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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2001
--------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________ to ________
Commission File No. 000-20688
DATATEC SYSTEMS, INC.
----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
- ------------------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
23 Madison Road, Fairfield NJ 07004
- ------------------------------------ -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (973) 808-4000
-----------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.001 par value Nasdaq National Market System
Preference Share Purchase Rights Nasdaq National Market System
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates at June 30, 2001 was approximately $15,828,000. 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 Common Stock of the Registrant outstanding at June
30, 2001 was 33,856,785.
TABLE OF CONTENTS
Part I Page #
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 21
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure 48
Part III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management 56
Item 13. Certain Relationships and Related Transactions 58
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports 59
on Form 8-K
FORWARD LOOKING STATEMENTS
--------------------------
In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements. Factors that may cause such differences include, but
are not limited to, competition, technological advances and availability of
managerial personnel. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Datatec Systems, Inc. undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
PART I
------
Item 1. Business
--------
The Company
Datatec Systems, Inc. and its subsidiaries (the "Company" or
"Datatec") are in the business of providing rapid and accurate technology
deployment services and licensing software tools, designed to accelerate the
delivery of complex Information Technology (IT) solutions for Technology
Providers and Enterprises. The Company markets its services primarily to large
Original Equipment Manufacturers (OEM's), systems integrators, independent
software vendors, telecommunications carriers and service providers
(collectively, "Technology Providers") as well as to a select number of Fortune
2000 customers in the United States and Canada. The Company's deployment
services include the following: (i) the process of "customizing" Internetworking
devices such as routers and switches, and computing devices such as servers and
workstations to meet the specific needs of the user (hereinafter referred to as
"configuration"), (ii) the process of integrating these hardware devices as well
as integrating operational and application software on a network to ensure they
are compatible with the topology of the network and all legacy systems
(hereinafter referred to as "integration"), and (iii) the physical process of
installing technology on networks (hereinafter referred to as "installation").
The Company licenses its software tools through its subsidiary, eDeploy.com,
Inc., and has established a new division, Global Integration Services, for its
proposed entry into Europe.
The Company utilizes Web-enabled implementation tools that were
internally developed to provide its deployment services. These, together with
its proprietary processes, allow the Company to rapidly and efficiently deliver
high quality and cost effective large-scale technology deployment solutions to
its clients, which it does primarily on a fixed time/fixed cost basis. The
components of the Company's implementation model are made up of a combination of
people, process and tools, that include:
o The utilization of a Web-based software tool, eDeploy(TM), that provides
design and project management automation and enhances the speed and
accuracy of the deployment process. The automation also significantly
reduces the labor costs and technical skills required to accomplish most
complex deployment projects.
o The utilization of Integrators Workbench and Router Central process and
software that provide automation and mass customization in the
configuration / integration of computing and Internetworking devices as
well as application and operational software.
3
o The Company carries out most of its complex integration and configuration
process within three (3) Configuration Centers situated throughout the
United States and one (1) in Canada. By conducting these activities at the
Company's staging centers, and utilizing, where applicable, the Company's
software tools, the Company is able to prepare and rollout project
components so that they arrive at a customer site in a "plug and play"
state.
o A field deployment force capable of delivering all types of complex
technologies due to the "plug and play" nature of the Company's
"configuration/integration" process.
The Company operates out of 13 offices and has a field deployment
team of approximately 227 people, allowing it to conduct multiple, simultaneous
large-scale deployments across the United States and Canada. The Company's
deployment capabilities further enable Technology Providers to rapidly increase
the "absorption" of their products in the marketplace onto what are increasingly
complex networks and "IT" environments.
The Company was incorporated in the State of Delaware on January 10,
1996 and its stock is traded on the Nasdaq National Market System under the
symbol "DATC". The Company maintains its executive offices at 23 Madison Road,
Fairfield, New Jersey 07004. Its telephone number is (973) 808-4000. The
Company's Website can be located at www.datatec.com. The Company's subsidiary,
eDeploy.com, Inc. maintains its headquarters at 1536 Cole Blvd., Suite 350,
Golden, CO 80401. Its telephone number is (303) 854-3200. eDeploy.com's Website
can be located at www.eDeploy.com.
Datatec's Deployment Solutions
Technology Providers need to improve the "absorption" or "time to
market" of their products to maximize return on sales, as well as return on
product development costs. In addition, end-users need to maximize their return
on technology investments especially when one considers the rapid obsolescence
factor, which aggravates returns if the time to deploy new technology is not
minimized. The speed and accuracy of deployment is a critical factor in
improving these fundamental ratios.
The dynamics that are creating an increasing demand for the
Company's software-enabled deployment offerings include the following:
o The global configuration and deployment market is highly fragmented and to
the best of the Company's knowledge there are no other companies that have
focused their entire business model on this market space. The need for a
company devoted to providing alternative solutions for deployment services
becomes clear when one considers that despite the speed of technology
innovation over the past decade, the way in which technology is deployed
has remained relatively constant over the same period. It is therefore not
surprising that deployment has become a bottleneck and a major restraint
to growth for Technology Providers.
o Due to shorter product life cycles, hardware manufacturers and software
vendors alike must find ways to rapidly bring their products to market or
face losing market share. The Company has shown a capability of reducing
the time to deploy by between 40% and 80%.
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o By significantly reducing the "time to market", technology providers and
users benefit from improved return on sales and return on investment,
respectively.
o In order to maintain a competitive edge in the market, corporations are
constantly looking to become more efficient and technology has become a
major source of competitive advantage. Speed of deployment has therefore
become vital.
o Due to the utilization of software tools, error rates are significantly
reduced, thereby increasing customer satisfaction and efficiency.
o Technologies are becoming increasingly complex, which makes them extremely
difficult and costly to implement, especially without tools and
methodologies. Given the downsizing of many IT departments and their
preoccupation with core operations, companies are increasingly looking to
outsource the deployment of new technologies.
o Technology companies are today launching new products at an ever faster
rate. The problem is that due to inadequate levels of skilled resources
there is a lack of capacity to assimilate these new products rapidly in
the market. The Company believes that the skill gap that exists is
widening every year and so without automation, the problem will persist.
The Company's software tools bring a level of automation to the process
that reduces the level of skills required to perform complex technology
implementations. The Company can therefore recruit from a less costly and
larger pool of resources.
eDeploy.com
The eDeploy(TM) solution is a compelling and unique mix of flexible
tools, project logistics, process mapping/automation and connected, virtual
"communities" of users and participants. Leveraging the core benefits of new-era
IT applications and platforms, the solution improved process, controls,
monitoring and best practices to complex IT deployments thereby significantly
increasing efficiencies and reducing costs.
The application platform is designed to be open and standards-based,
and can easily integrate with a wide variety of other existing business systems
including back office applications, management and support platforms and process
automation tools. The eDeploy(TM) solution is generally accessed via an Internet
Web browser connection.
At its highest level, eDeploy(TM) has been grouped into four
discreet application sets that can be combined to provide workflow continuum and
to more effectively integrate with an organization's existing platforms and
applications solutions. Each application module and associated tool leverages
related project information and integrates seamlessly with one another. The four
modules that make up eDeploy(TM) are:
o Preparation & Design
This module organizes the collection of data from site and equipment surveys,
creates a gap analysis and drives to a fully designed and ready to implement
project plan. This module provides the user with tools to feed project and
equipment specific configuration files that construct the base for its automated
configuration solution sets. Once confirmed, this module provides a backdrop
5
for access to other eDeploy modules that organize a project. The module provides
a base information flow for project contacts, site information, schedules and
begins the project manual process. This approach institutionalizes the proven
best practices for successful project fulfillment, and feeds other modules for
project deployment steps.
o Configuration & Integration (Integrators' Workbench)
eDeploy.com's automated configuration tools load software on any manner of
desktop-based servers, PCs, applications or operating systems as well as complex
Internetworking/multiservices equipment including routers, switches and IP
telephony devices. These automated tools reduce configuration time by 50% to 90%
compared with other manual and semi-automatic approaches and prepare these
devices for easy to complete, plug and play installations. These tools are
available through the eDeploy.com Web-based Extranet site and can be used either
onsite or via multi-disciplinary configuration centers.
o Deployment Management
This module builds the base for managing information flow for equipment
shipments, completion schedules, configuration files, quality tracking and
related customer satisfaction statistics. eDeploy.com has an innovative
"dashboard" report that consolidates all the many steps and report formats into
a single "at a glance" report for the project managers to assess project
progress.
o Transition & Maintenance
Once deployed, this module organizes as-built drawings and digitized images and
maintenance reports, installed equipment serial numbers, and creates the
configuration database for future reference. eDeploy.com provides on-line
product registration information, and becomes a source for on-site configuration
rebuilds for update or maintenance purposes.
In the hands of any Technology Provider, including the Company, the software
tools provide support in their endeavors to:
o Automate each configuration / integration process;
o Shorten time to market for new product introductions;
o Obtain real time, secure feedback from its channel; and
o Provide the channel with a well proven implementation process that
provides for "best practices".
Other benefits provided by eDeploy(TM) to technology providers, as well as
end-users, include the following:
o Planning, monitoring and executing complex technology implementations. The
integrated applications allow users to better manage the myriad of
personnel issues, customer needs, and logistics that all need to be
properly coordinated to ensure success.
o Reduction in labor costs and increased productivity and efficiency.
Typical time reductions achieved by using software-enabled process range
between 40% and 80%, while efficiency improvements can reach over 200%.
o The ability to leverage technical skills. Highly complex technical
solutions can be deployed using less technical people. This is of
particular importance in the IT market, where
6
the increasing demand for experienced highly skilled engineers is placing
constraints on the availability of such resources.
o A higher degree of accuracy in the deployment process increases customer
satisfaction through a combination of process, tools and people.
Technologies can be more accurately and speedily deployed thereby
increasing customer satisfaction. In a recent project, the utilization of
eDeploy(TM) was the major reason for increasing customer satisfaction from
a "D" to a "B" in less than three months.
Datatec's Software-Enabled Service Offerings
The Company has created the following distinct branded solutions
targeted towards specific market needs: (i) Network Device Deployment; (ii)
Computing Device Deployment; (iii) Technology Refresh & Migration; and (iv) Site
Readiness & Infrastructure.
Network Device Deployment ("NDD"). NDD is the software-enabled
process for staging, configuring, integrating and installing new communication
devices such as routers and switches. Client's can select to outsource one or
all of the above functions. They can also choose to carry out the first three
processes within their own manufacturing, staging or integration facilities
using Integrator's Workbench. In the past year, the Company believes it has
moved this offering from the proof of concept stage to an offering with strong
demand and general market acceptance. NDD is the primary solution supporting the
Company's relationship with Cisco Systems, Inc. ("Cisco").
Computing Device Deployment ("CDD"). CDD is the software-enabled
process for staging, configuring, integrating and installing new computing
devices such as servers, workstations and laptops. Clients ship products to one
of the Company's configuration centers for processing. However, before the
deployment process can commence, significant pre-deployment time is spent in
engineering, designing, software customization and data collection to ensure
rapid and error free deployment. The Company has identified CDD as a major
opportunity for growth.
Technology Refresh & Migration ("TRM"). TRM projects apply the
Company's methodology and configuration automation tools to decrease the time
and complexity of upgrading a client's existing IT infrastructure and equipment
on-site. Typical TRM projects may include one or in some cases all of the
following:
o Migration to a new desktop operating system;
o Migration to a new server operating system;
o Rollout of a new or upgraded application suite;
o Introducing Internet services; and
o Upgrading the network infrastructure.
Site Readiness and Infrastructure ("SRI"). A major technology
migration or upgrade within an organization often first requires an overhaul of
the company's physical infrastructure. The Company has significant experience
and expertise in ensuring a site is fully capable of accepting new technology.
Infrastructure improvement could include one or all the following:
o Data Communications Cabling;
7
o Telecommunications Cabling;
o Power Cabling; and
o Physical/Structural Pathway Modification.
One primary reason why organizations choose the Company for their
deployment is because it can carry out all the attendant functions to implement
technology without recourse to sub-contractors. The same project team
responsible for infrastructure is capable of installing routers, workstations
and servers as well as migrating operating systems within the most complex
enterprise environments.
Strategy
The Company's mission is to see its processes and methodologies
which are encapsulated in its software tools become the defacto standard for
technology deployment. The strategy is to achieve this by providing software
enabled services as well as licensing software to large Technology Providers and
certain Fortune 2000 companies. In support of this strategy the Company is
engaged in the following activities:
o Continuing to invest in the research and development of automated tools;
o Creating strong long-term relationships with Technology Providers, thereby
providing a source for repeatable business;
o Engaging its salesforce to support the marketing efforts of its strategic
partners like Cisco, IBM, Hewlett Packard and Cabletron;
8
Sales and Marketing
The Company's marketing efforts are focused towards projects
requiring more complex solutions from a technical, geographic dispersion, or
time sensitive point of view. In the Company's experience, more complex,
multi-site deployments have significantly less competitive pressures, and
generate higher proposal close rates and gross margins than deployments with
less complexity and/or less geographic dispersion.
Over the past several years, the Company's sales force which is now
comprised of 18 account managers worked directly with large Enterprise Customers
and built a solid business foundation on its ability to provide rapid technology
deployment services. The Company's service offerings have improved the return on
investment for these enterprise customers by providing People, Process and Tools
to greatly reduce the time for deployment projects with quality, speed, accuracy
and value.
Given the growth of the Internet economy, the Company has over the
past several years focused on creating relationships with OEM (original
equipment manufactures) and SP (Service Providers). These market segments are in
need of resources and processes to facilitate the assimilation of new
technologies in their respective market space. By accelerating the absorption of
technologies, the Company improves the return on sales for these partners.
This strategy has helped establish a new identity for the Company as
it forms significant relationships with global OEMs and major integrators. These
relationships have in turn provided new and additional leverage for access and
identity in the market space. Since initiating this strategy in late 1998, the
Average Annual Growth Rate (AAGR) in this segment has been approximately 100%
and today comprises close to 50% of the Company's total sales.
Clients
The Company performs deployment services directly to a variety of
enterprise clients across a broad range of industries. The Company also delivers
its services to end-users through Technology Providers that utilize the
Company's deployment services on a project-by-project basis. The Company's
clients include:
Enterprise - Direct Technology Providers - Indirect
- ------------------- -------------------------------
CitiGroup, Inc. American Telephone and Telegraph (ATT)
Federated Department Stores, Inc. Bell Atlantic Network Integration, Inc.
Lowe's Companies, Inc. Cisco Systems, Inc.
Office Depot, Inc. Computer Sciences Corporation
Starbucks Corporation Electronic Data Systems Corporation
State Farm Mutual Automobile IBM Global Services
Insurance Company MCI Worldcom, Inc.
The Chubb Corporation Qwest Communications International Inc.
The Home Depot, Inc.
Toys "R" Us, Inc.
Walgreen Co.
During each of the past three fiscal years, revenues from the
Company's services to a limited number of customers have accounted for a
substantial percentage of the Company's total revenues. For the years ended
April 30, 1999, 2000 and 2001, the Company's 15 largest customers accounted for
approximately 57%, 73%, and 82% of the Company's revenues,
9
respectively. For the year ended April 30, 1999, Cisco Systems, Inc. accounted
for approximately 10% of the Company's revenues. For the year ended April 30,
2000, Lowe's Companies, Inc. accounted for approximately 19% of the Company's
revenues. For the year ended April 30, 2001, IBM Corporation accounted for
approximately 27%, and Lowe's Companies accounted for approximately 21%, of the
Company's revenues. This concentration of customers can cause the Company's
revenues and earnings to fluctuate from quarter-to-quarter, based on the
requirements of its customers and the timing of delivery of services.
Competition
The Company competes with a number of other companies involved in
the design, sale, installation, integration and servicing of computer networking
technologies, as well as companies that develop software tools to automate the
technology implementation process. The IT deployment market is highly fragmented
and characterized by a small number of very large organizations that carry out a
significant amount of deployment and a large number of small companies that in
turn carry out small amounts of deployment. In addition to direct competition,
the Company faces indirect competition from its existing customers, many of whom
internally design, integrate and deploy their own technologies. The Company,
however, knows of no other Company that offers rapid IT deployment services or
software tools designed to support the delivery of complex IT solutions as their
primary business focus.
Intellectual Property
The Company relies on a combination of trade secrets, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its software developers, and when
obtainable, enters into non-disclosure agreements with its suppliers,
distributors and others so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will prove sufficient to deter misappropriation of the
Company's technologies or that the Company's competitors will not independently
develop non-infringing technologies that are substantially similar to or
superior to the Company's technology.
Employees
As of April 30, 2001, the Company had approximately 575 full-time
employees. Of these full-time employees, approximately 227 are employed under
contracts with the International Brotherhood of Electrical Workers and the
International Brotherhood of Electrical Workers Local 1430.
The success of the Company depends in large part upon its ability to
attract and retain qualified employees, particularly senior management, systems
engineering personnel and sales personnel. The competition for such employees is
intense. There can be no assurance that the Company will be successful in
attracting or retaining any employees. Any failure by the Company to retain
qualified senior management, systems engineering personnel and sales personnel
could materially adversely affect the Company's business, operating results, and
financial condition. The Company believes its relationship with its employees is
satisfactory.
10
Item 2. Properties
----------
The Company's corporate headquarters aggregating approximately
39,570 square feet is located at 23 Madison Road, Fairfield, New Jersey 07004.
The headquarters building is comprised of the Company's New York/New Jersey
office as well as one of the Company's four Configuration Centers. In addition
to its headquarters building, the Company leases throughout the United States
approximately 274,000 square feet of space in 13 locations for its sales and
field operations and configuration centers. The Company also leases an aggregate
of approximately 7,000 square feet of space in one location in Canada.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings which
individually or in the aggregate, are believed to be material to the Company's
business.
11
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted during the fourth quarter of fiscal 2001
to a vote of security holders.
12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's Common Stock is currently traded on the Nasdaq
National Market System ("Nasdaq") under the symbol "DATC". The Company's Common
Stock commenced listing on the Nasdaq Small Cap Market on May 3, 1994. The
following table sets forth the high and low sale prices on Nasdaq for the
periods indicated.
High Low
May 1, 1999 - July 31, 1999...............................$4 1/16 $2 9/32
August 1, 1999 - October 31, 1999.........................$3 13/16 $2 9/32
November 1, 1999 - January 31, 2000......................$9 5/8 $2 1/16
February 1, 2000 - April 30, 2000.........................$18 7/16 $4 11/16
May 1, 2000 - July 31, 2000...............................$9 1/8 $3 1/2
August 1, 2000 - October 31, 2000.........................$5 1/14 $2 7/8
November 1, 2000 - January 31, 2001.......................$4 1/2 $1 1/2
February 1, 2001 - April 30, 2001.........................$2 7/8 $ 1/2
On July 25, 2001, the closing sale price for the Company's Common
Stock as reported on Nasdaq was $0.75. The closing price for the Company's
Common Stock has been below $1.00 for over 30 consecutive trading days. If the
closing price has not been at or above $1.00 for 10 consecutive trading days
prior to October 11, 2001, the Company would anticipate receiving a delisting
notification from Nasdaq. As of July 25, 2001, there were approximately 128
holders of record of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock
since its inception, other than distributions to shareholders in amounts
sufficient to reimburse Datatec Industries, Inc. shareholders for Federal (and
some state) income tax liabilities arising from Datatec Industries, Inc.'s
former status as an "S" corporation. The Company currently intends to retain any
earnings for use in the business and does not anticipate paying any dividends to
its shareholders in the foreseeable future. The Company's loan agreements with
its lender include a restriction prohibiting the payment of dividends.
13
Item 6. Selected Financial Data
-----------------------
The following table sets forth the selected financial data of the
Company for, and at the end of the years ended April 30, 1997, 1998, 1999, 2000,
and 2001.
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.
Year Ended
April 30,
(in thousands, except share and per share data)
Statement of Operations Data: 1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Revenues $ 59,481 $ 76,804 $ 93,751 $ 95,148 $ 94,285
Operating income (loss) 1,538 517 1,662 47 (18,348)
Minority Interest -- -- -- -- (682)
Income (loss) from continuing operations 127 (1,218) (191) (1,633) (21,145)
Discontinued operations (5,662) (2,768) (315) -- --
Net loss $ (5,535) $ (3,986) $ (506) $ (1,633) $ (21,145)
============ ============ ============ ============ ============
Income (loss) per share
- - Basic and Diluted:
Income (loss) from continuing operations $ (.09) $ (.05) $ (.01) $ (.05) $ (.63)
Discontinued operations (.27) (.10) (.01) -- --
------------ ------------ ------------ ------------ ------------
Net loss per share $ (.36) $ (.15) $ (.02) $ (.05) $ (.63)
============ ============ ============ ============ ============
Average common and common equivalent
shares - Basic and Diluted 21,151,000 26,451,000 29,517,000 31,541,000 33,608,000
============ ============ ============ ============ ============
April 30,
------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $(2,957) $ 1,022 $ 2,297 $16,158 ($3,312) (a)
Total assets 27,804 37,813 40,603 55,062 43,496
Long-term debt 4,751 2,415 607 226 14
Total shareholders' equity (deficit) (1,750) 10,468 14,729 21,045 869
(a) Includes a $3,000 Term Loan due in 2003 which the Company intends to repay
in 2002.
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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 and licensing software tools to support
Technology Providers and Enterprises in the delivery of complex IT solutions.
Utilizing 4 regional staging and configuration centers and its own field
deployment team of approximately 227 people operating out of 13 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 Enterprise 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 of Illinois,
Inc. ("HH"), a systems integrator with an expertise in routing technologies. In
October 1996, the Company acquired Datatec Industries, Inc., a systems
integrator with a focus on installation services.
Since the acquisition of Datatec Industries, Inc. in October 1996,
the Company has transitioned its business to providing rapid deployment
services. In June 1997, the Company discontinued its data communications
equipment distribution business.
During fiscal 1999 the Company began expanding its development of
software tools to incorporate several new applications in addition to its
Integrators Workbench and has incorporated them into a new product, eDeploy(TM).
As previously mentioned in Item 1., these applications include: Preparation and
Design, Configuration and Integration, Deployment Management and Transition and
Maintenance. In light of potential conflicts between the
15
licensing of eDeploy(TM) and providing deployment services, the Company merged
the activities of developing, marketing, selling and managing the licensing of
its software into its CASI subsidiary. The Company then changed the name of CASI
to eDeploy.com, Inc (eDeploy.com).
The Company's deployment services are generally provided at a fixed
contract price pursuant to purchase orders or other agreements with its
customers.
Revenues from deployment services, including configuration,
integration and installation under short-term workorders are recognized as the
services are provided. On long-term deployment service contracts the Company
recognizes revenue on a percentage of completion basis. The Company recognizes
revenue from licensing its software in accordance with Statement of Position
97-2 "Software Revenue Recognition". The Company also recognizes revenue as an
Application Service Provider (ASP). Under this scenario, the Company does not
license the software, but provides access to the software that is being hosted
by eDeploy.com. For this access, eDeploy.com bills its customers and recognizes
this revenue over the period of access.
The Company's cost of deployment services consists of three main
categories: labor, materials, and project expenses. 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.
The Company capitalizes certain computer software costs incurred by
eDeploy.com, Inc. in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". The Company also capitalizes certain costs of computer
software developed or obtained for internal use in accordance with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". These costs are amortized over a period not to
exceed three years.
As of April 30, 2001, the Company had net operating loss
carryforwards for Federal tax purposes of approximately $31 million. United
States tax rules limit the amount of net operating loss that companies may
utilize in any one year in the event of a 5% shareholder having 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, 2001, although ownership changes in future periods may
pose limitations on the Company's use of net operating loss carryforwards. These
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere herein.
16
Results of Operations
- ---------------------
Comparison of Fiscal Years Ended April 30, 2001 and 2000
Revenues. Revenues for the year ended April 30, 2001 were $94.3
million compared to $95.1 million for the year ended April 30, 2000,
representing a decrease of 0.8%. Deployment Services revenues decreased by 1.8%
from $94.1 million in 2000 to $92.4 million in 2001. The decrease in revenues
was attributed to the overall slowdown in the retail sector, which delayed
business decisions in the fiscal quarters ended January 31 and April 30, 2001.
Revenues from Technology Providers increased 100% from $24.2 million in 2000 to
$48.5 million in 2001. Revenues from Enterprise customers decreased by 36.1%
from $69.9 million in 2000 to $44.7 million in 2001. eDeploy.com revenue
increased from $1.1 million in 2000 to $2.5 million in 2001. These revenues
represent license sales, ASP access and other fees.
Gross profit. Gross profit for the year ended April 30, 2001 was
$27.8 million compared to $34.8 million for the year ended April 30, 2000. Gross
profit percentage was 29.5% for the year ended April 30, 2001 compared to 36.5%
for the year ended April 30, 2000. Deployment Services cost of revenues
increased by 8.4% from $60.4 million in 2000 to $65.5 million in 2001. Gross
profit as a percentage of sales decreased from 35.7% in 2000 to 29.1% in 2001.
The decrease in gross profit is the result of several factors, including the mix
of higher material sales, which carry lower margins, and the impact of the lead
time required to bring costs in line with lower revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 2001 were $46.2 million
compared to $34.7 million for the year ended April 30, 2000, representing an
increase of 33.1%. As a percentage of revenues, selling, general and
administrative expenses represented 49.0% for the year ended April 30, 2001
compared to 36.5% for the year ended April 30, 2000. Deployment Services
selling, general and administrative expenses increased by 17.4% from $31.7
million in 2000 to $37.2 million in 2001 and as a percentage of revenues,
increased from 33.7% in 2000 to 40.3% in 2001. The increase in selling, general
and administrative expenses in absolute dollars is primarily due to increased
salary, benefits and payroll taxes associated with higher headcount levels in
the fiscal quarters ended July 31 and October 31, 2000, in addition to the costs
associated with the emergence in fiscal 2000 of eDeploy.com.
Interest expense. Interest expense for the year ended April 30, 2001
was $1.7 million, compared to $1.7 million for the year ended April 30, 2000.
Income Taxes. The valuation allowance of $0.4 million was
established during fiscal 2001 relating to the uncertainty in the realization of
deferred state income taxes.
Comparison of Fiscal Years Ended April 30, 2000 and 1999
Revenues. Revenues for the year ended April 30, 2000 were $95.1
million compared to $93.8 million for the year ended April 30, 1999,
representing an increase of 1.5%. Deployment Services revenues increased by less
than 1% from $93.8 million in 1999 to $94.1 million in 2000. Growth in revenue
was negatively impacted by customer Y2k concerns and the associated "lock
downs", as well as a shift in the Company's sales/marketing strategy. This shift
has increased the level of focus on the indirect sale. Revenues from Technology
Providers increased 22.5% from $19.8 million in 1999 to $24.2 million in 2000.
Revenues from Enterprise customers
17
decreased by 5.5% from $74.0 million in 1999 to $69.9 million in 2000.
eDeploy.com revenue increased from $0 in 1999 to $1.1 million in 2000. These
revenues represent ASP access and other fees.
Gross profit. Gross profit for the year ended April 30, 2000 was
$34.8 million compared to $32.8 million for the year ended April 30, 1999. Gross
profit percentage was 36.5% for the year ended April 30, 2000 compared to 35.0%
for the year ended April 30, 1999. Deployment Services cost of revenues
decreased by 1% from $61.0 million in 1999 to $60.4 million in 2000. Gross
profit as a percentage of sales increased from 34.9% in 1999 to 35.7% in 2000.
The improved gross profit is the result of several factors, including improved
information systems for project management and the termination of certain low
margin customers at the end of 1999. All costs and expenses of eDeploy are
reflected as selling, general and administrative.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended April 30, 2000 were $34.7 million
compared to $31.1 million for the year ended April 30, 1999, representing an
increase of 11.7%. As a percentage of revenues, selling, general and
administrative expenses represented 36.5% for the year ended April 30, 2000
compared to 33.1% for the year ended April 30, 1999. Deployment Services
selling, general and administrative expenses increased by 6.4% from $29.8
million in 1999 to $31.7 million in 2000 and as a percentage of revenues,
increased from 31.8% in 1999 to 33.7% in 2000. The increase in selling, general
and administrative expenses in absolute dollars is primarily due to increased
facility costs, salary and benefit costs and one time travel related costs.
eDeploy.com selling, general and administrative expenses increased by 144% from
$1.3 million in 1999 to $3.1 million in 2000. The increase is the result of
eDeploy.com's growth and emergence in 2000 as a stand-alone company. Increases
in salary and benefits were the primary contributors to the increase as
eDeploy.com builds out its infrastructure to develop, market and manage the
licensing of its software.
Interest expense. Interest expense for the year ended April 30, 2000
was $1.7 million, compared to $1.9 million for the year ended April 30, 1999.
The decrease is primarily attributable to reduced average debt balances for the
year.
Income Taxes. A valuation allowance has been provided to offset
deferred tax assets as realization is presently not more likely than not.
Backlog
- -------
Backlog for the Company's services as of July 2001 and July 2000 was
$62.2 million and $59.1 million, respectively. Backlog consists of purchase
orders and written 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 have a material adverse affect on 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.
18
Liquidity and Capital Resources
- -------------------------------
In November 2000, the Company replaced its existing credit
facilities with a $21 million credit facility consisting of (i) an $18 million
three year revolving credit facility and (ii) a $3 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 25-35% of eligible inventory. The revolving line of credit bears
interest at prime plus .25% and the term loan bears interest at prime plus .75%.
The Company was not in compliance with the covenants of its new
credit facility as of January 31, 2001. As a result, the Company and IBM Credit
Corp. entered into the Acknowledgment, Waiver and Amendment to Financing
Agreement dated May 2, 2001 (the "First Waiver and Amendment"), which provided
for the following:
1. Reduction in the line of credit to $14 million, which was subsequently
increased to $16 million on July 25, 2001.
2. Revision of the covenants to reflect current business conditions.
3. Increase in the interest rates in the revolver and term loans to prime
plus 3.0% and 3.5% respectively.
The Company was not in compliance with the new covenants set forth
in the First Waiver and Amendment. As a result, pursuant to the Acknowledgment,
Waiver and Amendment to Financing Agreement dated July 25, 2001 between the
Company and IBM Credit Corp., a waiver was obtained to bring the Company back in
compliance with the new credit facility. Based on its forecast for fiscal 2002,
the Company believes that it has the ability to meet the revised quarterly loan
covenants.
The Company incurred significant losses during 2001 due to the
downturn in the technology sector. Of the consolidated net loss of approximately
$21.1 million, $11.4 million was incurred by Datatec Services and $9.7 was
incurred by eDeploy. Substantially all losses were incurred during the fiscal
quarters ended January 31 and April 30, 2001. During the fiscal quarter ended
October 31, 2000, Datatec Services had achieved record revenues and profits of
$32.2 million and $2.4 million, respectively.
Based on results for the fiscal quarter ended October 31, 2000, the
Company continued to build its infrastructure to support expected increases in
revenues. In the fiscal quarters ended January 31 and April 30, 2001, however,
the Company experienced a sudden and deep slowdown in the technology sector.
Notwithstanding the slowdown, consolidated revenues for 2001 of $94.3 million
were approximately at the same levels as consolidated revenues for 1999 and
2000.
The guidance from the Company's customers was that projects were
being postponed for only a short period of time. As a result of this guidance,
the Company postponed reductions in its labor resources. Consequently, the
Company's direct labor costs and other direct costs were out of balance with the
new revenue reality.
The Company has taken aggressive action to insure its ability to
continue as a going concern during 2002. Several revenue forecasts have been
developed which show that a cash break even can be achieved at revenues of $85.0
million. Infrastructure costs have been reduced by over $13.0 million on an
annual basis, of which $11.0 million relate to payroll reductions.
19
The Company's analysis indicates that its primary problems during
2001 related to a build up in costs in anticipation of increased revenues that
did not occur. After a significant reduction in revenues during the fiscal
quarters ended January 31 and April 30, 2001, revenues have increased in the
fiscal quarter ending July 31, 2001. The Company's backlog is strong and
identified costs have been reduced by over $13.0 million.
Although the Company has sustained significant operating losses
during 2001, its 2002 operating plan projects profitable results for the fiscal
year. The achievement of the operating plan depends on the timing of work
performed by the Company on existing projects and the ability of the Company to
gain and perform work on new projects. Multiple project cancellations, delays in
the timing of work performed by the Company on existing projects or the
inability of the Company to gain and perform work on new projects could have an
adverse impact on the Company's ability to execute its operating plan and
maintain adequate cash flow. In the event actual results do not approximate the
operating plan, management believes it could execute contingency plans to
mitigate such effects. Such plans include additional cost reductions or seeking
additional financing. Considering the Company's borrowing facility and based on
the achievement of the operating plan and management's actions taken to date,
management believes it has the ability to continue to generate sufficient cash
to satisfy its operating requirements in the normal course of business. However,
no assurance can be given that sufficient cash will be generated from
operations. Management believes that the Company will have sufficient cash
resources to continue as a going concern during 2002.
Inflation
In the opinion of management, inflation has not had a material
adverse effect on its results of operations.
20
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. . . . . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets as of April 30, 2000 and 2001 . . . . . . . . . . . . 23
Consolidated Statements of Operations For the Years Ended April 30, 1999,
2000 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Comprehensive Loss For the years
ended April 30, 1999, 2000 and 2001 . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended April 30, 1999, 2000 and 2001 . . . . . . . . . . . . . . . 26
Consolidated Statements of Cash Flows For the Years Ended
April 30, 1999, 2000 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 27
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . 28
Schedules
---------
Schedule II -Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . 47
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.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Datatec Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datatec Systems,
Inc. and subsidiaries, as of April 30, 2000 and 2001 and the related
consolidated statements of operations, comprehensive loss, changes in
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 2001. These consolidated financial statements and schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Datatec Systems, Inc. and
subsidiaries as of April 30, 2000 and 2001 and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2001, in conformity with accounting principles generally accepted in the United
States.
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 a
required part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
Roseland, New Jersey ARTHUR ANDERSEN LLP
July 26, 2001
22
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
----------------------------
2000 2001
------------ ------------
ASSETS
- --------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 10,077,000 $ 571,000
Receivables, net (Note 3) 23,849,000 22,990,000
Inventory (Note 1) 5,129,000 5,273,000
Prepaid expenses and other current assets 1,301,000 792,000
------------ ------------
Total current assets 40,356,000 29,626,000
Property and equipment, net (Notes 1 & 4) 5,169,000 5,050,000
Goodwill, net (Note 1) 3,102,000 2,665,000
Other assets 6,435,000 6,155,000
------------ ------------
Total assets $ 55,062,000 $ 43,496,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
CURRENT LIABILITIES:
Short-term borrowings (Note 5) $ 9,070,000 $ 13,912,000
Current portion of long-term debt 776,000 210,000
Accounts payable 9,480,000 9,803,000
Accrued and other liabilities 3,482,000 7,599,000
Due to related parties (Note 9) 1,390,000 1,414,000
------------ ------------
Total current liabilities 24,198,000 32,938,000
Long-term debt 226,000 14,000
Commitments and contingencies (Note 11)
Minority interest 9,593,000 9,675,000
Shareholders' equity (Notes 1, 7 & 10)
Common stock, $.001 par value (authorized 75,000,000
shares; issued and outstanding 33,413,000 and
33,754,000 shares as of April 30, 2000 and 2001,
respectively) 33,000 34,000
Additional paid-in capital 42,268,000 43,241,000
Accumulated deficit (20,908,000) (42,053,000)
Accumulated comprehensive loss (348,000) (352,000)
------------ ------------
Total shareholders' equity 21,045,000 869,000
------------ ------------
Total liabilities and shareholders' equity $ 55,062,000 $ 43,496,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
23
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
April 30,
------------------------------------------------------
1999 2000 2001
----------------- --------------- ---------------
Revenues (Note 1) $ 93,751,000 $ 95,148,000 $ 94,285,000
Cost of revenues 60,993,000 60,381,000 66,476,000
----------------- --------------- ---------------
Gross profit 32,758,000 34,767,000 27,809,000
Selling, general and administrative expenses 31,096,000 34,720,000 46,157,000
----------------- --------------- ---------------
Operating income (loss) 1,662,000 47,000 (18,348,000)
Interest expense (Note 5) (1,853,000) (1,680,000) (1,715,000)
----------------- --------------- ---------------
Loss before income taxes (191,000) (1,633,000) (20,063,000)
Income taxes (Notes 1& 8) -- -- (400,000)
----------------- --------------- ---------------
Minority interest -- -- (682,000)
----------------- --------------- ---------------
Loss from continuing operations (191,000) (1,633,000) (21,145,000)
Discontinued operations (Note 16):
Loss from operations (315,000) -- --
----------------- --------------- ---------------
Net loss $ (506,000) $(1,633,000) $ (21,145,000)
================= =============== ===============
LOSS PER SHARE - BASIC AND DILUTED (Note 2):
Loss from continuing operations $ (.01) $ (.05) $ (.63)
Loss from discontinued operations (.01) -- --
----------------- --------------- ---------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (.02) $ (.05) $ (.63)
================= =============== ===============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES - BASIC AND DILUTED
29,517,000 31,541,000 33,608,000
================= =============== ===============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
24
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended
April 30,
-----------------------------------------------------
1999 2000 2001
--------------- --------------- ----------------
Net loss ($506,000) ($1,633,000) ($21,145,000)
Other comprehensive income (loss) -
Foreign currency translation adjustment 5,000 (5,000) (4,000)
--------------- --------------- ----------------
Comprehensive loss ($501,000) ($1,638,000) ($21,149,000)
=============== =============== ================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
25
Datatec Systems, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Preferred Stock Common Stock
----------------------------------------------------- Additional
Paid-in Capital
Shares Dollars Shares Dollars Preferred
----------- ----------- ----------- ----------- -----------
Balance at April 30, 1998 -- -- 29,007,000 $ 29,000 $ --
Issuance of preferred stock (Note 7) 300 -- -- -- 2,337,000
Exercise of warrants and options -- -- 40,000 -- --
Private placement offering of common stock (Note 7) -- -- 533,000 -- --
Issuance of common stock under Employee Stock
Purchase Plan (Note 10) -- -- 190,000 -- --
Conversion of preferred stock into common stock (Note 7) (180) -- 719,000 1,000 (1,402,000)
Net loss -- -- -- -- --
Effect of exchange rate changes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at April 30, 1999 120 -- 30,489,000 30,000 935,000
Exercise of warrants and options -- -- 2,263,000 2,000 --
Issuance of common stock under Employee Stock
Purchase Plan (Note 10) -- -- 188,000 -- --
Conversion of preferred stock into common stock (Note 7) (120) -- 473,000 1,000 (935,000)
Net loss -- -- -- -- --
Effect of exchange rate changes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at April 30, 2000 -- -- 33,413,000 33,000 --
Exercise of warrants and options -- -- 106,000 -- --
Issuance of common stock under Employee Stock
Purchase Plan (Note 10) -- -- 235,000 1,000 --
Net loss -- -- -- -- --
Effect of exchange rate changes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at April 30, 2001 -- $ -- 33,754,000 $ 34,000 $ --
=========== =========== =========== =========== ===========
Additional Accumulated Accumulated Total
Paid-in Capital Deficit Comprehensive Shareholders
Common Loss Equity
----------- ----------- ----------- -----------
Balance at April 30, 1998 $29,556,000 $(18,769,000) $ (348,000) $10,468,000
Issuance of preferred stock (Note 7) -- -- -- 2,337,000
Exercise of warrants and options 75,000 -- -- 75,000
Private placement offering of common stock (Note 7) 1,854,000 -- -- 1,854,000
Issuance of common stock under Employee Stock
Purchase Plan (Note 10) 496,000 -- -- 496,000
Conversion of preferred stock into common stock (Note 7) 1,401,000 -- -- --
Net loss -- (506,000) -- (506,000)
Effect of exchange rate changes -- -- 5,000 5,000
----------- ----------- ----------- -----------
Balance at April 30, 1999 33,382,000 (19,275,000) (343,000) 14,729,000
Exercise of warrants and options 7,543,000 -- -- 7,545,000
Issuance of common stock under Employee Stock
Purchase Plan (Note 10) 409,000 -- -- 409,000
Conversion of preferred stock into common stock (Note 7) 934,000 -- -- --
Net loss -- (1,633,000) -- (1,633,000)
Effect of exchange rate changes -- -- (5,000) (5,000)
----------- ----------- ----------- -----------
Balance at April 30, 2000 42,268,000 (20,908,000) (348,000) 21,045,000
Exercise of warrants and options 325,000 -- -- 325,000
Issuance of common stock under Employee Stock
Purchase Plan (Note 10) 648,000 -- -- 648,000
Net loss -- (21,145,000) -- (21,145,000)
Effect of exchange rate changes -- -- (4,000) (4,000)
----------- ----------- ----------- -----------
Balance at April 30, 2001 $43,241,000 $(42,053,000) $ (352,000) $ 869,000
=========== ============ =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
26
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 30,
----------------------------------------------------
1999 2000 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (506,000) $ (1,633,000) $(21,145,000)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 2,723,000 3,702,000 5,316,000
Loss from discontinued operations 315,000 -- --
Accretion of subsidiary preferred stock -- -- 82,000
Changes in operating assets and liabilities--
(Increase) decrease in receivables, net (2,555,000) (3,188,000) 859,000
Increase in inventory (134,000) (1,877,000) (144,000)
Increase in prepaid expenses and other assets 712,000 1,985,000 821,000
(Increase) decrease in net assets from discontinued
operations
(310,000) 447,000 --
Increase (decrease) in accounts payable, accrued
liabilities and other
1,627,000 (847,000) 4,441,000
------------ ------------ ------------
Net cash used in operating activities 1,872,000 (1,411,000) (9,770,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,291,000) (2,256,000) (2,421,000)
Investment in software development (2,332,000) (3,091,000) (2,371,000)
------------ ------------ ------------
Net cash used in investing activities (3,623,000) (5,347,000) (4,792,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from short-term borrowings (2,136,000) 447,000 4,842,000
Net payments of indebtedness (1,088,000) (1,388,000) (778,000)
Net proceeds from stock issuances 4,887,000 7,954,000 973,000
Net increase in due to related parties -- -- 23,000
Net proceeds from preferred stock offering of subsidiary -- 9,593,000 --
------------ ------------ ------------
Net cash provided by financing activities 1,663,000 16,606,000 5,060,000
------------ ------------ ------------
Net effect of foreign currency translation adjustment 5,000 (5,000) (4,000)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (83,000) 9,843,000 (9,506,000)
CASH AND CASH EQUIVALENTS at beginning of period
317,000 234,000 10,077,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS at end of period $ 234,000 $ 10,077,000 $ 571,000
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
27
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Summary of Significant Accounting Policies:
-------------------------------------------------------
Business--
Datatec Systems, Inc. (the "Company"), and its subsidiaries are
in the business of providing rapid and accurate technology
deployment services and licensing software tools to support
Technology Providers and Enterprises in the delivery of
complex IT solutions.
During fiscal year 2000, the Company changed the name of its CASI
subsidiary to eDeploy.com Inc., ("eDeploy.com"). eDeploy.com
develops, markets and manages the licensing of its software
tools to support Technology Providers and Enterprises in the
delivery of complex IT solutions. The Company also utilizes
these software tools in its delivery of complex IT solutions
to its customers. (See Note 6).
Although the Company has sustained significant operating losses
during 2001, its 2002 operating plan projects profitable
results for the fiscal year. The achievement of the operating
plan depends on the timing of work performed by the Company on
existing projects and the ability of the Company to gain and
perform work on new projects. Multiple project cancellations,
delays in the timing of work performed by the Company on
existing projects or the inability of the Company to gain and
perform work on new projects could have an adverse impact on
the Company's ability to execute its operating plan and
maintain adequate cash flow. In the event actual results do
not approximate the operating plan, management believes it
could execute contingency plans to mitigate such effects. Such
plans include additional cost reductions or seeking additional
financing. Considering the Company's borrowing facility and
based on the achievement of the operating plan and
management's actions taken to date, management believes that
the ability to continue to generate sufficient cash to satisfy
its operating requirements in the normal course of business.
However, no assurance can be given that sufficient cash will
be generated from operations. Management believes that the
Company will have sufficient cash resources to continue as a
going concern during 2002.
Basis of Presentation--
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of Estimates--
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and
28
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition--
Revenues from configuration, integration and deployment services
under short-term workorders are recognized as the services are
provided. The Company recognizes revenue utilizing percentage
of completion accounting for long-term contracts. Revisions in
estimated profits are made in the period in which the
circumstances requiring the revision become known. Provisions,
if any, are made currently for anticipated losses on
uncompleted contracts.
The Company's subsidiary, eDeploy.com, may enter into certain
contracts to sell software. Revenue from such contracts are
recognized in accordance with Statement of Position ("SOP")
No. 97-2, as amended, "Software Revenue Recognition". Revenue
from license fees is recognized when an agreement has been
signed, delivery of the product has occurred, the fee is fixed
or determinable and collectibility is probable. Revenue is
deferred if the criteria is not met. If the fee due from the
customer is not fixed or determinable, revenue is recognized
as payments become due from the customer. If collectibility is
not considered probable, revenue is recognized when the fee is
collected. Maintenance revenues, if applicable, are recognized
ratably over the contract period. The Company also recognizes
revenues as an Application Service Provider (ASP). Under this
scenario, the Company does not license the software, but
provides access to the software that is being hosted by
eDeploy.com. For this access, eDeploy.com bills its customers
and recognizes this revenue over the period of access.
Cash and Cash Equivalents--
The Company considers cash equivalents to be all highly liquid
investments purchased with an original maturity of three
months or less.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out
basis) or market.
Property and Equipment, Net--
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed using the straight-line and double-declining
balance methods over the estimated useful lives or lease terms
of the related assets, whichever is shorter.
Capitalized Software Development Costs--
TheCompany capitalizes certain computer software costs, which
include product enhancements, after technological feasibility
has been established, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". These costs are amortized using the
greater of the ratio that current gross revenues for a product
29
bear to the total of current and anticipated future gross
revenues for the product or a maximum of three years using the
straight line method beginning when the products are available
for general release to customers. Approximately $3,571,000 and
$3,459,000 of net capitalized software costs are included in
other assets in the accompanying consolidated financial
statements as of April 30, 2000 and 2001, respectively. These
costs relate to the software developed by eDeploy.com (See
Note 6). Amortization expense of capitalized software costs
for the years ended April 30, 1999, 2000 and 2001 was
$133,000, $577,000 and $1,544,000, respectively.
Long-Lived Assets--
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets" requires, among other things, that an entity review
its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The
amount of impairment of goodwill would be determined as part
of the long-lived asset grouping being evaluated. Due to the
substantial losses incurred in 2001, the Company has assessed
its long-lived assets for impairment. Based on estimated
undiscounted cash flows, the Company believes that there is no
impairment of its long-lived assets as of April 30, 2001.
Income Taxes--
The Company accounts for income taxes in accordance with SFAS
No. 109 "Accounting for Income Taxes". 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--
Thelocal currency of the Company's foreign subsidiary is its
functional currency. Assets and liabilities of the Company's
foreign subsidiary are translated into U.S. dollars at the
current exchange rate. Statement of operations accounts are
translated at the average rate of exchange prevailing during
the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included as
a component of accumulated comprehensive loss included in
shareholders' equity.
Stock Based Compensation--
SFAS 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
Accounting Principle Bulletin ("APB") Opinion No. 25,
"Accounting for
30
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 loss and losses per share as if the fair
value based method of accounting under SFAS 123 had been
applied (see Note 10).
Internal Use Software--
Inaccordance with SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," the
Company capitalizes certain costs of computer software
developed or obtained for internal use. During the years ended
April 30, 2000 and 2001, approximately $1,240,000 and $837,000
of costs were capitalized and are included in other assets in
the accompanying consolidated balance sheets. These costs
relate to the design and installation of internal use software
developed for the Company's job costing and other systems and
will be amortized over a period not to exceed three years.
Approximately $29,000, $351,000 and $676,000 of amortization
expense was incurred during the years ended April 30, 1999,
2000 and 2001, respectively. The Company has expensed costs
incurred during the preliminary and post implementation
phases.
Comprehensive Loss--
SFAS No. 130 "Reporting Comprehensive Income", establishes
standards for reporting and displaying of comprehensive income
and its components (revenue, expenses, gains and losses) in a
full set of general-purpose financial statements. The
components of other comprehensive loss consists primarily of
foreign currency translation adjustments.
Recently Announced Accounting Pronouncement--
On June 30, 2001, the Financial Accounting Standards Board issued
SFAS No. 141 "Business Combinations" and SFAS 142 "Goodwill
and Other Intangible Assets," collectively ("the Standards").
The Standards require all business combinations initiated
after June 30, 2001 to be accounted for using the purchase
method of accounting, that goodwill is no longer subject to
amortization and that other identifiable intangibles are to be
separated and amortized over their useful lives. Goodwill must
be assessed once a year for impairment, and more frequently if
circumstances indicate a possible impairment. The Company is
required to adopt these provisions on May 1, 2002; however, it
has the option to adopt the Standards on May 1, 2001. The
Company has not decided on whether to early adopt the
Standards. The Company is unable to determine the effect of
the financial impact, if any, that may result from
implementation of the Standards.
(2) Net Loss Per Share:
------------------
SFAS No. 128, "Earnings Per Share" 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
31
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 No. 128, the following table reconciles
net loss and per share amounts used to calculate basic and
diluted earnings per share:
32
For the Years Ended April 30,
-----------------------------------------------------------
1999 2000 2001
-------------- ----------- --------------
Numerator:
Loss from continuing operations $(191,000) $(1,633,000) $(21,145,000)
Discontinued operations (315,000) -- --
Net loss (506,000) $(1,633,000) (21,145,000)
============== =========== ==============
Denominator:
Weighted average number of common
Shares outstanding - Basic and Diluted 29,517,000 31,541,000 33,608,000
============== =========== ==============
Loss per share - Basic and Diluted:
Loss from continuing operations ($.01) ($.05) ($.63)
Loss from discontinued operations (.01) -- --
-------------- ----------- --------------
Net loss per share ($.02) ($.05) ($.63)
============== =========== ==============
In 1999, 2000 and 2001, approximately 6,360,247, 4,141,238 and
5,335,991, respectively, of outstanding options and warrants
have been excluded from the computation of diluted EPS as
their inclusion would have been anti-dilutive for those
periods.
(3) Receivables:
------------
April 30,
Receivables consist of the following -- --------------------------------------
2000 2001
---- ----
Billed accounts receivable, including unbilled amounts under
short-term completed work orders $ 16,142,000 $ 16,358,000
Revenues in excess of amounts billed under percentage of
completion accounting
7,943,000 7,204,000
Allowance for doubtful accounts (236,000) (572,000)
------------ ------------
Receivables, net $ 23,849,000 $ 22,990,000
============ ============
(4) Property and equipment:
----------------------
The following is a summary of property and equipment--
April 30,
-------------------------------------
2000 2001
----------- -----------
Equipment $ 2,821,000 $ 3,543,000
Computer equipment 6,830,000 8,064,000
Furniture, fixtures and leasehold improvements 4,649,000 5,113,000
----------- -----------
14,300,000 16,720,000
Less--Accumulated depreciation and amortization 9,131,000 11,670,000
----------- -----------
Property and equipment, net $ 5,169,000 $ 5,050,000
=========== ===========
33
The estimated useful lives of these assets are:
Expected Useful Lives
---------------------
Equipment 2 to 5 years
Computer Equipment 3 to 5 years
Furniture, Fixtures and Leasehold Improvements 5 to 7 years
(5) Short-term Borrowings:
---------------------
In November 2000, the Company replaced its current lender and
entered into a credit line with IBM Credit Corporation. Under
the credit line, the Company has a revolving loan that
provides for maximum borrowings of $16,000,000 which was
increased from $14,000,000 on July 25, 2001. Availability
under the revolving loan is calculated as the sum of 85% of
eligible accounts receivable, as defined, and 35% and 25% of
cable and non-cable eligible inventory respectively, as
defined. $10,912,000 was outstanding as of April 30, 2001. The
amount of additional available borrowings, as defined, was
$175,000 as of April 30, 2001. The revolving loan accrues
interest at the prime rate plus 3.00% and matures in November
2003. The credit line includes covenants under which the
Company was in violation. IBM Credit Corporation has waived
the covenant violations.
The Company has a $3,000,000 term loan with IBM Credit
Corporation that is due in November 2003. The term loan
accrues interest at the prime rate plus 3.50% and is payable
in monthly installments of principal and interest of $97,154.
As the Company intends to repay the term loan in 2002, the
term loan has been classified as a current liability.
(6) eDeploy.com, Inc.:
------------------
In April 2000, eDeploy.com entered into a Series A Preferred
Stock Purchase Agreement, an Investors Rights Agreement
(collectively, the "Agreements") and a Software Tool License
and Development Agreement ("License") with Cisco Systems, Inc.
("Cisco"). Under the Agreements, Cisco purchased 100,000 shares
of eDeploy.com Series A Mandatory Redeemable Convertible
Preferred Stock ("Preferred Stock") for $100 per share
("Original Issue Price"), which amount has been recorded as
minority interest in the accompanying consolidated balance
sheets. Dividends are payable quarterly at the rate of 6% and
the Preferred Stock has a liquidation preference in an amount
equal to the Original Issuance Price per share. The holder of
the Preferred Stock may require eDeploy.com to redeem all or a
portion of the Preferred Stock at the Original Issuance Price,
plus any accrued but unpaid dividends, at any time after 5
years from the date of issuance. The Preferred Stock dividends
and accretion of the Preferred Stock are recorded as minority
interest in the accompanying consolidated statements of
operations.
In the event of a Buy-Out Event, as defined, eDeploy.com shall
redeem each share of Preferred Stock for consideration equal to
the Buy-Out Redemption Price, as defined. In the event of a
Qualified IPO, each share of Preferred Stock shall be
automatically converted into a number of shares of common stock
of eDeploy.com equal to the Original Issue Price, plus all
accrued but unpaid dividends, divided by a price ranging from
60% to 80% of the Qualified IPO
34
Price, as defined. Also in April 2000, the Company entered into
the Exchange Agreement with Cisco, pursuant to which, in the
event of a Parent Buy-Out Event, as defined each share of the
Preferred Stock will be automatically exchanged for shares of
the Company's common stock determined by dividing the Original
Issue Price plus accrued but unpaid dividends by the lesser of
$8.00, subject to adjustment as defined, or the Parent Buy-Out
Consideration, as defined.
The License requires a license fee of $1,000,000 to be paid in
accordance with the completion of specified events, as defined,
and provides for specified offsetting re-bills and credits, as
defined. eDeploy.com will grant Cisco a perpetual,
non-exclusive, non-transferable, worldwide license for the
permitted purpose, as defined. As of April 30, 2001, no portion
of the license fee has been recognized.
(7) Shareholders' Equity:
---------------------
Preferred Stock--
In May 1998, the Company issued 300 shares of Series E Cumulative
Convertible Preferred Stock. The net proceeds from this
issuance were approximately $2,300,000. In connection with the
transaction, the Company issued warrants to purchase 165,000
shares of common stock at $6.29.
During fiscal 1999, 180 shares of the Series E Cumulative
Convertible Preferred Stock were converted into 718,860 shares
of common stock. During the year ended April 30, 2000, the
remaining 120 shares of Series E Cumulative Convertible
Preferred Stock were converted into 473,124 shares of common
stock.
Common Stock--
In February 1999, the Company, through a private placement equity
offering, issued 533,334 shares of common stock for net
proceeds of approximately $1,854,000.
35
Warrants--
The following table is a summary and status of warrants issued by
the Company:
Outstanding Warrants
----------------------------------
Number Weighted Average
of Warrants Exercise Price
----------- -----------------
April 30, 1998 1,434,860 $ 5.06
Grants 165,000 $ 6.29
Cancellations (12,360) $ 3.75
---------- ---------
April 30, 1999 1,587,500 $ 5.20
Exercises (695,000) $ 4.97
Cancellations (202,500) $ 4.99
---------- ---------
April 30, 2000 690,000 $ 5.50
Cancellations (90,000) $ 6.29
---------- ---------
April 30, 2001 600,000 $ 5.38
========== =========
Outstanding Warrants
-----------------------------------------------
Weighted Average
Range of Number Warrants Contractual Life Weighted Average
Exercise Prices of Warrants Exercisable (in years) Exercise Price
- ----------------------- ------------------ -------------- --------------------- ---------------------
$5.00 - $5.99 525,000 525,000 1.79 $5.25
>$5.99 75,000 75,000 1.91 $6.29
------------------ -------------- --------------------
Total 600,000 600,000 $5.38
================== ============== ====================
(8) Income Taxes:
------------
The following are the major components of the provision (benefit) for income taxes as of April 30, -
1999 2000 2001
--------------- ----------------- ----------------
Current-
Federal $(65,000) $(555,000) $ --
State (12,000) (98,000) --
--------------- ----------------- ----------------
(77,000) (653,000) --
--------------- ----------------- ----------------
Deferred-
Federal 65,000 555,000 --
State 12,000 98,000 400,000
--------------- ----------------- ----------------
77,000 653,000 400,000
--------------- ----------------- ----------------
Total provision $ -- $ -- $ 400,000
=============== ================= ================
The following indicates the significant elements contributing to
the difference between the U.S. Federal statutory tax rate and
the Company's effective tax rate for the years ending April
30,
36
1999 2000 2001
-------------- -------------- --------------
US Federal Statutory tax rate
(34.0%) (34.0%) (34.0%)
State and foreign income taxes
(6.0%) (6.0)% (6.0%)
Valuation reserve on deferred tax asset
40.0% 40.0% 40.0%
-------------- -------------- --------------
Effective tax rate -- -- --
============== ============== ==============
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:
2000 2001
--------------------- ----------------------
Net operating loss carryforwards $ 8,181,000 $15,151,000
Depreciation (747,000) (864,000)
Allowance for doubtful accounts 80,000 138,000
Other 186,000 287,000
--------------------- ----------------------
7,700,000 14,712,000
Valuation Allowance (7,300,000) (14,712,000)
--------------------- ----------------------
Net deferred tax asset $ 400,000 $ --
===================== ======================
The net deferred tax asset related to the Company's expected
ability to utilize certain state net operating loss
carryforwards. During fiscal 2001, the Company determined that
it was not likely it would realize these state net operating
loss carryforwards, and as such, has provided a valuation
allowance. As of April 30, 2001, the Company has approximately
$31,000,000 of net operating loss carryforwards, which may be
used to offset future Federal taxable income. These net
operating loss carryforwards expire through 2020.
There are no undistributed earnings in the Company's foreign subsidiaries.
(9) Related Party Transactions:
--------------------------
The Company owes a former executive officer $1,414,000. The
original note bore interest at a rate of 12.5%. On April 15,
2001, the note was restated with a maturity date of April 15,
2004, bearing an interest rate of 17.5%. The note is
subordinated by the Company's primary lender. The Company
continues to pay interest on the note. The above note is
included in due to related parties in the accompanying
consolidated balance sheets.
(10) Incentive Plans:
----------------
At April 30, 2001, 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 the stock-based incentive plans. Had
compensation cost for the Company's stock-based plans been
determined at the fair value at the grant dates for awards
under the plans, consistent with SFAS 123, the Company's net
loss and net loss per share would have been, as follows:
37
1999 2000 2001
--------- ----------- ------------
Net loss:
As reported $(506,000) $(1,633,000) $(21,145,000)
Pro Forma (1,724,000) (2,635,000) (22,714,000)
Net loss per share - Basic and Diluted:
As reported $ (.02) $ (.05) $ (.63)
Pro Forma $ (.06) $ (.08) $ (.68)
The per share weighted-average fair value of stock options
granted during 1999, 2000 and 2001 was $1.56, $1.38 and $2.61
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 6% in 1999,
8.5% in 2000 and 7.5% in 2001 and volatility of 75% for 1999,
75% for 2000 and 133% for 2001.
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
period's range from 2 to 4 years. As of April 30, 2001, 11,617
shares remain reserved for future issuance under the 1990
Plan.
During January 1992, the Company granted options to purchase
1,386,742 shares of its common stock, at an exercise price of
$.005 per share. The options may be exercised at any time
prior to January 1, 2002. Options for 1,016,332 shares of
common stock have been exercised as of April 30, 2001. 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, 2001, all options to the
consultant/advisor have been exercised.
The 1993 Consultant Stock Option Plan (the "1993 Plan") provides
for grants of 30,000 shares of common stock to selected
persons who provide consulting and advisory services to the
Company at a price at least equal to 100% of the fair market
value of such shares on the grant date, as determined by the
Board of Directors. The exercise price of any options granted
to a person owning more than 10% of the combined voting power
of all classes of stock of the Company ("10% shareholder"),
shall be at least equal to 110% of the fair market value of
such shares on the grant date. The options are granted for no
more than a 10-year term (5 years for 10% shareholders) and
the Board of Directors determines the vesting
38
periods. As of April 30, 2001, 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, 2001, 92,000
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 the Board of Directors determines
periods. As of April 30, 2001, 101,446 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, 2001, 200,000 shares remain
reserved for future issuance under the Executive Plan.
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, 2001, 47,508
shares remain reserved for future issuance under the
Conversion Plan.
The 2000 Stock Option Plan (the "2000 Plan") provides for grants
of 3,000,000 shares of common stock to employees, directors,
consultants and advisors 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 Board of
Directors determines the vesting periods. As of April 30,
2001, 1,329,690 shares remain reserved for future issuance.
39
Summary of the status of stock option activity follows:
Outstanding Options
-------------------
Shares Available Number Weighted Average
---------------- ------ ----------------
for Future Grants Of Shares Exercise Price
----------------- --------- --------------
Balance as of April 30, 1998 1,103,128 4,357,651 $3.41
Grants (560,188) 560,188 $2.53
Exercises -- (38,874) $2.29
Cancellations 106,218 (106,218) $3.56
-------------- -------------- --------------
Balance as of April 30, 1999 649,158 4,772,747 $3.36
Grants (504,737) 504,737 $2.88
Exercises -- (1,572,877) $2.75
Cancellations 253,369 (253,369) $3.16
2000 Stock Option Plan 3,000,000
-------------- -------------- --------------
Balance as of April 30, 2000 3,397,790 3,451,238 $3.59
Grants (1,750,751) 1,750,071 $3.40
Exercises -- (106,316) $3.07
Cancellations 359,002 (359,002) $3.56
--------------- -------------- --------------
Balance as of April 30, 2001 2,006,041 4,735,991 $3.55
Options exercisable at April 30, 2001 3,559,460 $3.55
============== ==============
40
Outstanding Options
------------------------------------------------------
Weighted Average
Range of Exercise Prices Number Contractual Life Weighted Average Exercise
of Shares (in years) Price
- ---------------------------- -------------------------- ------------------------- -------------------------
$.005 - $0.99 370,411 1.67 $0.01
$1.00 - $1.99 391,101 6.83 $1.33
$2.00 - $2.99 706,143 6.90 $2.63
$3.00 - $3.99 1,534,057 8.24 $3.17
$4.00 - $4.99 1,105,762 4.58 $4.03
>$4.99 628,517 4.43 $8.16
-------------------------- -------------------------
Total 4,735,991 $3.55
========================== =========================
Exercisable Options
Exercisable Options Weighted Average
Range of Exercise Prices Number of Shares Exercise Price
$.005 - $0.99 370,411 $0.01
$1.00 - $1.99 226,100 $1.22
$2.00 - $2.99 534,425 $2.64
$3.00 - $3.99 901,245 $3.23
$4.00 - $4.99 1,073,762 $4.03
>$4.99 453,517 $8.17
------------------- -----------------------------------
Total 3,559,460 $3.55
=================== ===================================
Employee Stock Purchase Plan--
During fiscal 1999, the Company implemented an employee stock
purchase plan (the "stock 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 stock plan's
quarter. A total of 750,000 shares of common stock have been
reserved for issuance under the plan. During the years ended
April 30, 1999, 2000 and 2001, the Company issued 190,000,
188,000 and 229,000 shares respectively, of common stock to
participants of the stock plan.
Retirement Plan--
The Company has a 401(k) Saving Plan (the "Plan") which permits
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 Plan requires a minimum contribution of 1% of
gross earnings and no more than 15% of gross earnings up to
the maximum allowed under the Internal Revenue Service Code.
(11) Commitments and Contingencies:
------------------------------
The Company leases offices and staging and configuration
facilities throughout the United States and Canada. The
minimum annual rentals for future years are as follows:
41
Twelve Month Period Amount
Ending April 30,
------------------------------------------------- -----------------------------------------------
2002 $1,942,000
2003 1,567,000
2004 1,007,000
2005 891,000
2006 780,000
Thereafter 4,906,000
Rent expense was $1,863,000, $2,207,000 and $2,367,000 for the
years ended April 30, 1999, 2000 and 2001, respectively.
The Company has lease commitments for its fleet of vehicles.
These leases generally range from two to three years. In
addition, the Company from time to time will rent vehicles as
a supplement to its fleet. The expense related to these
vehicles was $2,869,000, $2,497,000 and $2,634,000 for the
years ended April 30, 1999, 2000 and 2001, respectively.
Future commitments are not reflected in the amounts above but
are expected to approximate the 2001 expense.
The Company has entered into employment agreements with three key
employees. These agreements provide for an aggregate annual
salary of $770,000, increased annually by the percentage
increase in the consumer price index. The agreements are
generally three years in duration and expire through April
2003.
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.
42
(12) Segment Information:
-----------------------------------------------------------------------------------------------------------
1999 2000
---- ----
Deployment e-Deploy Eliminations Consolidated Deployment e-Deploy Eliminations Consolidated
----------- -------- ------------ ------------ ----------- -------- ------------ ------------
Services Services
-------- --------
Revenues $93,751,000 $--- $--- $93,751,000 $94,051,000 $1,097,000 $--- $95,148,000
------------ ----- ---- ------------ ------------ ----------- ---- ------------
Gross Profit 32,758,000 --- --- 32,758,000 33,670,000 1,097,000 --- 34,767,000
SG&A Expenses 29,846,000 1,250,000 --- 31,096,000 31,669,000 3,051,000 --- 34,720,000
----------- ---------- --- ----------- ----------- ---------- --- -----------
Operating Income 2,912,000 (1,250,000) --- 1,662,000 2,001,000 (1,954,000) --- 47,000
---------- ----------- --- ---------- ---------- ----------- --- -------
(Loss)
Minority Interest --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- ---
Income (Loss) from 1,813,000 (2,004,000) --- (191,000) 1,504,000 (3,137,000) -- (1,633,000)
Continuing Ops
Loss from (315,000) --- --- (315,000) --- --- --- ---
--------- --- --- --------- --- --- --- ---
Discontinued Ops
Income (Loss) 1,498,000 (2,004,000) --- (506,000) 1,504,000 (3,137,000) --- (1,633,000)
Net Income (Loss) $1,498,000 $(2,004,000) $--- $(506,000) $1,504,000 $(3,137,000) $--- $(1,633,000)
=========== ============ ===== ========== =========== ============ ==== ============
--------------------------------------------------------------------------------------------------------
-----------------------------------------------------
2001
----
Deployment e-Deploy Eliminations Consolidated
----------- -------- ------------ ------------
Services
--------
Revenues $92,362,000 $2,455,000 $(532,000) $94,285,000
------------ ----------- ---------- -----------
Gross Profit 26,898,000 911,000 --- 27,809,000
SG&A Expenses 37,248,000 8,909,000 --- 46,157,000
----------- ---------- --- ----------
Operating Income (10,350,000) (7,998,000) --- (18,348,000)
------------ ----------- --- ------------
(Loss)
Minority Interest --- --- 682,000 682,000
--- --- -------- -------
Income (Loss) from (11,375,000) (9,170,000) 82,000 (21,145,000)
Continuing Ops
Loss from --- --- -- --
--- --- -- --
Discontinued Ops
Income (Loss) (11,375,000) (9,170,000) 82,000 (21,145,000)
Net Income (Loss) $(11,375,000) $(9,170,000) $(600,000) $(21,145,000)
============= ============ ========== =============
-----------------------------------------------------
----------------------------------------------------------------------------------------------------------
1999 2000
Deployment e-Deploy Eliminations Consolidated Deployment e-Deploy Eliminations Consolidated
----------- -------- ------------ ------------ ----------- -------- ------------ ------------
Services Services
-------- --------
Identifiable Assets $34,545,000 $6,058,000 $--- $40,603,000 $38,084,000 $16,978,000 $--- $55,062,000
Depreciation & $2,016,000 $107,000 $--- $2,123,000 $2,205,000 $132,000 $--- $2,337,000
Amortization of
Identifiable Assets
Amortization of $29,000 $134,000 $--- $163,000 $351,000 $577,000 $--- $928,000
Software
Development Costs
Amortization of $--- $437,000 $--- $437,000 $--- $437,000 $--- $437,000
Goodwill
Capital Expenditures $1,254,000 $37,000 $--- $1,291,000 $2,032,000 $224,000 $--- $2,256,000
----------------------------------------------------------------------------------------------------------
------------------------------------------------------
2001
Deployment e-Deploy Eliminations Consolidated
----------- -------- ------------ ------------
Services
--------
Identifiable Assets $35,366,000 $8,130,000 $--- $43,496,000
Depreciation & $2,310,000 $229,000 $--- $2,539,000
Amortization of
Identifiable Assets
Amortization of $780,000 $1,544,000 $--- $2,324,000
Software
Development Costs
Amortization of $--- $437,000 $--- $437,000
Goodwill
Capital Expenditures $1,544,000 $877,000 $--- $2,421,000
------------------------------------------------------
43
(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, 2000 and 2001, the
Company's customers were primarily within the continental
United States and Canada. Customers representing approximately
41.0% of the Company's net sales are in the retail industry.
For the year ended April 30, 2001, two customers accounted for
27% and 21% of revenues, respectively. For the year ended
April 30, 2000, one customer accounted for 19% of revenues.
For the year ended April 30, 1999, one customer accounted for
19% of revenues.
(14) Shareholder Rights Plan:
------------------------
On January 30, 1998, the Board of Directors adopted a shareholder
rights plan (the "rights plan"). Under the rights plan, each
shareholder on record as of 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, 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
44
Preferred Stock will be entitled to one hundred votes on all
matters submitted for 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.
(15) Supplemental Disclosures of Cash Flow Information:
--------------------------------------------------
Cash paid during the year for:
1999 2000 2001
----------------- ---------------- ----------------
Interest $ 1,536,000 $ 1,489,000 $ 1,495,000
Income taxes $ 31,000 $ 36,000 $ 149,000
(16) Discontinued Operations:
------------------------
Prior to fiscal 1997, the Company had primarily been a
distributor of data communications equipment. In June 1997,
the Company, with the concurrence of its Board of Directors,
discontinued its data communications equipment distribution
business. Accordingly, as of April 30, 1998, the Company
reflected this business as a discontinued operation in the
accompanying consolidated statements of operations. The
winding down of the business was effectively completed during
fiscal 1999.
45
(17) Selected Quarterly Financial Data (Unaudited):
--------------------------------------------
A summary of quarterly financial information for fiscal 2000 and
2001 is as follows (in 000's, except per share data):
First Second Third Fourth
----- ------- ----- ------
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000:
Revenues ......................................... $ 25,556 $ 25,503 $ 21,363 $ 22,726
Gross Profit ..................................... 9,742 9,757 7,664 7,818
Net income ....................................... 844 823 (1,031) (2,277)
Basic and diluted earnings per share ............. 0.03 0.03 (0.03) (0.07)
2001:
Revenues ......................................... $ 24,663 $ 32,696 $ 21,279 $ 15,647
Gross Profit ..................................... 9,469 11,991 3,546 2,804
Net income ....................................... (924) 723 (10,051) (10,893)
Basic and diluted earnings per share ............. (0.03) 0.02 (0.30) (0.32)
46
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II, Valuation and Qualifying Accounts
Balance,
beginning of Charges to cost Balance, end of
period and expenses Deductions (a) period
------ ------------ -------------- ------
Year ended April 30, 2001 $ 236,000 $ 746,000 $(410,000) $ 572,000
Allowance for doubtful accounts
Year ended April 30, 2000
Allowance for doubtful accounts $ 326,000 -- $ (90,000) $ 236,000
Year ended April 30, 1999
Allowance for doubtful accounts $ 305,000 $ 57,000 $ (36,000) $ 326,000
.........
(a) Represents write-off of uncollectable accounts
47
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
48
PART III
--------
Item 10. Directors and Executive Officers of Registrant
----------------------------------------------
The directors and executive officers of the Company, their ages and
present positions with the Company are as follows:
Name Age Position with the Company
- ---- --- -------------------------
Isaac J. Gaon 52 Chairman of the Board and Chief Executive Officer
Ron Marino 37 Chief Financial Officer, Secretary and Treasurer
Raymond R. Koch 56 Chief Operating Officer
David M. Milch 46 Executive Director - Office of the Chairman and Director
William J. Adams, Jr. 52 Director
Frank P. Brosens 44 Director
Robert H. Friedman 48 Director
Walter Grossman 57 Director
Mark L. Berenblut 45 Director
Isaac J. Gaon, Chairman of the Board since December 1997 and
Director since 1992, has served as the Chief Executive Officer since October
1994. He served as Chief Financial Officer from April 1992 until October 1994.
From September 1987 to December 1991, Mr. Gaon, a chartered accountant, served
as President and Chief Executive Officer of Toronto-based NRG, Inc., (a
subsidiary of Gestetner International) an office equipment supplier, and in
several senior management roles within Gestetner Canada and Gestetner USA.
Ron Marino, Chief Financial Officer, Secretary and Treasurer since
December 2000, recently headed the financial organization at Omnipoint
Communications prior to its acquisition by VoiceStream Wireless, where he
reported directly to the President. He has over 15 years of financial experience
in the telecommunications and technology industries, including two years at
AT&T and six years at NYNEX Mobile Communications. A Certified Public
Accountant, Mr. Marino holds a Bachelor's Degree in Business and an MBA in
Corporate Financial Management.
Raymond R. Koch, Chief Operating Officer, joined the Company in July
2001. From April 2000 to October 2000, Mr. Koch was President and Chief
Operating Officer for Nua Limited, Dublin, Ireland, an Internet software
development and e-learning organization. From 1989 to 2000, Mr. Koch held
several Senior Executive positions with the Company and its subsidiary Datatec
Industries, Inc. as follows: Chief Operating Officer and Executive Vice
President of the Company from 1996 to 2000; President and Chief Operating
Officer of Datatec Industries, Inc. from 1994 to 1996; and Executive Vice
President of Datatec Industries, Inc. from 1989 to 1991.
49
Dr. David M. Milch, Director since October 1996 and Executive
Director -- Office of the Chairman on a part-time basis since October 2000, has
been a director and principal since 1983 of Bermil Industries Corporation, a
closely held diversified Company owned by the Milch family involved in the
manufacture, sale, financing, and distribution of capital equipment, and in real
estate development. Dr. Milch is also the sole stockholder of Davco Consultants,
Inc., a corporation that he founded in 1979 for the purpose of identifying,
advising, and investing in emerging growth technologies.
William J. Adams, Jr., Director since April 2000, has served as the
President of WhiteSpace, Inc., a consulting firm specializing in marketing
techniques for technology-based firms, since he founded such firm in February
1998. Prior to that time and since January 1994, Mr. Adams served as the
President of Infosource, Inc., an information technology consulting firm that he
also founded.
Frank P. Brosens, Director since November 1998, is one of the
founding partners of Taconic Capital Partners, an investment firm. Mr. Brosens
was a general partner of Goldman Sachs & Co. from November 1988 to November
1994, where he served as head of the equity derivative and risk arbitrage
businesses, as well as a member of several of the firm's principal investment
committees.
Robert H. Friedman, Director since August 1994, has been a partner
with Olshan Grundman Frome Rosenzweig & Wolosky LLP, a New York City law
firm, since August 1992. Prior to that time and since September 1983 he was with
Cahill Gordon & Reindel, also a New York City law firm. Mr. Friedman
specializes in corporate and securities law matters.
Walter Grossman, Director since May 2001, is also Chairman of
Brookehill Capital Partners, Ltd., a private investment firm. He began his
professional work experience at the Department of Commerce in Washington, D.C.
and then joined the investment firm of E.F. Hutton. In 1970, he joined Loeb,
Rhoades & Co. as Vice President and subsequently the institutional research
firm of Faulkner, Dawkins & Sullivan before founding Brookehill Capital
Management in 1978. During the last several years, Mr. Grossman has utilized his
depth of experience in the early stage funding of medical and information
technology firms. He has been actively involved in the structure and financing
of multiple businesses, several of which have either gone public or have been
acquired in separate transactions. Mr. Grossman graduated from the University of
Pennsylvania in 1966, and currently serves as a member of its Board of
Overseers.
Mark L. Berenblut, Director since June 2001, has also been a
managing partner of Carnegie Hill Investment Partners and the managing partner
of Berenblut Consulting, which specializes in strategy, finance and economics.
He is qualified as a Chartered Accountant and Business Valuator. Until recently
he was an equity partner with Arthur Andersen LLP since 1992. Mr. Berenblut is
also a member of the advisory boards of a technology investment fund and a
charitable endowment fund.
50
Section 16 (a) Beneficial Ownership Reporting Compliance
- --------------------------------------------------------
Section 16(a) of the Securities Exchange Acts of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than ten percent
stockholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by
it, or written representation from certain reporting persons, the Company
believes, during the fiscal year ended April 30, 2001, that there was compliance
with all section 16(a) filing requirements applicable to its officers, directors
and 10% stockholders, with the exception of Robert Friedman whose acquisitions
of securities in two transactions were inadvertently reported late and Don
Bergal, the Company's former Chief Operating Officer, who has not yet filed a
Form 3.
51
Item 11. Executive Compensation
----------------------
Summary Compensation Table
The following table sets forth information for the fiscal years
ended April 30, 1999, 2000 and 2001 with respect to annual and long-term
compensation for services in all capacities to the Company of (i) the chief
executive officer, (ii) the most highly compensated executive officers of the
Company at April 30, 2001 who received compensation of at least $100,000 and
(iii) two individuals who were not executive officers at April 30, 2001 but who
did receive compensation of at least $100,000 during the fiscal year ended April
30, 2001 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation(1)
Long-Term Compensation
Name and Position Year Salary Awards Securities Underlying Options(#)
----------------- ---- ------ ---------------------------------------
Isaac J. Gaon, Chairman of the Board and 2001 $346,772 700,000
Chief Executive Officer 2000 $266,000 --
1999 $262,000 --
Robert F. Gadd, Former Senior Vice 2001 $219,000 --
President and Chief Technology Officer(2) 2000 $202,000 --
1999 $197,000 --
James M. Caci, Former 2001 $102,294 --
Vice President of Finance, Chief 2000 $156,000 40,000
Financial Officer, Treasurer, and 1999 $154,000 --
Secretary(3)
(1) The value of personal benefits for executive officers of the Company
during Fiscal 2001 that might be attributable to management as
executive fringe benefits such as automobiles and club dues cannot
be specifically or precisely determined; however, it would not
exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported for any individual named above.
(2) Mr. Gaad became an officer of a subsidiary of the Company during
Fiscal 2001.
(3) Mr. Caci resigned during Fiscal 2001.
52
Option Grants Table
The following table sets forth certain information regarding stock
option grants made to each of the Named Officers during Fiscal 2001.
Option Grants in Last Fiscal Year
Potential
Realizable Value
at Assumed Rates
Individual Grants of Annual Rates
----------------- of Stock Price
Appreciation for
Option(1)
- ------------------- --------------- ------------------ ------------------ ------------------ ----------- ----------
Shares of Percent of Total
Common Stock Options Granted Exercise or
Underlying to Employees in Base Price Expiration
Name Options Granted Fiscal Year (%) ($/Sh) Date 5% 10%
---- --------------- --------------- ------ ---- -- ---
Isaac J. Gaon 100,000 6% 9.12 5/01/10 45,600 91,200
Isaac J. Gaon 350,000 21% 3.06 10/25/10 53,600 107,100
Isaac J. Gaon 250,000 14% 3.06 10/25/10 38,300 76,500
(1) The potential realizable portion of the foregoing table illustrates
value that might be realized upon exercise of options immediately
prior to the expiration of their term, assuming (for illustrative
purposes only) the specified compounded rates of appreciation on the
Company's Common Stock over the term of the option. These numbers do
not take into account provisions providing for termination of the
option following termination of employment, non-transferability or
difference in vesting periods.
53
Aggregated Option Exercises and Year-End Option Values Table
The following table sets forth certain information concerning stock
options exercised during Fiscal 2001 and stock options which were unexercised at
the end of Fiscal 2001 with respect to the Named Officers.
Aggregated Option Exercises
During The Most Recently Completed
Fiscal Year and Fiscal Year-End Option Values
Value Number of Securities Underlying Value of Unexercised
Shares Acquired ) Realized Unexercised Options Held at Fiscal In-The-Money Options at Fiscal
on Exercise (#) ($) Year-End(#) Year-End($)(1)
------------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Isaac J. Gaon -- -- 1,433,732 333,334 $331,420 --
Robert Gadd -- -- 196,151 0 1,949 --
James Caci -- -- -- -- -- --
(1) Represents the total gain that would be realized if all in-the-money
options held at April 30, 2001 were exercised, determined by multiplying
the number of shares underlying the options by the difference between the
per share option exercise price and $0.90 per share, which was the closing
bid price per share of the Company's Common Stock on April 30, 2001. An
option is in-the-money if the fair market value of the underlying shares
exceeds the exercise price of the option.
Directors Compensation
- ----------------------
Each director who is not an employee of the Company is eligible to
receive a fee of $1,000 per meeting attended. The members of the Board are also
eligible for reimbursement of their reasonable expenses incurred in connection
with attendance of Board meetings. In addition, each director who is not an
employee of the Company receives a grant of options to purchase 24,000 shares of
Common Stock on the date that such director first becomes a director of the
Company and on the day which is the yearly anniversary date after he began
serving on the Board.
Employment Agreements
- ---------------------
Isaac Gaon is employed as the Company's Chairman of the Board and
Chief Executive Officer of the Company pursuant to an employment agreement dated
as of May 1, 2000, for a term ending on April 30, 2003. The agreement provides
for an initial base salary of $350,000 which shall be increased annually by a
percentage equal to the percentage by which the Consumer Price Index for Urban
Borrowers and Clerical Workers: New York, N.Y.-Northeastern New Jersey shall
have been increased over the preceding year. The agreement also provides for
incentive compensation in an amount of up to 25% of the base salary based upon
profits, stock market returns and Board discretion. In the event of his
disability, Mr. Gaon is to receive the full amount of his base salary for six
months. Upon a Change of Control of the Company (as defined in the agreement)
that results in Mr. Gaon's removal from the Company's Board of Directors, a
significant change in the conditions of his employment or other breach of the
agreement, he is to receive liquidated damages equal to 2.99 times the "base
amount," as defined in
54
the United States Internal Revenue Code of 1986, as amended (the "Code"), of his
compensation. Upon early termination by the Company without Cause (as defined in
the agreement), or by Mr. Gaon with "Good Reason" (as defined in the agreement),
the Company is required to pay Mr. Gaon the remainder of the salary owed him for
the employment period, but in no event shall such payment be less than $500,000.
Additionally, Mr. Gaon will be entitled to undistributed bonus payments, as well
as pro-rata unused vacation time payments. In addition, following a Change of
Control, termination by the Company without Cause, or termination by Mr. Gaon
for Good Reason, the Company is obligated to purchase all Mr. Gaon's stock
options, whether exercisable or not, for a price equal to the difference between
the fair market value of the Common Stock on the date of termination and the
exercise price of such options.
David Milch is employed as the Company's Executive Director - Office
of the Chairman pursuant to an employment agreement dated October 27, 2000, for
a term ending on October 26, 2002. The agreement provides for an annual base
salary of $125,000. Dr. Milch was granted options to purchase 200,000 shares of
Common Stock on March 7, 2001. Upon early termination by the Company without
Cause (as defined in the agreement), or by Mr. Milch with "Good Reason" (as
defined in the agreement), the Company is required, within thirty days of the
termination, to pay Mr. Milch an amount equal to the lesser of (a) the pro rata
portion of his base salary on the number of calendar days beginning on the date
of termination through and including December 31, 2002, and (b) three months of
his base salary, and all expense reimbursements due to him.
54
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth information concerning ownership of
the Common Stock outstanding as of July 25, 2001 by (i) each person known by the
Company to be the beneficial owner of more than five percent (5%) of the
Company's Common Stock, (ii) each director, (iii) each of the executive officers
named in the summary compensation table, and (iv) by all executive officers and
directors of the Company as a group.
Amount of Shares
Beneficially
Name and Address of Beneficial Owner(1) Owned(2) Percentage of Class
- --------------------------------------- -------- -------------------
Isaac J. Gaon(3) 1,560,757 4.4%
Ron A. Marino 30,000 *
Raymond Koch 0 *
William J. Adams, Jr.(4) 24,000 *
Frank Brosens(5) 744,873 2.2%
Walter Grossman(6) 627,975 1.9%
Robert H. Friedman(7) 146,946 *
David M. Milch(8) 849,505 2.5%
Mark Berenblut(9) 8,000 *
All directors and officers as a group (9 persons)(10) 3,992,056 11.0%
Daruma Asset Management, Inc.(11) 4,097,500 12.1%
Mariko O. Gordon(12) 4,097,500 12.1%
Wellington Management Company, LLP(13) 2,299,400 6.8%
- --------------
* Less than 1%
(1) Unless otherwise indicated, all addresses are c/o Datatec Systems,
Inc., 23 Madison Road, Fairfield, New Jersey 07004.
(2) Beneficial ownership has been determined in accordance with Rule
13d-3 under the Exchange Act ("Rule 13d-3") and unless otherwise
indicated, represents shares for which the beneficial owner has sole
voting and investment power. The percentage of class is calculated
in accordance with Rule 13d-3 and includes options or other rights
to subscribe which are exercisable within sixty (60) days of July
25, 2001.
(3) Mr. Gaon's beneficial ownership includes options exercisable within
sixty (60) days from July 25, 2001 to purchase 1,546,879 shares of
Common Stock.
56
(4) Mr. Adams' beneficial ownership consists of options exercisable
within sixty (60) days from July 25, 2001 to purchase 24,000 shares
of Common Stock. Mr. Adams' address is 555 East Main Street,
Chester, New Jersey 07930.
(5) Mr. Brosens' beneficial ownership includes warrants exercisable
within sixty (60) days from July 25, 2001 to purchase 350,000 shares
of Common Stock and options exercisable within sixty (60) days of
July 25, 2001 to purchase 32,000 shares of Common Stock. Mr.
Brosens' address is 63 East Field Drive, Bedford, New York 10506.
(6) Mr. Grossman's beneficial ownership includes options exercisable
within sixty (60) days from July 25, 2001 to purchase 8,000 shares
of Common Stock. Mr. Grossman's address is 1221 Post Road East,
Westport, Connecticut 06880.
(7) Mr. Friedman's beneficial ownership includes options exercisable
within sixty (60) days from July 25, 2001 to purchase 112,000 shares
of Common Stock. Mr. Friedman's address is 505 Park Avenue, New
York, New York 10022-1170.
(8) Dr. Milch's beneficial ownership includes options exercisable within
sixty (60) days from July 25, 2001 to purchase 380,000 shares of
Common Stock. Dr. Milch's address is 114 East 13th Street, New York,
New York 10003.
(9) Mr. Berenblut's beneficial ownership consists of options exercisable
within sixty (60) days from July 25, 2001 to purchase 8,000 shares
of Common Stock. Mr. Berenblut's address is 27 Shelborne Avenue,
Toronto, Ontario M5N 1Y8.
(10) Includes options and warrants exercisable within sixty (60) days
from July 25, 2001 to purchase an aggregate of 2,460,879 shares of
Common Stock held by the directors and executive officers of the
Company.
(11) Based on information obtained from the Statement on Schedule 13G
filed by Daruma Asset Management, Inc. on February 6, 2001. The
address for Daruma Asset Management, Inc. is 60 East 42nd Street,
Suite 1111, New York, New York 10165.
(12) Consists of 4,097,500 shares of Common Stock owned by Daruma Asset
Management, Inc. ("Daruma"). As the President and owner of in excess
of 50% of the voting stock of Daruma, Mr. Gordon may be deemed to be
a beneficial owner of the shares held by Daruma. The address of Mr.
Gordon is 60 East 42nd Street, Suite 1111, New York, New York 10165.
(13) Based on information obtained from the Statement on Schedule 13G
filed by Wellington Management Company, LLP on February 13, 2001.
The address for Wellington Management Company, LLP is 75 State
Street, Boston, Massachusetts 02109.
57
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
In October and November 1997, the Company loaned an aggregate of
$200,000 to Isaac Gaon. The loan matured on April 30, 2000 and bore interest at
a rate of 8.0% per annum. The loan was repaid upon its maturity.
The Company and Isaac Gaon are parties to a Stock Option Agreement
dated November 18, 1992, pursuant to which the Company has agreed to reimburse
Mr. Gaon for the difference between ordinary income tax rates and capital gains
rates on the exercise of stock options. On March 9, 2000, Mr. Gaon exercised
options to purchase 127,000 shares of Common Stock, resulting in an obligation
of the Company to reimburse Mr. Gaon in the amount of $389,000. During July
2000, Mr. Gaon forgave the Company of its obligation to reimburse him for such
expenses.
Mr. William J. Adams, Jr., a Director of the Company, is the
President of WhiteSpace, Inc., which Company has been retained by the Company to
provide consulting services to the Company. During the last fiscal year the
Company paid fees to WhiteSpace, Inc. in the amount of $102,000.
Mr. Robert H. Friedman, a Director of the Company, is a member of
the law firm of Olshan Grundman Frome Rosenzweig & Wolosky LLP, which law firm
has been retained by the Company during the last fiscal year. Fees received from
the Company by such firm during the last fiscal year did not exceed 5% of such
firm's or the Company's revenues.
58
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K
---------------------------------------------------------------
(a)(1) The following financial statements are included in Part II, Item 8:
Consolidated Financial Statements
---------------------------------
Reports of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets as of April 30, 2000 and 2001
Consolidated Statements of Operations for the years
ended April 30, 1999, 2000 and 2001.
Consolidated Statements of Comprehensive
Income (loss) for the years ended April
30, 1999, 2000 and 2001
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
April 30, 1999, 2000 and 2001. Consolidated
Statements of Cash Flows for the years ended
April 30, 1999, 2000 and 2001.
Notes to Consolidated Financial Statements
(2) The following financial statement schedules are included
in this Form 10-K report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not
required, are inapplicable, or the information is
otherwise shown in the financial statements or notes
thereto.
(b) Reports on Form 8-K filed during the last quarter of 2001:
N/A
(c) Exhibits:
3.1 -- Certificate of Incorporation of the Company (as
amended), incorporated by reference to the
Company's Form 10-K for the fiscal year ended April
30, 1998.
3.2 -- Bylaws of the Company, incorporated by reference to
the Company's Form 10-K for the fiscal year ended
April 30, 1996.
4.1 -- Specimen Common Stock Certificate, incorporated by
reference to the Company's registration statement
on Form S-1 (File No. 333-39985) filed with the
Commission on November 12, 1997.
59
4.2 -- Certificate of Designations defining the powers,
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series D
Preference Stock, incorporated by reference to the
Company's form 8-A filed with the Commission on
February 24, 1998.
10.1 -- 1990 Stock Option Plan, as amended to date,
incorporated by reference to the Company's
registration statement on Form S-8 (File No.
333-08381) filed with the Commission on June 18,
1996.
10.2 -- 1993 Consultant Stock Option Plan, incorporated by
reference to the Company's registration statement
on Form S-1 (File No. 33-93470) filed with the
Commission on June 14, 1995.
10.3 -- 1995 Director's Stock Option Plan, incorporated by
reference to the Company's registration statement
on Form S-1 (File No. 33-93470) filed with the
Commission on June 14, 1995.
10.4 -- 1996 Employee and Consultant Stock Option Plan,
incorporated by reference to the Company's Form
10-K for the fiscal year ended April 30, 1996.
10.5 -- 1996 Stock Option Conversion Plan, incorporated by
reference to the Company's Form 10-K for the fiscal
year ended April 30, 1997.
10.6 -- 1996 Senior Executive Stock Option Plan,
incorporated by reference to the Company's Form
10-K for the fiscal year ended April 30, 1997.
10.7 -- 2000 Stock Option Plan, incorporated by reference
to the Company's Form 10-K for the fiscal year
ended April 30, 2000.
10.8 -- 1998 Employee Stock Purchase Plan, incorporated by
reference to the Company's registration statement
on Form S-8 (File No. 333-48757), filed with the
Commission on March 27, 1998.
10.9 -- Form of Rights Agreement, dated as of February 24,
1998, between the Company and Continental Stock
Transfer & Trust Company, incorporated by reference
to the Company's Registration Statement of Form 8-A
filed with the Commission on February 24, 1998.
10.10 -- Employment Agreement dated May 1, 2000 between the
Company and Isaac Gaon, incorporated by reference
to the Company's Form 10-K for the fiscal year
ended April 30, 2000.
60
10.11 -- Employment Agreement dated October 31, 1996 between
the Company and James Caci, incorporated by
reference to the Company's Form 10-K for the fiscal
year ended April 30, 1997.
10.12 -- Employment Agreement dated October 31, 1996 between
the Company and Robert Gadd, incorporated by
reference to the Company's Form 10-K for the fiscal
year ended April 30, 1997.
10.13 -- Loan and Security Agreement dated March 17, 1997
between the Company and Finova Capital Corporation,
incorporated by reference to the Company's Form
10-K for the fiscal year ended April 30, 1997.
10.14 -- First Amendment to Loan and Security Agreement
dated December 15, 1999 between the Company and
Finova Capital Corporation, incorporated by
reference to the Company's Form 10-K for the fiscal
year ended April 30, 2000.
10.15 -- Second Amendment to Loan and Security Agreement
dated April 2000 between the Company and Finova
Capital Corporation, incorporated by reference to
the Company's Form 10-K for the fiscal year ended
April 30, 2000.
10.16 -- Stock Purchase Agreement dated as of February 15,
1996 by and among the Company, David H. Tobey and
Computer-Aided Software Integration, Inc.,
incorporated by reference to the Company's
registration statement on Form S-3 (File No.
333-03414) filed with the Commission on April 8,
1996.
10.17 -- Stock Purchase Agreement dated March 9, 1998 by and
among David H. Tobey, the Company and
Computer-Aided Software Integration, Inc., which
includes the Form of Convertible Promissory Note as
Exhibit A, the form of Registration Rights
Agreement as Exhibit B, and the form of
Non-Competition Agreement as Exhibit C,
incorporated by reference to the Company's Form 8-K
dated March 9, 1998.
10.18 -- Stock Purchase Agreement dated as of July 31, 1996
by and among the Company, Francis J. Frazel, Steven
M. Grubner, Mark Herzog, George Terlizzi and HH
Communications, Inc., incorporated by reference to
the Company's Form 8-K dated July 31, 1996.
10.19 -- Stock Purchase Agreement dated as of October 31,
1996 by and among the Company, Datatec Industries
Inc. and Those Stockholders Listed on Schedule 1.1
Thereto, incorporated by reference to the Company's
Form 8-K dated October 31, 1996.
61
10.20 -- Notes and Warrant Purchase Agreement dated as of
February 18, 1997, by and between the Company,
Tinicum Investors and Frank Brosens (Exhibit A-
Form of Convertible Note, Exhibit B- Form of
Warrant, Exhibit C- Form of Conditional Warrant),
incorporated by reference to the Company's Form
10-K for the fiscal year ended April 30, 1997.
10.21 -- Securities Purchase Agreement, dated as of April
30, 1998, by and among the Company, Stark
International and Shepherd Investments
International, Ltd., which includes (i) the
Certificate of Designations of Series E Convertible
Preferred Stock as Exhibit A, (ii) the form of
Common Stock Purchase Warrant dated April 30, 1998
as Exhibit B, and (iii) the form of Registration
Rights Agreement as Exhibit C, incorporated by
reference to the Company's Form 8-K dated April 30,
1998.
10.22 -- Common Stock Purchase Agreement dated January 7,
1994 by and among Direct Connect International,
Inc., the Company and Ralph Glasgal, incorporated
by reference to the Company's registration
statement on Form S-1 (File No. 33-93470) filed
with the Commission on June 14, 1995.
10.23 -- Stock Purchase Agreement dated July 25, 1997 by and
among the Company and the Purchasers listed on the
Signature Pages thereto, incorporated by reference
to the Company's Form 10-K for the fiscal year
ended April 30, 1997.
10.24 -- Stock Purchase Agreement dated June 30, 1997
between the Company and Ralph Glasgal, incorporated
by reference to the Company's Form 10-K for the
fiscal year ended April 30, 1997.
10.25 -- Amended and Restated License Agreement dated as of
July 1, 1997 by and between CASI and Cumetrix Data
Systems Corporation, (formerly Datanet
International Incorporated), incorporated by
reference to the registration statement on Form S-1
(File No. 333-43151) filed by Cumetrix Data Systems
Corp. with the commission on December 23, 1997.
10.26 -- Stock Purchase Agreement dated February 25, 1999 by
and among the Company and the Purchasers listed on
the signature pages thereto.
62
*11.1 -- Statement of Computation of Per Share Earnings.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent to the incorporation by reference in the
Company's Registration Statements on Forms S-3 and
S-8 of the report of Arthur Andersen LLP included
herein.
- ---------------------------
* Filed herewith.
63
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: July 26, 2001 By: /s/ Ron A. Marino
-------------------------------
Name: Ron A. Marino
-----------------------------
Title: Chief Financial Officer
----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Isaac J. Gaon Chairman of the Board and Chief Executive July 26, 2001
- -------------------------------- Officer (principal executive
Isaac J. Gaon officer)
/s/ Ron Marino Chief Financial Officer (principal financial July 26, 2001
- -------------------------------- and accounting officer)
Ron Marino
/s/ Frank Brosens Director July 26, 2001
- --------------------------------
Frank Brosens
/s/ Robert H. Friedman Director July 26, 2001
- --------------------------------
Robert H. Friedman
/s/ William Adams Director July 26, 2001
- --------------------------------
William Adams
/s/ Walter Grossman Director July 26, 2001
- --------------------------------
Walter Grossman
64