UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended: July 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 000-20688
Datatec Systems, Inc.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20C Commerce Way, Totowa, NJ 07512-1154
- ---------------------------- ----------
(Address of principal executive (Zip Code)
offices)
(973) 890-4800
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Check whether the Registrant (1) has filed all reports required to be filed by
Section 12 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subjected to such filing requirements for the past 90
days. Yes /X/ No / /.
The number of shares of Registrant's Common Stock outstanding on July 31, 1999
was 31,160,389.
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
THREE MONTHS ENDED JULY 31, 1999
INDEX
PART I: FINANCIAL INFORMATION
Page
Item 1: Consolidated Financial Statements
Balance Sheets at April 30, 1999 and
July 31, 1999 3
Statements of Operations for the three months ended
July 31, 1998 and 1999 4
Statements of Comprehensive Income for the
three months ended July 31, 1998 and 1999 5
Statements of Cash Flows for the three months ended
July 31, 1998 and 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 10
Item 6: Exhibits and Reports of Form 8-K 11
2
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1999
April 30, 1999 (unaudited)
-------------- -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 234,000 $ 124,000
Accounts receivable, net 20,661,000 23,506,000
Inventory 3,252,000 3,482,000
Prepaid expenses and other current assets 2,970,000 2,423,000
Net assets from discontinued operations 447,000 --
------------ ------------
Total current assets 27,564,000 29,535,000
Property and equipment, net 5,200,000 5,105,000
Goodwill, net 3,539,000 3,429,000
------------ ------------
Other assets 4,300,000 4,930,000
============ ============
Total assets 40,603,000 42,999,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIaBILITIES:
Short-term borrowings $ 8,623,000 $ 11,942,000
Current portion of long-term debt 1,783,000 1,306,000
Accounts payable 9,943,000 9,288,000
Accrued and other liabilities 3,866,000 3,228,000
------------ ------------
Due to related parties 1,052,000 1,052,000
------------ ------------
Total current liabilities 25,267,000 26,816,000
------------ ------------
Long-term debt 607,000 494,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock 30,000 31,000
Additional paid-in capital 34,317,000 34,433,000
Accumulated deficit (19,275,000) (18,431,000)
Accumulated other comprehensive loss (343,000) (344,000)
------------ ------------
Total shareholders' equity 14,729,000 15,689,000
------------ ------------
Total liabilities and shareholders' equity $ 40,603,000 $ 42,999,000
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
July 31,
-------------------------------------------------
1998 1999
--------------------- ---------------------
<S> <C> <C>
Revenues $ 25,143,000 $ 25,556,000
Cost of revenues 16,151,000 15,814,000
--------------------- ---------------------
Gross profit 8,992,000 9,742,000
Selling, general and administrative expenses 8,039,000 8,462,000
--------------------- ---------------------
Operating income 953,000 1,280,000
Interest expense 493,000 436,000
--------------------- ---------------------
Income before provision (benefit) for income
taxes 460,000 844,000
Provision (benefit) for income taxes -- --
--------------------- ---------------------
Net income $ 460,000 844,000
===================== =====================
Income per share (Note 3):
Basic and diluted:
Net income $ .02 $ .03
===================== =====================
WEIGHTED AVERAGE COMMON SHARES - BASIC 29,054,000 30,686,000
===================== =====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES - DILUTED 30,561,000 31,418,000
===================== =====================
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
4
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
July 31,
--------------------------------------------------------
1998 1999
------------------------ --------------------------
<S> <C> <C>
Net Income $ 460,000 $ 844,000
Other comprehensive income(loss)-
Foreign currency translation adjustment 3,000 (1,000)
------------------------ --------------------------
Comprehensive income $ 463,000 $ 843,000
======================== ==========================
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
DATATEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
July 31,
-------------------------------------------------------
1998 1999
------------------------ --------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 460,000 $ 844,000
Adjustments to reconcile net income to net cash used in
operating activities --
Depreciation and amortization 746,000 786,000
Changes in operating assets and liabilities:
Increase in accounts receivable (231,000) (2,845,000)
Increase in inventory (642,000) (230,000)
Increase in prepaid expenses and other assets (340,000) (234,000)
(Increase) decrease in assets held for sale or disposition (284,000) 447,000
Increase (decrease) in accounts payable, accrued and
other liabilities 49,000 (1,293,000)
------------------------ --------------------------
Net cash used in operating activities (242,000) (2,525,000)
------------------------ --------------------------
Cash flows from investing activities:
Purchases of property and equipment (256,000) (430,000)
--------------------------
------------------------
Net cash used in investing activities (256,000) (430,000)
------------------------ --------------------------
Cash flows from financing activities:
Net (payments) borrowings of short-term borrowings (1,929,000) 3,319,000
Net payments of indebtedness (288,000) (590,000)
Net proceeds from common stock/warrant issuances 2,532,000 117,000
------------------------
--------------------------
Net cash provided by financing activities 315,000 2,846,000
------------------------
--------------------------
Net effect on foreign currency translation on cash 3,000 (1,000)
------------------------ --------------------------
Net decrease in cash (180,000) (110,000)
Cash and cash equivalents at beginning of period 317,000 234,000
======================== ==========================
Cash and cash equivalents at end of period $ 137,000 124,000
======================== ==========================
</TABLE>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these consolidated statements.
6
<PAGE>
DATATEC SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Datatec Systems, Inc. and its subsidiaries (the "Company" or "Datatec")
are in the business of providing rapid and accurate technology deployment
services and licensing software tools to support enterprises in the delivery of
complex IT solutions.
(2) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and transactions have
been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles consistent
with those applied in, and should be read in conjunction with, the audited
financial statements for the year ended April 30, 1999. The interim financial
information is unaudited, but reflects all normal recurring adjustments that
are, in the opinion of management, necessary for a fair statement of results for
the interim periods presented. The results for the three months ended July 31,
1999 are not necessarily indicative of the results expected for the full fiscal
year.
(3) Earnings per share
Basic earnings per share is calculated using the weighted average
number of shares outstanding for the three months ended July 31, 1998 and 1999.
Diluted earnings per share is calculated using the weighted average number of
shares outstanding plus the incremental shares from assumed conversions of
options, debt and preferred stock for the three months ended July 31, 1998 and
1999.
(4) Supplemental Disclosure of Cash Flows
Cash paid during the three months ended July 31:
1998 1999
------------ ---------
Interest Paid $ 429,000 $ 351,000
(5) Statement of Position 98-5
On April 9, 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 98-5 "Reporting on
the Costs of Start-Up Activities". The new standard amends previous guidance
from the AICPA that permitted capitalization of start-up costs in certain
industries and requires that all non-governmental entities expense the costs of
start-up activities as those costs are incurred. Under the SOP, the term
"start-up" has been broadly defined to include pre-operating, pre-opening
organization activities. Upon further review of the provisions of SOP 98-5, the
Company believes that its pre-contract costs are not start-up costs subject to
this SOP.
7
<PAGE>
DATATEC SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - For the Three Months Ended July 31, 1999
Revenues. Revenues for the three months ended July 31, 1999 were
$25,556,000 compared to $25,143,000 for the three months ended July 31, 1998,
representing an increase of 2%. Beginning in the third quarter of fiscal 1999,
the Company began terminating certain low margin customer relationships that did
not fit in the business model. The estimated impact of terminating these
relationships was a reduction in sales of approximately 8%. In addition, the
growth rate has been negatively affected by customers completing Y2K remediation
projects. Included in revenues for the three months ended July 31, 1999 was
$60,000 of software sales from e-Deploy.com.
Gross Profit. Gross profits for the three months ended July 31, 1999
were $9,742,000 compared to $8,992,000 for the three months ended July 31, 1998.
Gross profits as a percentage of revenues were 38.1% for the three months ended
July 31, 1999 compared to 35.8% for the three months ended July 31, 1998. The
increase in gross margin percentage is the result of initiatives the Company
began in the third and fourth quarters of fiscal 1999. These initiatives
included improved project management information using new systems, including a
centralization of the management of the Company's labor and material resources
and additional quality control personnel. As a result of these initiatives, the
Company is better able to manage its existing projects and has improved its
efficiency, utilization of labor and other resources, and improved quality.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended July 31, 1999 were $8,462,000
compared to $8,039,000 for the three months ended July 31, 1998, representing
33.1% and 32.0% of revenues, respectively. The most significant increase in
selling, general and administrative expenses was $500,000 relating to personnel
costs. Personnel costs increased by 10% over the same period last year. The
increase of personnel costs has three components: additional personnel,
predominantly project management, professional services and e-Deploy.com;
recruiting costs associated with these additional personnel; and salary
increases. Included in selling, general and administrative expenses were
$352,000 relating to e-Deploy.com.
Interest expense. Interest expense for the three months ended July
31, 1999 was $436,000 compared to $493,000 for the three months ended July 31,
1998, representing a decrease of 11.6%. The decrease is a result of lower
long-term debt levels, primarily due to the repayment of a mortgage.
Financial Position
During the three months ended July 31, 1999 cash used in operations
was $2,525,000 compared to a year-ago cash usage of $242,000.
8
<PAGE>
Cash used for investing activities during the first quarter of the
fiscal year ending April 30, 2000 was $430,000 compared to $256,000 during the
first quarter of the fiscal year ended April 30, 1999.
Cash provided by financing activities during the three months ended
July 31, 1999 was $2,846,000 compared to $315,000 in the year-ago period. The
cash was provided by increases in the Company's borrowing under its revolving
credit facility to fund receivables and growth.
The Company's working capital was $2,719,000 at July 31, 1999
compared to $2,297,000 at April 30, 1999.
At July 31, 1999, total debt was $13,742,000 compared to $11,013,000
at April 30, 1999.
Shareholders' equity increased $960,000 during the three months
ended July 31, 1999, principally reflecting income of $844,000 and proceeds from
the issuance of common stock related to stock option and employee stock plans of
$117,000.
9
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
None
10
<PAGE>
DATATEC SYSTEMS, INC.
FORM 10-Q
PART II - OTHER INFORMATION - CONTINUED
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATATEC SYSTEMS, INC.
Registrant
Date: September 14, 1999 By: /s/ James M. Caci
---------------------------
James M. Caci
Chief Financial Officer and Duly
Authorized Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF JULY 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JUL-31-1999
<CASH> 124
<SECURITIES> 0
<RECEIVABLES> 23,683
<ALLOWANCES> (177)
<INVENTORY> 3,482
<CURRENT-ASSETS> 29,535
<PP&E> 5,630
<DEPRECIATION> (525)
<TOTAL-ASSETS> 42,999
<CURRENT-LIABILITIES> 26,816
<BONDS> 0
<COMMON> 31
0
0
<OTHER-SE> 12,790
<TOTAL-LIABILITY-AND-EQUITY> 42,999
<SALES> 25,556
<TOTAL-REVENUES> 25,556
<CGS> 15,814
<TOTAL-COSTS> 15,814
<OTHER-EXPENSES> 8,462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436
<INCOME-PRETAX> 844
<INCOME-TAX> 0
<INCOME-CONTINUING> 844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 844
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
