UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended: JANUARY 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 0-20688
-------------------------------
Datatec Systems, Inc.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20C Commerce Way, Totowa, NJ 07512
- ------------------------------- ----------
(Address of principal executive (Zip Code)
offices)
(973) 890-4800
--------------
Registrant's telephone number, including area code
Check whether the Registrant (1) has filed all reports required to be filed by
Section 12 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subjected to such filing requirements for the past 90
days. Yes X No .
--- ---
The number of shares of Registrant's Common Stock outstanding on
February 28, 1999 was 30,371,162.
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
NINE MONTHS ENDED JANUARY 31, 1999
INDEX
-----
PART I: FINANCIAL INFORMATION
PAGE
Item 1: Consolidated Financial Statements
Balance Sheets at January 31, 1999 and
April 30, 1998 3
Statements of Operations for the three months ended
January 31, 1999 and 1998 4
Statements of Operations for the nine months ended
January 31, 1999 and 1998 5
Statements of Cash Flows for the nine months ended
January 31, 1999 and 1998 6
Notes to Unaudited Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 6: Exhibits and Reports of Form 8-K 13
2
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1999
APRIL 30, 1998 (UNAUDITED)
-------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 317,000 $ 123,000
Accounts receivable, net 18,106,000 15,912,000
Inventory 3,118,000 3,271,000
Prepaid expenses and other current assets 2,983,000 4,747,000
Net assets from discontinued operations 501,000 756,000
------------ ------------
Total current assets 25,025,000 24,809,000
Property and equipment, net 6,012,000 5,383,000
Goodwill, net 3,975,000 3,648,000
Other Assets 2,801,000 2,223,000
============ ============
Total assets $ 37,813,000 $ 36,063,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 10,759,000 $ 7,521,000
Current portion of long-term debt 1,063,000 880,000
Accounts payable 7,085,000 9,054,000
Accrued liabilities 3,882,000 3,198,000
Other current liabilities 1,214,000 166,000
------------ ------------
Total current liabilities 24,003,000 20,819,000
------------ ------------
Due to related parties 927,000 903,000
------------ ------------
Long-term debt 2,415,000 1,777,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock 29,000 30,000
Additional paid-in capital 29,556,000 32,209,000
Accumulated deficit (18,769,000) (19,329,000)
Cumulative translation adjustment (348,000) (346,000)
------------ ------------
Total shareholders' equity 10,468,000 12,564,000
============ ============
Total liabilities and shareholders' equity $ 37,813,000 $ 36,063,000
============ ============
</TABLE>
3
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31,
<TABLE>
<CAPTION>
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Net Sales $ 17,954,000 $ 19,377,000
Cost of Sales 10,729,000 13,456,000
------------ ------------
Gross Profit 7,225,000 5,921,000
Selling, general and administrative expenses 7,179,000 7,017,000
------------ ------------
Operating income (loss) 46,000 (1,096,000)
Interest expense, net 350,000 483,000
------------ ------------
Income (loss) before taxes (304,000) (1,579,000)
Provision (benefit) for income taxes -- --
------------ ------------
Income (loss) from continuing operations (304,000) (1,579,000)
Discontinued operations (443,000) --
------------ ------------
Net loss $ (747,000) $ (1,579,000)
============ ============
Income (loss) per share - Basic & Diluted
Continuing operations $ (0.01) $ (0.05)
Discontinued operations $ (0.02) $ --
------------ ------------
Net income (loss) per share - Basic & Diluted $ (0.03) $ (0.05)
============ ============
Weighted average common and common stock
equivalent shares - Basic & Diluted 28,431,000 29,642,000
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these statements.
4
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JANUARY 31,
<TABLE>
<CAPTION>
1998 1999
-------- ------
(unaudited)
<S> <C> <C>
Net Sales $ 56,078,000 $ 70,098,000
Cost of Sales 34,091,000 46,146,000
------------ ------------
Gross Profit 21,987,000 23,952,000
Selling, general and administrative expenses 20,877,000 23,064,000
------------ ------------
Operating Income 1,110,000 888,000
Interest expense, net 1,605,000 1,448,000
------------ ------------
Income (loss) before taxes (495,000) (560,000)
Provisions for income taxes -- --
------------ ------------
Income (loss) from continuing operations (495,000) (560,000)
Discontinued operations (443,000) --
------------ ------------
Net income (loss) $ (938,000) $ (560,000)
============ ============
Income (loss) per share - Basic & Diluted
Continuing operations $ (0.02) $ (0.02)
Discontinued operations $ (0.02) $ --
------------ ------------
Net income (loss) per share - Basic & Diluted $ (0.04) $ (0.02)
============ ============
Weighted average common and common stock
equivalent shares - Basic & Diluted 25,693,000 29,285,000
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these statements.
5
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31,
<TABLE>
<CAPTION>
1998 1999
---------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (938,000) $ (560,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,451,000 2,387,000
Accretion of debt discount 250,000 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,984,000) 2,194,000
(Increase) decrease in inventory (1,187,000) (153,000)
(Increase) decrease in prepaid expenses and other assets (2,510,000) (1,723,000
(Increase) decrease in assets held for sale or disposition 237,000 (292,000)
Increase (decrease) in accounts payable,
accrued and other liabilities (218,000) 237,000
----------- -----------
Net cash provided by (used in) operating activities (5,899,000) 2,090,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
(994,000) (881,000)
----------- -----------
Net cash used in investing activities
(994,000) (881,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net
(7,324,000) (3,238,000)
Net proceeds (payments) of indebtedness (811,000) (821,000)
Proceeds from issuance of stock 4,076,000 2,654,000
----------- -----------
Net cash provided by (used in) financing activities 5,941,000 (1,405,000)
----------- -----------
Net effect of foreign currency translation
(63,000) 2,000
----------- -----------
Net decrease in cash
(1,015,000) (194,000)
CASH AT BEGINNING OF PERIOD
1,135,000 317,000
----------- -----------
CASH AT END OF PERIOD $ 120,000 $ 123,000
=========== ===========
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these statements.
6
<PAGE>
DATATEC SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Datatec Systems, Inc. (the "Company"), and its subsidiaries are in the
business of providing rapid and accurate technology deployment services.
(2) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and transactions have
been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles consistent
with those applied in, and should be read in conjunction with, the audited
financial statements for the year ended April 30, 1998. The interim financial
information is unaudited, but reflects all normal recurring adjustments that
are, in the opinion of management, necessary for a fair statement of results for
the interim periods presented. The results for the three and nine months ended
January 31, 1999 are not necessarily indicative of the results expected for the
full fiscal year.
(3) Comprehensive Income
Effective May 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income", which
establishes standards for reporting and displaying of comprehensive income and
its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. For the three and nine months ended
January 31, 1999, the components of comprehensive income were immaterial. The
components of other comprehensive income consists primarily of foreign currency
translation adjustments.
(4) Equity
In May 1998, the Company issued 300 shares of Series E Convertible
Preferred Stock. The net proceeds from this issuance were approximately
$2,350,000. In connection with this transaction, the Company issued warrants to
purchase 165,000 shares of common stock at $6.29. Through January 31, 1999, 150
shares of the Series E Convertible Preferred Stock were converted into 601,000
shares of common stock.
In February 1999, the Company issued 533,334 shares of common stock in a
private placement at $3.75 per share. Net proceeds were approximately $2
million.
(5) Earnings per share:
Basic earnings per share is calculated using the weighted average number
of shares outstanding for the three and nine months ended January 31, 1998 and
1999. Diluted
7
<PAGE>
earnings per shares is calculated using the weighted average number of shares
outstanding plus the incremental shares from assumed conversions of options,
debt and preferred stock for the three and nine months ended January 31, 1998
and 1999. Outstanding options and warrants have been excluded from the
computation of diluted EPS as their inclusion would have been anti-dilutive for
these periods.
(6) Supplemental Disclosure of Cash Flows
Cash paid during the nine months ended January 31:
1998 1999
----------------- --------------
Interest Paid $828,000 $1,221,000
(7) Change in Accounting Policy
On March 4, 1998, the American Institute of Certified Public Accountants
("AICPA") issues Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The new standard
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company has adopted the new standard in the third
quarter of 1999. The effect of adopting the new standard was to capitalize
approximately $520,000 of internal software development costs.
On April 9, 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 cots 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
2000. Had the Company adopted the new standard as of January 31, 1999 the net
loss of $560,000 for the nine months ended January 31, 1999 would have increased
by $2,844,000 for the effect of the write-off of capitalized costs incurred
through the third quarter of 1999.
8
<PAGE>
DATATEC SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 1999
Net sales for the three and nine months ended January 31, 1999 were
$19,377,000 and $70,098,000, respectively, compared to $17,954,000 and
$56,078,000 respectively for the three and nine months ended January 31, 1998.
This represents an increase of 7.9% and 25.0% for the three and nine months
ended January 31, 1999, respectively. The increase in sales for the three and
nine months ended January 31, 1999 is the result of several factors: more
focused efforts on the selling of rapid configuration and deployment services
and increased non-retail sales. The December holidays fall within the Company's
third quarter and usually have a significant negative impact on sales. This
negative impact is the result of the Company's retail customers reducing their
purchases from the Company during their peak selling periods. Historically, the
retail industry has represented between 50% and 60% of the Company's sales. As
of January 31, 1999, the Company's backlog of services to be delivered in the
next twelve months increased by $18.9 million to $57.5 million compared to $38.6
million as of October 31, 1998, representing an increase of 49.0%.
Gross profits for the three and nine months ended January 31, 1999 were
$5,921,000 and $23,952,000, respectively, compared to $7,225,000 and $21,987,000
in the three and nine months ended January 31, 1998. Gross profits as a
percentage of net sales were 30.6% and 34.2% for the three and nine months ended
January 31, 1999 compared to 40.2% and 39.2% for the three and nine months ended
January 31, 1998. Gross profits for the first two quarters of fiscal 1999 were
approximately 35.0%. The Company had anticipated slightly lower margins in the
third quarter, as a result of lower sales volume and thus less leverage on the
fixed portion of cost of sales. The gross profit percentage was also negatively
affected by several low margin projects accounting for a greater percentage of
the lower sales volume. The Company has undertaken several initiatives aimed at
improving its gross margin percentage. These initiatives are focused on
improving project information, increasing accountability and improving quality.
Selling, general and administrative expenses for the three and nine
months ended January 31, 1999 were $7,017,000 and $23,064,000 compared to
$7,179,000 and $20,877,000 for the three and nine months ended January 31, 1998.
As a percentage of sales, selling, general and administrative expenses were
36.2% and 32.9% for the three and nine months ended January 31, 1999, compared
to 40.0% and 37.2% for the three and nine months ended January 31, 1998. The
decrease in selling, general and administrative expenses as a percentage of
sales is the result of the Company's ability to leverage its expense base to
support increased sales volume. In addition, in accordance with Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained
9
<PAGE>
for Internal Use", the Company has capitalized approximately $520,000
relating to internal use software.
Net interest expense for the three and nine months ended January 31,
1999 was $483,000 and $1,448,000, respectively, compared to $350,000 and
$1,605,000 for the three and nine months ended January 31, 1998. This increase
in interest expense for the three months ended January 31, 1999 is primarily
attributable to an increase in the average debt outstanding supporting the
Company's growth in sales.
The loss from discontinued operations for the three months ended January
31, 1998 was $443,000 representing additional expenses related to the disposal
and discontinuance of the Company's distribution of data communications
equipment business. This business was discontinued in June 1997.
The Company's net loss for the three and nine months ended January 31,
1999 was $1,579,000 and $560,000 respectively, compared to a net loss of
$747,000 and $938,000 for the three and nine months ended January 31, 1998.
FINANCIAL POSITION
During the nine months ended January 31, 1999, cash provided by
operations was $2,090,000 compared to a year-ago cash usage of $5,899,000. The
cash provided by operations is the result of significant collections in the
third quarter reducing receivable levels and providing cash.
Cash used for investing activities during the first nine months of the
fiscal year ending April 30, 1999 was $881,000 compared to $994,000 during the
first nine months of the fiscal year ended April 30, 1998.
Cash used in financing activities during the nine months ended January
31, 1999 was $1,405,000 compared to $5,941,000 of cash being provided by
financing activities in the year-ago period. Included in the current nine-month
period were net proceeds of approximately $2,350,000 from the issuance of 300
shares of Series E Convertible Preferred Stock. The net proceeds were used to
repay the convertible note issued during March 1998 to the former minority
interest shareholder of the Company's subsidiary Computer-Aided Software
Integration, Inc. and for working capital purposes. Also included in the current
period were proceeds from the issuance of common stock related to the exercise
of stock options and purchases under the employee stock purchase plan. The
Company also used the cash generated from operations to reduce the borrowings
outstanding under its revolving credit facility.
The Company's shareholders' equity as of January 31, 1999 increased by
approximately $2,096,000 to $12,564,000, compared to $10,468,000 as of April 30,
1998. The increase in shareholder equity reflects proceeds from the issuance of
Series E Convertible Preferred Stock and proceeds from the issuance
10
<PAGE>
of common stock related to the exercise of stock options and purchases under the
employee stock purchase plan.
The Company's working capital improved from $1,022,000 at April 30, 1998
to working capital of $3,990,000 at January 31, 1999.
11
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
12
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION - CONTINUED
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATATEC SYSTEMS, INC.
REGISTRANT
Date: March 17, 1999 By: /s/ James M. Caci
--------------------------------
James M. Caci
Chief Financial Officer and Duly
Authorized Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF JANUARY 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JAN-31-1999
<CASH> 123
<SECURITIES> 0
<RECEIVABLES> 16,181
<ALLOWANCES> (269)
<INVENTORY> 3,271
<CURRENT-ASSETS> 24,809
<PP&E> 11,573
<DEPRECIATION> (6,190)
<TOTAL-ASSETS> 36,063
<CURRENT-LIABILITIES> 20,819
<BONDS> 0
<COMMON> 30
0
0
<OTHER-SE> 12,534
<TOTAL-LIABILITY-AND-EQUITY> 36,063
<SALES> 70,098
<TOTAL-REVENUES> 70,098
<CGS> 46,146
<TOTAL-COSTS> 46,146
<OTHER-EXPENSES> 23,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,448
<INCOME-PRETAX> (560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (560)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
