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: OCTOBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 000-20688
---------------------------------
DATATEC SYSTEMS, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20C Commerce Way, Totowa, NJ 07512-1154
- ------------------------------- -------------------
(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 October 31,
1998 was 29,387,981.
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
THREE MONTHS ENDED OCTOBER 31, 1998
INDEX
PART I: FINANCIAL INFORMATION
Page
Item 1: Consolidated Financial Statements
Balance Sheets at April 30, 1998 and
October 31, 1998 3
Statements of Operations for the three months ended
October 31, 1997 and 1998 4
Statements of Operations for the six months ended
October 31, 1997 and 1998 5
Statements of Cash Flows for the six months ended
October 31, 1997 and 1998 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
Item 6: Exhibits and Reports of Form 8-K
2
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
1998
APRIL 30, 1998 (UNAUDITED)
-------------------------- ------------------
ASSETS
- ------------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 317,000 $ 127,000
Accounts receivable, net 18,106,000 22,342,000
Inventory 3,118,000 3,926,000
Prepaid expenses and other current assets 3,433,000 4,377,000
Net assets from discontinued operations 501,000 764,000
----------- ------------
Total current assets 25,475,000 31,536,000
Property and equipment, net 6,012,000 5,585,000
Goodwill, net 3,975,000 3,757,000
Other Assets 4,601,000 4,090,000
=========== ============
Total assets $40,063,000 $44,968,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 10,759,000 $ 11,883,000
Current portion of long-term debt 1,063,000 987,000
Accounts payable 7,085,000 8,388,000
Accrued liabilities 3,882,000 4,193,000
Other current liabilities 1,214,000 196,000
------------ -----------
Total current liabilities 24,003,000 25,647,000
------------ -----------
Due to related parties 927,000 927,000
------------ -----------
Long-term debt 2,415,000 1,967,000
------------ -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock 29,000 29,000
Additional paid-in capital 26,603,000 29,303,000
Accumulated deficit (13,566,000) (12,547,000)
Cumulative translation adjustment (348,000) (358,000)
------------ ---------------
Total shareholders' equity 12,718,000 16,427,000
============ ===============
Total liabilities and shareholders' equity $ 40,063,000 $ 44,968,000
============ ===============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
3
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
OCTOBER 31,
----------------------------------------------
1997 1998
------------------- -------------------
<S> <C> <C>
Net sales $ 19,523,000 $ 25,574,000
Cost of sales 12,085,000 16,538,000
------------------- --------------------
Gross profit 7,438,000 9,036,000
Selling, general and administrative expenses 6,855,000 8,005,000
------------------- --------------------
Operating income 583,000 1,031,000
Interest expense 550,000 472,000
------------------- --------------------
Income before income taxes 33,000 559,000
Provision (benefit) for income taxes -- --
=================== ====================
Net income $ 33,000 $ 559,000
=================== ====================
INCOME (LOSS) PER SHARE:
BASIC $-- $0.02
=================== ====================
DILUTED $-- $0.02
=================== ====================
WEIGHTED AVERAGE COMMON SHARES - BASIC 27,959,000 29,110,000
=================== ====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - DILUTED 30,223,000 29,931,000
=================== ====================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
4
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
OCTOBER 31,
-------------------------------------------------
1997 1998
--------------------- ---------------------
<S> <C> <C>
Net sales $38,124,000 $50,721,000
Cost of sales 23,362,000 32,690,000
--------------------- ---------------------
Gross profit 14,762,000 18,031,000
Selling, general and administrative expenses 13,698,000 16,047,000
--------------------- ---------------------
Operating income 1,064,000 1,984,000
Interest expense 1,005,000 965,000
--------------------- ---------------------
Income before income taxes 59,000 1,019,000
Provision (benefit) for income taxes -- --
--------------------- ---------------------
Net income $ 59,000 $1,019,000
===================== =====================
INCOME (LOSS) PER SHARE :
BASIC $-- $0.04
===================== =====================
DILUTED $-- $0.03
===================== =====================
WEIGHTED AVERAGE COMMON SHARES - BASIC 26,804,000 29,082,000
===================== =====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - DILUTED 29,068,000 30,232,000
===================== =====================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
5
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
OCTOBER 31,
-----------------------------------------------
1997 1998
------------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 59,000 $ 1,019,000
Adjustments to reconcile net income to net cash used in
operating activities --
Depreciation and amortization 998,000 1,527,000
Changes in operating assets and liabilities:
Increase in accounts receivable (2,328,000) (4,236,000)
Increase in inventory (843,000) (808,000)
Increase in prepaid expenses and other assets (2,602,000) (726,000)
Decrease (increase) in assets held for sale or disposition 1,109,000 (287,000)
Increase in accounts payable, accrued and other liabilities 44,000 596,000
---------------- ---------------------
Net cash used in operating activities (3,563,000) (2,915,000)
---------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (354,000) (565,000)
--------------- ---------------------
Net cash used in investing activities (354,000) (565,000)
---------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings of short-term borrowings (10,507,000) 1,124,000
Net payments of indebtedness (543,000) (524,000)
Net proceeds from stock/warrant issuances 14,105,000 2,700,000
---------------- ---------------------
Net cash provided by financing activities 3,055,000 3,300,000
---------------- ---------------------
Net effect on foreign currency translation on cash (18,000) (10,000)
---------------- ---------------------
Net decrease in cash (880,000) (190,000)
CASH AT BEGINNING OF PERIOD 1,135,000 317,000
================ =====================
CASH AT END OF PERIOD $ 255,000 $ 127,000
================ =====================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
6
<PAGE>
DATATEC SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Datatec Systems, Inc. (the "Company"), and its subsidiaries are in the
business of providing rapid and accurate technology deployment services.
(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, 1998. 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 six months ended
October 31, 1998 are not necessarily indicative of the results expected for the
full fiscal year.
(3) Comprehensive Income
Effective May 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. For the three and six months ended October
31, 1998, the components of comprehensive income were immaterial. The components
of other comprehensive income consists of foreign currency translation
adjustments.
(4) Equity
In May 1998, the Company issued 300 shares of Series E Convertible
Preferred Stock. The net proceeds from this issuance were approximately
$2,350,000. In connection with this transaction, the Company issued warrants to
purchase 165,000 shares of common stock at $6.29. In October 1998, 40 shares of
the Series E Convertible Preferred Stock were converted into 195,400 shares of
common stock. In November 1998, 110 shares of the Series E Convertible Preferred
Stock were converted into 405,600 shares of common stock.
(5) Earnings per share:
Basic earnings per share is calculated using the weighted average number
of shares outstanding for the three and six months ended October 31, 1997 and
1998. Diluted earnings per share is calculated using the weighted average number
of shares outstanding plus the incremental shares from assumed conversions of
options, debt and preferred stock for the three and six months ended October 31,
1997 and 1998.
(6) Supplemental Disclosure of Cash Flows
Cash paid during the six months ended October 31:
1997 1998
----------------- ---------------------
Interest Paid $828,000 $935,000
7
<PAGE>
DATATEC SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 1998
NET SALES. Net sales for the three and six months ended October 31,
1998 were $25,574,000 and $50,721,000 compared to $19,523,000 and $38,124,000
for the three and six months ended October 31, 1997, respectively, representing
an increase of 31% and 33% for the three and six months, respectively. The
increase in sales is attributable to an increase in sales to the Company's
strategic alliance partners.
GROSS PROFIT. Gross profits for the three and six months ended
October 31, 1998 were $9,036,000 and $18,031,000, respectively, compared to
$7,438,000 and $14,762,000 for the three and six months ended October 31, 1997,
respectively. Gross profits as a percentage of net sales were 35.3% and 35.6%
for the three and six months ended October 31, 1998 compared to 38.1% and 38.7%
for the three and six months ended October 31, 1997, respectively. Included in
sales and gross margins for the three and six months ended October 31, 1997 was
approximately $1.1 million of revenue associated with the license of the
Company's proprietary software. Excluding the effects of this software sale, as
no such sale occurred during the first six months of fiscal 1999, gross margins
for the three and six months ended October 31, 1997 were 34.3% and 36.9%. The
Company has undertaken several initiatives to improve its overall margins. These
initiatives include further automation of the field force as well as several
other initiatives aimed at improving overall operating efficiencies and quality.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three and six months ended October 31, 1998 were
$8,005,000 and $16,047,000, respectively, compared to $6,855,000 and $13,698,000
for the three and six months ended October 31, 1997, respectively. As a
percentage of sales, selling, general and administrative expenses were 31.3% and
31.6% for the three and six months ended October 31, 1998, compared to 35.1% and
35.9% for the three and six months ended October 31, 1997. The decrease in
selling, general and administrative expense as a percentage of sales
demonstrates the Company's ability to leverage its expense base to support
increased sales volume.
INTEREST EXPENSE. Interest expense for the three and six months
ended October 31, 1998 was $472,000 and $965,000, respectively, compared to
$550,000 and $1,005,000 for the three and six months ended October 31, 1997,
respectively.
FINANCIAL POSITION
During the six months ended October 31, 1998, cash used in
operations was $2,916,000 compared to a year-ago cash usage of $3,563,000. The
cash used in operations is supporting Company growth in sales and receivables.
Cash used for investing activities during the first six months of
the fiscal year ending April 30, 1999 was $565,000 compared to $354,000 during
the first six months of the fiscal year ended April 30, 1998.
8
<PAGE>
Cash provided by financing activities during the six months ended
October 31, 1998 was $3,300,000 compared to $3,055,000 in the year-ago period.
Included in the current six-month period were net proceeds of approximately
$2,350,000 from the issuance of 300 shares of Series E Convertible Preferred
Stock. The net proceeds were used to repay the convertible note issued during
March 1998 to the former minority interest shareholder of the Company's
subsidiary Computer-Aided Software, Integration, Inc. and for working capital
purposes. Also included in the current period were net proceeds of $350,000 from
the issuance of common stock related to the exercise of stock options and
purchases under the employee stock purchase plan.
The Company's working capital improved from $1,472,000 at April 30,
1998 to $5,889,000 at October 31, 1998.
At October 31, 1998, total debt was $14,837,000 compared to
$14,237,000 at April 30, 1998.
Stockholders' equity increased $3,709,000 during the six months
ended October 31, 1998, principally reflecting net income of $1,019,000,
proceeds of approximately $2,350,000 from the issuance of Series E Convertible
Preferred Stock and proceeds from the issuance of common stock related to the
exercise of stock options and purchases under the employee stock plan of
$350,000.
IMPACT OF THE YEAR 2000 ISSUE
Many computer systems and software products currently in use by
businesses and government organizations are coded to accept two digits, rather
than four, to specify the year. Such computer systems and software products will
be unable to properly interpret dates beyond the year 1999, which could lead to
business disruptions (the "Year 2000 Issue"). As a result, in less than two
years, computer systems and/or software used by many companies may need to be
upgraded to properly interpret dates beyond 1999. The Company's technical
personnel are in the process of assessing the impact of the Year 2000 Issue on
the Company's products.
Based on a recent assessment of its internal computer systems, the
Company determined that it will be required to modify or replace portions of its
internal software so that its computer systems will properly utilize dates
beyond December 31, 1999. The Company is in the process of performing its Year
2000 modifications and expects to have its internal computer systems year 2000
compliant by the end of 1999. If such modifications are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. The total
cost of the program is being funded through operating cash flows. Costs
associated with the purchase of new software will be capitalized. The total cost
associated with the required modifications and conversions is not expected to be
material to the Company's consolidated results of operations and financial
position.
9
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION - CONTINUED
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
11
<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
December 15, 1998 By: /s/ JAMES M. CACI
--------------------------------
James M. Caci
Chief Financial Officer and Duly
Authorized Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF OCTOBER 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 22,617
<ALLOWANCES> (275)
<INVENTORY> 3,926
<CURRENT-ASSETS> 31,536
<PP&E> 11,316
<DEPRECIATION> (5,731)
<TOTAL-ASSETS> 44,968
<CURRENT-LIABILITIES> 25,647
<BONDS> 0
<COMMON> 29
0
0
<OTHER-SE> 16,398
<TOTAL-LIABILITY-AND-EQUITY> 44,968
<SALES> 50,721
<TOTAL-REVENUES> 50,721
<CGS> 32,690
<TOTAL-COSTS> 32,690
<OTHER-EXPENSES> 16,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (965)
<INCOME-PRETAX> 1,019
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,019
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
