SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from ________ to ________
Commission File No. 000-20688
DATATEC SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
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(State of Incorporation) (I.R.S. Employer Identification No.)
20C Commerce Way, Totowa, NJ 07512-1154
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 890-4800
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.001 par value Boston Stock Exchange and Nasdaq Small-Cap
Market
Preference Share Purchase Rights Boston Stock Exchange and Nasdaq Small-Cap
Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Registrant's voting stock held by
non-affiliates at July 30, 1999 was approximately $99,374,159. For purposes of
computing such market value, the Registrant has deemed as affiliates only
executive officers, directors and their affiliates.
The total number of shares of Common Stock of the Registrant outstanding at July
30, 1999 was 31,160,389.
<PAGE>
TABLE OF CONTENTS
Part I Page #
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 24
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure 52
Part III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management 59
Item 13. Certain Relationships and Related Transactions 60
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 61
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FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements. Factors that may cause such differences include, but
are not limited to, competition, technological advances and availability of
managerial personnel. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Datatec Systems, Inc. undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that arise
after the date hereof.
PART I
Item 1. Business
The Company
Datatec Systems, Inc. and subsidiaries (the "Company" or "Datatec")
are in the business of providing rapid and accurate technology deployment
services and licensing software tools to support enterprises in the delivery of
complex IT solutions. The Company markets its services to Fortune 2000 customers
and other large systems manufacturers, systems integrators, independent software
vendors and telecommunications carriers (collectively, "Technology Providers")
in the United States and Canada. The Company's deployment services include the
following: (i) the process of "customizing" network devices such as routers,
switches, servers, workstations to meet the specific needs of the user
(hereinafter referred to as "configuration"), (ii) the process of ensuring that
devices installed on a network are compatible with the topology of the network
and all legacy systems (hereinafter referred to as "integration"), and (iii) the
physical process of installing technology on networks (hereinafter referred to
as "installation"). The Company is expecting to begin generating revenues from
licensing its e-Deploy.com(TM) web-based software tool through its subsidiary
called e-Deploy.com, Inc. during fiscal 2000.
The Company utilizes a software-enabled implementation model to
provide its deployment services, which allows the Company to efficiently deliver
high quality and cost effective large-scale technology deployment solutions for
Fortune 2000 companies and other Technology Providers in the United States and
Canada primarily on a fixed time/fixed cost basis. The components of the
Company's implementation model include the following:
o The utilization of a proprietary web-based software tool,
e-Deploy.com(TM), which includes the Integrator's Workbench Product
SeriesTM ("Integrator's Workbench"), that provides pricing,
assessment, design and project management automation and enhances
the speed and accuracy of the deployment process. The automation
also significantly reduces the labor costs and technical skills
required to accomplish most complex deployment projects.
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o The employment of a field deployment team throughout the United
States and Canada that is capable of delivering complex
technologies, which include computing platforms, cabling, and
infrastructure.
o The application of five staging and configuration centers, to
conduct numerous activities including receipt and tracking of
project components, assembly, testing, verification, documentation
and configuration and integration of hardware and software
components. By conducting these activities at the Company's staging
centers, and utilizing, where applicable, the Company's Integrator's
Workbench software tools, the Company is able to prepare and
roll-out project components so that they arrive at a customer site
in a "plug and play" state.
The Company operates out of 19 offices and has a field deployment
team of approximately 390 people, allowing it to conduct multiple simultaneous
large-scale deployments for Fortune 2000 end-user customers and Technology
Providers across the United States and Canada. The Company's deployment
capabilities further permit Technology Providers to enhance the "absorption" of
their products in the marketplace onto increasingly complex networks and
information technology ("IT") environments.
The Company is incorporated in Delaware and its stock is traded on
the Nasdaq Small-Cap Market under the symbol "DATC" and the Boston Stock
Exchange under the symbol "DAT". The Company maintains its executive offices at
20C Commerce Way, Totowa, New Jersey, 07512. Its telephone number is (973)
890-4800. The Company's website can be located at www.datatec.com.
Datatec's Deployment Solutions
The Company's management believes that the market for deployment
services will continue to rapidly increase. Technology Providers need to improve
the "absorption" or "time to market" of their products to maximize return on
sales, as well as return on product development costs. In addition, large
end-users need to maximize their return on technology investments. The speed of
the deployment is a critical factor in improving these fundamental ratios.
The dynamics that are creating an increasing demand for Datatec's
software-enabled deployment offerings include the following:
o Due to shorter product life cycles, hardware manufacturers and software
vendors alike must find ways to rapidly bring their products to market or
face losing market share.
o In order to maintain a competitive edge in the market, corporations are
constantly looking
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to become more efficient and technology has become a major source of
competitive advantage. Speed of deployment has therefore become vital.
o Technologies are becoming increasingly complex, which makes them extremely
difficult and costly to implement, especially without tools and
methodologies. Given the downsizing of many IT departments and their
preoccupation with core operations, companies are increasingly looking to
outsource the deployment of new technologies.
Datatec is positioned to address the demand for configuring,
integrating and installing workstations, servers, routers, switches and the
latest multi-service devices onto networks through its software-enabled process
and methodology. Through proper utilization of its e-Deploy.com and Integrator's
Workbench tools, the Company's proprietary software-enabled processes and
methodologies, many labor-intensive deployment services are being automated
thereby increasing the Company's effective yield and profitability. In the past
few months, some of Datatec's end-user customers have expressed an interest in
licensing Datatec's e-Deploy automated tools and processes to use as a framework
for helping them plan, monitor and manage complex IT deployment implementations.
In addition, Datatec's Technology Provider clients are also expressing interest
in the software as it allows them to more easily define, develop and deliver IT
solutions to their own customers and end users.
e-Deploy.com
The e-Deploy solution is a compelling and unique mix of flexible
tools, project logistics, process mapping/automation and connected, virtual
"communities" of users and participants. Leveraging the core benefits of new-era
IT applications and platforms, the solution combines the functionality of a
full-featured customer relationship management ("CRM") application with the
process framework, but includes the "just in time" information value of an
enterprise resource planning ("ERP") application.
The application platform is designed to be open and standards-based,
and can easily integrate with a wide variety of other existing business systems
including back office applications, management and support platforms and process
automation tools. The e-Deploy solution is generally accessed via an Internet
web browser connection.
At its highest level, e-Deploy has been grouped into five discreet applications
sets that can be combined to provide workflow continuum and to more effectively
integrate with an organization's existing platforms and applications solutions.
Each application module and associated tool, leverages related project
information and integrates seamlessly with one another. The five modules that
make up e-Deploy are:
o Bid & Proposal Engine
In practice, the Bid and Proposal Engine prompts users through a series of
simple instructions
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that feed the project assessment tools. The user is left with a detailed
proposal, scope of work, work estimates, pricing and contract draft. The
Statement of Work ("SOW") and other deliverables provide a digital "baseline"
for other e-Deploy.com modules. This application has proven to reduce sales lead
times by up to 90% and truly leverages an organization's professional resources
by maximizing their ability to quickly and accurately respond to complex
opportunity assessment.
o Preparation & Design
This section organizes the collection of data from site and equipment surveys,
creates a gap analysis and drives to a fully designed and ready to implement
project plan. e-Deploy provides the user with tools to feed project and
equipment specific configuration files that construct the base for its
automated configuration solution sets. Once confirmed, this module provides a
backdrop for access to other e-deploy tools that organize a project. The tool
set provides a base information flow for project contacts, site information,
schedules and begins the project manual process. This approach
institutionalizes the proven e-Deploy to successful project fulfillment, and
feeds other modules for project deployment steps.
o Configuration & Integration (Integrators' Workbench)
e-Deploy's automated configuration tools load software on any manner of
desktop-based servers, PCs, applications or operating systems as well as
complex internetworking/multiservices equipment including routers, switches
and IP telephony devices. These automated tools reduce configuration time by
50% to 90% compared with other manual and semi-automatic approaches and
prepare these devices for easy to complete, plug and play installations. These
tools are available through the e-Deploy.com web-based Extranet site and can
be used either onsite or via multi-disciplinary configuration centers.
o Deployment Management
This module builds the base for managing information flow for equipment
shipments, completion schedules, configuration files, quality tracking and
related customer satisfaction statistics. e-Deploy.com has an innovative
"dashboard" report that consolidates all the many steps and report formats
into a single "at a glance" report for the project managers to assess project
progress.
o Transition & Maintenance
Once deployed, this module organizes as-built drawings and digitized images
and maintenance reports, installed equipment serial numbers, and creates the
configuration database for future reference. e-Deploy.com provides on-line
product registration information, and becomes a source for on-site
configuration rebuilds for update or maintenance purposes.
In the hands of any Technology Provider, including Datatec, the software tools
provide support in their endeavors to:
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o Shorten time to market for new product introductions;
o Create a fast unified, efficient and accurate end-user pricing
methodology;
o Obtain real time, secure feedback from its channel;
o Provide their channel opportunities to propose and bid on leads with
minimal resource and at high speed;
o Provide the channel with a well-proven and accepted implementation
process.
Other benefits provided by e-Deploy technology providers, as well as
end-users, include the following:
o Planning, monitoring and executing complex technology implementations. The
integrated applications of e-Deploy allows users to better manage the
myriad of personnel, issues, customer needs, and logistics that all need
to be properly coordinated to ensure success.
o Reduction in labor costs and increased productivity. Typical time
reductions achieved by using Datatec's software-enabled process range
between 40% and 90%. For example, the typical router that takes between
forty-five minutes and one hour to configure and document manually is
reduced to five minutes using the Company's software-enabled process. The
software-enabled process further reduces the Company's costs to complete
deployment projects by using fewer high priced engineers. Accordingly,
Datatec can reduce the prices for deployment services without compromising
margins. In addition, projections of task times become significantly more
accurate as these tasks become less dependent on human intervention and
increasingly automated. As a result of the utilization of the
software-enabled process, Datatec significantly reduces the risk of cost
overruns for its clients.
o The ability to leverage technical skills. Highly complex technical
solutions can be deployed using less technical people, as the knowledge is
resident in the software. This is of particular importance in the IT
market, where the increasing demand for experienced highly skilled
engineers is placing constraints on the availability of such resources.
Because of the methodologies employed at Datatec's configuration centers,
products arrive at a client's site in a "plug and play" state. The
Company's field deployment force are fully equipped to address computing,
cabling or electrical tasks associated with a technology deployment. As a
result, it usually takes only one visit to a site to complete the
installation.
o A higher degree of accuracy in the configuration and integration process
leads to virtual "plug and play" installations. The automated process
eliminates the risk of input mistakes, which account for a significant
portion of errors during the configuration and integration processes. As a
result of such automation, highly complex and fully customized devices
convert into "plug and play" products for the Company's deployment teams.
This process saves significant time in the configuration and integration
processes, as well as the installation process. It also significantly
reduces time spent on rework, which is normally provided at the Company's
expense, and reduces disruption at the clients operation, which is often
associated with the implementation of new technology.
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<PAGE>
Datatec's Software-Enabled Service Offerings
The Company has created the following distinct branded solutions
targeted towards specific market needs: (i) Network Device Deployment; (ii)
Computing Device Deployment; (iii) Technology Refresh & Migration; and (iv) Site
Readiness & Infrastructure.
Network Device Deployment ("NDD"). NDD is the software-enabled
process for staging, configuring, integrating and installing new communication
devices such as routers and switches. Client's can select to outsource one or
all the above functions. They can also choose to carry out the first three
processes within their own manufacturing, staging or integration facilities
using Integrator's Workbench or in one of the Company's configuration centers.
In the past year the Company believes it has moved this offering from the proof
of concept stage to an offering with strong demand and general market
acceptance. NDD is the primary solution supporting the Company's relationship
with Cisco Systems, Inc. ("Cisco").
Computing Device Deployment ("CDD"). CDD is the software-enabled
process for staging, configuring, integrating and installing new computing
devices such as servers, workstations and laptops. Clients ship products to one
of the Company's configuration centers for processing. However, before the
deployment process can commence significant pre-deployment time is spent in
engineering, designing, software customization and data collection to ensure
rapid and error free deployment. The Company has identified CDD as a major
opportunity for growth.
Technology Refresh & Migration ("TRM"). TRM projects apply the
Company's methodology and configuration automation tools to decrease the time
and complexity of upgrading a clients existing IT infrastructure and equipment
on-site. TRM was launched in April 1998 and is the primary solution supporting
the Company's new relationship with Microsoft Corporation ("Microsoft"). Typical
TRM projects may include one or in some cases all of the following:
o Migration to a new desktop operating system;
o Migration to a new server operating system;
o Rollout of a new or upgraded application suite;
o Introducing Internet services; and
o Upgrading the network infrastructure.
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Site Readiness and Infrastructure ("SRI"). A major technology migration or
upgrade within an organization often first requires an overhaul of the company's
physical infrastructure. The Company has significant experience and expertise in
ensuring a site is fully capable of accepting a new technology. Infrastructure
improvement could include one or all the following:
o Data Communications Cabling;
o Telecommunications Cabling;
o Power Cabling; and
o Physical/Structural Pathway Modification.
One primary reason why organizations choose the Company for their
deployment is because it can carry out all the attendant functions to implement
technology without recourse to sub-contractors. The same Datatec team
responsible for infrastructure is capable of installing routers, workstations
and servers as well as migrating operating systems within the most complex
enterprise environments.
Strategy
The Company's mission is to see its processes and methodologies
become the defacto standard for technology deployment. The strategy is to
achieve this by both providing direct services to end-users and by providing
resources or licensing its software to Fortune 2000 customers and large
Technology Providers who utilize the tools to deploy technology using their own
resources. The Company is also pursuing the following strategies:
o Continuing to invest in the research and development of automated
tools through a separate subsidiary called e-Deploy.com, Inc.;
o Creating strong long-term relationships with end-user clients and
Technology Providers, thereby providing a source for repeatable
business;
o Engaging its salesforce to support the selling efforts of its
strategic partners like Cisco, IBM and Microsoft, as well as selling
to direct end-user clients;
o Supplementing its organic growth with strategic acquisitions where
it can leverage its tools and processes and methodology to
significantly enhance the gross margins and quality of the acquired
company's revenues and expand geographic coverage.
Sales and Marketing
The Company's marketing efforts are focused towards organizations
that require more complex solutions from a technical, geographic dispersion, or
time sensitive point of view. In the Company's experience, more complex,
multi-site deployments have significantly less competitive pressures, and
generate higher proposal close rates and gross margins than deployments with
less complexity and/or geographic dispersion.
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The Company has two sales forces comprised of 40 individuals. The
direct sales division is dedicated to bringing full solutions to end-users while
the indirect division provides solutions to Technology Providers in the form of
either resources or process via the Company's web-based tools. Both sales teams
follow a rigorous methodology called "The Datatec Relationship Cycle" (the
"DRC"), which has been instrumental in creating long-term relationships with the
Company's clients. The DRC consists of the following five stages: (i)
initiation, (ii) definition, (iii) testing, (iv) rollout, and (v) feedback. This
process has enabled the Company to monitor and improve client satisfaction.
There is significant interaction between the various departments in
the Company to bring optimal solutions to its clients. The Company's sales
functions work as a team with the Professional Services division who, in turn,
work closely with the software development division to provide the most cost
effective solutions to our clients.
Clients
The Company performs deployment services directly to a variety of
end-user clients across a broad range of industries. The Company also delivers
its services to end-users through indirect clients that utilize the Company's
deployment services on a project-by-project basis. The Company's clients
include:
Direct Indirect
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American Stores Company Automated Data Processing, Inc.
Blockbuster Entertainment Inc. Bell Atlantic Network Integration, Inc.
Federated Department Stores, Inc. Cisco Systems, Inc.
Lowe's Companies, Inc. Computer Sciences Corporation
Office Depot, Inc. Diebold Incorporated
Regions Financial Corporation Electronic Data Systems Corporation
Starbucks Corporation IBM Global Services
The Chubb Corporation
The Home Depot, Inc.
Toys "R" Us, Inc.
Walgreen Co.
The Company utilizes the DRC to monitor and continually improve
client satisfaction. The Company has several large repeat clients and believes
that significant opportunities exist to expand its client relationships and
leverage its existing client base. The Company will continue to emphasize client
satisfaction and seek ways to improve service in order to generate increased
repeat business.
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During each of the past three fiscal years, sales of the Company's
services to a limited number of customers have accounted for a substantial
percentage of the Company's total revenues. For the years ended April 30, 1999,
1998 and 1997, the Company's 15 largest customers accounted for approximately
57.3%, 51.8% and 61.5% of the Company's revenues. For the year ended April 30,
1999 Cisco Systems, Inc. accounted for approximately 10.3% of the Company's
revenues. For the year ended April 30, 1998, there were no customers who
accounted for more then 10% of the revenues. For the year ended April 30, 1997,
Federated Department Stores, Inc. and Lowe's Companies, Inc. accounted for
approximately 11.7% and 10.1% respectively, of the Company's total revenues.
This concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter-to-quarter, based on the requirements of its customers
and the timing of delivery of services.
Competition
The Company competes with a number of other companies involved in
the design, installation, integration and servicing of computer networking
technologies, as well as companies that develop software tools to automate the
technology implementation process. The IT deployment market is highly fragmented
and characterized by a small number of very large organizations that carry out a
significant amount of deployment and a large number of small companies that in
turn carry out small amounts of deployment. In addition to direct competition,
the Company faces indirect competition from its existing customers, many of whom
internally design, integrate and deploy their own technologies. The Company,
however, knows of no other company that offers rapid IT deployment services or
software tools designed to support the delivery of complex IT solutions as their
primary business focus.
Intellectual Property
The Company relies on a combination of trade secrets, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its software developers, and when
obtainable, enters into non-disclosure agreements with its suppliers,
distributors and others so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will prove sufficient to deter misappropriation of the
Company's technologies or that the Company's competitors will not independently
develop non-infringing technologies that are substantially similar to or
superior to the Company's technology.
Employees
As of April 30, 1999, the Company had approximately 750 full-time
employees. Of these full-time employees, approximately 390 are employed under
contracts with the International Brotherhood of Electrical Workers and the
International Brotherhood of Electrical Workers Local 1430.
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The success of the Company depends in large part upon its ability to
attract and retain qualified employees, particularly senior management, systems
engineering personnel and sales personnel. The competition for such employees is
intense. There can be no assurance that the Company will be successful in
attracting or retaining any employees. Any failure by the Company to retain
qualified senior management, systems engineering personnel and sales personnel
could materially adversely affect the Company's business, operating results, and
financial condition. The Company believes its relationship with its employees is
satisfactory.
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Item 2. Properties
The Company's corporate headquarters is located in Totowa, New
Jersey. The headquarters leased office space of 19,245 square feet also houses
the Company's New York/New Jersey office. In addition to its headquarters
building, the Company leases throughout the United States approximately 186,767
square feet of space in 17 locations for its sales and field operations and
configuration centers. The Company also leases an aggregate of approximately
17,110 square feet of space in one location in Canada.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings which
individually or in the aggregate, is believed to be material to the Company's
business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently traded on the Nasdaq
Small-Cap Market ("Nasdaq") under the symbol "DATC". The Company's Common Stock
commenced listing on Nasdaq on May 3, 1994. The following table sets forth the
high and low sale prices on Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
May 1, 1997 - July 31, 1997................. $5 5/8 $2 3/4
August 1, 1997 - October 31, 1997........... $8 7/16 $3 7/8
November 1, 1997 - January 31, 1998........ $7 1/8 $3 3/32
February 1, 1998 - April 30, 1998........... $6 3/4 $3 1/2
May 1, 1998 - July 31, 1998................. $6 3/8 $3 13/16
August 1, 1998 - October 31, 1998........... $4 6/32 $1 7/8
November 1, 1998 - January 31, 1999........ $5 6/32 $2 9/16
February 1, 1999 - April 30, 1999........... $4 1/2 $2 1/4
</TABLE>
On July 30, 1999, the closing sale price for the Company's Common
Stock as reported on Nasdaq was $3.625. As of July 30, 1999, there were
approximately 199 holders of record of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock
since its inception, other than distributions to shareholders in amounts
sufficient to reimburse Datatec Industries, Inc. shareholders for Federal (and
some state) income tax liabilities arising from Datatec Industries, Inc. former
status as an "S" corporation. The Company currently intends to retain any
earnings for use in the business and does not anticipate paying any dividends to
its shareholders in the foreseeable future. The Company's loan agreements with
the bank include a restriction prohibiting the payment of dividends.
Recent Sales of Unregistered Securities
During the fiscal year ended April 30, 1999, the following
securities were sold by the Company without registration under the Securities
Act. Except as otherwise indicated, the securities were sold by the Company in
reliance upon the exemption provided by Section 4(2) of the Securities Act,
among others, on the basis that such transactions did not involve any public
offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
In May 1998, the Company entered into a financing arrangement with
Shepherd Investments International, Ltd. ("Shepherd") and Stark International
("Stark") pursuant to which it issued 300 shares of Series E Convertible
Preferred Stock (the "Preferred Stock") for an aggregate purchase price of
$3,000,000. The Company issued to Shepherd and Stark currently
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exercisable warrants to purchase an aggregate of 90,000 shares of Common Stock
at a per share exercise price of $6.29, which expire in April 2001. In
connection with the offering, the Company (i) paid a placement fee to Reedland
Capital Partners equal to 5% of the gross proceeds, and (ii) issued currently
exercisable warrants to Reedland Capital Partners to purchase an aggregate of
75,000 shares of Common Stock at a per share exercise price of $6.29, which
expire in April 2003. As of April 30, 1999, 180 shares of the preferred stock
had been converted into 718,860 shares of common stock. Subsequent to April 30,
1999, the remaining 120 shares of preferred stock were converted into 473,124
shares of common stock.
In February 1999, the Company sold an aggregate 533,334 shares of
common stock in a private placement to accredited investors, at a purchase price
of $3.75 per share.
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Item 6. Selected Financial Data
The following table sets forth the selected financial data of the
Company for, and at the end of the years ended April 30, 1995, 1996, 1997, 1998
and 1999.
The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended
April 30,
-----------------------------------------------------------------------------------
(in thousands, except share and per share data)
Statement of Operations Data: 1995 1996 1997 1998 1999
-------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 55,876 $ 59,169 $ 59,481 $ 76,804 $ 93,751
Operating income 3,204 (4,248) 1,538 517 1,662
Income (loss) from continuing operations 2,596 (5,149) 127 (1,218) (191)
Discontinued operations (4,989) (8,046) (5,662) (2,768) (315)
Extraordinary item -- (223)(a) -- -- --
Net income (loss) $ $ (2,393) $(13,418) $ (5,535)(b) $ (3,986) $ (506)
============== =============== =============== =============== ============
Income (loss) per share - Basic:
Income (loss) from continuing operations $ .16 $ (.28) $ (.09) (b) $ (.05) $ (.01)
Discontinued operations (.31) (.44) (.27) (.10) (.01)
Extraordinary item -- (.01) -- -- --
============== =============== =============== =============== ============
Net loss per share $ (.15) $ (.73) $ (.36) (b) $ (.15) $ (.02)
============== =============== =============== =============== ============
Income (loss) per share - Diluted:
Income (loss) from continuing operations $ .14 $ (.28) $ (.09) $ (.05) $ (.01)
Discontinued operations (.27) (.44) (.27) (.10) (.01)
Extraordinary item -- (.01) -- -- --
-------------- --------------- --------------- --------------- ------------
Net loss per share $ (.13) $ (.73) $ (.36) $ (.15) $ (.02)
============== =============== =============== =============== ============
Average common and common equivalent
shares - Basic 16,181,000 18,354,000 21,151,000 26,451,000 29,517,000
=============== =============== ============= ============== ============
Average common and common equivalent
shares - Diluted 17,981,000 18,354,000 21,151,000 26,451,000 29,517,000
=============== =============== ============= ============= ============
</TABLE>
(a) Write off of unamortized deferred financing fees as a result of the early
extinguishment of debt.
(b) The net loss applicable to common shareholders has been increased by
$2,128,000, representing the non-cash accretion of the discount on convertible
preferred securities.
<TABLE>
<CAPTION>
April 30,
----------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $(585) $(7,664) $(2,957) $ 1,022 $ 2,297
Total assets 22,334 23,494 27,804 37,813 40,603
Long-term debt 3,642 2,338 4,751 2,415 607
Total shareholders'
equity (deficit) 1,967 (3,706) (1,750) 10,468 14,729
</TABLE>
-16-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act. Such statements reflect the
Company's current views with respect to future events and financial performance
and are subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated in such forward-looking statements.
Overview
The Company is in the business of providing rapid and accurate
technology deployment services and licensing software tools to support
enterprises in the delivery of complex IT solutions. Utilizing five regional
staging and configuration centers and its own field deployment team of
approximately 390 people operating out of 19 offices, the Company conducts
multiple simultaneous large scale deployments for organizations throughout the
United States and Canada. The Company believes its consistent, rapid deployment
model enables its end-user customers to accelerate the assimilation of
networking technologies into their organizations and allows its Technology
Providers to enhance the "absorption" of their products in the marketplace.
The Company was established in 1975 as a regional distributor of
data communications equipment. Through fiscal 1991, the Company expanded
geographically by opening 14 new offices within the United States. Beginning in
1991, the Company began redirecting its efforts to become a systems integrator
providing complete computer networking systems and integration services. In
October 1994, the Company acquired Signatel Ltd. ("Signatel"), a Canadian
systems integrator, which expanded the Company's geographic scope to include
four offices in Canada.
Over the course of fiscal 1995 and early fiscal 1996, the Company
continued to encounter, and was greatly impacted by, the trend of declining
profitability in data communications equipment sales. As a result, the Company
decided to accelerate the process of transitioning from the business of
distributing data communications equipment to its current business of providing
deployment services. In April 1996, the Company acquired Computer-Aided Software
Integration, Inc. ("CASI"), the developer of the Integrator's Workbench - a
suite of software tools to aid in the automation of configuration and
integration. In July 1996, the Company acquired HH Communications, Inc. ("HH"),
a systems integrator with an expertise in routing technologies. In October 1996,
the Company acquired Datatec Industries, Inc., a systems integrator with a focus
on installation services.
Since the acquisition of Datatec Industries, Inc. in October 1996,
the Company has transitioned its business to providing rapid deployment
services. In June 1997, the Company discontinued its data communications
equipment distribution business.
During fiscal 1999 the Company began expanding its development of
software tools to incorporate several new applications in addition to its
Integrators Workbench and has incorporated them into a new product named
e-Deploy.com. As previously mentioned in Item 1., these applications include:
Bid and Proposal, Preparation and Design, Deployment Management and Transition
and Maintenance. In light of potential conflicts between the licensing of
e-Deploy.com and providing deployment services, the Company formed a new
subsidiary in July 1999. This new subsidiary is focused on the development,
marketing and licensing of e-Deploy.com. The subsidiary is incorporated in
Delaware under the name e-Deploy.com, Inc..
The Company's current business represents a substantial change from
the Company's historical line of business. Consequently, the Company's
historical results of operations do not reflect combined operations relating to
its current business for a significant period of time and such results may not
be indicative of the Company's future results of operations.
-17-
<PAGE>
The Company's deployment services are generally provided at a fixed
contract price pursuant to purchase orders or other written agreements with its
customers. Although certain traditional customers of Datatec Industries, Inc.
continue to order services through oral agreements, the Company is in the
process of changing its procedure to assure that in the future, where possible,
all services will be provided under written agreements or purchase orders.
The Company generally invoices its customers for its services after
installation is completed at each customer site, and recognizes revenue relating
to such site at the time invoices are issued. The Company recognizes revenue on
certain long-term contracts on the percentage of completion basis. The Company
defers certain deployment costs such as engineering, planning and project
management costs and amortizes such costs as it recognizes revenue from such
projects. The Company's cost of services consists of three main categories:
labor, materials and project expense. Labor consists of salaries and benefits of
the Company's field installation force as well as staging and configuration
personnel. The materials category includes all materials used in the
installation process such as connectors, wall plates, conduit, and data and
electrical cable. Project expenses include travel and living expenses for the
installation teams, equipment rentals and other costs that are not labor related
or materials.
During fiscal 1999, the Company adopted Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The new standard provides guidance as to whether certain costs of
computer software developed or obtained for internal use should be capitalized
or expensed. In accordance with this new standard, the Company has capitalized
$681,000 of costs during fiscal 1999.
During 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities". The new standard amends previous guidance from the AICPA
that permitted capitalization of start-up costs and requires these costs to be
expensed as incurred. The Company will adopt the new standard in the first
quarter of fiscal 2000. Had the Company adopted the new standard as of April 30,
1999 the net loss of $506,000 for the year ended April 30, 1999 would have been
increased by $1,622,000 for the effect of the write-off of pre-contract costs
which were previously capitalized (see Note 1 to the Consolidated Financial
Statements).
As of April 30, 1999, the Company has net operating loss
carryforwards for Federal tax purposes of approximately $14 million. United
States tax rules limit the amount of net operating loss that companies may
utilize in any one year in the event of cumulative changes in ownership over a
three year period in excess of 50%. The Company has completed several financings
since the effective date of these rules and does not believe that its ability to
utilize its net operating loss carryforwards is limited as of April 30, 1999,
although ownership changes in future periods may pose limitations of the
Company's use of net operating loss carryforwards. These carryforwards are
subject to review and possible adjustment by the Internal Revenue Service.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere herein. The Signatel, HH and Datatec Industries, Inc. acquisitions
have been accounted for as pooling of interests and the financial information
for all periods represents the combined results of all companies. The
acquisition of CASI was accounted for as a purchase and the operations of CASI
have been included from the date of acquisition. In addition, the Company
decided to discontinue its business of distributing data communications
equipment in June 1997. As a result of the Company's discontinuance of this
business, all financial information has been restated to reflect such operations
as discontinued in all periods presented.
Results of Operations
Comparison of Fiscal Years Ended April 30, 1999 and 1998
Revenues. Revenues for the year ended April 30, 1999 were $93.8
million compared to $76.8 million for the year ended April 30, 1998,
-18-
<PAGE>
representing an increase of 22.1%. The Company has seen increased demand for its
services from both its direct end-user clients and its indirect clients,
including its strategic partners. Revenues from the Company's indirect clients
increased by 109%, while revenues to direct end-user clients increased by 9%.
Over the past two years the Company has devoted significant efforts to
developing strategic relationships with Technology Providers. The three most
significant relationships to date include Cisco Systems, Inc., IBM and
Microsoft, Inc. Revenue from these relationships has increased from $4.9 million
in fiscal 1998 to $13.2 million in fiscal 1999.
Gross profit. Gross profit for the year ended April 30, 1999 was
$32.8 million compared to $29.6 million for the year ended April 30, 1998. Gross
profit percentage was 35.0% for the year ended April 30, 1999 compared to 38.5%
for the year ended April 30, 1998. The gross profit for the year was negatively
impacted by lower than anticipated gross margins in the third quarter. Gross
profit for the third quarter of 1999 was 31% compared to 40% for the third
quarter of 1998. The third quarter gross profit in fiscal 1999 was negatively
impacted by lower than anticipated revenue volume in the quarter and project
management control issues with a couple of major projects .
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 1999 were $31.1 million
compared to $30.3 million for the year ended April 30, 1998, representing an
increase of 2.7%. As a percentage of revenues, selling, general and
administrative expenses were 33.1% for the year ended April 30, 1999 and 39.5%
for the year ended April 30, 1998.
Reversal of reserves deemed unnecessary. During the year ended April
30, 1998, the Company, as a result of assessing its previous history related to
sales tax audit adjustments, reversed approximately $1.2 million of sales tax
reserves it no longer deemed necessary.
Interest expense. Interest expense for the year ended April 30, 1999
was $1.9 million compared to $2.1 million for the year ended April 30, 1998.
Non-cash interest expense of $250,000 was recognized in 1998 related to the
accretion of the discount on certain debt securities.
Income taxes. The income tax benefit of $400,000 in 1998 relates to
the Company's ability to sell its state income tax net operating loss
carryforwards as a result of recent changes in the New Jersey tax law. The
Company has provided a tax benefit as a result of its review of the new tax law
and its expected ability to realize the benefits of such state net operating
loss carryforwards.
Comparison of Fiscal Years Ended April 30, 1998 and 1997
Revenues. Revenues for the year ended April 30, 1998 were $76.8
million compared to $59.5 million for the year ended April 30, 1997,
representing an increase of 29.1%. The increase is the result of increased
demand for the Company's deployment services.
-19-
<PAGE>
Gross profit. Gross profit for the year ended April 30, 1998 was
$29.6 million compared to $22.3 million for the year ended April 30, 1997. Gross
profit percentage was 38.5% for the year ended April 30, 1998 compared to 37.5%
for the year ended April 30, 1997. Gross profit for 1998 was not impacted by
tight liquidity.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 1998 were $30.3 million
compared to $20.8 million for the year ended April 30, 1997, representing an
increase of 45.7%. As a percentage of revenues, selling, general and
administrative expenses represented 39.5% for the year ended April 30, 1998 and
34.8% for the year ended April 30, 1997. The increase in selling, general and
administrative expenses is the result of the Company's continued investment in
supporting its ability to sell and deliver software enabled rapid deployment
services. The Company's expense structure enables it to provide nationwide
deployment capabilities to its clients and believes that it is now capable of
supporting significantly higher sales volumes without proportionate cost
increases.
Reversal of reserves deemed unnecessary. During the year ended April
30, 1998, the Company, as a result of assessing its previous history related to
sales tax audit adjustments, reversed approximately $1.2 million of sales tax
reserves it no longer deemed necessary.
Other Income. Other income for the year ended April 30, 1997 was
primarily related to gains realized from the sales of certain fixed assets.
There were no such gains realized during the year ended April 30, 1998.
Interest expense. Interest expense for the year ended April 30, 1998
was $2.1 million, compared to $1.7 million for the year ended April 30, 1997.
The weighted average outstanding debt for the year ended April 30, 1998 was
$14.5 million compared to $12.8 million for year ended April 30, 1997. For the
year ended April 30, 1998 interest expense of $201,000 related to the
amortization of deferred financing fees associated with the Company's credit
facility. Non-cash interest expense of $575,000 and $250,000 was recognized in
1997 and 1998, respectively, related to the accretion of the discount on certain
debt securities.
Income taxes. The income tax benefit of $400,000 in 1998 relates to
the Company's ability to sell its state income tax net operating loss
carryforwards as a result of recent changes in the New Jersey tax law. The
Company has provided a tax benefit as a result of its review of the new tax law
and its expected ability to realize the benefits of such state net operating
loss carryforwards.
Backlog
Backlog for the Company's services as of July 1, 1999 totaled $59.0
million compared to $45.5 million as of July 1, 1998. Backlog consists of
purchase orders, written agreements and oral agreements with customers for which
a customer has scheduled the provision of services within the next 12 months.
Certain traditional customers of Datatec Industries, Inc. continue to order
services through oral agreements, the Company is in the process of changing its
procedures to assure that in the future, all services will be provided under
written agreements or purchase orders. Orders included in backlog may be
canceled or rescheduled by customers without penalty. A variety of conditions,
both specific to the individual customer and generally affecting the customer's
industry, may cause customers to cancel, reduce or delay orders that were
previously made or anticipated. The Company cannot assure the timely replacement
of canceled, delayed or reduced orders. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could
materially adversely affect the Company's business, financial condition and
results of operations. Backlog should not be relied upon as indicative of the
Company's revenues for any future period.
-20-
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents at April 30, 1999 were $234,000 compared
to $317,000 as of April 30, 1998.
During 1999, cash used by operations was $460,000 compared to 1998
cash usage of $8.6 million. The Company was able to improve its operating cash
flow due in large part to improved working capital management including
improvements in accounts receivable days sales outstanding and improved
operating profitability.
Cash used for investing activities during 1999 was $1.3 million
compared to $3.1 million in 1998. During the year the Company continued to
upgrade its internal computing and communications environment, to improve
operational efficiencies as well as execute its year 2000 compliance plan.
Cash provided by financing activities for the year ended April 30,
1999 was $1.7 million compared to $10.9 million for the year ended April 30,
1998. In 1999, the Company completed two private equity placements. During May
1998, the Company issued 300 shares of convertible preferred stock for net
proceeds of $2.3 million. During February 1999, the Company issued 533,334
shares of common stock for proceeds of $2.0 million. The Company issued
approximately 230,000 shares of common stock under its Employee Stock Purchase
Plan and stock option plans for net proceeds of $0.6 million. These cash inflows
were offset by payments of indebtedness of $3.2 million. In 1998, warrant
holders exercised approximately 2.7 million warrants resulting in net proceeds
to the Company of $9.7 million. Also, in 1998, the Company issued 855,000 shares
of common stock for net proceeds of $3.1 million from private equity placements.
In March 1997, the Company replaced existing credit facilities with
a $17 million credit facility consisting of (i) a $15 million three year
revolving credit facility and (ii) a $2 million three year term loan payable in
monthly installments of principal and interest. The borrowings under the
revolving line of credit are based on a formula of 85% of eligible receivables
and 50% of eligible inventory. The revolving line of credit bears interest at
prime plus .75% and the term loan bears interest at prime plus 1.5%. As of April
30, 1999 approximately $8.6 million was outstanding under the revolving credit
facility and $1.2 million was outstanding under the term loan. As of April 30,
1999, the amount of additional available borrowings, as defined, was $1.3
million.
As of April 30, 1999, the Company had working capital of $2.3
million compared to a working capital of $1.0 million at April 30, 1998.
Included in current liabilities, as of April 30, 1999, is a term note of $1.2
million with the Company's primary lender which matures in April 2000. Although
there can be no assurance, it is the Company's intention to refinance the
existing term loan. The improvements in working capital are due to the equity
offering during the year, improved profitability and improved working capital
management.
As of April 30, 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $14 million to offset
future taxable income. Such net operating loss carryforwards expire at various
dates through 2014.
The Company believes it has adequate liquidity and resources to
sustain current operations for the next twelve (12) months.
-21-
<PAGE>
Impact of the Year 2000 Issue
The "Year 2000 Issue" arises because many computer hardware and
software systems use only two digits to represent the year. As a result, these
systems and programs may not process dates beyond 1999, which may cause errors
in information or systems failures. Assessments of the potential effects of the
Year 2000 issues vary markedly among different companies, governments,
consultants, economists and commentators, and it is not possible to predict what
the actual impact may be. Given this uncertainty, the company recognizes the
need to remain vigilant and is continuing its analysis, assessment, conversion
and contingency planning for the various Year 2000 issues, across its business.
The Company's Year 2000 initiatives are focused primarily on three
areas of potential impact: internal information technology (IT) systems;
internal non-IT systems, including services and embedded chips (controllers);
and the readiness of significant third parties with whom the Company has
material business relationships. The Company expects to implement successfully
the systems and programming changes necessary to address Year 2000 internal IT
and non-IT readiness issues.
The Company estimates that at the conclusion of its various Year
2000 efforts, including conversion, testing and contingency planning, it will
-22-
<PAGE>
have spent a total of approximately $1.2 million over a multi-year period.
Although the Company believes its efforts will be successful, any failure or
delay could result in the disruption of business and have an adverse effect on
future results of operations or financial condition.
Inflation
In the opinion of management, inflation has not had a material
adverse effect on its results of operations.
-23-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statements Schedules
Consolidated Financial Statements
Page
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 25
Consolidated Balance Sheets as of April 30, 1998 and 1999 . . . . . . . . . .26
Consolidated Statements of Operations for the years ended April 30, 1997,
1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Consolidated Statements of Comprehensive Loss for the years
ended April 30, 1997, 1998 and 1999. . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended April 30, 1997, 1998 and 1999 . . . . . . . . . . . . .29
Consolidated Statements of Cash Flows for the years ended
April 30, 1997, 1998 and 1999. . . . . . . . . . . . . . . . . . . . . . . .30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 51
Schedules
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . 50
Schedules other than the one listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the consolidated financial statements or related notes.
-24-
<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 as of April 30, 1998 and 1999 and
the related consolidated statements of operations, comprehensive loss, changes
in shareholders' equity (deficit) and cash flows for each of the three years in
the period ended April 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Datatec
Systems, Inc. and subsidiaries as of April 30, 1998 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
-----------------------
Roseland, New Jersey ARTHUR ANDERSEN LLP
August 9, 1999
-25-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30,
1998 1999
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 317,000 $ 234,000
Accounts receivable, less allowance for doubtful
accounts of $305,000 and
$326,000 in 1998 and 1999, respectively 18,106,000 20,661,000
Inventory (Note 1) 3,118,000 3,252,000
Prepaid expenses and other current assets (Note 1) 2,983,000 2,970,000
Net assets from discontinued operations (Notes 1 & 15) 501,000 447,000
------------ ------------
Total current assets 25,025,000 27,564,000
Property and equipment, net (Notes 1, 4 & 6) 6,012,000 5,200,000
Goodwill, net (Notes 1 & 2) 3,975,000 3,539,000
Other assets (Notes 1 & 8 ) 2,801,000 4,300,000
------------ ------------
Total assets $ 37,813,000 $ 40,603,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIaBILITIES:
Short-term borrowings (Note 5) $ 10,759,000 $ 8,623,000
Current portion of long-term debt (Note 6) 1,063,000 1,783,000
Accounts payable 7,085,000 9,943,000
Accrued and other liabilities 5,096,000 3,866,000
Due to related parties (Note 9) -- 1,052,000
------------ ------------
Total current liabilities 24,003,000 25,267,000
------------ ------------
Due to related parties (Note 9) 927,000
------------
------------
Long-term debt (Note 6) 2,415,000 607,000
------------ ------------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 1, 7 & 13):
Preferred stock, $.001 par value (4,000,000 shares
authorized, 300 shares issued and 120 outstanding
as of April 30, 1999) -- --
Common stock, $.001 par value (authorized
75,000,000 shares; issued and outstanding
29,007,000 and 30,489,000 shares as of April 30,
1998 and 1999, respectively) (Notes 7 & 13) 29,000 30,000
Additional paid-in capital 29,556,000 34,317,000
Accumulated deficit (18,769,000) (19,275,000)
Accumulated comprehensive loss (348,000) (343,000)
------------ ------------
Total shareholders' equity 10,468,000 14,729,000
------------ ------------
Total liabilities and shareholders' equity $ 37,813,000 $ 40,603,000
============ ============
</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,
------------------------------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues (Note 1) $ 59,481,000 $ 76,804,000 $ 93,751,000
Cost of revenues 37,159,000 47,208,000 60,993,000
------------ ------------ ------------
Gross profit 22,322,000 29,596,000 32,758,000
Selling, general and administrative expenses 20,784,000 30,279,000 31,096,000
Reversal of reserves deemed unnecessary (Note 1) -- (1,200,000) --
------------ ------------ ------------
Operating income 1,538,000 517,000 1,662,000
Other income 430,000 -- --
Interest expense (Notes 5 and 6) (1,730,000) (2,135,000) (1,853,000)
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes 238,000 (1,618,000) (191,000)
Provision (benefit) for income taxes (Notes 1 & 8)
111,000 (400,000) --
------------ ------------ ------------
Income (loss) from continuing operations
127,000 (1,218,000) (191,000)
Discontinued operations (Note 15):
Loss from operations
(4,709,000) (2,768,000) (315,000)
Provision for future losses
(953,000) -- --
============ ============ ============
Net loss
$ (5,535,000) $ (3,986,000) $ (506,000)
============ ============ ============
INCOME (LOSS) PER SHARE - BASIC AND DILUTED (Note 3):
Income (loss) from continuing operations
$ (.09) $ (.05) $ (.01)
Discontinued operations
(.27) (.10) (.01)
============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
$ (.36) $ (.15) $ (.02)
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - BASIC AND DILUTED
21,151,000 26,451,000 29,517,000
============ ============ ============
</TABLE>
-27-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
April 30,
------------------------------------------------------------------------
1997 1998 1999
---------------------- --------------------- --------------------
<S> <C> <C> <C>
Net loss ($5,535,000) ($3,986,000) ($ 506,000)
Other comprehensive income (loss) -
Foreign currency translation adjustment (38,000) (63,000) 5,000
----------- ----------- -----------
Comprehensive loss ($5,573,000) ($4,049,000) ($ 501,000)
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-28-
<PAGE>
Datatec Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 7)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------------------------- Additional
Paid-in Capital
Shares Dollars Shares Dollars Preferred
------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at April 30,1996 - $ - 20,341,000 $ 20,000 $ -
Distributions to S Corporation
Shareholders
Issuance of preferred stock (Note 7) 350,000 6,562,000
Amount allocated to warrant
and beneficial conversion feature
on convertible debt and equity
securities (Note 7) - - - - 2,128,000
Conversion of preferred stock into
common stock (Note 7) (350,000) 2,500,000 3,000 (8,690,000)
Exercise of warrants and options 649,000 1,000
Conversion of accounts payable into
common stock 171,000
Conversion from S corporation status
to C corporation
Net loss
Effect of exchange rate changes
------------ ------------- ------------- ------------- --------------
Balance at April 30, 1997 - - 23,661,000 24,000 -
Exercise of warrants and options 3,860,000 4,000
Private placement offerings of common stock 855,000 1,000
Conversion of long-term debt into common stock 631,000
Net loss
Effect of exchange rate changes
------------ ------------- ------------- ------------- --------------
Balance at April 30, 1998 - - 29,007,000 29,000 -
Issuance of preferred stock (Note 7) 300 - 2,337,000
Exercise of warrants and options 40,000 -
Private placement offering of
common stock (Note 7) 533,000 -
Issuance of common stock under
Employee Stock
Purchase Plan (Note 10) 190,000 -
Conversion of preferred stock into
common stock (Note 7) (180) - 719,000 1,000 (1,402,000)
Net loss
Effect of exchange rate changes
------------ ------------- ------------- ------------- --------------
Balance at April 30, 1999 120 $ - 30,489,000 $ 30,000 $ 935,000
============ ============= ============= ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional Accumulated Accumulated Total
Paid-in Capital Deficit Comprehensive Shareholders'
Common Loss Equity (Deficit)
----------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Balance at April 30,1996 $ 11,662,000 $ (15,141,000) $ (247,000) $ (3,706,000)
Distributions to S Corporation
Shareholders (837,000) (837,000)
Issuance of preferred stock (Note 7) 6,562,000
Amount allocated to warrant
and beneficial conversion feature
on convertible debt and equity
securities (Note 7) 825,000 (2,128,000) 825,000
Conversion of preferred stock into
common stock (Note 7) 8,687,000 -
Exercise of warrants and options 429,000 430,000
Conversion of accounts payable into
common stock 549,000 549,000
Conversion from S corporation status
to C corporation (8,858,000) 8,858,000 -
Net loss (5,535,000) (5,535,000)
Effect of exchange rate changes (38,000) (38,000)
----------------- --------------- -------------- --------------
Balance at April 30, 1997 13,294,000 (14,783,000) (285,000) (1,750,000)
Exercise of warrants and options 11,021,000 11,025,000
Private placement offerings of common stock 3,079,000 3,080,000
Conversion of long-term debt into common stock 2,162,000 2,162,000
Net loss (3,986,000) (3,986,000)
Effect of exchange rate changes (63,000) (63,000)
----------------- --------------- -------------- --------------
Balance at April 30, 1998 29,556,000 (18,769,000) (348,000) 10,468,000
Issuance of preferred stock (Note 7) 2,337,000
Exercise of warrants and options 75,000 75,000
Private placement offering of
common stock (Note 7) 1,854,000 1,854,000
Issuance of common stock under
Employee Stock
Purchase Plan (Note 10) 496,000 496,000
Conversion of preferred stock into
common stock (Note 7) 1,401,000 -
Net loss (506,000) (506,000)
Effect of exchange rate changes 5,000 5,000
----------------- --------------- -------------- ==============
Balance at April 30, 1999 $ 33,382,000 $ (19,275,000) $ (343,000) $ 14,729,000
================= =============== ============== =============-
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-29-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
April 30,
-------------------------------------------------------------
1997 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (5,535,000) $ (3,986,000) $ (506,000)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 1,200,000 2,090,000 2,723,000
Impairment of long-lived asset -- -- 315,000
Accretion of debt discount 575,000 250,000 --
Changes in operating assets and liabilities net of
effects from acquisitions
Increase in accounts receivable (3,819,000) (6,817,000) (2,555,000)
Increase (decrease) in inventory 1,104,000 (984,000) (134,000)
Increase in prepaid expenses and other assets (940,000) (537,000) (1,620,000)
(Increase) decrease in net assets from discontinued
operations (1,590,000) 327,000 (310,000)
Increase (decrease) in accounts payable, accrued
liabilities and other (2,169,000) 1,093,000 1,627,000
------------ ------------ ------------
Net cash used in operating activities (11,174,000) (8,564,000) (460,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,349,000) (2,404,000) (1,291,000)
Net cash used for CASI acquisition -- (670,000) --
------------ ------------ ------------
Net cash used in investing activities (1,349,000) (3,074,000) (1,291,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 3,338,000 (2,749,000) (2,136,000)
Net proceeds (payments) of indebtedness 958,000 (374,000) (1,088,000)
Net proceeds from stock issuances 6,992,000 14,105,000 4,887,000
Net proceeds from related parties 1,026,000 (99,000) --
Distributions to shareholders (837,000) -- --
------------ ------------ ------------
Net cash provided by financing activities 11,477,000 10,883,000 1,663,000
------------ ------------ ------------
Net effect of foreign currency translation on cash (38,000) (63,000) 5,000
------------ ------------ ------------
Net decrease in cash (1,084,000) (818,000) (83,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,219,000 1 ,135,000 317,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 1,135,000 $ 317,000 $ 234,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-30-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies:
Business--
Datatec Systems, Inc. (the "Company"), and its subsidiaries are
in the business of providing rapid and accurate technology
deployment services and licensing software tools to support
enterprises in the delivery of complex IT solutions (see Note
15).
Basis of Presentation--
The consolidated financial statements include the accounts of the
Company and its subsidiaries. These consolidated financial
statements include, for all periods presented, the accounts of
all companies acquired under the pooling of interests method
of accounting and its wholly owned subsidiaries (see Note 2).
All intercompany accounts and transactions have been
eliminated.
Use of Estimates--
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Revenue Recognition--
Revenues from configuration, integration and deployment services
are recognized as the services are provided. The Company
recognizes revenue utilizing percentage of completion
accounting for long-term contracts. Revisions in estimated
profits are made in the period in which the circumstances
requiring the revision become known. Provisions, if any, are
made currently for anticipated losses on uncompleted
contracts.
The Company may enter into certain contracts to sell software.
Revenue from such contracts are recognized in accordance with
Statement of Position No. 97-2, "Software Revenue
Recognition".
Precontract Costs--
Precontract costs incurred in connection with defining and
clarifying technical requirements and designing technical
solutions related to executed contracts are deferred and
amortized as the services are provided. As of April 30, 1998
and 1999, approximately $1,810,000 and $1,622,000,
respectively, of such costs are included in other current
assets.
-31-
<PAGE>
Cash and Cash Equivalents--
TheCompany considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Other assets includes $132,000 of restricted cash as of April
30, 1998 and 1999, related to a certificate of deposit for the
Company's EDA note.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment--
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed using the straight-line and declining balance
methods over the estimated useful lives or lease terms of the
related assets, whichever is shorter.
Capitalized Software Costs--
The Company capitalizes certain computer software costs, which
includes product enhancements, in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". These costs are amortized utilizing the
straight-line method over the economic lives of the related
software products, not to exceed three years. Approximately
$780,000 and $2,295,000 of net capitalized software costs are
included in other assets in the accompanying consolidated
financial statements as of April 30, 1998 and 1999,
respectively. Amortization expense of capitalized software
costs for the year ended April 30, 1997, 1998 and 1999 was $0,
$118,000 and $133,000 respectively.
Goodwill--
Goodwill is amortized on a straight-line basis over 10 years.
Long-Lived Assets--
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets" requires, among other
things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset
may not be fully recoverable.
-32-
<PAGE>
Subsequent to year-end, the Company sold property it owned that
was included in net assets from discontinued operations as of
April 30, 1999. The sale resulted in a writedown of $315,000,
which has been reflected as a loss from discontinued
operations for the year ended April 30, 1999 (see Note 15).
Income Taxes--
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"). Certain
transactions are recorded in the accounts in a period
different from that in which these transactions are reported
for income tax purposes. These transactions, as well as other
temporary differences between the basis in assets and
liabilities for financial reporting and income tax purposes,
result in deferred income taxes.
Foreign Currency Translation--
The local currency of the Company's foreign subsidiary is its
functional currency. Assets and liabilities of the Company's
foreign subsidiary are translated into US dollars at the
current exchange rate. Statement of operations accounts are
translated at the average rate of exchange prevailing during
the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included as
a component of accumulated comprehensive loss included in
shareholders' equity.
Stock Based Compensation--
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") requires that an
entity account for employee stock-based compensation under a
fair value based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee
stock-based compensation arrangements using the intrinsic
value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees". The Company
continues to account for employee stock-based compensation
using the intrinsic value based method and is required to make
pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting under SFAS 123
had been applied (see Note 10).
-33-
<PAGE>
Internal Use Software--
During 1999, the Company adopted Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
certain costs of computer software developed or obtained for
internal use be capitalized or expensed as incurred. During
the year ended April 30, 1999, approximately $681,000 of costs
were capitalized under SOP 98-1 and are reflected in other
assets in the accompanying balance sheet. These costs relate
to the design and installation of internal use software
developed for the Company's job costing and other systems and
will be amortized over a period not to exceed three years.
Approximately $29,000 of amortization expense was incurred
during the year ended April 30, 1999. The Company has
expensed, in accordance with SOP 98-1, those costs which were
incurred during the preliminary and post implementation
phases.
Recent Accounting Pronouncements--
During 1998, the American Institute of Certified Public
Accountant's ("AICPA") issued Statement of Position ("SOP")
98-5 "Reporting on the Costs of Start-up Activities". The new
standard amends previous guidance from the AICPA that
permitted capitalization of start-up costs in certain
industries and requires that all nongovernmental entities
expense the costs of start-up activities as those costs are
incurred. Under the SOP, the term "start-up" has been broadly
defined to include pre-operating, pre-opening and organization
activities. Companies must adopt the new standard in fiscal
years beginning after December 15, 1998. At adoption, a
company must record a cumulative effect of a change in
accounting principle to write off any unamortized start-up
costs that existed as of the beginning of the fiscal year in
which the SOP is adopted and an operating expense for those
costs which were incurred and capitalized since the beginning
of the fiscal year and adoption of the SOP.
The Company has decided to adopt the new standard in the first
quarter of fiscal 2000. Had the Company adopted the new
standard as of April 30, 1999 the net loss of $506,000 for the
year ended April 30, 1999 would have increased by $1,622,000
for the effect of the write-off of pre-contract costs which
were previously capitalized.
Comprehensive Income (Loss)--
Effective May 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and
displaying of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The components of other
comprehensive income consists primarily of foreign currency
translation adjustments.
-34-
<PAGE>
Reclassifications--
Certain prior year amounts have been reclassified to conform to
the current year financial statement presentation.
(2) Mergers and Acquisitions:
Computer-Aided Software Integration, Inc.--
On April 24, 1996, the Company acquired 80% of the common stock
of Computer-Aided Software Integration, Inc. (CASI), a company
that develops and licenses software products, in exchange for
$705,000, including expenses, and 44,260 shares of common
stock of the Company valued at $6.57 per share based on the
average trading price of the Company's common stock for
several days before and after the date of the acquisition
agreement. The acquisition was accounted for as a purchase.
In March 1998, the Company acquired the remaining 20% of CASI for
$2,414,000. As part of the purchase price the Company issued a
convertible note due June 15, 1998 for $1,833,000 (see Note
5). This note was paid in full on May 1, 1998. In connection
with the purchase, the Company entered into a two-year
non-compete agreement with the minority shareholder.
Consideration for the non-compete agreement was $77,000.
HH Communications, Inc.--
On July 31, 1996, the Company acquired all of the issued and
outstanding shares of HH Communications, Inc. (HH), a systems
integrator, in exchange for 1,500,000 shares of its common
stock. The transaction has been accounted for as a pooling of
interests.
Datatec Industries, Inc. --
On October 31, 1996, the Company acquired 98.5% of the issued and
outstanding shares of Datatec Industries, Inc., an implementor
of information communications networks, in exchange for
4,000,000 shares of its common stock. The transaction has been
accounted for as a pooling of interests. The remaining 1.5% of
Datatec Industries, Inc. was acquired for 50,000 shares of
common stock on August 27, 1997.
-35-
<PAGE>
Presented below are the individual entity and combined financial
information, after giving effect to classifying certain
segments of the Company's business as discontinued operations.
<TABLE>
<CAPTION>
Datatec Systems, Inc. HH Datatec Industries Combined
------------------------ -------------- --------------------- ------------------
For the year ended April 30, 1997
<S> <C> <C> <C> <C>
Net Sales $ 4,835,000 $ - $ 54,646,000 $ 59,481,000
Income (loss) from Continuing Operations (301,000) - 428,000 127,000
Loss from Discontinued Operations (5,267,000) (395,000) - (5,662,000)
Net income (loss) (5,568,000) (395,000) 428,000 (5,535,000)
</TABLE>
The combined results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in
effect for the entire periods presented. In addition, the
combined results are not intended to be a projection of future
results and do not reflect any synergies that might be
achieved from operations.
(3) Earnings Per Share:
The Company has adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") which
requires the presentation of basic earnings per share ("Basic
EPS") and diluted earnings per share ("Diluted EPS"). Basic
EPS is calculated by dividing income available to common
shareholders by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS is
calculated by dividing income available to common shareholders
by the weighted average number of common shares outstanding
for the period adjusted to reflect potentially dilutive
securities.
In accordance with SFAS 128, the following table reconciles net
loss and share amounts used to calculate basic and diluted
earnings per share:
-36-
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Numerator:
Basic and Diluted-
<S> <C> <C> <C>
Income (loss) from continuing operations $ 127,000 ($ 1,218,000) ($ 191,000)
Less: preferred dividends (Note 7) (2,128,000) -- --
------------ ------------ ------------
Loss available for common shareholders (2,001,000) (1,218,000) (191,000)
Discontinued operations (5,662,000) (2,768,000) (315,000)
------------ ------------ ------------
Net loss - Basic and Diluted ($ 7,663,000) ($ 3,986,000) ($ 506,000)
============ ============ ============
Denominator:
Weighted average number of common
shares outstanding - Basic 21,151,000 26,451,000 29,517,000
Incremental shares from assumed
conversions of options and debt -- -- --
------------ ------------ ------------
Weighted average number of common shares
and common share equivalents- Diluted 21,151,000 26,451,000 29,517,000
============ ============ ============
Earnings per share - Basic and Diluted:
Income (loss) from continuing operations ($ 0.09) ($ 0.05) ($ .01)
Discontinued operations (0.27) (0.10) (.01)
------------ ------------ ------------
Net loss ($ 0.36) ($ 0.15) ($ .02)
============ ============ ============
</TABLE>
In 1997, 1998 and 1999, approximately 2,406,000, 1,642,000, and
1,547,000 respectively, of outstanding options and warrants
have been excluded from the computation of diluted EPS as
their inclusion would have been antidilutive for those
periods.
-37-
<PAGE>
(4) Property and equipment:
The following is a summary of property and equipment--
<TABLE>
<CAPTION>
April 30,
1998 1999
<S> <C> <C>
Equipment $ 1,955,000 $ 2,225,000
Computer equipment 4,661,000 5,551,000
Furniture, fixtures and leasehold improvements 4,135,000 4,268,000
----------- -----------
10,751,000 12,044,000
Less--Accumulated depreciation and amortization
4,739,000 6,844,000
----------- -----------
Property and equipment, net $ 6,012,000 $ 5,200,000
=========== ===========
</TABLE>
-38-
<PAGE>
(5) Short-term borrowings:
The Company has a revolving loan agreement that provides for
maximum borrowings of $15,000,000. Availability under the
revolving loan is calculated as the sum of 85% of eligible
accounts receivable, as defined, and 50% of the cost or
wholesale market value of eligible inventory, as defined.
Approximately $8,623,000 was outstanding as of April 30,
1999. The amount of additional available borrowings, as
defined, was $1,290,000 as of April 30, 1999. The revolving
loan accrues interest at the prime rate plus 0.75% (8.5% at
April 30, 1999) and matures on March 16, 2000.
Included in short-term borrowings, as of April 30, 1998 is
$1,833,000 due to the minority shareholder of CASI. The note
bore interest at 10% per annum. On May 1, 1998 the Company
paid the note in full plus accrued interest.
(6) Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30,
-----------------------------------------
1998 1999
---- ----
<S> <C> <C>
New Jersey EDA Note (a) $ 570,000 $ 445,000
Term note (b) 1,620,000 1,195,000
Capital leases 1,288,000 750,000
----------- -----------
Total debt 3,478,000 2,390,000
Less - current maturities (1,063,000) (1,783,000)
----------- -----------
Long-term debt, net of current maturities $ 2,415,000 $ 607,000
=========== ===========
</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, 1999 the interest rate was
3.85%. The loan is secured by the assets acquired with the
loan proceeds.
(b)The term note bears interest at a variable rate equal to the
prime rate plus 1.5% (9.25% at April 30, 1999) 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.
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. These notes were convertible at 80% of the market
price on the date of conversion. Approximately $825,000 was
allocated to paid-in-capital attributable to the warrants and
the beneficial conversion feature of the convertible debt. The
debt was subsequently accreted to face value by a non-cash
charge to interest expense of $575,000 in 1997 and $250,000 in
1998. 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:
-39-
<PAGE>
2000 $ 1,783,000
2001 440,000
2002 154,000
2003 13,000
(7) Shareholders' equity:
Preferred Stock--
During 1997, the Company issued 350,000 shares of Series A, B and
C convertible preferred stock, including warrants to purchase
175,000 shares of common stock at fair market value. The net
proceeds from these issuances were approximately $6,562,000.
The conversion price of the preferred stock would be the
lesser of (a) the average per share market value for the 5
trading day immediately preceding the original issue date or
(b) 80%, 69.5% and 69.5%, respectively, of the average per
share market value in the 5 trading days immediately preceding
the conversion date. Approximately $2,128,000 was allocated to
additional paid-in-capital for the beneficial conversion
feature of the convertible preferred stock. The preferred
stock was accreted to face value by a non-cash charge to
accumulated deficit during fiscal 1997. This amount has been
deducted from income available to common shareholders for EPS
purposes. 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. The Series E Cumulative
Convertible Preferred Stock is convertible into common stock
at the lesser of $6.29 or the average of the closing bid
prices selected by the holder for 2 days during the 10 days
immediately prior to the conversion date (the "Floating
Conversion Price"). The fair market value on the date of grant
approximated the Floating Conversion Price.
During fiscal 1999, 180 shares of the Series E Cumulative
Convertible Preferred Stock were converted into 718,860 shares
of common stock. Subsequent to April 30, 1999, the remaining
120 shares of preferred stock were converted into 473,124
shares of common stock.
Common Stock--
During fiscal 1998, the Company, through private placement equity
offerings, issued 855,000 shares of common stock for net
proceeds of approximately $3,080,000.
-40-
<PAGE>
In February 1999, the Company, through a private placement equity
offering, issued 533,334 shares of common stock for net
proceeds of approximately $1,862,000.
Warrants--
The following table is a summary and status of warrants issued
by the Company:
Outstanding Warrants
---------------------------------------
Number Weighted Average
of Warrants Exercise Price
----------------------------------------
April 30, 1996 3,451,250 $ 3.89
Grants 905,000 $ 5.28
Exercises (178,100) $ 3.75
---------- -----
April 30, 1997 4,178,150 $ 4.20
Exercises (2,743,290) $ 3.75
---------- --------
April 30, 1998 1,434,860 $ 5.06
Grants 165,000 $ 6.29
Cancellations (12,360) $ 3.75
---------- --------
April 30, 1999 1,587,500 $ 5.20
========== ========
<TABLE>
<CAPTION>
Outstanding Warrants
-------------------------------------
Weighted Average
Range of Exercise Number Warrants Contractual Life Weighted Average
Prices of Warrants Exercisable (in years) Exercise Price
- ----------------- ------------ --------------------- ----------------- ----------------
<S> <C> <C> <C>
$4.00 - $4.99 517,500 517,500 3.00 $ 4.69
$5.00 - $5.99 885,000 885,000 2.77 $ 5.26
>$5.99 185,000 185,000 2.64 $ 6.38
--------- --------- --------
Total 1,587,500 1,587,500 $ 5.20
========= ========= ========
</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 warrants were exercised.
The Company follows the guidance prescribed by SFAS No. 123 in
accounting for its warrants.
-41-
<PAGE>
(8) 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.
The following are the major components of the provision
(benefit) for income taxes as of April 30, -
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current-
Federal $ 0 $ 0 $ 0
State 111,000 0 0
Foreign 0 0 0
--------- --------- ---------
111,000 0 0
--------- --------- ---------
Deferred-
Federal 0 0 0
State 0 (400,000) 0
Foreign 0 0 0
--------- --------- ---------
0 (400,000) 0
========= ========= =========
Total provision (benefit) $ 111,000 $(400,000) $ 0
========= ========= =========
</TABLE>
The following indicates the significant elements contributing to
the difference between the U.S. Federal statutory tax rate and
the Company's effective tax rate for the years ending April
30, -
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------------- --------------
<S> <C> <C> <C>
US Federal Statutory tax rate 34.0% (34.0%) (34.0%)
State and foreign income taxes 46.6 (24.7) --
Valuation reserve on deferred tax asset (34.0) 34.0 34.0
------------ ----------------- --------------
Effective tax rate 46.6% (24.7%) --
============ ================= ==============
</TABLE>
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:
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1999
-------------------- --------------------------
<S> <C> <C>
Net operating loss carryforwards $ 5,509,000 $ 4,987,000
Depreciation (542,000) (711,000)
Allowance for doubtful accounts 102,000 91,000
Inventory obsolescence 129,000 106,000
Other 2,000 86,000
-------------------- --------------------------
5,200,000 4,559,000
Valuation Allowance (4,800,000) (4,159,000)
==================== ==========================
Net deferred tax asset $ 400,000 $ 400,000
==================== ==========================
</TABLE>
-42-
<PAGE>
The net deferred tax asset recorded as of April 30, 1998 and
1999 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
2004.
There are no undistributed earnings in the Company's foreign
subsidiaries.
As of April 30, 1999, the Company has approximately $14 million
of net operating loss carryforwards, which may be used to
offset future Federal taxable income. These net operating loss
carryforwards expire through 2014.
(9) Related Party Transactions:
The Company has outstanding loans of $362,000 to certain
executive officers of the Company. These loans bear interest
at 8% per annum. These loans are repayable in cash or from the
proceeds from the sale of stock received from future exercise
of stock options of these executives. These loans mature on
December 31, 1999. During 1999, the Company forgave $125,000
of a loan from a related party in exchange for signing a
"lock-up" agreement as part of a private placement equity
offering. This amount has been deducted from the net proceeds
of the private placement.
-43-
<PAGE>
The Company owes an affiliated company of an executive officer
$1,414,000. The note bears interest at a rate of 12.5%. The
note matured on November 20, 1998, however, the note is
subordinated to the Company's primary lender and remains
outstanding. The Company continues to pay interest on the
note.
The above are reflected in due to related parties in the
accompanying balance sheet.
(10) Incentive Plans:
At April 30, 1999 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 at the fair value at the grant dates for awards
under the plans, consistent with SFAS 123, the Company's net
loss and net loss per share on a basic basis would have been
reduced to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
(in thousands, except per share data)
Proforma net loss:
<S> <C> <C> <C>
As reported $(5,535,000) $(3,986,000) $(506,000)
Proforma $(6,624,000) $(5,113,000) (1,724,000)
Proforma net loss per share - Basic
and Diluted:
As reported $ (.36) $ (.15) $ (.02)
Proforma $ (.41) $ (.19) $ (.06)
</TABLE>
The per share weighted-average fair value of stock options
granted during 1997, 1998 and 1999 was $5.57, $1.80 and $1.56
respectively, on the date of grant using the Black Scholes
option-pricing model with the following assumptions: expected
life for options of 5 years for all periods, expected dividend
yield 0% in all periods, risk free interest rate of 8.5% in
1997, 1998 and 1999 and volatility of 75% for 1997, 1998 and
1999, 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, 1999, 18,334
shares remain reserved for future issuance under the 1990
Plan.
-44-
<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. Options for 739,332 shares of common
stock have been exercised as of April 30, 1999. 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, 1999, all options to the
consultant/advisor 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, 1999, 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, 1999, 116,000
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, 1999, 442,295 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, 1999, 25,000 shares remain
reserved for future issuance under the Executive Plan.
-45-
<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, 1999, 33,521
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, 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 (880,934) 880,934 $ 4.45
Exercises -- (1,027,679) $ 1.26
Cancellations 391,545 (391,545) $ 4.26
---------- ---------- --------
Balance as of April 30, 1998 1,124,076 4,336,703 $ 3.41
Grants (495,138) 495,138 $ 2.53
Exercises -- (38,874) $ 2.29
Cancellations 105,673 (105,673) $ 3.56
---------- ---------- --------
Balance as of April 30, 1999 734,611 4,687,294 $ 3.36
========== ========== ========
Options Exercisable at:
April 30, 1999 3,832,575 $ 3.29
========== ========
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------------------
Weighted Average
Range of Exercise Prices Number Contractual Life Weighted Average
of Shares (in years) Exercise Price
- -------------------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C>
$.005 - $0.99 647,411 2.67 $0.01
$1.00 - $1.99 290,681 6.20 $1.30
$2.00 - $2.99 740,718 7.38 $2.66
$3.00 - $3.99 790,006 8.51 $3.51
$4.00 - $4.99 1,813,301 7.90 $4.02
>$4.99 405,177 3.84 $8.27
================ =============
Total 4,687,294 $3.35
================ =============
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options
------------------------------------------------------
Range of Exercise Weighted Average
Prices Number of Shares Exercise Price
-------------------------- ------------------------------- ----------------
<S> <C> <C>
$.005 - $0.99 647,411 $ 0.01
$1.00 - $1.99 290,681 $ 1.30
$2.00 - $2.99 545,018 $ 2.73
$3.00 - $3.99 657,969 $ 3.54
$4.00 - $4.99 1,320,279 $ 4.01
>$4.99 371,217 $ 8.45
========= ========
Total 3,832,575 $ 3.28
========= ========
</TABLE>
Employee Stock Purchase Plan--
During fiscal 1999, 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. During the year ended April 30, 1999 the Company
issued 190,000 shares of common stock to participants of the
plan.
Retirement Plans--
The Company currently has two 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
of $600 annually, per participant. Company matching
contributions for the three years ended April 30, 1997, 1998
and 1999 were $15,000, $11,000 and $9,600 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.
(11) Commitments and Contingencies:
The Company leases offices and staging and configuration
facilities throughout the United States and Canada. The
minimum annual rentals for future years are as follows:
-47-
<PAGE>
<TABLE>
<CAPTION>
Twelve Month Period Sublease
Ending April Rental Income Net
----------------------------------------- ------------------------ ---------------------- ----------------------
<S> <C> <C> <C> <C>
2000 $ 1,546,000 $ (155,000) $ 1,391,000
2001 1,160,000 (4,000) 1,156,000
2002 916,000 -- 916,000
2003 757,000 -- 757,000
2004 577,000 -- 577,000
Thereafter 3,284,000 -- 3,284,000
</TABLE>
Rent expense was $1,713,000, $1,931,000 and $1,863,000 for the
years ended April 30, 1997, 1998 and 1999, respectively.
The Company has lease commitments for its fleet of vehicles.
These leases generally range from two to three years. In
addition, the Company from time to time will rent vehicles as
a supplement to its fleet. The expense related to these
vehicles was $1,347,000, $2,005,000 and $2,869,000 for the
years ended April 30, 1997, 1998 and 1999, respectively.
Future commitments are not reflected in the amounts above but
are expected to approximate the 1999 expense.
The Company has entered into employment agreements with four key
employees. These agreements provide for an aggregate annual
salary of $1,040,000, increased annually by the percentage
increase in the consumer price index. The agreements are
generally three years in duration and expire through April
2000.
-48-
<PAGE>
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.
(12) 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, 1999, the Company's
customers were primarily within the continental United States
and Canada. Customers representing approximately 45% of the
Company's net sales are in the retail industry.
For the year ended April 30, 1997, two customers had sales of
$7,000,000 and $6,000,000. For the year ended April 30, 1999
one customer had sales of $9,900,000. No single customer
accounted for more than 10% of net sales for the year ended
April 30, 1998.
(13) 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.
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.
-48-
<PAGE>
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.
(14) Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest $ 1,313,000 $1,571,000 $ 1,536,000
Income taxes $ 397,000 $33,000 $ 31,000
</TABLE>
Supplemental Disclosures of Non-Cash Activities--
During 1999, the Company forgave $125,000 of a loan from a
related party in exchange for signing a "lock-up" agreement as
part of a private placement equity offering.
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. As part
of this transaction, the Company recorded additional goodwill
of approximately $2,503,000.
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.
During 1997, the Company converted $561,000 of accounts payable
into 171,000 shares of common stock.
(15) 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.
-49-
<PAGE>
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 during the winding down of this
business, will only honor its existing commitments.
Accordingly, as of April 30, 1997 and 1998, the Company has
reflected this business as a discontinued operation in the
accompanying consolidated statements of operations. The
winding down of the business was effectively completed during
fiscal 1999.
Revenues from such operations were $35,178,000 and $3,386,000 for
the years ended April 30, 1997 and 1998, respectively.
Operating expenses, including cost of sales, excluding
reserves for discontinued operations, were $39,887,000 and
$3,904,000 for the years ended April 30, 1997 and 1998,
respectively. Included in net assets from discontinued
operations as of April 30, 1999 is a 10-year mortgage
agreement with a bank on a building owned by the Company. The
outstanding balance of the mortgage as of April 30, 1999 was
$960,000 and bore interest at a rate of 8.05% per annum.
During June 1999, the building was sold and the mortgage was
paid in full. A loss of $315,000 was recorded as a loss from
discontinued operations in the April 30, 1999 statement of
operations as a result of an impairment recognized on the
sale.
The net loss of this business during 1998, in excess of
provisions for future losses recorded in 1997, was $2,768,000
and is reflected as loss from discontinued operations.
Included in this amount is approximately $2,250,000 relating
to the writedown of accounts receivable and inventories, which
were exchanged for barter credits. Although no value has been
recorded related to the barter credits, the Company expects
that this amount will result in a reduction of certain
operating costs over the five-year barter agreement.
-50-
<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 expemses Deductions (a) period
------------------ ------------------- ------------------- ---------------
Year ended April 30, 1999
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $305,000 $ 57,000 $ (36,000) $ 326,000
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
</TABLE>
(a) Represents writeoff of uncollectible accounts
-51-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-52-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, their ages and
present positions with the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
Isaac J. Gaon 50 Chairman and Chief Executive Officer
Christopher J. Carey 47 Director and President
Robert F. Gadd 38 Senior Vice President and Chief Technology
Officer
James M. Caci 34 Chief Financial Officer, Secretary and
Treasurer
Thomas J. Berry 74 Director
Frank Brosens 42 Director
Robert H. Friedman 46 Director
Dr. David Milch 44 Director
The directors are elected for one-year terms, which expire at the
next annual meeting of shareholders. Executive officers are elected annually by
the Board of Directors to hold office at the discretion of the Board of
Directors until the first meeting of the Board following the next annual meeting
of shareholders and until their successors have been elected and qualified.
The following is a brief summary of the background of each director
and executive officer of the Company.
Isaac J. Gaon, Chairman of the Board since December 1997 and
Director since 1992, he has served as the Chief Executive Officer since October
1994. He served as Chief Financial Officer from April 1992 until October 1994.
From September 1987 to December 1991, Mr. Gaon, a chartered accountant, served
as President and Chief Executive Officer of Toronto-based NRG, Inc., (a
subsidiary of Gestetner International) an office equipment supplier, and in
several senior management roles within Gestetner Canada and Gestetner USA.
Christopher J. Carey, Director of the Company since he joined the
Company in October 1996. Mr. Carey was elected as President in December 1997.
Mr. Carey founded Datatec Industries in 1976 and served as its President and
Chief Executive Officer since that time.
Robert F. Gadd, Senior Vice President and Chief Technology Officer,
joined the Company in April 1992. Mr. Gadd has been the Company's Chief
Technology Officer since November 1996. From August 1992 until November 1996 Mr.
Gadd was the Vice President of the Company's Federal and Enterprise Systems
-53-
<PAGE>
group. Mr. Gadd served as Director of Technical Operations of the Company from
April 1992 until August 1992. Prior to joining the Predecessor, Mr. Gadd was
co-founder of Automation Partners International, Inc. ("API"), a San
Francisco-based systems integration firm which has provided open architecture
solutions to the legal industry since 1986. Prior to API, Mr. Gadd had his own
automation consulting firm and specialized in developing integrated solutions to
meeting specific objectives in a variety of business disciplines, including
political campaigns, oil and gas, real estate, and banking.
James M. Caci, Chief Financial Officer, Vice President of Finance,
Secretary and Treasurer, joined the Company in October 1994. Mr. Caci has been
the Company's Chief Financial Officer since October 1994, Vice President of
Finance since January 1997, and the Company's Secretary and Treasurer since June
1995. From April 1994 to October 1994 Mr. Caci was a manager in the finance
department of Merck & Co., and from July 1986 to April 1994, Mr.
Caci was with the accounting firm of Arthur Andersen LLP, most recently as
Manager.
Thomas J. Berry, Director since July 1995, is currently retired. Mr.
Berry was an executive with the U.S. Postal Service from November 1986 to
December 1992, serving as executive assistant to the Postmaster General. Prior
to that time and until November 1986, Mr. Berry held various executive positions
at AT&T. Mr. Berry is a director of Computer Horizons Corp., a company which
provides a range of information technology services, including professional
staffing, and other technology-based solutions to informational problems.
Frank Brosens, Director since November 1998, is one of the founding
partners of Taconic Capital Partners, an investment firm. Mr. Brosens was a
general partner of Goldman Sachs & Co. from November 1988 to November 1994,
where he served as head of the equity derivative and risk arbitrage businesses,
as well as a member of several of the firm's principal investment committees.
Robert H. Friedman, Director since August 1994, has been a partner
with Olshan Grundman Frome & Rosenzweig LLP, a New York City law firm, since
August 1992. Prior to that time and since September 1983 he was with Cahill
Gordon & Reindel, also a New York City law firm. Mr. Friedman specializes in
corporate and securities law matters.
Dr. David M. Milch, Director since October 1996, has been a director
and principal since 1983 of Bermil Industries Corporation, a closely held
diversified company owned by the Milch family involved in the manufacture, sale,
financing, and distribution of capital equipment, and in real estate
development. Dr. Milch is also the sole stockholder of Davco Consultants, Inc.,
a corporation that he founded in 1979 for the purpose of identifying, advising,
and investing in emerging growth technologies.
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission"). Officers, directors and greater than ten percent
stockholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Each of the following persons failed to file on a timely basis one
report for a single transaction required by Section 16(a) of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "Exchange Act"), during the fiscal ended April 30, 1999: Thomas
Berry and David Milch. Chris Carey failed to file on a timely basis two reports
covering transactions required by Section 16(a) of the Exchange Act during the
fiscal year ended April 30, 1999. Each of the transactions were subsequently
reported to the Commission on a Form 4.
-54-
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information for the fiscal years
ended April 30, 1997, 1998 and 1999 with respect to annual and long-term
compensation for services in all capacities to the Company of (i) the chief
executive officer, and (ii) the other four most highly compensated executive
officers of the Company at April 30, 1999 who received compensation of at least
$100,000 during Fiscal 1999 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation (1) Long-Term
Compensation
Awards
Securities All Other
Underlying Compensation
Name and Position Year Salary Bonus Options(#) ($)(2)
- ----------------- ---- ------ ----- ---------- ------
<S> <C> <C>
Isaac J. Gaon 1999 $262,000 -- --
Chairman of the Board and Chief Executive 1998 257,000 -- 150,000 --
Officer 1997 250,000 -- 350,000 --
Christopher J. Carey 1999 $262,000 $171,000
President 1998 257,000 164,000 150,000 --
1997 345,000 95,000 120,353 24,000
Robert F. Gadd 1999 $197,000 -- --
Senior Vice President and 1998 162,000 -- 30,000 --
Chief Technology Officer 1997 155,000 -- -- --
James M. Caci 1999 $154,000 -- --
Vice President of Finance, Chief 1998 152,000 -- 20,000 --
Financial Officer, Treasurer, Secretary 1997 128,100 -- 175,000 --
Raymond Koch (3) 1999 $250,000 $ 75,000 50,000 --
Former Chief Operating 1998 250,000 75,000 30,000 --
Officer 1997 273,000 38,000 -- 23,000
</TABLE>
(1) The value of personal benefits for executive officers of the Company
during Fiscal 1998 that might be attributable to management as executive
fringe benefits such as automobiles and club dues cannot be specifically
or precisely determined; however, it would not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for any
individual named above.
(2) The amounts shown in this column reflect the dollar value of life
insurance premiums paid by the Company.
(3) Mr. Koch is no longer an executive officer of the Company but continues to
perform services for the Company and receive compensation through October
31, 1999.
-55-
<PAGE>
Option Grants Table
The following table sets forth certain information regarding stock
option grants made to each of the Named Officers during Fiscal 1999.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential Realizable Value at
Assumed Rates of Annual Rates
of Stock Price Appreciation
for Option (1)
--------------
Individual Grants
-----------------
Shares of Common
Stock Percent of Total
Underlying Options Granted to Exercise or
Options Employees in Fiscal Base Price
Name Granted Year(%) ($/Sh) Expiration Date 5% 10%
---- ------- ------ --------------- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Isaac J. Gaon -- -- -- -- -- --
Christopher J. Carey -- -- -- -- -- --
Robert F. Gadd -- -- -- -- -- --
James M. Caci -- -- -- -- -- --
Raymond Koch 50,000 10.1% $2.307 4/30/00 6,000 12,000
</TABLE>
(1) The potential realizable portion of the foregoing table illustrates value
that might be realized upon exercise of options immediately prior to the
expiration of their term, assuming (for illustrative purposes only) the
specified compounded rates of appreciation on the Company's Common Stock
over the term of the option. These numbers do not take into account
provisions providing for termination of the option following termination
of employment, nontransferability or difference in vesting periods.
Aggregated Option Exercises and Year-End Option Values Table
The following table sets forth certain information concerning stock
options exercised during Fiscal 1999 and stock options which were unexercised
at the end of Fiscal 1999 with respect to the Named Executive Officers.
Aggregated Option Exercises
During The Most Recently Completed
Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Shares Value Number of Securities Underlying Value of Unexercised
Acquired on Realized ($) Unexercised Options Held at Fiscal In-The-Money Options at Fiscal
Exercise (#) Year-End(#) Year-End($)(1)
---------------- ------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Isaac J. Gaon -- -- 1,273,880 0 $ 633,699 --
Christopher J. Carey -- -- 270,353 0 0 --
Robert Gadd -- -- 275,766 0 0 --
James M. Caci -- -- 255,983 0 0 --
Raymond Koch -- -- 101,835 25,000 0 8,600
</TABLE>
(1) Represents the total gain that would be realized if all in-the-money
options held at April 30, 1999 were exercised, determined by multiplying
the number of shares underlying the options by the difference between the
per share option exercise price and $2.594 per share, which was the
closing bid price per share of the Company's Common Stock on April 30,
1999. An option is in-the-money if the fair market value of the underlying
shares exceeds the exercise price of the option.
-56-
<PAGE>
Options Repricing Table
In May 1997, certain employees and director stock options, including
options held by executive officers, were repriced to $4.00 per share, with all
other terms and conditions remaining unchanged. The following table sets forth
certain information regarding the repricing of stock options for executive
officers of the Company in May 1997 and within the ten previous years.
<TABLE>
<CAPTION>
Ten-Year Option Repricing
Number of Length of
Securities Market Price of Exercise Price Original Term
Underlying Stock at Time at Time of New Exercise Remaining at
Repricing Options Repriced of Repricing Repricing ($) Price ($) Date of
Name Date (#) ($) Repricing
- ------------------------ ---------------- ------------------- --------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Isaac Gaon, 5/30/97 350,000 $3.81 $5.25 $4.00 9 yrs. 5 mos.
Chief Executive Officer
James Caci, 5/30/97 175,000 $3.81 $5.25 $4.00 9 yrs. 5 mos.
Vice President,
CFO and Secretary
</TABLE>
Directors Compensation
Each director who is not an employee of the Company receives a fee
of $1,000 per meeting attended. The members of the Board are also eligible for
reimbursement of their reasonable expenses incurred in connection with
attendance of Board meetings.
Employment Agreements
Isaac Gaon is employed as the Company's Chairman of the Board and
Chief Executive Officer of Glasgal pursuant to an employment agreement dated as
of October 31, 1996, for a term ending on October 31, 1999, which has been
extended to April 30, 2000. The agreement provides for an initial base salary of
$250,000 which is reviewed annually by the Compensation Committee and incentive
compensation based on the Company's Projected EBIT (as defined in the
agreement). In the event of his disability, Mr. Gaon is to receive the full
amount of his base salary for six months. Upon a Change of Control of the
Company (as defined in the agreement) that results in Mr. Gaon's removal from
the Company's Board of Directors, a significant change in the conditions of his
employment or other breach of the agreement, he is to receive liquidated damages
equal to 2.99 times the "base amount," as defined in the United States Internal
Revenue Code of 1986, as amended (the "Code"), of his compensation. Upon early
termination by the Company without Cause (as defined in the agreement), or by
Mr. Gaon with "Good Reason" (as defined in the agreement), the Company is
required to pay Mr. Gaon the remainder of the salary owed him through April 30,
2000, but in no event shall such payment be less than $500,000. Additionally,
Mr. Gaon will be entitled to undistributed bonus payments, as well as pro-rata
unused vacation time payments. In addition, following a Change of Control,
termination by the Company without Cause, or termination by Mr. Gaon for Good
Reason, the Company is obligated to purchase all Mr. Gaon's stock options,
whether exercisable or not, for a price equal to the difference between the fair
market value of the Common Stock on the date of termination and the exercise
price of such options.
The Company entered into an employment and non-competition agreement
dated as of November 1, 1996 with Christopher J. Carey for a term ending on
October 31, 1999, which has been extended to April 30, 2000. The agreement
provides for an initial base salary of $250,000, which is reviewed annually by
the Compensation Committee and non-discretionary incentive compensation based on
the Company's achievement of net income goals. The agreement contains covenants
restricting Mr. Carey's ability to engage in activities competitive with those
of the Company for a period ending three years after his termination. In
addition, upon termination without "Cause" (as defined in the agreement), Mr.
Carey is entitled to receive his salary as of the time of termination, plus
bonuses as provided for in the agreement, until April 30, 2000. If he is totally
disabled, Mr. Carey is entitled to receive a pro-rated bonus.
-57-
<PAGE>
The Company entered into an employment agreement dated as of
December 31, 1996, with Robert Gadd on terms substantially similar to those of
Isaac Gaon's employment agreement for a term ending on December 31, 1999, which
has been extended to April 30, 2000. Mr. Gadd's agreement provides for his
employment by the Company as its Senior Vice President at an initial base salary
of $155,000 which is reviewed annually by the Compensation Committee, and in the
case of early termination, his accelerated payment is in no case to be below
$200,000.
Effective as of October 31, 1996, the Company entered into an
employment agreement with James Caci on terms substantially similar to those of
Isaac Gaon's employment agreement for a term ending on October 31, 1999, which
has been extended to April 30, 2000. Mr. Caci's agreement provides for his
employment by the Company as its Chief Financial Officer and Vice President of
Finance and Secretary at an initial base salary of $150,000 which is reviewed
annually by the Compensation Committee, and in case of early termination, his
accelerated salary payment is in no case to be below $300,000.
-58-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning ownership of
the Common Stock outstanding as of July 31, 1999, by (i) each person known by
the Company to be the beneficial owner of more than five percent (5%) of the
Company's Common Stock, (ii) each director, (iii) each of the executive officers
named in the summary compensation table, and (iv) by all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Amount of Shares
Beneficial Owner(1) Beneficially Owned (2) Percentage of Class
- ------------------------------ ----------------------- -------------------
<S> <C> <C>
Isaac J. Gaon (3) 1,282,258 4.0%
Christopher J. Carey (4) 3,443,389 11.0%
Robert F. Gadd (5) 470,766 1.5%
James M. Caci (6) 258,707 *
Thomas J. Berry (7) 72,000 *
Frank P. Brosens(8) 586,873 1.9%
Robert H. Friedman (9) 92,146 *
David Milch (10) 493,505 1.6%
All directors and officers as a group
(8 persons) (11) 6,699,644 19.9%
Ralph Glasgal (12) 2,848,307 9.1%
</TABLE>
* Less than 1%
(1) Unless otherwise indicated, all addresses are c/o Datatec Systems,
Inc., 20C Commerce Way, Totowa, New Jersey 07512.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act ("Rule 13d-3") and unless otherwise indicated,
represents shares for which the beneficial owner has sole voting and
investment power. The percentage of class is calculated in accordance
with Rule 13d-3 and includes options or other rights to subscribe which
are exercisable within sixty (60) days of July 31, 1999.
(3) Mr. Gaon's beneficial ownership includes options exercisable within
sixty (60) days from July 31, 1999 to purchase an aggregate of
1,273,880 shares of Common Stock.
-59-
<PAGE>
(4) Mr. Carey's beneficial ownership includes (i) options exercisable
within sixty (60) days from July 31, 1999 to purchase 270,353 shares of
Common Stock, (ii) 118,518 shares of Common Stock owned by Mary Carey,
Mr. Carey's wife, (iii) 96,296 shares held by the Amy Carey GRAT, a
trust formed for the benefit of Mr. Carey's daughter, (iv) 96,296
shares held by the Christopher Carey GRAT, a trust formed for the
benefit of Mr. Carey's son, and (v) 45,000 shares beneficially owned by
Plan C LLC, a limited liability company of which Mr. Carey is a member.
Mr. Carey disclaims beneficial ownership of the shares owned by his
family members and except to the extent of his pecuniary interest
therein, those shares owned by Plan C LLC.
(5) Mr. Gadd's beneficial ownership includes options exercisable within
sixty (60) days from July 31, 1999 to purchase 275,766 shares of Common
Stock.
(6) Mr. Caci's beneficial ownership includes options exercisable within
sixty (60) days from July 31, 1999 to purchase 255,983 shares of Common
Stock.
(7) Mr. Berry's beneficial ownership includes options exercisable within
sixty (60) days of July 31, 1999 to purchase 72,000 shares of Common
Stock. Mr. Berry's address is P.O. Box 447, Lindsley Road, New Vernon,
New Jersey 07976.
(8) Mr. Brosens' beneficial ownership includes warrants exercisable within
sixty (60) days from July 31, 1999 to purchase 350,000 shares of Common
Stock. Mr. Brosens' address is 63 East Field Drive, Bedford, New York
10506.
(9) Mr. Friedman's beneficial ownership includes options exercisable within
sixty (60) days from July 31, 1999 to purchase 72,000 shares of Common
Stock. Mr. Friedman's address is 505 Park Avenue, New York, New York
10022-1170.
(10) Dr. Milch's beneficial ownership includes options exercisable within
sixty (60) days from July 31, 1998 to purchase 24,000 shares of Common
Stock. Dr. Milch's address is 114 East 13th Street, New York, New York
10003.
(11) Includes options and warrants exercisable within sixty (60) days of
July 31, 1999 to purchase an aggregate of 2,593,982 shares of Common
Stock held by the directors and executive officers of the Company
(including options to purchase an aggregate of 205,902 shares of Common
Stock from Ralph Glasgal).
(12) Based on information obtained from the Statement on Schedule 13D, dated
December 22, 1998, filed by Mr. Glasgal. Mr. Glasgal's address is 4
Piermont Road, Rockleigh, New Jersey 07512.
Item 13. Certain Relationships And Related Transactions
In 1999, the Company forgave $125,000 of a loan from Ralph Glasgal for
signing a "lock-up" agreement as part of a private placement equity offerng. Mr.
Glasgal is the former Chairman of the Company and a 5% Stockholder.
Mr. Robert Friedman, a Director of the Company is a member of the law
firm of Olshan Grundman Frome Rosenzweig & Wolosky LLP, which law firm has been
retained by the Company during the last fiscal year. Fees received from the
Company during the last fiscal year did not exceed 5% of such firm's or the
Company's revenues.
-60-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K
(a)(1) The following financial statements are included in Part II,
Item 8:
Consolidated Financial Statements
Reports of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets as of April 30, 1998 and 1999
Consolidated Statements of Operations for the years
ended April 30, 1997, 1998 and 1999.
Consolidated Statements of Comprehensive
Income (loss) for the years ended April
30, 1997, 1998 and 1999
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the years ended April 30, 1997, 1998 and 1999.
Consolidated Statements of Cash Flows for the years ended April
30, 1997, 1998 and 1999.
Notes to Consolidated Financial Statements
(2) The following financial statement schedules are included
in this Form 10-K report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
are inapplicable, or the information is otherwise shown in the
financial statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1999:
N/A
(c) Exhibits:
3.1 -- Certificate of Incorporation of the Company (as amended),
incorporated by reference to the Company's Form 10-K for the
fiscal year ended April 30, 1998.
3.2 -- Bylaws of the Company, incorporated by reference to the
Company's Form 10-K for the fiscal year ended April 30,
1996.
4.1 -- Specimen Common Stock Certificate, incorporated by reference
to the Company's registration statement on Form S-1 (File
No. 333-39985) filed with the Commission on November 12,
1997.
4.2 -- Certificate of Designations defining the powers,
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series D Preference
Stock (incorporated by reference to the Company's form 8-A
filed with the Commission on February 24, 1998).
-61-
<PAGE>
10.1 -- 1990 Stock Option Plan, as amended to date, incorporated by
reference to the Company's registration statement on Form
S-8 (File No. 333-08381) filed with the Commission on June
18, 1996.
10.2 -- 1993 Consultant Stock Option Plan, incorporated by reference
to the Company's registration statement on Form S-1 (File
No. 33-93470) filed with the Commission on June 14, 1995.
10.3 -- 1995 Director's Stock Option Plan, incorporated by reference
to the Company's registration statement on Form S-1 (File
No. 33-93470) filed with the Commission on June 14, 1995.
10.4 -- 1996 Employee and Consultant Stock Option Plan, incorporated
by reference to the Company's Form 10-K for the fiscal year
ended April 30, 1996.
10.5 -- 1996 Stock Option Conversion Plan, incorporated by reference
to the Company's Form 10-K for the fiscal year ended April
30, 1997.
10.6 -- 1996 Senior Executive Stock Option Plan, incorporated by
reference to the Company's Form 10-K for the fiscal year
ended April 30, 1997.
10.7 -- 1998 Employee Stock Purchase Plan, incorporated by reference
to the Company's registration statement on Form S-8 (File
No. 333-48757), filed with the Commission on March 27, 1998.
10.8 -- Form of Rights Agreement, dated as of February 24, 1998,
between the Company and Continental Stock Transfer & Trust
Company, incorporated by reference to the Company's
Registration Statement of Form 8-A filed with the Commission
on February 24, 1998.
10.9 -- Employment Agreement dated October 31, 1996 between the
Company and Isaac Gaon, incorporated by reference to the
Company's Form 10-K for the fiscal year ended April 30,
1997.
10.10 -- Employment Agreement dated October 31, 1996 between the
Company and James Caci, incorporated by reference to the
Company's Form 10-K for the fiscal year ended April 30,
1997.
10.11 -- Employment Agreement dated October 31, 1996 between the
Company and Robert Gadd, incorporated by reference to the
Company's Form 10-K for the fiscal year ended April 30,
1997.
-62-
<PAGE>
10.12 -- Employment and Non-Competition Agreement dated November 1,
1997 between the Company and Christopher J. Carey,
incorporated by reference to the Company's Form 10-K for the
fiscal year ended April 30, 1997.
10.13 -- Loan and Security Agreement dated March 17, 1997 between the
Company and Finova Capital Corporation, incorporated by
reference to the Company's Form 10-K for the fiscal year
ended April 30, 1997.
10.14 -- Stock Purchase Agreement dated as of February 15, 1996 by
and among the Company, David H. Tobey and Computer-Aided
Software Integration, Inc., incorporated by reference to the
Company's registration statement on Form S-3 (File No.
333-03414) filed with the Commission on April 8, 1996.
10.15 -- Stock Purchase Agreement dated March 9, 1998 by and among
David H. Tobey, the Company and Computer-Aided Software
Integration, Inc., which includes the Form of Convertible
Promissory Note as Exhibit A, the form of Registration
Rights Agreement as Exhibit B, and the form of
Non-Competition Agreement as Exhibit C, incorporated by
reference to the Company's Form 8-K dated March 9, 1998.
10.16 -- Stock Purchase Agreement dated as of July 31, 1996 by and
among the Company, Francis J. Frazel, Steven M. Grubner,
Mark Herzog, George Terlizzi and HH Communications, Inc.,
incorporated by reference to the Company's Form 8-K dated
July 31, 1996.
10.17 -- Stock Purchase Agreement dated as of October 31, 1996 by and
among the Company, Datatec Industries Inc. and Those
Stockholders Listed on Schedule 1.1 Thereto, incorporated by
reference to the Company's Form 8-K dated October 31, 1996.
10.18 -- Notes and Warrant Purchase Agreement dated as of February
18, 1997, by and between the Company, Tinicum Investors and
Frank Brosens (Exhibit A- Form of Convertible Note, Exhibit
B- Form of Warrant, Exhibit C- Form of Conditional Warrant),
incorporated by reference to the Company's Form 10-K for the
fiscal year ended April 30, 1997.
10.19 -- Securities Purchase Agreement, dated as of April 30, 1998,
by and among the Company, Stark International and Shepherd
Investments International, Ltd., which includes (i) the
Certificate of Designations of Series E Convertible
Preferred Stock as Exhibit A, (ii) the form of Common Stock
Purchase Warrant dated April 30, 1998 as Exhibit B, and
(iii) the form of Registration Rights Agreement as Exhibit
C, incorporated by reference to the Company's Form 8-K dated
April 30, 1998.
-63-
<PAGE>
10.20 -- Common Stock Purchase Agreement dated January 7, 1994 by and
among Direct Connect International, Inc., the Company and
Ralph Glasgal, incorporated by reference to the Company's
registration statement on Form S-1 (File No. 33-93470) filed
with the Commission on June 14, 1995.
10.21 -- Stock Purchase Agreement dated July 25, 1997 by and among
the Company and the Purchasers listed on the Signature Pages
thereto, incorporated by reference to the Company's Form
10-K for the fiscal year ended April 30, 1997.
10.22 -- Stock Purchase Agreement dated June 30, 1997 between the
Company and Ralph Glasgal, incorporated by reference to the
Company's Form 10-K for the fiscal year ended April 30,
1997.
10.23 -- Amended and Restated License Agreement dated as of July 1,
1997 by and between CASI and Cumetrix Data Systems
Corporation, (formerly Datanet International Incorporated),
incorporated by reference to the registration statement on
Form S-1 (File No. 333-43151) filed by Cumetrix Data Systems
Corp. with the commission on December 23, 1997.
10.24 -- Sublease Agreement for 20C Commerce Way, Totowa, New Jersey
dated December 1996 by and between Motorola Inc. and the
Company, incorporated by reference to the Company's
registration statement on Form S-1 (File No. 333-39985)
filed with the Commission on November 12, 1997.
*10.25 -- Stock Purchase Agreement dated February 25, 1999 by and
among the Company and the Purchasers listed on the signature
pages thereto.
*11.1 -- Statement of Computation of Per Share Earnings.
*21.1 -- Subsidiaries of the Company.
*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.
*27.1 -- Financial Data Schedule.
- ---------------------------
* Filed herewith.
-64-
<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.
Datatec Systems, Inc.
(Registrant)
Date: August 12, 1999 By:/s/ Isaac J. Gaon
-----------------------------
Name: Isaac J. Gaon
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Isaac J. Gaon Chairman of the Board and August 12, 1999
- -------------------------- Chief Executive Officer
Isaac J. Gaon (principal executive
officer)
/s/ Christopher J. Carey President and Director August 12, 1999
- --------------------------
Christopher J. Carey
/s/ David Milch Director August 12, 1999
- --------------------------
David Milch
/s/Frank Brosens Director August 12, 1999
- --------------------------
Frank Brosens
/s/ Robert H. Friedman Director August 12, 1999
- --------------------------
Robert H. Friedman
/s/Thomas Berry Director August 12, 1999
- --------------------------
Thomas Berry
/s/ James M. Caci Chief Financial Officer August 12, 1999
- -------------------------- (principal financial and
James M. Caci accounting officer)
Execution Copy
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into this 25th day of February, 1999, by and between Datatec Systems, Inc., a
Delaware corporation (the "Company") and each of the Purchasers named on the
execution pages hereof (each a "Purchaser" and collectively, the "Purchasers").
In consideration of the premises and of the mutual
representations, warranties and covenants hereinafter set forth, the Company and
each Purchaser hereby agree as follows:
ARTICLE I
The Purchase and Sale
1.1 The Purchase and Sale. (a) Subject to the terms and
conditions set forth herein, at the Closing described below, the Company will
sell and each Purchaser will purchase, the number of shares (the "Shares") of
the common stock, $.001 par value per share, of the Company (the "Common Stock")
set forth on Schedule A hereto.
(b) The purchase price for the Shares (the "Purchase Price")
is $3.75 per share, or an aggregate amount of $2,000,002.50, with each Purchaser
purchasing the amount of Shares and paying the Purchase Price set forth below
such Purchaser's name on Schedule A hereto. The Purchase Price shall be paid as
provided in Section 1.2.
1.2 The Closing. The closing of the transactions contemplated
hereby (the "Closing") shall take place at the principal offices of the Company
at 20 C Commerce Way, Totowa, New Jersey 07512 on February 25, 1999 at 12:00
P.M. or at such other place or time as the parties may agree (the "Closing
Date"). At the Closing, the Purchase Price shall be payable by delivery of
immediately available funds by wire transfer to an account of the Company that
shall be specified in writing by the Company prior to the Closing. At the
Closing, the Company shall deliver to each Purchaser a certificate representing
such Purchaser's Shares.
1.3 Termination of this Agreement. Anything contained in this
Agreement to the contrary notwithstanding, in the event that the Purchasers fail
to deliver immediately available funds representing the Purchase Price by the
close of business on the Closing Date, this Agreement shall terminate and be of
no force and effect without the requirement of any notice from, or any action
by, the Company.
<PAGE>
ARTICLE II
Representations and Warranties
Concerning the Company
The Company hereby represents and warrants to each Purchaser
as follows:
2.1 Organization and Standing. The Company is a corporation
duly organized and existing under the laws of the State of Delaware and is in
good standing under such laws.
2.2 Corporate Power. The Company has all requisite corporate
power and authority to enter into this Agreement and the Company will have at
the Closing Date all requisite corporate power to sell the Shares and to carry
out and perform its obligations under the terms of this Agreement. The execution
and delivery of this Agreement by the Company and the performance by the Company
of its obligations hereunder have been duly authorized by its Board of
Directors. This Agreement has been duly executed and delivered to the Purchasers
and (assuming due and valid authorization, execution and delivery by the
Purchasers) constitutes a valid and binding obligation of the Company,
enforceable in accordance with its terms, except (i) as such enforceability may
be limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally, (ii) as
such obligations are subject to general principles of equity and (iii) as rights
to indemnity may be limited by federal or state securities laws or by public
policy.
2.3 Capitalization. The authorized capital stock of the
Company consists of (i) 75,000,000 shares of Common Stock and (ii) 4,000,000
shares of preferred stock, par value $.001 per share. There are approximately
29,837,825 shares of the Company's Common Stock and 150 shares of Series E
Convertible Preferred Stock currently issued and outstanding.
2.4 SEC Reports and Financial Statements. The Company has
filed with the Securities and Exchange Commission (the "SEC"), and has
heretofore made available to the Purchasers true and complete copies of all
forms, reports, schedules, statements and other documents required to be filed
by it since April 30, 1998 under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") (as such documents have been amended or
supplemented since the time of their filing, collectively, the "SEC Reports"),
each of which (except to the extent revised or superceded by a subsequently
filed SEC Report) complied as to form in all material respects with the
requirements of the Exchange Act. As of their respective dates, or if amended,
as of the date of the last such amendment, the SEC Reports did not contain any
untrue statement of a material fact or fail to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading. The financial
statements of the Company contained in the SEC Reports have been prepared in
conformity with Generally Accepted Accounting Principles consistently applied
(subject in the case of unaudited interim financial statements, to normal year
end adjustments) and as of the dates indicated, and for the periods then ended,
present fairly the financial position and results of operations of the Company
as of the dates and for the periods indicated.
-2-
<PAGE>
2.5 Absence of Undisclosed Liabilities. Except as described in
the SEC Reports, the Company has no material debts, liabilities or obligations
of any kind, whether accrued, absolute, contingent or other, whether due or to
become due, except as incurred in the ordinary course of business, that would
have a material adverse effect on the Company.
2.6 Fully Paid Shares. The Shares, when acquired by the
Purchasers will be fully paid and non-assessable, free of preemptive rights and
encumbrances, and will have the same rights under the Company's certificate of
incorporation and by-laws as all other shares of Common Stock.
ARTICLE III
Representations and Warranties
of the Purchasers
Each Purchaser, as to itself only, represents and warrants to
the Company as follows:
3.1 Investment Intent, Etc. Each Purchaser is an "accredited
investor" as such term is defined in Rule 501 of Regulation D promulgated under
the Securities Act. Each Purchaser has received, examined and reviewed copies of
the Company's most recent reports, as amended, filed under the Exchange Act and
other publicly available documents requested by him and recognizes that the
investment in the Shares involves a high degree of risk. Each Purchaser has been
advised that it may not be possible to readily liquidate this investment. Each
Purchaser's overall commitment to the Shares, which are not readily marketable,
is not disproportionate to its net worth, its investment in the Company will not
cause such overall commitment to become excessive, and he can afford to bear the
loss of its entire investment in the Company. Each Purchaser has such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of an investment in the Common Stock of the
Company. Each Purchaser confirms that the Company has made available to him the
opportunity to ask questions of, and receive answers from, the Company
concerning the Company and the activities of the Company and otherwise to obtain
any additional information, to the extent that the Company possesses such
information or could acquire it without unreasonable effort or expense,
necessary to verify the accuracy of the information conveyed to him. Each
Purchaser hereby acknowledges that it has been advised that this offering of
Shares has not been registered with, or reviewed by, the Securities and Exchange
Commission because this offering is intended to be a non-public offering
pursuant to Section 4(2) of the Securities Act. Each Purchaser represents that
the Shares are being purchased for its own account, for investment purposes only
and not with a view towards distribution or resale to others. Each Purchaser
agrees that he will not attempt to sell, transfer, assign, pledge or otherwise
dispose the Shares unless they are registered under the Securities Act or unless
in the opinion of counsel satisfactory to the Company an exemption from such
registration is available. Each Purchaser understands that no securities
administrator of any state has made any finding or determination relating to the
fairness of this investment and that no securities administrator of any state
has recommended or endorsed, or will recommend or endorse, the offering of the
Shares. The execution, delivery and performance by each Purchaser of this
Agreement will not constitute or result in a
-3-
<PAGE>
breach or default under, or conflict with, any order, ruling or regulation of
any court or other tribunal or of any governmental commission or agency, or any
agreement or other undertaking, to which each Purchaser is a party or by which
it is bound. Each Purchaser has relied solely upon the advice of its own tax and
legal advisors with respect to the tax and other legal aspects of this
investment. Each Purchaser is purchasing the Shares for its account, and not in
any agency, fiduciary or similar capacity. The source of the funds evidencing
the Purchase Price are from legally available funds of each Purchaser.
3.2 Organization and Authorization. This Agreement has been
duly authorized, executed and delivered by each Purchaser. Each Purchaser is
duly incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority to
purchase and hold the Shares. The decision to invest and the execution and
delivery of this Agreement by each Purchaser, the performance by such Purchaser
of its obligations hereunder and the consummation by such Purchaser of the
transactions contemplated hereby have been duly authorized and requires no other
proceedings, consent or authorization of such Purchaser or its Board of
Directors, stockholders, partners, manager or others, as the case may be. Each
Purchaser's signatory has all the right, power and authority to execute and
deliver this Agreement on behalf of such Purchaser. This Agreement has been duly
executed and delivered by each Purchaser and, assuming the execution and
delivery hereof and acceptance thereof by the Company, will constitute the
legal, valid and binding obligations of such Purchaser, enforceable against such
Purchaser in accordance with its terms.
3.3 Legends. Each Purchaser understands that the certificates
evidencing the Shares will bear a legend substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE
ACT SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO AND THEY
SHALL HAVE BEEN REGISTERED OR QUALIFIED FOR SALE UNDER THE
APPROPRIATE STATE SECURITIES LAWS OR (II) IN THE OPINION OF
COUNSEL TO THE CORPORATION, REGISTRATION AND QUALIFICATION
UNDER THE ACT AND THE SECURITIES LAWS OF THE APPROPRIATE STATE
IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER."
The legend referred to above shall be removed by the Company
from any certificate at such time as the holder of the shares represented by the
certificate delivers an opinion of counsel reasonably satisfactory to the
Company to the effect that such legend is not required in order to establish
compliance with any provisions of the Securities Act, or at such time as the
holder of such shares satisfies the requirements of Rule 144(k) under the
Securities Act, as then in effect with respect to such shares.
-4-
<PAGE>
3.4 Risk Factors. Each Purchaser has conducted its own due
diligence with respect to all aspects of this transaction and is familiar with
the risk factors inherent in the purchase of the Shares, and has been fully
apprized that all or a portion of the proceeds from this investment will be used
for working capital purposes, which may include the repayment of indebtedness.
3.5 Ownership. The Purchasers and their affiliates and
associates (including, but not limited to The Clark Estates, Inc.) currently
beneficially own an aggregate of 877,500 shares of Common Stock.
ARTICLE IV
Registration of Shares
4.1 "S-3 Registration". The Company shall prepare and file a
Registration Statement on Form S-3 (or such other appropriate form) covering the
resale of the Shares of Common Stock by each of the Purchasers within 45 days
following the Closing Date and shall use its reasonable best efforts to have
such registration statement declared effective promptly thereafter. The Company
shall use its reasonable best efforts to cause any such Registration Statement
to remain current and effective to permit the sale of the Shares until the
earlier of (a) the date that all of the Shares have been sold, (b) the date the
Purchasers receive an opinion of counsel that the Shares may be sold under the
provisions of Rule 144(k) promulgated under the Securities Act, or (c) the two
year anniversary of the Closing Date or, if the Purchasers shall be required to
discontinue offers and sales pursuant hereto, for such additional time after
such two year anniversary equal to the time period during which the Purchasers
were so required.
4.2 Registration Procedures. Each Registration Statement filed
pursuant to this Article IV shall be pursuant to the procedures set forth below:
(a) The Company shall notify the Purchasers promptly after it
shall receive notice thereof, of the date and time when such Registration
Statement and each post-effective amendment thereto has become effective or a
supplement to any prospectus forming a part of such Registration Statement has
been filed;
(b) The Company shall furnish to the Purchasers such
reasonable number of copies of the Registration Statement and prospectus and
such other documents as the Purchasers may reasonably request in order to
facilitate the public offering of the Shares;
(c) The Company shall use its reasonable best efforts to
register or qualify the Shares covered by such Registration Statement under such
state securities or blue sky laws of such jurisdictions as the Purchasers may
reasonably request, provided, however, that the Company shall not be obligated
to file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified or to subject
itself to taxation in connection with any such registration or qualification of
such securities;
-5-
<PAGE>
(d) The Company shall notify the Purchasers participating in
such registration promptly of any request by the SEC for the amending or
supplementing of such Registration Statement or prospectus or for additional
information. Each Purchaser agrees that, upon receipt of any notice from the
Company of the occurrence of any event of the kind described in this subsection
(d), each Purchaser will forthwith discontinue the offer and sale of Shares
pursuant to the Registration Statement covering such Shares until receipt by
such Purchaser and underwriters of the copies of such supplemented or amended
prospectus and, if so directed by the Company, each Purchaser will deliver to
the Company all copies, other than permanent file copies then in such Purchaser'
possession, of the most recent prospectus covering such Shares at the time of
receipt of such notice;
(e) The Company shall advise the Purchasers participating in
such registration, promptly after it shall receive notice or obtain knowledge
thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of such Registration Statement or the initiation or threatening of
any proceeding for that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued;
(f) The Company shall enter into such agreements (including an
underwriting agreement in customary form) and take such other actions as the
Purchasers shall reasonably request in order to expedite or facilitate the
disposition of the Shares;
(g) The Company shall, from and after the effective date of
the registration, use its reasonable best efforts to cause all Shares covered by
such Registration Statement to be listed or quoted on each securities exchange,
if any, on which similar securities issued by the Company are then listed or
quoted; and
(h) Each Purchaser shall furnish to the Company in writing
such information and documents regarding the Purchaser and the distribution of
such securities as may be required to be disclosed in the registration statement
in question by the rules and regulations under the Securities Act or under any
other applicable securities or applicable blue sky laws.
4.3 Expenses of Registration. All expenses of the Company
incident to the Company's performance of or compliance with the provisions of
this Article IV shall be borne by the Company including without limitation:
(a) All registration and filing fees;
(b) Fees and expenses of compliance with all securities or
blue sky laws (including fees and disbursements of counsel for the Company in
connection with blue sky qualifications of the Shares; provided, however, that
the Company shall not be required to consent to general service of process in
any such state); and
(c) Fees and disbursements of the Company and its independent
auditors.
-6-
<PAGE>
Nothing in this Section 4.3 shall be deemed to require the
Company to pay or bear any expenses of the Purchasers' attorneys or accountants
or any other personal expenses or any underwriting discounts relating to the
Shares, selling commissions or similar fees attributable pro rata to the Shares
if such registration results in an Underwritten Offering of all or any portion
of the Shares.
4.4 Indemnification. (a) The Company will, and hereby does,
indemnify, to the extent permitted by law, each Purchaser, its officers and
directors, if any, and each person, if any, who controls such Purchaser within
the meaning of Section 15 of the Securities Act, against all losses, claims,
damages, liabilities (or proceedings in respect thereof) and expenses under the
Securities Act, joint or several, caused by any untrue statement or alleged
untrue statement of a material fact contained in any registration statement or
prospectus (and as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities (or proceedings in
respect thereof) or expenses are caused by any untrue statement or alleged
untrue statement or an omission or alleged omission to state a material fact
made in reliance on or in conformity with any information furnished to the
Company by any of the Purchasers or any participating underwriter expressly for
use therein.
(b) If for any reason the indemnity under Section 4.4(a) is
unavailable, then the Company shall contribute to the amount paid or payable by
the indemnified party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and of the indemnified party on the other. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(c) Each of the Purchasers will, and hereby does, severally
but not jointly, indemnify, to the extent permitted by law, the Company, its
officers and directors, if any, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act, against all
losses, claims, damages, liabilities (or proceedings in respect thereof) and
expenses under the Securities Act, caused by any untrue statement or alleged
untrue statement of a material fact contained in any registration statement or
prospectus (and as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading but
only to the extent that such losses, claims, damages, liabilities (or
proceedings in respect thereof) or expenses are caused by any untrue statement
or alleged untrue statement made in reliance on or in conformity with any
information concerning such Purchaser furnished to the Company by any such
Purchaser expressly for inclusion therein.
-7-
<PAGE>
(d) If for any reason the indemnity under Section 4.4(c) is
unavailable, then any such Purchaser shall contribute to the amount paid or
payable by the indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of such Purchaser on the one hand and of the indemnified party on
the other. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation
4.5 Resale Restriction. Each Purchaser hereby agrees that for
a period of 90 days from the Closing Date, he will not offer, sell, transfer,
pledge, assign or otherwise dispose of any of the Shares, irrespective of
whether there is an effective Registration Statement covering the resale of such
Shares, without the prior written consent of the Company.
ARTICLE V
Covenant of the Company
5.1 Board Representative. Until such time as the Purchasers
and its affiliates and associates (or such other accounts for which The Clark
Estates Inc. provides management services) shall own in the aggregate less than
2% of the Company's outstanding shares of Common Stock, a majority in interest
of the Purchasers shall have the right to designate one member of the Company's
Board of Directors . Notwithstanding the forgoing, such designation right shall
terminate unless it is initially exercised prior to February 23, 2001. The
Company agrees that it shall nominate such representative for re-election by the
Company's stockholders at the annual meeting at which directors are to be
elected immediately following the initial designation (provided that such
meeting is held prior to the termination of the Purchasers' right to designate
such member pursuant to this Section 5.1) and use its reasonable efforts to
cause such designee to be elected to the Board.
ARTICLE VI
Conditions to Closing
6.1 Conditions to the Company's Obligation to Sell. Each
Purchaser understands that the Company's obligation to sell the Shares is
conditioned upon:
(a) The execution and delivery of this Agreement by the Company.
(b) Delivery by the Purchasers of good cleared funds as payment in full
representing the Purchase Price for the Shares.
(c) There shall be no action, suit or proceeding or threatened before
any court or quasi- judicial or administrative agency that seeks to prohibit the
sale of the Shares.
-8-
<PAGE>
(d) The representations and warranties of each Purchaser contained in
this Agreement shall be true and correct in all material respects as of the date
when made and at and as of the Closing Date.
6.2 Conditions to the Purchasers' Obligation to Purchase. The
Company understands that each Purchaser's obligation to purchase the Shares is
conditioned upon:
(a) The execution and delivery of this Agreement by the Purchasers.
(b) The representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects as of the date when
made and as of the Closing Date and receipt and acceptance of the Purchase Price
shall be deemed a representation and warranty by the Company to such effect.
(c) The Purchasers shall have received the opinion of the Company's
counsel, to the effect that (i) the execution and delivery of this Agreement has
been duly authorized by all requisite corporate action on the part of the
Company, (ii) this Agreement has been duly executed and delivered to the
Purchasers, and (assuming due and valid authorization by the Purchasers)
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, except (x) as such enforceability may be limited by
or subject to any bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally, (y) as such obligations are
subject to general principles of equity and (z) as rights to indemnity may be
limited by federal or state securities laws or by public policy, and (iii) upon
issuance, the Shares will be duly authorized, validly issued, fully-paid and
nonassessable.
ARTICLE VII
Miscellaneous Provisions
7.1 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by written agreement of the Purchasers owning at
least a majority of the shares purchased hereby and the Company.
7.2 Waiver. Any breach of any obligation, covenant, agreement
or condition contained herein shall be deemed waived by the non-breaching party,
only by a writing, setting forth with particularity the breach being waived and
the scope of the waiver, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other breach. No waiver shall be
implied from any conduct or action of the non-breaching party. No failure or
delay by any party in exercising any right, power or privilege hereunder and no
course of dealing by any party shall operate as a waiver and any right, power or
privilege hereunder nor shall any single or partial exercise thereof or the
exercise of any other right, power or privilege.
-9-
<PAGE>
7.3 Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
delivered as follows:
(a) if to the Company, to:
Datatec Systems, Inc.
20 C Commerce Way
Totowa, New Jersey 07512
Attn: Isaac J. Gaon
with a copy (which shall not constitute notice) to:
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
Attention: Robert Friedman, Esq.
(b) if to Purchaser, to:
c/o The Clark Estates, Inc.
One Rockefeller Plaza, Suite 3100
New York, New York 10020-2102
Attention: Kevin S. Moore
with a copy (which shall not constitute notice) to:
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
Attention: David Ambrosia, Esq.
or to such other address as any party shall have specified by notice in writing
to the other in compliance with this Section 7.3. Notices shall be deemed to
have been duly given when delivered personally or by facsimile transmission, in
either case when receipt acknowledged, or three days after being sent by
registered or certified mail, return receipt requested, postage prepaid.
7.4 Binding Nature Agreement. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
either of the parties hereto without prior written consent of the other parties.
7.5 Acknowledgment by the Purchaser. Each Purchaser has been
informed that the Common Stock is publicly-traded on the Nasdaq Small-Cap Market
and that the Purchase Price
-10-
<PAGE>
for the Shares may bear no relation to the future market value or book value of
the Common Stock. Each Purchaser further acknowledges that (i) it has reviewed
such information as it deems appropriate to evaluate whether to enter into this
Agreement and (ii) it is not relying on any oral information or representations
from the Company or any other person, including representatives of the Company
in connection with its decision to enter into this Agreement, including the
Company's financial condition, prospects, present or future results of
operations, business plans or the potential for future appreciation in the
Common Stock.
7.6 Survival. The representations and warranties of the
Company and the Purchasers contained in Sections 2 and 3, respectively, shall
survive the Closing (i) without limitation in the case of representations and
warranties under Sections 2.2 and 2.6, and (ii) until two years after the
Closing Date in the case of all such other representations and warranties.
7.7 Governing Law. This Agreement will be construed and
enforced in accordance with and governed by the laws of the State of New York,
without reference to principals of conflicts of law.
7.8 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
7.9 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
7.10 Expenses. All costs and expenses incurred in connection
with this Agreement shall be paid by the party incurring such cost or expense.
7.11 Counterparts. This Agreement may be signed in
counterparts with the same effect as if both parties had signed one and the same
instrument.
7.12 Form of Signature. The parties hereto agree to accept a
facsimile transmission copy of their respective signatures as evidence of their
respective actual signatures to this Agreement; provided however, that each
party who produces a facsimile signature agrees, by the express terms hereof, to
place, immediately after transmission of its signature by fax, a true and
correct original copy of its signature in overnight mail to the address of the
other party.
-11-
<PAGE>
STOCK PURCHASE AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed the day and year first above written.
DATATEC SYSTEMS, INC.
By: _________________________________________
Name:
Title:
THE FERNLEIGH FOUNDATION
By: _________________________________________
Name: Kevin S. Moore
Title: Treasurer
THE CLARK FOUNDATION
By: _________________________________________
Name: Kevin S. Moore
Title: Treasurer
THE SCRIVEN FOUNDATION
By: _________________________________________
Name: Kevin S. Moore
Title: Treasurer
THE MARY IMOGENE BASSETT HOSPITAL
By: _________________________________________
Name: Kevin S. Moore
Title: Treasurer
-12-
<PAGE>
THE MARY IMOGENE BASSETT HOSPITAL -
SCC RESEARCH FUND
By: _________________________________________
Name: Kevin S. Moore
Title: Treasurer
THE FARMERS'MUSEUM, INC.
By: _________________________________________
Name: Richard C. Vanison
Title: Treasurer
TRUST FOR MARTIN PERETZ, 1976
By: _________________________________________
Name: Kevin S. Moore, as Trustee
TRUST FOR ANNE L. PERETZ, 1944
By: _________________________________________
Name: Edward W. Stack, as Trustee
EDMUND S. TWINING III
By: _________________________________________
Name: Kevin S. Moore, Attorney-in-Fact
-13-
<PAGE>
TRUST FOR DOROTHY POTTER BOARDMAN
By: _________________________________________
Name: Edward W. Stack, as Trustee
JANE F. CLARK
By: _________________________________________
Name: Kevin S. Moore, Attorney-in-Fact
-14-
<PAGE>
SCHEDULE A
Number of Shares
Name of Purchaser Purchased Purchase Price
----------------- ---------- --------------
The Fernleigh Foundation
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 40,000 150,000
The Clark Foundation
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 250,000 937,500
The Scriven Foundation
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 60,000 225,000
The Mary Imogene Bassett Hospital
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 12,000 45,000
The Mary Imogene Bassett Hospital -
SCC Research Fund
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 19,000 71,250
The Farmers' Museum, Inc.
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 30,000 112,500
-15-
<PAGE>
Number of Shares
Name of Purchaser Purchased Purchase Price
----------------- ---------- --------------
Trust for Martin Peretz, 1976
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 5,000 18,750
Trust for Anne L. Peretz, 1944
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 20,000 75,000
Edmund S. Twining III
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 14,000 52,500
Trust for Dorothy Potter Boardman
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 15,000 56,250
Jane F. Clark
c/o The Clark Estates, Inc.
One Rockefeller Plaza
Suite 3100
New York, New York 10020-2102 68,334 256,252.
------- ------------
533,334 2,000,002.50
======= ============
-16-
EXHIBIT 11.1
DATATEC SYSTEMS, INC.
COMPUTATION OF EARNINGS(LOSS) PER SHARE
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Earnings (loss) per share
<S> <C> <C> <C>
Income (loss) from continuing operations $ 127,000 $ (1,218,000) $ (191,000)
Less: preferred dividends (2,128,000) -- -
----------- ---------------- --------------
Loss available for common shareholders (2,001,000) (1,218,000) (191,000)
Discontinued operations (5,662,000) (2,768,000) (315,000)
----------- ---------------- ---------------
Net loss $ (7,663,000) $(3,986,000) $ (506,000)
============= ================ ==============
Weighted average number of shares outstanding 21,151,000 26,451,000 29,517,000
Assumed issuance's under exercise of
stock options and warrants -- (a) -- (a) -- (a)
----------- ---------------- --------------
Weighted average and common stock equivalents 21,151,000 26,451,000 29,517,000
=========== ================ ==============
Earnings per share - Basic and Diluted
Income (loss) from continuing operations $ (.09) $ (.05) $ (.01)
Discontinued operations (.27) (.10) (.01)
Extraordinary item -- -- --
----------- ---------------- --------------
Net loss per share $ ( .36) $ (.15) $ (.02)
============ ================ ==============
</TABLE>
(a) Common Stock equivalents outstanding for 1997, 1998 and 1999 were
antidilutive and therefore not included.
EX-21.1
Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction of INCORPORATION Percentage OWNED
----------------------------------- ----------------------
<S> <C> <C>
Datatec Industries, Inc. New Jersey 100%
HH Communications, Inc. Illinois 100%
Computer-Aided Software Integration, Inc. Delaware 100%
Signatel, Ltd. Canada 100%
e-Deploy.com, Inc. Delaware 100%
</TABLE>
Consent
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Datatec Systems, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated August 9, 1999, included in this Form 10-K, into the Company's
previously filed Registration Statements, Nos.33-87122, 33-94802, 33-93470,
333-08381, 333-03414 and 333-09509, 333-15541, 333-16579, 333-22257, 333-36045,
333-34893, 333-40585, 333-48757 and 333-53125.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DATATEC
SYSTEMS, INC.'S FINANCIAL STATEMENTS AS OF APRIL 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 234,000
<SECURITIES> 0
<RECEIVABLES> 20,987,000
<ALLOWANCES> (326,000)
<INVENTORY> 3,252,000
<CURRENT-ASSETS> 27,564,000
<PP&E> 12,044,000
<DEPRECIATION> (6,844,000)
<TOTAL-ASSETS> 40,603,000
<CURRENT-LIABILITIES> 25,267,000
<BONDS> 0
<COMMON> 30,000
0
0
<OTHER-SE> 14,699,000
<TOTAL-LIABILITY-AND-EQUITY> 40,603,000
<SALES> 93,751,000
<TOTAL-REVENUES> 93,751,000
<CGS> 60,993,000
<TOTAL-COSTS> 60,993,000
<OTHER-EXPENSES> 31,096,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,853,000
<INCOME-PRETAX> (191,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (191,000)
<DISCONTINUED> (315,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,000)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
