note 15) 20,000
Private placement offering of common stock (Note 2) 313,000 -
Stock issued for business acquisition (Note 2) 44,000 -
Net loss
Effect of exchange rate changes
---------- ---------- -------------- ---------- -----------
Balance at April 30,1996 - - 20,341,000 20,000 -
---------- ---------- -------------- ---------- -----------
Distributions to S Corporation Shareholders
Issuance of preferred stock (Note 8) 350,000 6,562,000
Conversion of preferred stock into common stock (Note 8) (350,000) 2,500,000 3,000 (6,562,000)
Exercise of warrants and options 649,000 1,000
Conversion of accounts payable into common stock (Note 8) 171,000
Conversion from S corporation status to C corporation
Net loss
Effect of exchange rates changes
---------- ---------- -------------- ---------- -----------
Balance at April 30, 1997 - - 23,661,000 24,000 -
========== ========== ============== ========== ===========
Exercise of warrants and options 3,860,000 4,000
Private placement offering of common stock 855,000 1,000
Conversion of long-term debt into common stock 631,000
Net loss
Effect of exchange rates changes
---------- ---------- -------------- ---------- -----------
Balance at April 30, 1998 - $ - 29,007,000 $ 29,000 $ -
========== ========== ============== ========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
Additional Retained Cumulative Total
Paid-in capital Earnings Translation Shareholders'
Common (Deficit) Adjustment Equity
--------------- --------------- ------------ ---------------
<S> > <C> <C> <C> <C>
Balance at April 30, 1995 $ 2,974,000 $ (1,006,000) $ (98,000) $ 1,870,000
=============== =============== ============ ===============
Distributions to S Corporation Shareholders (667,000) (667,000)
Private placement offering of common stock and
warrants and bridge financing (Note 7) 579,000 579,000
Public offering of common stock
and warrants (Note 7) 6,535,000 (50,000) 6,485,000
Acquisition and cancellation of
common stock (27,000) (27,000)
Common stock issued for options exercised 123,000 123,000
Change in par value of common stock (Note 14) (20,000) -
Private placement offering of common stock (Note 2) 1,207,000 1,207,000
Stock issued for business acquisition (Note 2) 291,000 291,000
Net loss (13,418,000) (13,418,000)
Effect of exchange rate changes (149,000) (149,000)
--------------- --------------- ------------ ---------------
Balance at April 30,1996 11,662,000 (15,141,000) (247,000) (3,706,000)
--------------- --------------- ------------ ---------------
Distributions to S Corporation Shareholders (837,000) (837,000)
Issuance of preferred stock (Note 7) 6,562,000
Conversion of preferred stock into common stock (Note 7) 6,559,000 -
Exercise of warrants and options 429,000 430,000
Conversion of accounts payable into common stock (Note 7) 549,000 549,000
Conversion from S corporation status to C corporation (8,858,000) 8,858,000 -
Net loss (4,960,000) (4,960,000)
Effect of exchange rates changes (38,000) (38,000)
--------------- --------------- ------------ ---------------
Balance at April 30, 1997 10,341,000 (12,080,000) (285,000) (2,000,000)
=============== =============== ============ ===============
Exercise of warrants and options 11,021,000 11,025,000
Private placement offering of common stock 3,079,000 3,080,000
Conversion of long-term debt into common stock 2,162,000 2,162,000
Net loss (1,486,000) (1,486,000)
Effect of exchange rates changes (63,000) (63,000)
--------------- --------------- ------------ ---------------
Balance at April 30, 1998 $ 26,603,000 $ (13,566,000) $ (348,000) $ 12,718,000
=============== =============== ============ ===============
</TABLE>
28
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
APRIL 30,
---------------------------------------------------
1996 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(13,418,000) $(4,960,000) $(1,486,000)
Adjustments to reconcile net loss to net
Cash used in operating activities--
Depreciation and amortization 1,114,000 1,200,000 2,090,000
Extraordinary item 223,000 -- --
Changes in operating assets and liabilities net of effects from
purchase of CASI
(Increase) decrease in accounts
receivable, net 1,860,000 (3,819,000) (6,817,000)
(Increase) decrease in inventory (378,000) 1,104,000 (984,000)
(Increase) decrease in prepaid expenses and other assets
2,044,000 (940,000) (2,787,000)
(Increase) decrease in net assets from discontinued operations
(777,000) (1,590,000) 327,000
Increase (decrease) in accounts payable, accrued liabilities and
other 3,661,000 (2,169,000) 1,093,000
----------- ------------- ----------
Net cash used in operating activities (5,671,000) (11,174,000) (8,564,000)
----------- ------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (725,000) (1,349,000) (2,404,000)
Net cash used for CASI acquisition (705,000) --- (670,000)
Advances to CASI (1,135,000) --- --
Net cash used in investing activities (2,565,000) (1,349,000) (3,074,000)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 8,337,000 3,338,000 (2,749,000)
Net proceeds (payments) of indebtedness (5,103,000) 958,000 (374,000)
Net proceeds from common stock/warrant issuances 7,772,000 6,992,000 14,105,000
Net proceeds from related parties -- 1,026,000 (99,000)
Distributions to shareholders (667,000) (837,000) --
----------- ------------ -----------
10,339,000 11,477,000 10,883,000
----------- ------------ -----------
Net cash provided by financing activities
(149,000) (38,000) (63,000)
Net effect of foreign currency translation on cash
Net increase (decrease) in cash 1,954,000 (1,084,000) (818,000)
CASH AT BEGINNING OF PERIOD 265,000 2,219,000 1,135,000
----------- ------------ ------------
CASH AT END OF PERIOD $ 2,219,000 $ 1,135,000 $ 317,000
=========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
29
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Business--
Datatec Systems, Inc. (formerly Glasgal Communications, Inc.), (the
"Company"), and its subsidiaries are in the business of providing
software-enabled technical configuration, integration and
installation services (see Note 5).
Basis of Presentation--
The consolidated financial statements include the accounts of the
Company and its subsidiaries. These consolidated financial
statements include, for all periods presented, the accounts of all
companies acquired under the pooling of interests method of
accounting (see Note 2). All intercompany accounts and transactions
have been eliminated.
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. During 1998, the Company credited
operations in the amount of $1,200,000, representing the reversal of
certain accruals no longer deemed necessary.
Revenue Recognition--
Revenues from configuration, integration and installation services
are recognized as the services are provided.
Precontract Costs--
Precontract costs incurred in connection with defining and
clarifying technical requirements and designing technical solutions
related to executed contracts are deferred and amortized as the
services are provided. As of April 30, 1997 and 1998, approximately
$980,000 and $1,810,000, respectively, of such costs are included in
other current assets.
30
<PAGE>
Cash and Cash Equivalents--
The Company considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Included in other assets is $210,000 and $132,000 of restricted cash
as of April 30, 1997 and 1998, respectively.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out basis)
or market.
Property and Equipment--
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line and declining balance methods over
the estimated useful lives or lease terms of the related assets,
whichever is shorter.
Capitalized Software Costs--
The Company capitalizes certain software costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". These costs are amortized utilizing the straight-line
method over the economic lives of the related products, not to
exceed three years. Approximately $300,000 and $780,000 of
capitalized software costs are included in other assets in the
accompanying consolidated financial statements as of April 30, 1997
and 1998, respectively.
Goodwill--
Goodwill is amortized on a straight-line basis over 10 years.
Long-Lived Assets--
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets" requires, among other things,
that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully
recoverable (see Note 14).
Income Taxes--
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS 109"). Certain transactions are recorded in the
accounts in a period different from that in which these transactions
are reported for income tax purposes. These transactions, as well as
31
<PAGE>
other temporary differences between the basis in assets and
liabilities for financial reporting and income tax purposes, result
in deferred income taxes.
Foreign Currency Translation--
The local currency of the Company's foreign subsidiary is its
functional currency. Assets and liabilities of the Company's foreign
subsidiary are translated into US dollars at the current exchange
rate. Income statement accounts are translated at the average rate
of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to
period are included as a separate component of shareholders' equity
(deficit).
Stock Based Compensation--
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires that an entity
account for employee stock-based compensation under a fair value
based method. However, SFAS 123 also allows an entity to continue to
measure compensation cost for employee stock-based compensation
arrangements using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The Company continues to account for employee
stock-based compensation using the intrinsic value based method and
is required to make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting under SFAS
123 had been applied (see Note 11).
Reclassifications--
Certain prior year amounts have been reclassified to conform to the
current year financial statement presentation.
(2) MERGERS AND ACQUISITIONS:
Computer-Aided Software Integration, Inc.--
On April 24, 1996, the Company acquired 80% of the common stock of
Computer-Aided Software Integration, Inc. (CASI), a company that
develops and licenses software products, in exchange for $500,000
and 44,260 shares of common stock of the Company valued at $6.57 per
share based on the average trading price of the Company's common
stock for several days before and after the date of the acquisition
agreement. The acquisition was accounted for as a purchase.
In connection with this transaction, the Company completed a private
placement offering in March 1996 of 312,500 shares of common stock.
The net proceeds of the private
32
<PAGE>
placement offering, $1,207,000, were used to acquire 80% of the
issued and outstanding shares of common stock of CASI, and to
provide CASI with working capital.
In March 1998, the Company acquired the remaining 20% of CASI for
$2,414,000. As part of the purchase price the Company issued a
convertible note due June 15, 1998 for $1,833,000 (see Note 6). This
note was paid in full subsequent to year-end. In connection with the
purchase, the Company entered into a two-year non-compete agreement
with the minority shareholder. Consideration for the non-compete
agreement was $77,000.
HH Communications, Inc.--
On July 31, 1996, the Company acquired all of the issued and
outstanding shares of HH Communications, Inc. (HH), a systems
integrator, in exchange for 1,500,000 shares of its common stock.
The transaction has been accounted for as a pooling of interests.
Datatec Industries, Inc. --
On October 31, 1996, the Company acquired 98.5% of the issued and
outstanding shares of Datatec Industries, Inc., an implementor of
information communications networks, in exchange for 4,000,000
shares of its common stock. The transaction has been accounted for
as a pooling of interests. The remaining 1.5% of Datatec Industries,
Inc. was acquired for 50,000 shares of common stock on August 27,
1997.
(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:
33
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
---------------- --------------- --------------------
NUMERATOR:
Basic & Diluted-
<S> <C> <C> <C>
Income (loss) from continuing operations ($5,149,000) $ 702,000 ($968,000)
Discontinued operations (8,046,000) (5,662,000) (518,000)
Extraordinary item (223,000) -- --
---------------- --------------- --------------------
Net loss - Basic and Diluted ($13,418,000) ($4,960,000) ($1,486,000)
================ =============== ====================
DENOMINATOR:
Weighted average number of common
shares outstanding - Basic 18,354,000 21,151,000 26,451,000
Incremental shares from assumed
conversions of options and debt -- 2,406,000 --
---------------- --------------- --------------------
Weighted average number of common shares
and common share equivalents- Diluted 18,354,000 23,557,000 26,451,000
================ =============== ====================
Earnings per share - Basic:
Income (loss) from continuing operations ($0.28) $0.03 ($0.04)
Discontinued operations (0.44) (0.27) (0.02)
Extraordinary item (0.01) -- --
---------------- --------------- --------------------
Net loss ($0.73) ($0.24) ($0.06)
================ =============== ====================
Earnings per share - Diluted:
Income (loss) from continuing operations ($0.28) $0.03 ($0.04)
Discontinued operations (0.44) (0.24) (0.02)
Extraordinary item (0.01) -- --
---------------- -------------- --------------------
Net loss ($0.73) ($0.21) ($0.06)
================ =============== ====================
</TABLE>
In 1996 and 1998, approximately 2,661,000 and 4,339,000,
respectively, of outstanding options and warrants have been excluded
from the computation of diluted EPS because to do so would have been
antidilutive for those periods. In 1997, the dilutive effect of
outstanding options and warrants have been included in the
computation of diluted EPS because the Company negotiated earnings
from continuing operations.
Subsequent to year-end, the Company issued 300 shares of Series E
Cumulative Convertible Preferred Stock in a private placement (see
Note 8). The preferred shares convert to common stock at various
conversion rates, as defined. The impact of these shares, had they
been converted to common stock, would have been immaterial to the
basic and diluted earnings per share calculations.
34
<PAGE>
(4) PROPERTY AND EQUIPMENT:
The following is a summary of property and equipment--
<TABLE>
<CAPTION>
APRIL 30,
1997 1998
---- ----
<S> <C> <C>
Equipment $ 977,000 $1,955,000
Computer equipment 3,158,000 4,661,000
Furniture, fixtures and leasehold improvements 2,444,000 4,135,000
----------- ------------
6,579,000 10,751,000
Less--Accumulated depreciation and amortization
2,945,000 4,739,000
----------- -----------
Property and equipment, net $ 3,634,000 $ 6,012,000
=========== ===========
</TABLE>
(5) DISCONTINUED OPERATIONS:
Prior to fiscal 1997, the Company had primarily been a distributor
of data communications equipment. Commencing with the Company's
acquisition of Signatel in October 1994, the Company revised its
business strategy to expand its implementation of information
communication network services. The acquisition of Datatec
Industries, Inc. and CASI (see Note 2) enabled the Company to
transition from predominantly a reseller of data communications
network equipment to an open systems integrator, providing
software-enabled configuration, integration and installation
services. The acquisition of HH (see Note 2), a systems integrator,
provided the Company the opportunity to introduce these services to
HH's premier customers.
After several months of assimilating the Datatec Industries, Inc.
acquisition and repositioning its services, the Company, in June
1997, with the concurrence of its Board of Directors, discontinued
its data communications equipment distribution business. The Company
is no longer a distributor of data communications equipment and will
only honor its existing commitments. Accordingly, as of April 30,
1996, 1997 and 1998, the Company has reflected this business as a
discontinued operation in the accompanying consolidated statements
of operations.
Revenues from such operations were $43,033,000, $35,178,000 and
$3,386,000 for the years ended April 30, 1996, 1997 and 1998,
respectively. Included in net assets from discontinued operations as
of April 30, 1998 is a 10-year mortgage agreement with a bank, with
an outstanding balance as of April 30, 1998 of $974,000, and an
interest rate of 8.05% per annum. Beginning in the year 2002, the
interest rate is subject to adjustment, as defined.
35
<PAGE>
The net loss of this business during 1998, in excess of provisions
for future losses recorded in 1997, was $518,000 and is reflected as
loss from discontinued operations.
As of April 30, 1996, Datatec Industries, Inc. had discontinued its
international distribution operations, which sold computer hardware,
and its Shoppertrak division, which developed and sold a proprietary
system that provided shopper traffic information. The loss from
operations in 1996 was approximately $2,218,000 and the provision
for future losses was approximately $2,284,000 as of April 30, 1996,
all of which was utilized in 1997. Revenues relating to these
operations were approximately $14,000,000 in 1996.
(6) SHORT-TERM BORROWINGS:
The Company has a revolving loan agreement that provides for maximum
borrowings of $15,000,000. Availability under the revolving loan is
calculated at the sum of 85% of eligible accounts receivable, as
defined, and 50% of the cost or wholesale market value of eligible
inventory, as defined. Approximately $8,866,000 was outstanding as
of April 30, 1998. The amount of additional available borrowings, as
defined, was $1,028,000 as of April 30, 1998. The revolving loan
accrues interest at the prime rate plus 0.75% (9.25% at April 30,
1998) and matures on March 16, 2000.
Included in short-term borrowings is $1,833,000 due to the minority
shareholder of CASI. The note bears interest at 10% per annum. On
May 1, 1998 the Company repaid the note plus accrued interest.
(7) LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30,
-----------------------------------------------
1997 1998
----------------- -------------------------
<S> <C> <C>
New Jersey EDA Note (a) $ 680,000 $ 570,000
Term note (b) 2,000,000 1,620,000
Convertible notes (c) 2,000,000 --
Capital leases 1,171,000 1,288,000
----------- -------------
Total debt 5,851,000 3,478,000
Less - current maturities (850,000) (1,063,000)
=========== =============
Long-term debt, net of current maturities $5,001,000 $2,415,000
=========== =============
</TABLE>
(a) The Company had previously entered into a $1,320,000 loan
agreement with the New Jersey Economic Development Authority
("NJEDA"). The loan provides for monthly payments of principal and
interest through June 1, 2002. Monthly principal payments range from
$9,000 to $14,000. Interest is based on a floating rate equal to the
variable rate borne by the NJEDA Economic Growth Bonds. As of April
30, 1998 the interest rate was 4.05%. The loan is secured by the
assets acquired with the loan proceeds.
36
<PAGE>
(b)The term note bears interest at a variable rate equal to the
prime rate plus 1.5% (10.0% at April 30, 1998) and is payable
monthly. The principal is payable in monthly installments and
matures in April 2000. The term note is collateralized by certain
assets, as defined.
(c)In February 1997, the Company issued convertible notes of
$2,000,000. In connection with these notes, the Company issued
warrants to purchase 700,000 shares of the Company's common stock at
$5.25 per share, the fair market value on the date of issuance.
During fiscal 1998, the entire principal amount of the notes and
accrued interest were converted into an aggregate of approximately
631,000 shares of common stock.
The scheduled repayments of long-term debt are as follows:
1999 $ 1,063,000
2000 1,794,000
2001 393,000
2002 214,000
2003 14,000
(8) SHAREHOLDERS' EQUITY:
Public Offering--
During fiscal 1996, the Company consummated two bridge financings
for aggregate proceeds of $1,270,000. In connection with the
financings, 442,478 shares of common stock were issued at $1.13 per
share and warrants were issued for the purchase of 950,000 shares of
common stock. Each warrant was subsequently converted into a warrant
having terms identical to those of the redeemable warrants issued in
connection with the public offering (the "Offering") discussed
below. The bridge financings were repaid from the proceeds of the
Offering resulting in the write-off of the unamortized original
issue discount and deferred financing costs of $223,000. This amount
is reported as an extraordinary loss in 1996.
On September 28, 1995, the Company completed the Offering of
1,783,000 units at $5.00 per unit (including an overallotment of
258,000 units in October 1995) for net proceeds of approximately
$6,485,000. Each unit consisted of two shares of common stock and
one redeemable warrant. Each redeemable warrant entitles the holder
to purchase one share of common stock at an initial exercise price
of $3.75 per share. In addition, in connection with the sale of
400,000 shares of common stock by certain selling shareholders, the
Company contributed 200,000 redeemable warrants (valued at $50,000)
that were included in the 200,000 units sold by such shareholders.
In addition, the Company granted its underwriter warrants to
purchase 517,500 shares of common stock at $4.69.
37
<PAGE>
Preferred Stock--
During 1997, the Company issued 350,000 shares of convertible
preferred stock. The net proceeds from these issuances were
approximately $6,562,000. The preferred stock was subsequently
converted into approximately 2,500,000 shares of common stock during
1997.
In May 1998, the Company issued 300 shares of Series E Cumulative
Convertible Preferred Stock. The net proceeds from this issuance
were approximately $2,350,000. In connection with the transaction,
the Company issued warrants to purchase 165,000 shares of common
stock at $6.29.
Common Stock--
During fiscal 1998, the Company, through private placement equity
offerings, issued 855,000 shares of common stock for approximately
$3,080,000.
Warrants--
The following table is a summary and status of warrants issued by
the Company:
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS
---------------------------------------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
---------------------- ---------------------------------
<S> <C> <C>
APRIL 30, 1995 -- $--
Grants 3,451,250 $3.89
Exercises -- --
Cancellations -- --
---------------------- ---------------------------------
APRIL 30, 1996 3,451,250 $3.89
Grants 896,000 $5.28
Exercises (178,100) $3.75
Cancellations -- --
---------------------- ---------------------------------
APRIL 30, 1997 4,169,150 $4.20
Grants -- --
Exercises (2,743,290) $3.75
Cancellations -- --
---------------------- ---------------------------------
APRIL 30, 1998 1,425,860 $5.06
====================== =================================
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS
-----------------------------------------------------------------------
WEIGHTED AVERAGE
NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE
- --------------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
$3.75 12,360 -- $3.75
$4.00 - $4.99 517,500 4.00 $4.69
$5.00 - $5.99 885,000 3.77 $5.26
$5.99 11,000 1.42 $7.15
============== ========
TOTAL 1,425,860 $5.06
============== ========
</TABLE>
In September 1997, the Company provided notice to its redeemable
warrant holders that it would redeem each warrant on October 23,
1997 for $0.05 if not exercised prior to that date. Throughout the
month of October 1997, a total of approximately 2,743,000 were
exercised and 12,360 warrants have been redeemed or are in process
of redemption.
Under an agreement with Direct Connect International, Inc. ("DCI")
dated January 7, 1994, as amended on July 10, 1997, the Company has
the right to require DCI to purchase up to 1,207,239 additional
shares ("Additional Shares") of Common Stock of the Company at a per
share price of $6.54, less certain warrant solicitation fees (the
"Additional DCI Investment"). The Company may require the Additional
DCI Investment if, and then only to the extent, that DCI receives
proceeds from the exercise of existing DCI warrants, which are
scheduled to expire on March 31, 1999. If the Company does not
require the Additional DCI Investment, DCI may still purchase, on
the same terms, the Additional Shares. These rights are not included
in the above table.
(9) INCOME TAXES:
The Company accounts for income taxes under the provisions of SFAS
109. The statement requires that deferred income taxes reflect the
tax consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting
amounts.
Deferred income taxes result primarily from temporary differences in
the recognition of expenses for tax and financial reporting
purposes. Deferred income taxes consisted of the following:
39
<PAGE>
<TABLE>
<CAPTION>
APRIL 30, 1997 APRIL 30, 1998
--------------------------- --------------------
<S> <C> <C>
Net operating loss carryforwards $ 3,462,000 $ 4,509,000
Depreciation (1,159,000) (542,000)
Allowance for doubtful accounts 280,000 102,000
Inventory obsolescence 257,000 129,000
Other 480,000 2,000
--------------------- -------------------
3,320,000 4,200,000
Valuation Allowance (3,320,000) (3,800,000)
===================== ===================
Net deferred tax asset $ -- $ 400,000
===================== ====================
</TABLE>
The net deferred tax asset recorded as of April 30, 1998 relates to
the tax attributes for certain state net operating loss
carryforwards which the Company has the ability to sell as a result
of recent changes to the New Jersey State tax laws. The Company has
made an assessment of the new law and determined that realization of
the net deferred tax asset relating to the state operating loss
carryforwards is more likely than not. However, there can be no
assurance that the asset can or will be sold prior to its
expiration. The net operating loss carryforwards expire at various
dates through 2003.
The Company does not provide for Federal income taxes on the
undistributed earnings of its foreign subsidiaries as the Company
does not have any current intention of repatriating such earnings.
As of April 30, 1998, the Company has approximately $11,000,000 of
net operating loss carryforwards, which may be used to offset future
Federal taxable income. These net operating loss carryforwards
expire through 2013.
(10) RELATED PARTY TRANSACTIONS:
The Company has outstanding loans of $485,000 to certain executive
officers of the Company. These loans bear interest at 8% per annum.
Three of these loans, representing $360,000, are repayable with the
proceeds from the sale of stock received from future exercise of
stock options of these executives. All of these loans mature on
December 31, 1999.
The Company owes an executive officer $1,414,000. The note bears
interest at a rate of 12.5%. The note matures on November 20, 1998
and is subordinated to the Company's primary lender. Borrowings with
this lender are due March 16, 2000, accordingly the above note has
been classified as long-term in the accompanying balance sheets.
40
<PAGE>
The Company continues to lease a facility from a company with whom
an executive officer is affiliated. The annual lease payment on the
facility is included in Note 12.
(11) INCENTIVE PLANS
At April 30, 1998 the Company had several stock-based incentive
plans including an employee stock purchase plan, which are described
below. The Company applies APB Opinion No. 25 for its plans.
Accordingly, no compensation cost has been recognized for its
stock-based incentive plans. Had compensation cost for the Company's
stock-based plans been determined on the fair value at the grant
dates for awards under the plans, consistent with SFAS 123, the
Company's net income (loss) and net income (loss) per share on a
basic basis would have been reduced to the pro-forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- ----------------------- ---------------------
(in thousands, except per share data)
Proforma net income (loss):
<S> <C> <C> <C>
As reported $(13,418,000) $(4,960,000) $(1,486,000)
Proforma $(13,524,000) $(5,549,000) $(2,613,000)
Proforma net income(loss) per share - Basic:
As reported $ (.73) $ (.24) $ (.06)
Proforma $ (.73) $ (.26) $ (.10)
</TABLE>
The per share weighted-average fair value of stock options granted
during 1996, 1997 and 1998 was $4.45, $5.57 and $1.80, respectively,
on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions: expected dividend
yield 0% in all periods, risk free interest rate of 8.5% in 1996,
1997 and 1998 and volatility of 75% for 1996, 1997 and 1998,
respectively.
Common Stock Options--
The 1990 Stock Option Plan (the "1990 Plan") provides for grants of
1,500,000 common stock options to employees, directors, and
consultants to purchase common stock at a price at least equal to
100% of the fair market value of such shares on the grant date. The
exercise price of any options granted to a person owning more than
10% of the combined voting power of all classes of stock of the
Company ("10% shareholder"), shall be at least equal to 110% of the
fair market value of the share on the grant date. The options are
granted for no more than a 10-year term (5 years for 10%
shareholders) and the vesting periods range from 2 to 4 years. As of
April 30, 1998, 27,402 shares remain reserved for future issuance
under the 1990 Plan.
41
<PAGE>
During January 1992, the Company granted options to purchase
1,386,742 shares of its common stock, at an exercise price of $.005
per share. The options may be exercised at any time prior to January
1, 2002. 739,332 options have been exercised as of April 30, 1998.
In April 1993, the Company granted options, which expire in April
2003, to purchase 109,755 shares of common stock to a
consultant/advisor to the Company at an exercise price of $.005 per
share. As of April 30, 1998, all options have been exercised.
The 1993 Consultant Stock Option Plan (the "1993 Plan") provides for
grants of 30,000 shares of common stock to selected persons who
provide consulting and advisory services to the Company at a price
at least equal to 100% of the fair market value of such shares on
the grant date, as determined by the Board of Directors. The
exercise price of any options granted to a person owning more than
10% of the combined voting power of all classes of stock of the
Company ("10% shareholder"), shall be at least equal to 110% of the
fair market value of such shares on the grant date. The options are
granted for no more than a 10-year term (5 years for 10%
shareholders) and the vesting periods are determined by the Board of
Directors. As of April 30, 1998, 4,000 shares remain reserved for
future issuance under the 1993 Plan.
The 1995 Directors Stock Option Plan (the "Directors Plan") provides
for grants of 500,000 shares of Common Stock. All members of the
Board of Directors who are not employees of the Company ("Eligible
Directors") are eligible to receive grants of options. Each Eligible
Director is granted an option to purchase 24,000 shares of Common
Stock on the date the Eligible Director is elected to the Board of
Directors, and will be granted another option to purchase 24,000
shares of Common Stock annually thereafter so long as he remains an
Eligible Director. Generally, each option vests ratably over a
three-year period provided such individual continues to serve as
Director of the Company. As of April 30, 1998, 188,000 shares remain
reserved for future issuance under the Directors Plan.
The 1996 Employee and Consultant Stock Option Plan (the "1996 Plan")
provides for grants of 2,000,000 shares of common stock to employees
and consultants to purchase common stock at a price equal to 100% of
the fair market value of such shares on the grant date. The options
are granted for no more than a 10-year term and the vesting periods
are determined by the Board of Directors. As of April 30,1998,
753,002 shares remain reserved for future issuance under the 1996
Plan.
The Senior Executive Stock Option Plan (the "Executive Plan")
provides for grants of 560,000 shares of common stock to senior
executive officers of the Company at exercise prices and vesting
periods as determined by the Board of Directors at the time of
grant. As of April 30, 1998, 25,000 shares remain reserved for
future issuance under the Executive Plan.
42
<PAGE>
The 1996 Stock Option Conversion Plan (the "Conversion Plan") was
primarily established to replace stock options previously granted by
the Company's subsidiary, Datatec Industries, Inc., with Company
options on the same terms as indicated in the merger agreement. The
Conversion Plan provides for grants of 470,422 shares of common
stock. As of April 30, 1998, 28,795 shares remain reserved for
future issuance under the Conversion Plan.
A summary of the status of stock option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------
SHARES AVAILABLE NUMBER WEIGHTED AVERAGE
FOR FUTURE GRANTS OF SHARES EXERCISE PRICE
------------------- ---------------- ------------------
<S> <C> <C> <C>
BALANCE AS OF APRIL 30, 1995 4,698,440 2,463,498 $1.03
Grants (439,500) 439,500 $3.86
Exercises -- (202,009) $1.09
Cancellations 39,936 (39,936) $1.25
---------------- -------------- -------------
BALANCE AS OF APRIL 30, 1996 4,298,876 2,661,053 $1.49
Grants (2,899,380) 2,899,380 $3.92
Exercises -- (471,471) $0.30
Cancellations 213,969 (213,969) $6.49
---------------- -------------- -------------
BALANCE AS OF APRIL 30, 1997 1,613,465 4,874,993 $2.83
Grants (880,250) 880,250 $4.45
Exercises -- (1,027,679) $1.26
Cancellations 388,445 (388,445) $4.26
---------------- -------------- -------------
BALANCE AS OF APRIL 30, 1998 1,121,660 4,339,119 $3.41
================ ============== =============
Options Exercisable at:
April 30, 1996 2,054,422 $1.01
April 30, 1997 2,513,378 $2.08
April 30, 1998 2,769,388 $3.17
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------------------------------
WEIGHTED AVERAGE
NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE
- -------------------------------- ----------------- -------------------------------- --------------------------------
<S> <C> <C> <C> <C>
$.005 - $0.99 647,411 3.67 $0.01
$1.00 - $1.99 314,759 7.19 $1.30
$2.00 - $2.99 487,191 7.93 $2.81
$3.00 - $3.99 698,249 9.37 $3.55
$4.00 - $4.99 1,800,867 8.85 $4.02
$4.99 390,642 4.63 $8.40
============= ======
TOTAL 4,339,119 $3.41
============= ======
</TABLE>
EXERCISABLE OPTIONS
---------------------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES NUMBER OF SHARES EXERCISE PRICE
- ------------------------ --------------------- -----------------
$.005 - $0.99 647,411 $0.01
$1.00 - $1.99 280,672 $1.28
$2.00 - $2.99 369,526 $2.84
$3.00 - $3.99 258,500 $3.64
$4.00 - $4.99 871,836 $4.00
$4.99 341,443 $8.62
============= =====
TOTAL 2,769,388 $3.17
============= =====
Employee Stock Purchase Plan--
During fiscal 1998, the Company implemented an employee stock
purchase plan whereby eligible employees, as defined, may purchase
shares of the Company's common stock at a price equal to 85% of the
lower of the closing market price on the first or last trading day
of the plan's quarter. A total of 750,000 shares of common stock
have been reserved for issuance under the plan. As of April 30, 1998
the Company received contributions of $90,000 and in May 1998 issued
29,800 shares of common stock to participants of the plan.
Retirement Plans--
The Company currently has two contributory 401(k) salary reduction
plans which permit employees to contribute if they are at least 21
years of age and have been a full time employee of the Company for
six months.
The Glasgal Communications, Inc. Salary Reduction Plan (Savings Plan
I) requires a minimum contribution of 2% of the gross earnings and
no more than 15% of the gross earnings up to the maximum allowed by
the IRS. Savings Plan I matches a maximum
44
<PAGE>
of $600 annually, per participant. The matching contributions for
the three years ended April 30, 1996, 1997 and 1998 were $17,000,
$15,000, and $11,000 respectively.
The Datatec Industries, Inc. 401(k) Savings Plan (Savings Plan II)
requires a minimum contribution of 1% of the gross earning and no
more than 15% of the gross earnings up to the maximum allowed by the
IRS. Savings Plan II does not provide a company match of any of the
employee's contributions.
(12) COMMITMENTS AND CONTINGENCIES:
The Company leases offices and staging and configuration facilities
from related and unrelated parties throughout the United States and
Canada. The minimum annual rentals for future years are as follows
(in thousands):
<TABLE>
<CAPTION>
TWELVE MONTH PERIOD RELATED SUBLEASE
ENDING APRIL PARTY OTHER INCOME NET
- ---------------------- --------------- ------------------------ ---------------------- -------------------
<S> <C> <C> <C> <C> <C>
1999 $ 190 $ 1,296 $ (453) $ 1,033
2000 190 1,191 (372) 1,009
2001 190 813 (270) 733
2002 190 670 (210) 650
2003 190 540 (18) 712
Thereafter 2,219 1,408 -- 3,627
</TABLE>
Rent expense was $1,785,000, $1,713,000 and $1,809,000 for the years
ended April 30, 1996, 1997 and 1998, respectively.
The Company has one-year lease commitments for its fleet of
vehicles. Lease expense related to these vehicles was $1,155,000,
$1,347,000 and $1,505,000 for the years ended April 30, 1996, 1997
and 1998, respectively. The leases expire throughout the year, most
with an option for renewal. Future commitments are not reflected in
the amounts above but are expected to approximate the 1998 expense.
The Company has entered into employment agreements with nine key
employees. These agreements provide for an aggregate annual salary
of $1,530,000, increased annually by the percentage increase in the
consumer price index. The agreements are generally three years in
duration and expire through October 1999.
The Company, from time to time, is involved in routine litigation
and various legal matters in the ordinary course of business. The
Company does not expect that the ultimate outcome of this litigation
will have a material adverse effect on the results of operations or
financial position.
45
<PAGE>
(13) CONCENTRATIONS OF CREDIT RISK:
The Company's financial instruments subject to credit risk are
primarily trade accounts receivable. Generally, the Company does not
require collateral or other security to support customer
receivables. At April 30, 1998, the Company's customers were
primarily within the continental United States and Canada. Customers
representing approximately 56% of the Company's net sales are in the
retail industry.
In the year ended April 30, 1996, two customers had sales of
$5,000,000 and $4,700,000, for the year ended April 30, 1997, two
customers had sales of $7,000,000 and $6,000,000, and for the year
ended April 30, 1998, no customer exceeded 10% of net sales.
(14) RESTRUCTURING OF OPERATIONS:
In April 1996, the Company recorded restructuring charges of
$6,756,000 relating to reducing costs and improving the Company's
efficiency. These charges are included in selling, general and
administration expense and included $2,049,000 in noncash
write-downs of certain of the Company's long-lived assets based upon
the criteria described in Note 1 as well as the establishment of
$4,707,000 of accrued liabilities, which included $1,984,000 of
projected cash outflows for personnel severance and facilities
consolidation plans.
(15) RECAPITALIZATION
In January 1996, the Company was reincorporated in the State of
Delaware and each outstanding share of the old California
Corporation, no par value common stock, was converted into one share
of the new Delaware Corporation $.001 par value common stock. This
change resulted in the transfer of $20,000 from additional paid-in
capital to common stock. In conjunction with the reincorporation,
the Company increased the authorized common stock from 21,000,000
shares to 34,000,000 shares.
In January 1998, the Company increased the authorized common stock
from 34,000,000 shares to 75,000,000 shares.
(16) SHAREHOLDER RIGHTS PLAN
On January 30, 1998, the Board of Directors adopted a shareholder
rights plan. Under the rights plan, each shareholder of record on
March 9, 1998, received a dividend of one right for each outstanding
share of Common Stock. The rights are attached to, and presently
only trade with, the Common Stock and currently are not exercisable.
Accordingly, they are not considered in the computation of earnings
per share. Except as specified below, upon becoming exercisable, all
rights holders will be entitled to purchase from the Company one
one-hundredth of a share of Series D Preferred Stock ("Participating
Preferred Stock") at a price of $40, subject to adjustment.
46
<PAGE>
The rights become exercisable and will begin to trade separately
from the Common Stock upon the earlier of (i) the first date of
public announcement that a person or group (other than certain
exempted shareholders as described in the Rights Agreement) has
acquired beneficial ownership of 15% or more of the outstanding
Common Stock or (ii) 10 business days following a person's or
group's commencement of, or announcement of, and intention to
commence a tender or exchange offer, the consummation of which would
result in beneficial ownership of 15% or more of the Common Stock.
The rights will entitle holders (other than an Acquiring Person, as
defined) to purchase Company Common Stock having a market value
(immediately prior to such acquisition) of twice the exercise price
of the right. If the Company is acquired through a merger or other
business combination transaction after a person or group has become
an Acquiring Person, each right will entitle the holder to purchase
$80 worth of the surviving company's common stock for $40, i.e., at
a 50% discount. The Company may redeem the rights for $0.01 each at
any time prior to the acquisition of 15% or more of the outstanding
shares of Common Stock by a person or group of persons. The rights
will expire on February 24, 2008.
Until the rights are exercised, the holder thereof, as such will
have no rights as a stockholder of the Company, including without
limitation, the right to vote or to receive dividends.
The holders of the Participating Preferred Stock will be entitled to
receive dividends, if declared by the Board of Directors, from funds
legally available. Each share of Participating Preferred Stock will
be entitled to one hundred votes on all matters submitted to
stockholder vote. The shares of Participating Preferred Stock are
not redeemable by the Company nor convertible into Common Stock or
any other security of the Company.
(17) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
1996 1997 1998
---- ---- ----
Interest paid $ 1,020,000 $ 1,313,000 $1,571,000
Income taxes paid $ 14,000 $ 397,000 $33,000
Supplemental Disclosures of Non-Cash Activities--
On April 24, 1996, the Company purchased 80% of the common stock of
Computer-Aided Software Integration, Inc. (CASI) for $500,000 in
cash plus 44,260 shares of common stock of the Company valued at
$290,000. A summary of the transaction is as follows:
47
<PAGE>
Goodwill $1,866,000
Cash Paid for Common Stock (including expenses) (705,000)
Common Stock Issued (290,000)
-----------
Liabilities Assumed $ 871,000
===========
In March 1998, the Company purchased the remaining 20% of the common
stock of CASI for $581,000 in cash plus a note of $1,833,000. In
addition, the Company incurred $89,000 of legal costs associated
with the closing of this transaction.
During 1997, the Company converted $561,000 of accounts payable into
171,000 shares of common stock.
In February 1998, the Company acquired certain barter credits in the
amount of $2,250,000 in exchange for accounts receivable with a net
book value of $987,000 and inventory with a net book value of
$1,263,000. $450,000 of the barter credits are reflected in prepaid
expenses and other current assets and $1,800,000 of the barter
credits are reflected in other assets. The barter credits expire in
February 2003.
During fiscal 1998, $2,000,000 of convertible notes plus accrued
interest were converted into an aggregate of approximately 631,000
shares of common stock.
48
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Charges to
beginning of cost and Balance, end of
period expenses Deductions period
---------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
Year ended April 30, 1998
Allowance for doubtful accounts $520,000 $ (170,000) $ (45,000) $ 305,000
Year ended April 30, 1997
Allowance for doubtful accounts $538,000 $ 163,000 $(181,000) $ 520,000
Year ended April 30, 1996
Allowance for doubtful accounts $456,000 $ 542,000 $(460,000) $ 538,000
</TABLE>
49
<PAGE>
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
The list of Exhibits is hereby amended by deleting Exhibit 23.1 and
inserting in lieu thereof the following:
* 23.1 -- Consent to the incorporation by reference in the
Company's Registration Statements on Forms S-3 and S-8 of
the report of Arthur Andersen LLP included herein.
- ---------------------------
* Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 1, 1998
DATATEC SYSTEMS, INC.
By:/s/ James M. Caci
----------------------------------------
Name: James M. Caci
Title: Vice President-Finance, Chief
Financial Officer and Secretary
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Datatec Systems, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated July 27, 1998, included in this Form 10-K/A into the Company's
previously filed Registration Statements, Nos. 33-87122, 33-94802, 33-93470,
333-08381, 333-03414, 333-09509, 333-15541, 333-16579, 333-22257, 333-36045,
333- 34893, 333-40585, and 333-53125.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Roseland, New Jersey
August 27, 1998
