SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended APRIL 30, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________________ to ___________________
Commission file number 000-20688
DATATEC SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2914253
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
20C Commerce Way, Totowa, New Jersey 07512-1154
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(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (973) 890-4800
Securities registered under Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.001 par value Boston Stock Exchange
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Preference Share Purchase Rights Boston Stock Exchange
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Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates at June 30, 1998 was approximately $101,735,000. For purposes of
computing such market value, the Registrant has deemed as affiliates only
executive officers, directors and their affiliates.
The total number of shares of the Registrant's Common Stock outstanding
at June 30, 1998 was 29,084,342, exclusive of treasury shares or shares held by
subsidiaries of the registrant.
The information required by Part III is incorporated by reference to a
definitive proxy statement to be filed by the Registrant on August 28, 1998
pursuant to Regulation 14A.
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EXPLANATORY NOTE
This Amendment No. 2 on Form 10-K/A (this "Amendment") is being filed
in order to amend Items 6, 7 and 8 of Part II and Item 14 of Part IV of the
Registrant's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on July 29, 1998, as previously amended on September 1, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of the
Company for, and at the end of (i) the year ended December 31,1993, (ii) the
four months ended April 30, 1993 and 1994 and (iii) the years ended April 30,
1995, 1996, 1997 and 1998.
The Company changed its fiscal year-end from December 31 to April 30
on May 2, 1994. The financial data presented below for, and at the end of, the
four-month period ended April 30, 1993, has been derived from the unaudited
consolidated financial statements of the Company. In the opinion of management,
the financial data includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data.
During fiscal 1999, the Company received a letter from the staff of
the Securities and Exchange Commission ("the Staff") commenting on its recent
reviews of the Company's Form 10-K for the years ended April 30, 1998 and 1997
and the Form 10-Q for the quarter ended July 31, 1998. The Staff provided
comments on certain issues including the valuation of (1) convertible preferred
stock and convertible debt with warrants, both with beneficial conversion
features, issued in fiscal 1997 and (2) assets associated with a barter
transaction the Company executed in fiscal 1998. These items do not effect cash
or cash flow nor do they negatively affect the Company's current or future
operations. The comments related to the barter transaction involved assets
associated with the Company's discontinued operations and not those associated
with current operations. In addition, when the bartered assets are realized
under the Staff's position, they will benefit the Company's fiscal 1999 and
future operating results. Accordingly, and although the Company believes that
its original positions were appropriate at the date of the transactions,
management has decided to adopt the alternative positions provided by the Staff
and to amend its 1998 and 1997 reports (see Note 18 of Notes to Consolidated
Financial Statements).
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.
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<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31, APRIL 30, APRIL 30,
-------------- -------------------------- -------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA: 1993 1993 1994 1995 1996 1997 1998
-------------- ------------- ---------- ------------ --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 50,629 $ 13,795 $16,332 $ 55,876 $ 59,169 $ 59,481 $ 76,804
Operating income 13,244 2,299 1,191 3,204 (4,248) 1,538 517
Net income (loss) from
continuing 12,316 2,040 1,081 2,596 (5,149) 127 (1,218)
operations
Discontinued operations (6,491) (1,700) (2,600) (4,989) (8,046) (5,662) (2,768)
Extraordinary item -- -- -- -- (223)(a) -- --
Net income (loss) $ 5,825 $ 340 $ (1,519) $ (2,393) $(13,418) $ (5,535) (b) $ (3,986)
=========== ============= ========= ============ ======== ======== ==========
</TABLE>
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<TABLE>
<CAPTION>
Income (loss) per share - Basic:
<S> <C> <C> <C> <C>
Income (loss) from continuing $ .16 $ (.28) $ (.09)(b) $ (.05)
operations
Discontinued operations (.31) (.44) (.27) (.10)
Extraordinary item -- (.01) -- --
============ ======== ============ =========
Net loss per share $ (.15) $ (.73) $ (.36)(b) $ (.15)
=============== ======== ============ ==========
Income (loss) per share - Diluted:
Income (loss) from continuing $ .14 $ (.28) $ (.09) $ (.05)
operations
Discontinued operations (.27) (.44) (.27) (.10)
Extraordinary item -- (.01) -- --
----------- --------- ------------ --------------
Net loss per share $ (.13) $ (.73) $ (.36) $ (.15)
=========== ========= ============ ==============
Average common and common equivalent
shares - Basic 16,181,000 18,354,000 21,151,000 26,451,000
=========== ========== ========== =============
Average common and common equivalent
shares - Diluted 17,981,000 18,354,000 21,151,000 26,451,000
========== ========== ========== =============
</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>
DECEMBER 31, APRIL 30,
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1993 1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) $ 5,447 $ 1,442 $ 444 $ (585) $ (7,664) $ (2,957) $ 1,022
Total assets 13,877 13,103 17,665 22,334 23,494 27,804 37,813
Long-term debt 1,057 2,170 2,509 3,642 2,338 4,751 2,415
Total shareholders'
Equity (deficit) 6,893 1,761 4,768 1,967 (3,706) (1,750) 10,468
</TABLE>
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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. Utilizing five regional staging and
configuration centers and its own field deployment team of approximately 450
people operating out of 15 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.
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.
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.
As of April 30, 1998, the Company has net operating loss
carryforwards for Federal tax purposes of approximately $13 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, 1998,
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.
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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, 1998 AND 1997
NET SALES. Net sales 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.
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 as a percentage of net sales 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.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended April 30, 1998 were $29.1 million
compared to $20.8 million for the year ended April 30, 1997, representing an
increase of 39.9%. As a percentage of net sales, selling, general and
administrative expenses represented 37.9% 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 NO LONGER DEEMED NECESSARY. 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 $1,200,000 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.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1997 AND 1996
NET SALES. Net sales for the year ended April 30, 1997 were $59.5
million compared to $59.2 million for the year ended April 30, 1996,
representing an increase of approximately 0.5%. During the year, the Company
acquired two businesses, and discontinued its data communications equipment
business at year-end. These changes had a negative impact on sales during the
period.
GROSS PROFIT. Gross profits for the year ended April 30, 1997 were
$22.3 million compared to $25.0 million for the year ended April 30, 1996. Gross
profit as a percentage of net sales was 37.5% for the year ended April 30, 1997
compared to 42.2% for the year ended April 30, 1996. The decrease in gross
profit margin was primarily attributable to a lack or working capital. During
the year, the Company experienced delays in receiving materials, incurred
additional costs in delivering materials on a rush basis and was less efficient
in delivering its services to customers as a result of delays caused by a lack
of working capital.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended April 30, 1997 were $20.8 million
compared to $29.2 million for the year ended April 30, 1996, representing 34.9%
and 49.4% of net sales, respectively. Included in the year ended April 30, 1996
is a restructuring charge of $6.8 million recorded by Datatec Industries, Inc.
In April 1995, Datatec Industries, Inc. began an expansion plan which included
the addition of a marketing group, additional salespeople, equipment and several
new facilities including a new headquarters. In April 1996, Datatec Industries
realized the expansion plan was overaggressive and began taking corrective
actions. Datatec Industries relocated its headquarters facility to smaller, less
expensive offices, and sold certain furniture and fixtures associated with the
old headquarters facility.
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OTHER INCOME. Other income for the year ended April 30, 1997 is
primarily related to gains realized from the sales of certain fixed assets.
INTEREST EXPENSE. Interest expense for the year ended April 30, 1997
was $1.7 million compared to $938,000 for the year ended April 30, 1996,
representing an increase of 23.1%. This increase was attributed to a write-off
and amortization of defined financing fees associated with the Company's credit
facility that was replaced on March 1, 1997, as well as a 0.25% increase in
interest rates and the accretion of $575,000 of discount of non-cash interest
expense attributed to certain debt securities.
INCOME TAXES. Income taxes for the year ended April 30, 1997 were
$111,000 compared to a benefit of $37,000 for the year ended April 30, 1996. The
income taxes of $111,000 represent taxes on income of HH prior to its
acquisition by the Company on July 31, 1996. The benefit of $37,000 represents a
foreign tax benefit recorded by Signatel.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1996 AND 1995
NET SALES. Net sales for the year ended April 30, 1996 were $59.2
million compared to $55.9 million for the year ended April 30, 1995,
representing an increase of 5.9%.
GROSS PROFIT. Gross profits for the year ended April 30, 1996 were
$25.0 million compared to $23.3 million for the year ended April 30, 1995. Gross
profit as a percentage of net sales was 42.2 % for 1996 and 41.6% for 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended April 30, 1996 were $29.2 million
compared to $20.1 million for the year ended April 30, 1995, representing 49.4%
and 39.5% of net sales, respectively. The Company began an expansion program in
late 1995 and incurred a substantial portion of the additional costs of such
expansion during fiscal 1996. During April 1996, the Company realized the
expansion plan was overaggressive and took action to restructure its business.
Included in the year ended April 30, 1996 are $6.8 million of restructuring
charges. These restructuring charges included projected cash outflows for
personnel severance and facilities consolidation as well as write-downs of
certain of the Company's long-lived assets.
INTEREST EXPENSE. Interest expense for the year ended April 30, 1996
was $938,000 compared to $495,000 for the year ended April 30, 1995,
representing an increase of 89.5%. This increase was due to a significant
increase in the average borrowings outstanding to fund increases in receivables
and inventory.
INCOME TAXES. The Company reported an income tax benefit of $37,000 for
the year ended April 30, 1996 compared to an income tax provision of $112,000
for the year ended April 30, 1995. The benefit resulted from a benefit reported
by the Company's subsidiary, Signatel. The income tax provision represents a
state income tax provision for Datatec Industries, Inc. During the year ended
April 30, 1995, Datatec Industries, Inc. was taxed as a Subchapter "S"
corporation and provided for state income taxes in those states that did not
recognize Subchapter "S" status.
BACKLOG
Backlog for the Company's services as of July 1, 1998 totaled $45.5
million compared to $38.0 million as of July 1, 1997. 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at April 30, 1998 were $317,000 compared to
$1.1 million as of April 30, 1997.
During 1998, cash used by operations was $8.6 million compared to 1997
cash usage of $11.2 million. A significant use of cash resulted from a $6.8
million increase in accounts receivable.
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Cash used for investing activities during 1998 was $3.1 million
compared to $1.3 million in 1997. The Company used $2.4 million for capital
expenditures, primarily computer equipment. During the year the Company
significantly upgraded its internal computing and communications environment.
The Company also used approximately $.7 million to acquire the remaining 20% of
Computer-Aided Software Integration, Inc. In addition to the cash paid, the
Company entered into a note payable for approximately $1.8 million.
Cash provided by financing activities for the year ended April 30, 1998
was $10.9 million compared to $11.5 million for the year ended April 30, 1997.
In 1998, warrant holders exercised approximately 2.7 million warrants resulting
in net proceeds to the Company of $9.7 million. In private equity placements the
Company issued 855,000 shares of common stock for net proceeds of $3.1 million.
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, 1998
approximately $8.9 million was outstanding under the revolving credit facility
and $1.6 million was outstanding under the term loan.
As of April 30, 1998, the Company had working capital of $1.0 million
compared to a working capital deficiency of $3.0 million at April 30, 1997. The
improvement in working capital is attributable to the above mentioned equity
offering and loans.
Accounts receivable as of April 30, 1998 increased 60.3% as compared to
April 30, 1997. This was primarily attributed to a 45% increase in net sales for
the quarter ended April 30, 1998 compared to the quarter ended April 30, 1997,
in addition to some slowness in payments and collections during fiscal 1998.
Prepaid expenses and other current assets increased from $1,446,000 as
of April 30, 1997 compared to $2,983,000 as of April 30, 1998. The increases
were primarily attributed to an additional $842,000 of capitalized precontract
costs and approximately $301,000 of deferred financing costs for certain private
placements which were completed subsequent to year end.
As of April 30, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $13 million to offset future taxable
income. Such net operating loss carryforwards expire at various dates through
2013.
The Company believes it has adequate liquidity and resources to sustain
current operations for the next twelve (12) months.
IMPACT OF THE YEAR 2000 ISSUE
Many computer systems and software products currently in use by
businesses and government organizations are coded to accept two digits, rather
than four, to specify the year. Such computer systems and software products will
be unable to properly interpret dates beyond the year 1999, which could lead to
business disruptions (the "Year 2000 Issue"). As a result, in less than two
years, computer systems and/or software used by many companies may need to be
upgraded to properly interpret dates beyond 1999.
Based on a recent assessment of its internal computer systems, the
Company determined that it will be required to modify or replace portions of its
internal software so that its computer systems will properly utilize dates
beyond December 31, 1999. The Company is in the process of upgrading its
existing systems. It is anticipated that this upgrade will be completed during
the Company's fiscal year ending April 30, 1999. If such modifications are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
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The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. The total
cost of the program is being funded through operating cash flows. The total cost
associated with the required modifications and conversions is estimated to be
$1,250,000.
INFLATION
In the opinion of management, inflation has not had a material adverse
effect on its results of operations.
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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 . . . . . . . . . . . . . . .. . 12
Consolidated Balance Sheets as of April 30, 1997 and 1998 . . . . . . . . 13
Consolidated Statements of Operations for the years ended April 30, 1996,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended April 30, 1996, 1997 and 1998 . . . . . . . . . . . 15
Consolidated Statements of Cash Flows for the years ended
April 30, 1996, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . . 16
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 17
SCHEDULES
Schedule II - Valuation and Qualifying Accounts . . . . . . . . 38
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.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Datatec Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datatec Systems,
Inc. (a Delaware corporation) and subsidiaries (formerly Glasgal Communications,
Inc.) as of April 30, 1997 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended April 30, 1998 (as revised - see Note 18).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Datatec
Systems, Inc. and subsidiaries as of April 30, 1997 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
As explained in Note 18 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for its convertible
debt with warrants and convertible preferred securities having beneficial
conversion features.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Roseland, New Jersey ARTHUR ANDERSEN LLP
July 27, 1998 (except with respect to the matter
discussed in Note 18 as to which
the date is February 2, 1999)
-12-
<PAGE>
x DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
1997 1998
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 1,135,000 $ 317,000
Accounts receivable, less allowances for doubtful
accounts of $520,000 and $305,000, respectively,
in 1997 and 1998 11,289,000 18,106,000
Inventory (Note 1) 2,134,000 3,118,000
Prepaid expenses and other current
assets (Note 1) 1,446,000 2,983,000
Net assets from discontinued operations (Note 5)
4,816,000 501,000
Total current assets 20,820,000 25,025,000
Property and equipment, net
(Notes 1, 4 and 7) 3,634,000 6,012,000
Goodwill, net (Notes 1 & 2) 1,680,000 3,975,000
Other assets (Notes 1 & 9 ) 1,670,000 2,801,000
Total assets $ 27,804,000 $ 37,813,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings (Note 6) $ 11,675,000 $ 10,759,000
Current portion of long-term
debt (Note 7) 850,000 1,063,000
Accounts payable 5,415,000 7,085,000
Accrued liabilities 5,331,000 3,882,000
Other current liabilities 506,000 1,214,000
------------ ------------
Total current liabilities 23,777,000 24,003,000
------------ ------------
Due to related parties (Note 10) 1,026,000 927,000
Long-term debt (Note 7) 4,751,000 2,415,000
Commitments and contingencies (Note 12)
Shareholders' equity (deficit) (Notes 1, 8 & 15):
Preferred stock, $.001 par value (4,000,000 shares
authorized, no shares issued and outstanding) -- --
Common stock, $.001 par value (authorized
75,000,000 shares; issued and
outstanding 23,661,000 and 29,007,000 shares
as of April 30, 1997 and 1998,
respectively) (Notes 8, 15 and 16) 24,000 29,000
Additional paid-in capital 13,294,000 29,556,000
Accumulated deficit (14,783,000) (18,769,000)
Cumulative translation adjustment (285,000) (348,000)
Total shareholders' equity (deficit) (1,750,000) 10,468,000
Total liabilities and shareholders' equity (deficit) $ 27,804,000 $ 37,813,000
============ ============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
-13-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
APRIL 30,
------------------------------------------------------------------------
1996 1997 1998
---------------------- -------------------- ---------------------
<S> <C> <C> <C>
Net sales (Note 1) $ 59,169,000 $ 59,481,000 $76,804,000
Cost of sales 34,217,000 37,159,000 47,208,000
---------------------- -------------------- ---------------------
Gross profit 24,952,000 22,322,000 29,596,000
Selling, general and administrative expenses
(Notes 12 & 14) 29,200,000 20,784,000 30,279,000
Reversal of reserves no longer deemed
necessary (Note 1) -- -- (1,200,000)
---------------------- -------------------- ---------------------
Operating income (4,248,000) 1,538,000 517,000
Other income -- 430,000 --
Interest expense (Notes 5 and 6) (938,000) (1,730,000) (2,135,000)
---------------------- -------------------- ---------------------
Income (loss) before provision (benefit) for
income taxes (5,186,000) 238,000 (1,618,000)
Provision (benefit) for income taxes (Notes 1&
9) (37,000) 111,000
(400,000)
---------------------- -------------------- ---------------------
Income (loss) from continuing operations (5,149,000) 127,000 (1,218,000)
Discontinued operations (Note 5):
Loss from operations (5,762,000) (4,709,000) (2,768,000)
Provision for future losses (2,284,000) (953,000) --
---------------------- -------------------- ---------------------
Loss before extraordinary item (13,195,000) (5,535,000) (3,986,000)
Extraordinary item (223,000) -- --
====================== ==================== =====================
Net loss $ (13,418,000) $ (5,535,000) $ (3,986,000)
====================== ==================== =====================
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
(Note 3):
Income (loss) from continuing operations $ (.28) $ (.09) $ (.05)
Discontinued operations (.44) (.27) (.10)
Extraordinary item (.01) -- --
====================== ==================== =====================
NET LOSS PER SHARE - BASIC AND DILUTED
$ (.73) $ (.36) $ (.15)
====================== ==================== =====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - BASIC AND DILUTED 18,354,000 21,151,000 26,451,000
====================== ==================== =====================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
-14-
<PAGE>
Datatec Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 8)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Issued
Shares Dollars Shares Dollars
-------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1995 - $ - 15,799,000 $ -
Distributions to S Corporation Shareholders
Private placement offering of common stock and
warrants and bridge financing (Note 8) 443,000
Public offering of common stock
and warrants (Note 8) 3,566,000
Acquisition and cancellation of
common stock (13,000)
Common stock issued for options exercised 189,000
Change in par value of common stock (Note 5) 20,000
Private placement offering of common stock (Note 2) 313,000 -
Stock issued for business acquisition (Note 2) 44,000 -
Net loss
Effect of exchange rate changes
-------------- --------------- ----------------- -------------
Balance at April 30,1996 - $ - 20,341,000 $ 20,000
Distributions to S Corporation Shareholders
Issuance of preferred stock (Note 8) 350,000
Amount allocated to warrant and beneficial
conversion feature on convertible debt
and equity securities (Note 8) - - - -
Conversion of preferred stock into common
stock (Note 8) (350,000) 2,500,000 3,000
Exercise of warrants and options 649,000 1,000
Conversion of accounts payable into
common stock (Note 8) 171,000
Conversion from S corporation status
to C corporation
Net loss
Effect of exchange rates changes
-------------- --------------- ----------------- -------------
Balance at April 30, 1997 - - 23,661,000 24,000
Exercise of warrants and options 3,860,000 4,000
Private placement offering of common stock 855,000 1,000
Conversion of long-term debt into common stock 631,000
Net loss
Effect of exchange rates changes
-------------- --------------- ----------------- -------------
Balance at April 30, 1998 - $ - 29,007,000 $ 29,000
============== =============== ================= =============
</TABLE>
<TABLE>
<CAPTION>
Additional Additional Retained
Paid-in capital Paid-in capital Earnings
Preferred Common (Deficit)
--------------- -------------------- -------------------
<S> <C> <C> <C>
Balance at April 30, 1995 $ - $ 2,974,000 $ (1,006,000)
Distributions to S Corporation Shareholders (667,000)
Private placement offering of common stock and
warrants and bridge financing (Note 8) 579,000
Public offering of common stock
and warrants (Note 8) 6,535,000 (50,000)
Acquisition and cancellation of
common stock (27,000)
Common stock issued for options exercised 123,000
Change in par value of common stock (Note 5) (20,000)
Private placement offering of common stock (Note 2) 1,207,000
Stock issued for business acquisition (Note 2) 291,000
Net loss (13,418,000)
Effect of exchange rate changes
--------------- -------------------- -------------------
Balance at April 30,1996 $ - 11,662,000 (15,141,000)
Distributions to S Corporation Shareholders (837,000)
Issuance of preferred stock (Note 8) 6,562,000
Amount allocated to warrant and beneficial
conversion feature on convertible debt
and equity securities (Note 8) 2,128,000 825,000 (2,128,000)
Conversion of preferred stock into common
stock (Note 8) (8,690,000) 8,687,000
Exercise of warrants and options 429,000
Conversion of accounts payable into
common stock (Note 8) 549,000
Conversion from S corporation status
to C corporation (8,858,000) 8,858,000
Net loss (5,535,000)
Effect of exchange rates changes
--------------- -------------------- -------------------
Balance at April 30, 1997 - 13,294,000 (14,783,000)
Exercise of warrants and options 11,021,000
Private placement offering of common stock 3,079,000
Conversion of long-term debt into common stock 2,162,000
Net loss (3,986,000)
Effect of exchange rates changes
--------------- -------------------- -------------------
Balance at April 30, 1998 $ - $ 29,556,000 $ (18,769,000)
=============== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total
Translation Shareholders'
Adjustment Equity
---------------- --------------------
<S> <C> <C>
Balance at April 30, 1995 $ (98,000) $ 1,870,000
Distributions to S Corporation Shareholders (667,000)
Private placement offering of common stock and
warrants and bridge financing (Note 8) 579,000
Public offering of common stock
and warrants (Note 8) 6,485,000
Acquisition and cancellation of
common stock (27,000)
Common stock issued for options exercised 123,000
Change in par value of common stock (Note 5) -
Private placement offering of common stock (Note 2) 1,207,000
Stock issued for business acquisition (Note 2) 291,000
Net loss (13,418,000)
Effect of exchange rate changes (149,000) (149,000)
---------------- --------------------
Balance at April 30,1996 (247,000) (3,706,000)
Distributions to S Corporation Shareholders (837,000)
Issuance of preferred stock (Note 8) 6,562,000
Amount allocated to warrant and beneficial
conversion feature on convertible debt
and equity securities (Note 8) - 825,000
Conversion of preferred stock into common
stock (Note 8) -
Exercise of warrants and options 430,000
Conversion of accounts payable into
common stock (Note 8) 549,000
Conversion from S corporation status
to C corporation
Net loss (5,535,000)
Effect of exchange rates changes (38,000) (38,000)
---------------- --------------------
Balance at April 30, 1997 (285,000) (1,750,000)
Exercise of warrants and options 11,025,000
Private placement offering of common stock 3,080,000
Conversion of long-term debt into common stock 2,162,000
Net loss (3,986,000)
Effect of exchange rates changes (63,000) (63,000)
---------------- --------------------
Balance at April 30, 1998 $ (348,000) $ 10,468,000
================ ====================
</TABLE>
-15-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30,
----------------------------------------------------------
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(13,418,000) $(5,535,000) $(3,986,000)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 1,114,000 1,200,000 2,090,000
Extraordinary item 223,000 --- --
Accretion of debt discount -- 575,000 250,000
Changes in operating assets and liabilities net of
effects from
purchase of CASI
(Increase) decrease in accounts
receivable, net 1,860,000 (3,819,000) (6,817,000)
(Increase) decrease in inventory (378,000) 1,104,000 (984,000)
(Increase) decrease in prepaid expenses and
other assets 2,044,000 (940,000) (537,000)
(Increase) decrease in net assets from
discontinued operations (777,000) (1,590,000) 327,000
Increase (decrease) in accounts payable,
accrued liabilities and other 3,661,000 (2,169,000) 1,093,000
------------- ----------- -----------
Net cash used in operating activities (5,671,000) (11,174,000) (8,564,000)
------------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (725,000) (1,349,000) (2,404,000)
Net cash used for CASI acquisition (705,000) ---- (670,000)
Advances to CASI (1,135,000) ---- --
------------- ----------- ----------
Net cash used in investing activities (2,565,000) (1,349,000) (3,074,000)
------------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 7,861,000 3,338,000 (2,749,000)
Net proceeds (payments) of indebtedness (5,103,000) 958,000 (374,000)
Net proceeds from common stock/warrant issuances 8,248,000 6,992,000 14,105,000
Net proceeds from related parties -- 1,026,000 (99,000)
Distributions to shareholders (667,000) (837,000) -
------------- ----------- -------------
Net cash provided by financing activities 10,339,000 11,477,000 10,883,000
------------- ----------- --------------
Net effect of foreign currency translation on cash (149,000) (38,000) (63,000)
Net increase (decrease) in cash 1,954,000 (1,084,000) (818,000)
CASH AT BEGINNING OF PERIOD 265,000 2,219,000 1,135,000
------------- ----------- --------------
CASH AT END OF PERIOD $ 2,219,000 $ 1,135,000 $ 317,000
============= =========== ==============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
-16-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Business--
Datatec Systems, Inc. (formerly Glasgal Communications, Inc.),
(the "Company"), and its subsidiaries are in the business of
providing software-enabled technical configuration, integra-
tion and installation services (see Note 5).
Basis of Presentation--
The consolidated financial statements include the accounts of the
Company and its subsidiaries. These consolidated financial
statements include, for all periods presented, the accounts of
all companies acquired under the pooling of interests
method of accounting 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. During 1998, the Company credited operations in the
amount of $1,200,000, representing the reversal of certain
accruals no longer deemed necessary.
Revenue Recognition--
Revenues from configuration, integration and installation
services are recognized as the services are provided. The
Company recognizes revenue utilizing percentage of completion
accounting for long-term contracts. Short-term contracts
utilize completed contract accounting. 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.
From time to time the Company may enter into contracts to sell
software. Revenue from such contracts are recognized in
accordance with Statement of Position No. 97-2, "Software
Revenue Recognition".
-17-
<PAGE>
Precontract Costs--
Precontract costs incurred in connection with defining and
clarifying technical requirements and designing technical
solutions related to executed contracts are deferred and
amortized as the services are provided. As of April 30, 1997
and 1998, approximately $980,000 and $1,810,000, respectively,
of such costs are included in other current assets.
Cash and Cash Equivalents--
The Company considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Included in other assets is $210,000 and $132,000 of
restricted cash as of April 30, 1997 and 1998, respectively.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment--
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed using the straight-line and declining balance
methods over the estimated useful lives or lease terms of the
related assets, whichever is shorter.
Capitalized Software Costs--
The Company capitalizes certain computer software costs,
primarily 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
$300,000 and $780,000 of capitalized software costs are
included in other assets in the accompanying consolidated
financial statements as of April 30, 1997 and 1998,
respectively. Amortization expense of capitalized software
costs for the year ended April 30, 1996, 1997 and 1998 was $0,
$0 and $118,000, respectively.
Goodwill--
Goodwill is amortized on a straight-line basis over 10 years.
Long-Lived Assets--
Statement of Financial Accounting Standards No. 121,
"Accounting
-18-
<PAGE>
for the Impairment of Long-Lived Assets" requires, among other
things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset
may not be fully recoverable (see Note 14).
Income Taxes--
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"). Certain
transactions are recorded in the accounts in a period
different from that in which these transactions are reported
for income tax purposes. These transactions, as well as other
temporary differences between the basis in assets and
liabilities for financial reporting and income tax purposes,
result in deferred income taxes.
Foreign Currency Translation--
The local currency of the Company's foreign subsidiary is its
functional currency. Assets and liabilities of the Company's
foreign subsidiary are translated into US dollars at the
current exchange rate. Income statement accounts are
translated at the average rate of exchange prevailing during
the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included as
a separate component of shareholders' equity (deficit).
Stock Based Compensation--
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") requires that an
entity account for employee stock-based compensation under a
fair value based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee
stock-based compensation arrangements using the intrinsic
value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees". The Company
continues to account for employee stock-based compensation
using the intrinsic value based method and is required to make
pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting under SFAS 123
had been applied (see Note 11).
Impact of Recently Announced Accounting Standards--
During 1998, Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use" (SOP 98-1) was issued. SOP 98-1 is required to be adopted
during the Company's April 30, 2000 fiscal year. The Company
does not anticipate that the adoption of this SOP will have a
material effect on its operations.
-19-
<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 connection with this transaction, the Company completed a
private placement offering in March 1996 of 312,500 shares of
common stock. The net proceeds of the private placement
offering, $1,207,000, were used to acquire 80% of the issued
and outstanding shares of common stock of CASI, and to provide
CASI with working capital.
In March 1998, the Company acquired the remaining 20% of CASI for
$2,414,000. As part of the purchase price the Company issued a
convertible note due June 15, 1998 for $1,833,000 (see Note
6). This note was paid in full subsequent to year-end. In
connection with the purchase, the Company entered into a
two-year non-compete agreement with the minority shareholder.
Consideration for the non-compete agreement was $77,000.
HH Communications, Inc.--
On July 31, 1996, the Company acquired all of the issued and
outstanding shares of HH Communications, Inc. (HH), a systems
integrator, in exchange for 1,500,000 shares of its common
stock. The transaction has been accounted for as a pooling of
interests.
Datatec Industries, Inc. --
On October 31, 1996, the Company acquired 98.5% of the issued and
outstanding shares of Datatec Industries, Inc., an implementor
of information communications networks, in exchange for
4,000,000 shares of its common stock. The transaction has been
accounted for as a pooling of interests. The remaining 1.5% of
Datatec Industries, Inc. was acquired for 50,000 shares of
common stock on August 27, 1997.
-20-
<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>
GLASGAL HH DATATEC COMBINED
-------------------------------------- -------------------------------
For the year ended April 30, 1996
<S> <C> <C> <C> <C>
Net Sales $ 5,055,000 $ -- $ 54,114,000 $ 59,169,000
Income (loss) from Continuing Operations 2,298,000 -- (7,447,000) (5,149,000)
Loss from Discontinued Operations (3,255,000) (289,000) (4,502,000) (8,046,000)
Extraordinary loss (223,000) -- -- (223,000)
Net loss (1,180,000) (289,000) (11,949,000) (13,418,000)
For the year ended April 30, 1997
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:
-21-
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------------ -------------------- --------------------
NUMERATOR:
Basic & Diluted-
<S> <C> <C> <C>
Income (loss) from continuing operations ($5,149,000) $ 127,000 ($1,218,000)
Less: preferred dividends (Note 8) -- (2,128,000) --
------------------ -------------------- --------------------
Loss available for common shareholders (5,149,000) (2,001,000) (1,218,000)
Discontinued operations (8,046,000) (5,662,000) (2,768,000)
Extraordinary item (223,000) -- --
------------------ -------------------- --------------------
Net loss - Basic and Diluted ($13,418,000) ($7,663,000) ($3,986,000)
================== ==================== ====================
DENOMINATOR:
Weighted average number of common
shares outstanding - Basic 18,354,000 21,151,000 26,451,000
Incremental shares from assumed
conversions of options and debt -- -- --
------------------ --------------------
====================
Weighted average number of common shares
and common share equivalents- Diluted 18,354,000 21,151,000 26,451,000
================== ==================== ====================
Earnings per share - Basic and Diluted:
Income (loss) from continuing operations ($0.28) ($0.09) ($0.05)
Discontinued operations (0.44) (0.27) (0.10)
Extraordinary item (0.01) -- --
------------------ -------------------- --------------------
Net loss ($0.73) ($0.36) ($0.15)
================== ==================== ====================
</TABLE>
In 1996, 1997 and 1998, approximately 2,661,000, 2,406,000 and
4,339,000, 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.
Subsequent to year-end, the Company issued 300 shares of Series
E Cumulative Convertible Preferred Stock in a private
placement (see Note 8). The preferred shares convert to
common stock at various conversion rates, as defined. The
impact of these shares, had they been converted to common
stock, would have been immaterial to the basic and diluted
earnings per share calculations.
(4) PROPERTY AND EQUIPMENT:
The following is a summary of property and equipment--
<TABLE>
<CAPTION>
APRIL 30,
1997 1998
<S> <C> <C>
Equipment $977,000 $1,955,000
Computer equipment 3,158,000 4,661,000
Furniture, fixtures and leasehold improvements 2,444,000 4,135,000
----------- -------------
6,579,000 10,751,000
Less--Accumulated depreciation and amortization 2,945,000 4,739,000
Property and equipment, net $ 3,634,000 $ 6,012,000
=========== ============
</TABLE>
<PAGE>
(5) DISCONTINUED OPERATIONS:
Prior to fiscal 1997, the Company had primarily been a
distributor of data communications equipment. Commencing with
the Company's acquisition of Signatel in October 1994, the
Company revised its business strategy to expand its
implementation of information communication network services.
The acquisition of Datatec Industries, Inc. and CASI (see Note
2) enabled the Company to transition from predominantly a
reseller of data communications network equipment to an open
systems integrator, providing software-enabled configuration,
integration and installation services. The acquisition of HH
(see Note 2), a systems integrator, provided the Company the
opportunity to introduce these services to HH's premier
customers.
After several months of assimilating the Datatec Industries, Inc.
acquisition and repositioning its services, the Company, in
June 1997, with the concurrence of its Board of Directors,
discontinued its data communications equipment distribution
business. The Company is no longer a distributor of data
communications equipment and during the winding down of this
business, will only honor its existing commitments.
Accordingly, as of April 30, 1996, 1997 and 1998, the Company
has reflected this business as a discontinued operation in the
accompanying consolidated statements of operations. The
winding down of the business is expected to be completed in
fiscal 1999.
Revenues from such operations were $43,033,000, $35,178,000 and
$3,386,000 for the years ended April 30, 1996, 1997 and 1998,
respectively. Operating expenses, including cost of sales,
excluding reserves for discontinued operations, were
$48,795,000, $39,887,000 and $3,904,000 for the years ended
April 30, 1996, 1997 and 1998, respectively. Included in net
assets from discontinued operations as of April 30, 1998 is a
10-year mortgage agreement with a bank, with an outstanding
balance as of April 30, 1998 of $974,000, and an interest rate
of 8.05% per annum. Beginning in the year 2002, the interest
rate is subject to adjustment, as defined.
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.
As of April 30, 1996, Datatec Industries, Inc. had discontinued
its international distribution operations, which sold computer
hardware, and its Shoppertrak division, which developed and
sold a proprietary system that provided shopper traffic
information. The loss from operations in 1996 was
approximately $2,218,000 and the provision for future losses
was approximately $2,284,000 as of April 30, 1996, all of
which was utilized in 1997. Revenues relating to these
operations were approximately $14,000,000 in 1996.
(6) SHORT-TERM BORROWINGS:
The Company has a revolving loan agreement that provides for
maximum borrowings of $15,000,000. Availability under the
revolving loan is calculated at the sum of 85% of eligible
accounts receivable, as defined, and 50% of the cost or
wholesale market value of eligible inventory, as defined.
Approximately $8,866,000 was outstanding as of April 30,
1998. The amount of additional available borrowings, as
defined, was $1,028,000 as of April 30, 1998. The revolving
loan accrues interest at the prime rate plus 0.75% (9.25% at
April 30, 1998) and matures on March 16, 2000.
Included in short-term borrowings is $1,833,000 due to the
minority shareholder of CASI. The note bears interest at 10%
per annum. On May 1, 1998 the Company repaid the note plus
accrued interest.
-22-
<PAGE>
(7) LONG-TERM DEBT:
Long-term debt consists of the following:
April 30,
----------------------------------------------
1997 1998
---------------- -------------------------
New Jersey EDA Note (a) $ 680,000 $ 570,000
Term note (b) 2,000,000 1,620,000
Convertible notes (c) 1,750,000 --
Capital leases 1,171,000 1,288,000
---------------- ------------------------
Total debt 5,601,000 3,478,000
Less - current maturities (850,000) (1,063,000)
--------------- ------------------------
Long-term debt, net of
current maturities 4,751,000 $2,415,000
================ ======================
(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
<PAGE>
to the variable rate borne by the NJEDA Economic Growth Bonds.
As of April 30, 1998 the interest rate was 4.05%. The loan is
secured by the assets acquired with the loan proceeds.
(b)The term note bears interest at a variable rate equal to the
prime rate plus 1.5% (10.0% at April 30, 1998) and is payable
monthly. The principal is payable in monthly installments and
matures in April 2000. The term note is collateralized by
certain assets, as defined.
(c)In February 1997, the Company issued convertible notes of
$2,000,000. In connection with these notes, the Company issued
warrants to purchase 700,000 shares of the Company's common
stock at $5.25 per share, the fair market value on the date of
issuance. These notes are 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:
1999 $ 1,063,000
2000 1,794,000
2001 393,000
2002 214,000
2003 14,000
(8) SHAREHOLDERS' EQUITY:
Public Offering--
On May 8, 1995, the Company consummated a bridge financing (the
"First Bridge Financing"), pursuant to which it issued an
aggregate of (i) $1,200,000 principal amount of promissory
notes (the "Bridge Notes") which bore interest at the rate of
8% per annum and were payable upon the earlier of the
consummation of the Offering) as hereinafter defined), (ii)
600,000 warrants (the "First Bridge Warrants"), each First
Bridge Warrant entitling the holder to purchase one share of
Common Stock at an initial exercise price of $1.875 (subject
to adjustment upon the occurrence of certain events) during
the three-year period commencing May 8, 1996, and (iii)
442,478 shares of Common Stock at $1.13 per share. Financing
fees of approximately $260,000 were incurred in connection
with the First Bridge Financing. Upon the consummation of the
Offering, each First Bridge Warrant
-23-
<PAGE>
was converted into a redeemable warrant having terms identical
to those of the redeemable warrants underlying the units
offering in the Offering. The Company recorded an original
issuance discount of $120,000 associated with (i) and (ii)
above.
On June 13, 1995, the Company consummated a bridge financing (the
"Second Bridge Financing") pursuant to which it issued an
aggregate of 350,000 warrants (the "Second Bridge Warrants").
Each Second Bridge Warrant entitles the holder to purchase one
share of Common Stock at an initial exercise price of $1.74
per share during the three year period commencing June 13,
1996. The net proceeds from the Second Bridge Financing were
approximately $70,000. Upon consummation of the Offering, each
First Bridge Warrant was converted into a redeemable warrant
having terms identical to those of the redeemable warrants
underlying the units offered in the Offering.
On September 28, 1995, the Company completed the Offering of
1,783,000 units at $5.00 per unit (including an overallotment
of 258,000 units in October 1995) for net proceeds of
approximately $6,485,000. Each unit consisted of two shares of
common stock and one redeemable warrant. Each redeemable
warrant entitles the holder to purchase one share of common
stock at an initial exercise price of $3.75 per share. In
addition, in connection with the sale of 400,000 shares of
common stock by certain selling shareholders, the Company
contributed 200,000 redeemable warrants (valued at $50,000)
that were included in the 200,000 units sold by such
shareholders. In addition, the Company granted its underwriter
warrants to purchase 517,500 shares of common stock at $4.69.
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
-24-
<PAGE>
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 was $5.50 which
approximated the Floating Conversion Price.
Common Stock--
During fiscal 1998, the Company, through private placement equity
offerings, issued 855,000 shares of common stock for
approximately $3,080,000.
Warrants--
The following table is a summary and status of warrants issued by
the Company:
OUTSTANDING WARRANTS
-----------------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
-------------------- -------------
APRIL 30, 1995 -- $--
Grants 3,451,250 $3.89
Exercises -- --
Cancellations -- --
-------------- -------------------
APRIL 30, 1996 3,451,250 $3.89
Grants 896,000 $5.28
Exercises (178,100) $3.75
Cancellations -- --
-------------- -------------------
APRIL 30, 1997 4,169,150 $4.20
Grants -- --
Exercises (2,743,290) $3.75
Cancellations -- --
-------------- -------------------
APRIL 30, 1998 1,425,860 $5.06
============== ===================
-25-
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS
-----------------------------------------------------------
WEIGHTED AVERAGE
NUMBER SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISE
RANGE OF EXERCISE OF SHARES EXERCISABLE (IN YEARS) PRICE
PRICES
- --------------------- --------------- -------------------- ---------------------------- ------------------------
<S> <C> <C> <C> <C>
$3.75 12,360 12,360 -- $3.75
$4.00 - $4.99 517,500 517,500 4.00 $4.69
$5.00 - $5.99 885,000 885,000 3.77 $5.26
less than 5.99 11,000 11,000 1.42 $7.15
=========== ================= ========================
TOTAL 1,425,860 1,425,860 $5.06
=========== ================= ========================
</TABLE>
In September 1997, the Company provided notice to its redeemable
warrant holders that it would redeem each warrant on October
23, 1997 for $0.05 if not exercised prior to that date.
Throughout the month of October 1997, a total of approximately
2,743,000 warrants were exercised and 12,360 warrants are in
process of redemption subsequent to year-end.
The Company follows the guidance prescribed by SFAS No. 123 in
accounting for its warrants.
Under an agreement with Direct Connect International, Inc.
("DCI") dated January 7, 1994, as amended on July 10, 1997,
the Company has the right to require DCI to purchase up to
1,207,239 additional shares ("Additional Shares") of Common
Stock of the Company at a per share price of $6.54, less
certain warrant solicitation fees (the "Additional DCI
Investment"). The Company may require the Additional DCI
Investment if, and then only to the extent, that DCI receives
proceeds from the exercise of existing DCI warrants, which are
scheduled to expire on March 31, 1999. If the Company does not
require the Additional DCI Investment, DCI may still purchase,
on the same terms, the Additional Shares. These rights are not
included in the above table.
(9) INCOME TAXES:
The Company accounts for income taxes under the provisions of
SFAS 109. The statement requires that deferred income taxes
reflect the tax consequences on future years of differences
between the tax basis of assets and liabilities and their
financial reporting amounts.
-26-
<PAGE>
The following are the major components of the provision
(benefit) for income taxes as of April 30, -
<TABLE>
<CAPTION>
1996 1997 1998
------------------- -------------------- ---------------------
Current-
<S> <C> <C> <C>
Federal $ 0 $ 0 $ 0
State 0 111,000 0
Foreign (37,000) 0 0
------------------- -------------------- ---------------------
(37,000) 111,000 0
------------------- -------------------- ---------------------
Deferred-
Federal 0 0 0
State 0 0 (400,000)
Foreign 0 0 0
------------------- -------------------- ---------------------
0 0 (400,000)
=================== ==================== =====================
Total provision (benefit) $ (37,000) $ 111,000 $ (400,000)
=================== ==================== =====================
</TABLE>
-27-
<PAGE>
The following indicates the significant elements contributing to
the difference between the US Federal statutory tax rate and
the Company's effective tax rate for the years ending April
30, -
<TABLE>
<CAPTION>
1996 1997 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
US Federal Statutory tax rate (34.0%) 34.0% (34.0%)
State and foreign income taxes (0.7) 46.6 (24.7)
Valuation reserve on deferred tax asset 34.0 (34.0) 34.0
-------------- ---------------- ----------------
Effective tax rate (0.7%) 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, 1997 APRIL 30, 1998
--------------------------- --------------------------
<S> <C> <C>
Net operating loss carryforwards $ 3,682,000 $ 5,509,000
Depreciation (1,159,000) (542,000)
Allowance for doubtful accounts 280,000 102,000
Inventory obsolescence 257,000 129,000
Other 480,000 2,000
--------------------------- --------------------------
3,540,000 5,200,000
Valuation Allowance (3,540,000) (4,800,000)
=========================== ==========================
Net deferred tax asset $ -- $ 400,000
=========================== ==========================
</TABLE>
The net deferred tax asset recorded as of April 30, 1998 relates
to the tax attributes for certain state net operating loss
carryforwards which the Company has the ability to sell as a
result of recent changes to the New Jersey State tax laws. The
Company has made an assessment of the new law and determined
that realization of the net deferred tax asset relating to the
state operating loss carryforwards is more likely than not.
However, there can be no assurance that the asset can or will
be sold prior to its expiration. The net operating loss
carryforwards expire at various dates through 2003.
There are no undistributed earnings in the Company's foreign
subsidiaries.
As of April 30, 1998, the Company has approximately $13,000,000
of net operating loss carryforwards, which may be used to
offset future Federal taxable income. These net operating loss
carryforwards expire through 2013.
(10) RELATED PARTY TRANSACTIONS:
The Company has outstanding loans of $485,000 to certain
executive officers of the Company. These loans bear interest
at 8% per annum. Three of these loans, representing $360,000,
are repayable with the proceeds from the sale of stock
received from future exercise of stock options of these
executives. All of these loans mature on December 31, 1999.
The Company owes an executive officer $1,414,000. The note bears
interest at a rate of 12.5%. The note matures on November 20,
1998 and is subordinated to the Company's primary lender.
Borrowings with this lender are due March 16, 2000,
accordingly the above note has been classified as long-term in
the accompanying balance sheets.
The Company continues to lease a facility from a company with
whom an executive officer is affiliated. The annual lease
payment on the facility is included in Note 12.
-28-
<PAGE>
(11) INCENTIVE PLANS
At April 30, 1998 the Company had several stock-based incentive
plans including an employee stock purchase plan, which are
described below. The Company applies APB Opinion No. 25 for
its plans. Accordingly, no compensation cost has been
recognized for its stock-based incentive plans. Had
compensation cost for the Company's stock-based plans been
determined at the fair value at the grant dates for awards
under the plans, consistent with SFAS 123, the Company's net
income (loss) and net income (loss) per share on a basic basis
would have been reduced to the pro-forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -------------
(in thousands, except per share data)
Proforma net income (loss):
<S> <C> <C> <C>
As reported $(13,418,000) $(5,535,000) $(3,986,000)
Proforma $(13,524,000) $(6,624,000) $(5,113,000)
Proforma net income(loss) per share -
Basic and Diluted:
As reported $ (.73) $ (.36) $ (.15)
Proforma $ (.73) $ (.41) $ (.19)
</TABLE>
The per share weighted-average fair value of stock options
granted during 1996, 1997 and 1998 was $4.45, $5.57 and $1.80,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following 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
1996, 1997 and 1998 and volatility of 75% for 1996, 1997 and
1998, respectively.
Common Stock Options--
The 1990 Stock Option Plan (the "1990 Plan") provides for grants
of 1,500,000 common stock options to employees, directors, and
consultants to purchase common stock at a price at least equal
to 100% of the fair market value of such shares on the grant
date. The exercise price of any options granted to a person
owning more than 10% of the combined voting power of all
classes of stock of the Company ("10% shareholder"), shall be
at least equal to 110% of the fair market value of the share
on the grant date. The options are granted for no more than a
10-year term (5 years for 10% shareholders) and the vesting
periods range from 2 to 4 years. As of April 30, 1998, 27,402
shares remain reserved for future issuance under the 1990
Plan.
-29-
<PAGE>
During January 1992, the Company granted options to purchase
1,386,742 shares of its common stock, at an exercise price of
$.005 per share. The options may be exercised at any time
prior to January 1, 2002. 739,332 options have been exercised
as of April 30, 1998. In April 1993, the Company granted
options, which expire in April 2003, to purchase 109,755
shares of common stock to a consultant/advisor to the Company
at an exercise price of $.005 per share. As of April 30, 1998,
all options have been exercised.
The 1993 Consultant Stock Option Plan (the "1993 Plan") provides
for grants of 30,000 shares of common stock to selected
persons who provide consulting and advisory services to the
Company at a price at least equal to 100% of the fair market
value of such shares on the grant date, as determined by the
Board of Directors. The exercise price of any options granted
to a person owning more than 10% of the combined voting power
of all classes of stock of the Company ("10% shareholder"),
shall be at least equal to 110% of the fair market value of
such shares on the grant date. The options are granted for no
more than a 10-year term (5 years for 10% shareholders) and
the vesting periods are determined by the Board of Directors.
As of April 30, 1998, 4,000 shares remain reserved for future
issuance under the 1993 Plan.
The 1995 Directors Stock Option Plan (the "Directors Plan")
provides for grants of 500,000 shares of Common Stock. All
members of the Board of Directors who are not employees of the
Company ("Eligible Directors") are eligible to receive grants
of options. Each Eligible Director is granted an option to
purchase 24,000 shares of Common Stock on the date the
Eligible Director is elected to the Board of Directors, and
will be granted another option to purchase 24,000 shares of
Common Stock annually thereafter so long as he remains an
Eligible Director. Generally, each option vests ratably over a
three-year period provided such individual continues to serve
as Director of the Company. As of April 30, 1998, 188,000
shares remain reserved for future issuance under the Directors
Plan.
The 1996 Employee and Consultant Stock Option Plan (the "1996
Plan") provides for grants of 2,000,000 shares of common stock
to employees and consultants to purchase common stock at a
price equal to 100% of the fair market value of such shares on
the grant date. The options are granted for no more than a
10-year term and the vesting periods are determined by the
Board of Directors. As of April 30,1998, 753,002 shares remain
reserved for future issuance under the 1996 Plan.
The Senior Executive Stock Option Plan (the "Executive Plan")
provides for grants of 560,000 shares of common stock to
senior executive officers of the Company at exercise prices
and vesting periods as determined by the Board of Directors at
the time of grant. As of April 30, 1998, 25,000 shares remain
reserved for future issuance under the Executive Plan.
-30-
<PAGE>
The 1996 Stock Option Conversion Plan (the "Conversion Plan") was
primarily established to replace stock options previously
granted by the Company's subsidiary, Datatec Industries, Inc.,
with Company options on the same terms as indicated in the
merger agreement. The Conversion Plan provides for grants of
470,422 shares of common stock. As of April 30, 1998, 28,795
shares remain reserved for future issuance under the
Conversion Plan.
A summary of the status of stock option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------------
----------------------- --------------------------
SHARES AVAILABLE NUMBER WEIGHTED AVERAGE EXERCISE
FOR FUTURE GRANTS OF SHARES PRICE
------------------------- ----------------------- --------------------------
<S> <C> <C> <C>
BALANCE AS OF APRIL 30, 1995 4,698,440 2,463,498 $1.03
Grants (439,500) 439,500 $3.86
Exercises -- (202,009) $1.09
Cancellations 39,936 (39,936) $1.25
--------------- ----------------------- --------------------
BALANCE AS OF APRIL 30, 1996 4,298,876 2,661,053 $1.49
Grants (2,899,380) 2,899,380 $3.92
Exercises -- (471,471) $0.30
Cancellations 213,969 (213,969) $6.49
--------------- ----------------------- -------------------
BALANCE AS OF APRIL 30, 1997 1,613,465 4,874,993 $2.83
Grants (880,250) 880,250 $4.45
Exercises -- (1,027,679) $1.26
Cancellations 388,445 (388,445) $4.26
--------------- ----------------------- -------------------
BALANCE AS OF APRIL 30, 1998 1,121,660 4,339,119 $3.41
=============== ======================= ==================
Options Exercisable at:
April 30, 1996 2,054,422 $1.01
April 30, 1997 2,513,378 $2.08
April 30, 1998 2,769,388 $3.17
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------------------
WEIGHTED AVERAGE CONTRACTUAL
NUMBER LIFE WEIGHTED AVERAGE EXERCISE PRICE
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS)
- -------------------------------- ---------------------- -------------------------------- -----------------------------
<S> <C> <C>
$.005 - $0.99 647,411 3.67 $0.01
$1.00 - $1.99 314,759 7.19 $1.30
$2.00 - $2.99 487,191 7.93 $2.81
$3.00 - $3.99 698,249 9.37 $3.55
$4.00 - $4.99 1,800,867 8.85 $4.02
less $4.99 390,642 4.63 $8.40
====================== =============================
TOTAL 4,339,119 $3.41
====================== =============================
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE OPTIONS
------------------------------------------------------------------
WEIGHTED AVERAGE EXERCISE PRICE
RANGE OF EXERCISE PRICES NUMBER OF SHARES
- ----------------------------------------- --------------------------- --------------------------------
<S> <C> <C>
$.005 - $0.99 647,411 $0.01
$1.00 - $1.99 280,672 $1.28
$2.00 - $2.99 369,526 $2.84
$3.00 - $3.99 258,500 $3.64
$4.00 - $4.99 871,836 $4.00
less $4.99 341,443 $8.62
=========================== ================================
TOTAL 2,769,388 $3.17
=========================== ================================
</TABLE>
Employee Stock Purchase Plan--
During fiscal 1998, the Company implemented an employee stock
purchase plan whereby eligible employees, as defined, may
purchase shares of the Company's common stock at a price equal
to 85% of the lower of the closing market price on the first
or last trading day of the plan's quarter. A total of 750,000
shares of common stock have been reserved for issuance under
the plan. As of April 30, 1998 the Company received
contributions of $90,000 and in May 1998 issued 29,800 shares
of common stock to participants of the plan.
Retirement Plans--
The Company currently has two contributory 401(k) salary
reduction plans which permit employees to contribute if they
are at least 21 years of age and have been a full time
employee of the Company for six months.
The Glasgal Communications, Inc. Salary Reduction Plan (Savings
Plan I) requires a minimum contribution of 2% of the gross
-32-
<PAGE>
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. The matching contributions
for the three years ended April 30, 1996, 1997 and 1998 were
$17,000, $15,000, and $11,000 respectively.
The Datatec Industries, Inc. 401(k) Savings Plan (Savings Plan
II) requires a minimum contribution of 1% of the gross earning
and no more than 15% of the gross earnings up to the maximum
allowed by the IRS. Savings Plan II does not provide a company
match of any of the employee's contributions.
(12) COMMITMENTS AND CONTINGENCIES:
The Company leases offices and staging and configuration
facilities from related and unrelated parties throughout the
United States and Canada. The minimum annual rentals for
future years are as follows (in thousands):
<TABLE>
<CAPTION>
TWELVE MONTH PERIOD RELATED SUBLEASE
ENDING APRIL PARTY OTHER INCOME NET
- --------------------------- ---------------- ------------------------ ---------------------- -------------------
<S> <C> <C> <C> <C> <C>
1999 $ 190 $ 1,296 $ (453) $ 1,033
2000 190 1,191 (372) 1,009
2001 190 813 (270) 733
2002 190 670 (210) 650
2003 190 540 (18) 712
Thereafter 2,219 1,408 -- 3,627
</TABLE>
Rent expense was $1,785,000, $1,713,000 and $1,809,000 for the
years ended April 30, 1996, 1997 and 1998, respectively.
The Company has one-year lease commitments for its fleet of
vehicles. Lease expense related to these vehicles was
$1,155,000, $1,347,000 and $1,505,000 for the years ended
April 30, 1996, 1997 and 1998, respectively. The leases expire
throughout the year, most with an option for renewal. Future
commitments are not reflected in the amounts above but are
expected to approximate the 1998 expense.
The Company has entered into employment agreements with nine key
employees. These agreements provide for an aggregate annual
salary of $1,530,000, increased annually by the percentage
increase in the consumer price index. The agreements are
generally three years in duration and expire through October
1999.
The Company, from time to time, is involved in routine litigation
and various legal matters in the ordinary course of business.
The Company does not expect that the ultimate outcome of this
litigation will have a material adverse effect on the results
of operations or financial position.
(13) CONCENTRATIONS OF CREDIT RISK:
The Company's financial instruments subject to credit risk are
primarily trade accounts receivable. Generally, the Company
does not require collateral or other security to support
customer receivables. At April 30, 1998, the Company's
customers were primarily within the continental United States
and Canada. Customers representing approximately 56% of the
Company's net sales are in the retail industry.
In the year ended April 30, 1996, two customers had sales of
$5,000,000 and $4,700,000, for the year ended April 30, 1997,
two customers had sales of $7,000,000 and $6,000,000, and for
the year ended April 30, 1998, no customer exceeded 10% of net
sales.
(14) RESTRUCTURING OF OPERATIONS:
In April 1996, the Company recorded restructuring charges of
$6,756,000 relating to reducing costs and improving the
Company's efficiency. These charges are included in selling,
general and administration expense and included $2,049,000 in
noncash write-downs of certain of the Company's long-lived
assets based upon the criteria described in Note 1 as well as
the establishment of $4,707,000 of accrued liabilities, which
included $1,984,000 of projected cash outflows for personnel
severance and facilities consolidation plans.
-33-
<PAGE>
(15) RECAPITALIZATION
In January 1996, the Company was reincorporated in the State of
Delaware and each outstanding share of the old California
Corporation, no par value common stock, was converted into one
share of the new Delaware Corporation $.001 par value common
stock. This change resulted in the transfer of $20,000 from
additional paid-in capital to common stock. In conjunction
with the reincorporation, the Company increased the authorized
common stock from 21,000,000 shares to 34,000,000 shares.
In January 1998, the Company increased the authorized common
stock from 34,000,000 shares to 75,000,000 shares.
(16) SHAREHOLDER RIGHTS PLAN
On January 30, 1998, the Board of Directors adopted a shareholder
rights plan. Under the rights plan, each shareholder of record
on March 9, 1998, received a dividend of one right for each
outstanding share of Common Stock. The rights are attached to,
and presently only trade with, the Common Stock and currently
are not exercisable. Accordingly, they are not considered in
the computation of earnings per share. Except as specified
below, upon becoming exercisable, all rights holders will be
entitled to purchase from the Company one one-hundredth of a
share of Series D Preferred Stock ("Participating Preferred
Stock") at a price of $40, subject to adjustment.
The rights become exercisable and will begin to trade separately
from the Common Stock upon the earlier of (i) the first date
of public announcement that a person or group (other than
certain exempted shareholders as described in the Rights
Agreement) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock or (ii) 10 business days
following a person's or group's commencement of, or
announcement of, and intention to commence a tender or
exchange offer, the consummation of which would result in
beneficial ownership of 15% or more of the Common Stock. The
rights will entitle holders (other than an Acquiring Person,
as defined) to purchase Company Common Stock having a market
value (immediately prior to such acquisition) of twice the
exercise price of the right. If the Company is acquired
through a merger or other business combination transaction
after a person or group has become an Acquiring Person, each
right will entitle the holder to purchase $80 worth of the
surviving company's common stock for $40, i.e., at a 50%
discount. The Company may redeem the rights for $0.01 each at
any time prior to the acquisition of 15% or more of the
outstanding shares of Common Stock by a person or group of
persons. The rights will expire on February 24, 2008.
Until the rights are exercised, the holder thereof, as such will
have no rights as a stockholder of the Company, including
without limitation, the right to vote or to receive dividends.
The holders of the Participating Preferred Stock will be entitled
to receive dividends, if declared by the Board of Directors,
from funds legally available. Each share of Participating
Preferred Stock will be entitled to one hundred votes on all
matters submitted to stockholder vote. The shares of
Participating Preferred Stock are not redeemable by the
Company nor convertible into Common Stock or any other
security of the Company.
(17) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ -------------------- ---------------------
<S> <C> <C> <C>
Interest paid $ 1,020,000 $ 1,313,000 $1,571,000
Income taxes paid $ 14,000 $ 397,000 $33,000
</TABLE>
-34-
<PAGE>
Supplemental Disclosures of Non-Cash Activities--
On April 24, 1996, the Company purchased 80% of the common stock
of Computer-Aided Software Integration, Inc. (CASI) for
$705,000 in cash, including expenses, plus 44,260 shares of
common stock of the Company valued at $290,000. A summary of
the transaction is as follows:
Goodwill $1,866,000
Cash Paid for Common Stock (including expenses) (705,000)
Common Stock Issued (290,000)
--------------
Liabilities Assumed $ 871,000
==============
In March 1998, the Company purchased the remaining 20% of the
common stock of CASI for $581,000 in cash plus a note of
$1,833,000. In addition, the Company incurred $89,000 of legal
costs associated with the closing of this transaction. As part
of this transaction, the Company recorded additional goodwill
of approximately $2,503,000.
During 1997, the Company converted $561,000 of accounts payable
into 171,000 shares of common stock.
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.
(18) RESTATEMENTS
The financial position and results of operations presented in the
consolidated financial statements and footnotes for the years
ended April 30, 1997 and 1998 and the unaudited quarters ended
October 31, 1996, January 31, 1997 and July 31, 1997 have been
restated to give effect to the valuation of (i) convertible
preferred stock and convertible debt with warrants, both with
beneficial conversion features, issued in fiscal 1997 (Notes 7
and 8) and (ii) assets associated with a barter transaction
executed in fiscal 1998 (Note 5).
The non-cash accretion of the discount applicable to the
convertible securities has been reflected in the restated
consolidated financial statements as additional interest
expense relating to the convertible notes and as additional
preferred dividends relating to the preferred stock and such
discount has been accreted through the first possible
conversion date of the respective issuance. None of these
restatements had any effect on cash flows of the Company.
-35-
<PAGE>
The effect of the restatement is summarized below:
<TABLE>
<CAPTION>
Previously Reported Effect of Above
Restated
---------------------- ---------------------- -------------------
Year ended April 30, 1998
-------------------------------
<S> <C> <C> <C>
Total assets $ 40,063,000 $ (2,250,000) $ 37,813,000
Operating income 517,000 - 517,000
Interest expense (1,885,000) (250,000) (2,135,000)
Income (loss) from continuing operations (968,000) (250,000) (1,218,000)
Loss from discontinued operations (518,000) (2,250,000) (2,768,000)
Net loss $ (1,486,000) (2,500,000) $ (3,986,000)
====================== =======================
Per share data:
Basic & Diluted
Loss from continuing operations $ (0.04) $ (0.05)
Discontinued operations (0.02) (0.10)
====================== =======================
Net loss $ (0.06) $ (0.15)
====================== =======================
Three months ended July 31, 1997
--------------------------------
Operating income $ 479,000 $ - $ 479,000
Interest expense (454,000) (250,000) (704,000)
Income (loss) from continuing operations 25,000 (250,000) (225,000)
Net income (loss) $ 25,000 (250,000) $ (225,000)
====================== =======================
Per share data:
Basic & Diluted $ 0.00 $ (0.01)
====================== =======================
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
Previously
Reported Effective Above Restated
------------- ------------------ ------------
Year ended April 30, 1997
- -------------------------
<S> <C> <C> <C>
Operating income $ 1,538,000 $ -- $ 1,538,000
Interest expense (1,155,000) (575,000) (1,730,000)
Income (loss) from continuing operations 702,000 (575,000) 127,000
Net loss (4,960,000) (575,000) (5,535,000)
Income (loss) from continuing operations
available to Common shareholders 702,000 (2,703,000)(a) (2,001,000)
Net loss available to common shareholders $(4,960,000) (2,703,000)(a) $(7,663,000)
=========== ===========
Per Share Data:
Basic--
Income (loss) from continuing operations $ .03 $ (.09)
Net loss per share $ (.24) $ (.36)
Diluted--
Income (loss) from continuing operations $ .03 $ (.09)
Net loss per share $ (.21) $ (.36)
Three Months Ended January 31, 1997
-----------
Operating income $ 31,000 $ -- $ 31,000
Interest expense (208,000) -- (208,000)
Income (loss) from continuing operations (163,000) -- (163,000)
Net Income (2,269,000) -- (2,269,000)
Income (loss) from continuing operations available
to Common shareholders (163,000) (878,000)(b) (1,041,000)
Net loss available to common shareholders $(2,269,000) (878,000)(b) $(3,147,000)
=========== ===========
Per Share Data:
Basic and Diluted--
Loss from continuing operations $ (.01) $ (.05)
Net loss per share $ (.11) $ (.15)
Three Months Ended October 31, 1996
Operating income $ 1,550,000 $ -- $ 1,550,000
Interest expense (314,000) -- (314,000)
Income (loss) from continuing operations 1,155,000 -- 1,155,000
Net Income 31,000 -- 31,000
Income (loss) from continuing operations available
to Common shareholders 1,155,000 (1,250,000)(b) (95,000)
Net income (loss) available to common shareholders $ 31,000 (1,250,000)(b) $(1,219,000)
=========== ===========
Per Share Data:
Basic--
Income (loss) from continuing operations $ .06 --
Net loss per share -- $ (.06)
Diluted--
Income (loss) from continuing operations $ .04 --
Net loss per share -- $ (.06)
</TABLE>
(a) Includes $2,128,000 of non-cash accretion of the discount on convertible
preferred securities. (b) Represents non-cash accretion of the discount on
convertible preferred securities.
-37-
<PAGE>
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Charges to cost
beginning of and expenses Balance, end of
period Deductions period
--------------- ----------------- ------------- ---------------
Year ended April 30, 1998
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 520,000 $(170,000) $ (45,000) $ 305,000
Year ended April 30, 1997
Allowance for doubtful accounts $ 538,000 $ 163,000 $(181,000) $ 520,000
Year ended April 30, 1996
Allowance for doubtful accounts $ 456,000 $ 542,000 $(460,000) $ 538,000
</TABLE>
-38-
<PAGE>
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
The list of Exhibits is hereby amended by deleting Exhibits 11.1, 23.1
and 27.1 and inserting in lieu thereof the following:
* 11.1 -- Statement of Computation of Per Share Earnings
* 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
* 27.1 -- Financial Data Schedule
- ---------------------------
* Filed herewith.
-39-
<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: February 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 February 12, 1999
- -------------------------- and Chief Executive Officer
Isaac J. Gaon (principal executive officer)
/S/ CHRISTOPHER J. CAREY President and Director February 12, 1999
- --------------------------
Christopher J. Carey
/S/ DAVID MILCH Director February 12, 1999
- --------------------------
David Milch
/S/ ROBERT H. FRIEDMAN Director February 12, 1999
- --------------------------
Robert H. Friedman
Director February 12, 1999
- --------------------------
Thomas Berry
- -------------------------- Director February 12, 1999
Frank Brosens
/S/ JAMES M. CACI Chief Financial Officer February 12, 1999
- -------------------------- (principal financial and
James M. Caci accounting officer)
-40-
EXHIBIT 11.1
DATATEC SYSTEMS, INC.
COMPUTATION OF EARNINGS(LOSS) PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
Earnings (loss) per share
<S> <C> <C> <C>
Income (loss) from continuing operations $ (1,218,000) $ 127,000 $ (5,149,000)
Less: preferred dividends -- (2,128,000) --
------------- ----------- -------------
Loss available for common shareholders (1,218,000) (2,001,000) (5,149,000)
Discontinued operations (2,768,000) (5,662,000) (8,046,000)
Extraordinary item -- -- (223,000)
------------- ----------- -------------
Net loss $ (3,986,000) $ (7,663,000) $(13,418,000)
============== ============= =============
Weighted average number of shares outstanding 26,451,000 21,151,000 18,354,000
Assumed issuances under exercise of
stock options and warrants --(1) --(1) --(1)
------------- ----------- -------------
Weighted average and common stock equivalents 26,451,000 21,151,000 18,354,000
============= ========== ============
Earnings per share - Basic and Diluted
Income (loss) from continuing operations $ (.05) $ (.09) $ (.28)
Discontinued operations (.10) (.27) (.44)
Extraordinary item -- -- $ (.01)
------------- ----------- -------------
Net loss per share $ (.15) $ ( .36) $ (.73)
============= =========== =============
</TABLE>
(1) Common Stock equivalents outstanding for 1996, 1997 and 1998 were
antidilutive and therefore not included.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Datatec Systems, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated July 27, 1998, except with respect to the matter discussed in Note
18 as to which the date is February 2, 1999, included in this Form 10-K/A-2,
into the Company's previously filed Registration Statements, Nos.33-87122,
33-94802, 33-93470, 333-08381, 333-03414, 333-09509, 333-15541, 333-16579,
333-22257, 333-36045, 3333-34893, 333-40585, 333-48757 and 333-53125.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 12, 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, 1998 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-30-1998
<PERIOD-END> APR-30-1998
<CASH> 317
<SECURITIES> 0
<RECEIVABLES> 18,411
<ALLOWANCES> (305)
<INVENTORY> 3,118
<CURRENT-ASSETS> 25,025
<PP&E> 10,751
<DEPRECIATION> (4,739)
<TOTAL-ASSETS> 37,813
<CURRENT-LIABILITIES> 24,003
<BONDS> 0
<COMMON> 29
0
0
<OTHER-SE> 10,439
<TOTAL-LIABILITY-AND-EQUITY> 37,813
<SALES> 76,804
<TOTAL-REVENUES> 76,804
<CGS> 47,208
<TOTAL-COSTS> 47,208
<OTHER-EXPENSES> 29,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,135)
<INCOME-PRETAX> (1,618)
<INCOME-TAX> (400)
<INCOME-CONTINUING> (1,218)
<DISCONTINUED> (2,768)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,986)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
