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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2002
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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.
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(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 / / NO /X/
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 August 30, 2002 was approximately $33,495,000. 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
August 31, 2002 was 35,767,393.
1
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7a. Market Risk Disclosures 33
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 69
PART III
Item 10. Directors and Executive Officers of Registrant 70
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 77
Item 13. Certain Relationships and Related Transactions 80
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 81
on Form 8-K
2
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"), 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 that they are compatible with the
topology of the network and all legacy systems (hereinafter referred to as
"integration") and (iii) the process of physically installing technology on
networks (hereinafter referred to as "installation"). Also, the Company licenses
its software tools through its Global Integration Services division to
organizations with their own installation forces.
The Company utilizes internally developed Web-enabled implementation tools that
differentiate its deployment services. These tools, 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, processes and technology that include:
o The utilization of eDeploy(TM), a Web-based software tool that provides
collaboration capabilities for remote planning and design, communication
capabilities through fax, voice, data, or digital photographs and
monitoring capabilities, ensures that best practices are employed and that
mission critical milestones or timelines are escalated to supervisory
levels if missed by the responsible parties. These features and others are
designed to enhance the speed, accuracy and productivity of the deployment
process.
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o The utilization of IW2000 provides automation and mass customization in the
configuration/integration of Computing and Internetworking devices as well
as application and operational software. This automation significantly
reduces labor costs through time savings as well as through reduced
technical skill level requirements.
o Two (2) staging and configuration centers at which the Company carries out
most of its complex integration and configuration processes. By conducting
these activities at Datatec's staging centers, and utilizing, where
applicable, its 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. In this way, customers' operations are minimally disrupted.
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 15 offices and has a field deployment team of
approximately 250 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.
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.
RESTATEMENT OF FINANCIAL STATEMENTS
During fiscal 2002, the Company determined that it should have included indirect
costs as a component of cost of revenue in its previously issued financial
statements and it identified certain errors in its previously issued financial
statements related to total estimated contract values, total costs incurred with
certain long term contracts and certain accrued and prepaid expenses. As a
result, the Company has restated its previously issued financial statements for
the years ended April 30, 2000 and 2001 and has recorded a prior period
adjustment to its accumulated deficit as of April 30, 1999. The Company
previously reported a net loss of $1.633 million, or $(0.05) per share, and
$21.145 million, or $(0.63) per share for the years ended April 30, 2000 and
2001, respectively. The restatements resulted in the Company reporting net loss
of $1.924 million, or $(0.06) per share and net loss of $19.858 million, or
$(.59) per share for the years ended April 30, 2000 and 2001, respectively. The
components of the restatements and their effect on previously issued financial
statements are set forth in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Notes 2 and 19 of Notes to
Consolidated Financial Statements.
DATATEC'S DEPLOYMENT SOLUTIONS
Technology Providers need to improve the "absorption" or "time to market" of
their products in order 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 has a negative impact on returns if the time to deploy new
technology is not minimized. The speed and accuracy of deployment are critical
factors in improving these fundamental ratios.
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The dynamics that are driving increasing demand for the Company's
software-enabled deployment offerings include the following:
o The global 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 IT market segment. 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 currently deployed has
remained relatively constant over the same period. Therefore, it is not
surprising that deployment has become a bottleneck and a major restraint to
growth for Technology Providers.
o Due to shorter product life cycles and increased competitive pressures,
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%.
o By significantly reducing the "time to market," Technology Providers and
users benefit from improved return on sales and return on investment
("ROI"), 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 to improve company performance and increase ROI.
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, especially in large, complex
rollouts.
Today, technology companies are launching new products at an ever faster rate.
The problem is that due to the speed of change there is currently a lack of
trained personnel to assimilate these new products rapidly and efficiently in
the market. The Company believes that the use of its tools better aligns the
current speed of technology introductions with the absorption of that technology
in the market.
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. Clients can elect 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 Datatec's
5
IW2000. In the past year, the Company believes that it has moved this offering
from the proof of concept stage to an offering with strong demand and general
market acceptance.
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 Introduction of Internet services, and
o Upgrade of the network infrastructure.
SITE READINESS AND INFRASTRUCTURE ("SRI"). A major technology migration or
upgrade within an organization often requires an overhaul of a company's
physical infrastructure before the start of the migration or upgrade. Datatec
has significant experience and expertise in ensuring that a site is fully
capable of accepting new technology. Infrastructure improvement could include
one or all of the following:
o Data communications cabling,
o Telecommunications cabling,
o Power cabling, and
o Physical/structural pathway modification.
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 Company's strategy is to achieve this by providing full
end-to-end software-enabled deployment services and by licensing its software
tools to large Technology Providers and certain "Fortune 2000" companies. The
Company is engaged in the following activities in support of this strategy:
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 sales force to support the marketing efforts of its strategic
partners like Cisco, IBM and AT&T, as well as looking for new OEM
relationship opportunities, and
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o Creating relationships with non-competitive and complementary service
providers to extend Datatec's economic influence beyond the deployment
sphere in the asset lifecycle.
SALES AND MARKETING
The Company's marketing efforts are focused on 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.
Given the growth of the Internet economy, the Company has over the past several
years focused on creating relationships with OEMs and Technology Providers.
These market segments are in need of resources and processes to facilitate the
assimilation of new technologies in their respective markets. By accelerating
the absorption of technologies, the Company believes that it improves the return
on sales for these partners and the return on new technology investment for
their partners and customers.
This strategy has helped establish a new "Indirect" 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 to
and identity in the Company's targeted market segments.
During the past twelve months, the Company has created alliances with
non-competitive service providers in order to provide seamless solutions to end
users. Any major technology deployment comprises four major phases:
o Planning,
o Design,
o Implementation, and
o Operations, or post sales support.
Datatec focuses on the implementation phase but it is creating relationships
with companies that address the other three phases in order to provide greater
asset lifecycle support to its clients. Collaboration in resource allocation,
planning and project execution by the various partners is being enabled through
eDeploy(TM), allowing end users to benefit from the expertise of "best of breed"
providers without the disadvantages of having to manage the "agendas" of several
and disparate IT providers.
CLIENTS
The Company performs deployment services directly to a variety of enterprise
clients. The major industry segments to which Datatec sells are Retail,
Financial Services, Insurance and Hospitality, which typically have a large
number of geographically dispersed sites and deploy complex technology. Also,
the Company 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:
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Enterprise - Direct Technology Providers - Indirect
- ------------------- -------------------------------
CVS Co. American Telephone and Telegraph (AT&T)
Lowe's Companies, Inc. Bell South
Office Depot, Inc. Cisco Systems, Inc.
Starbucks Corporation IBM Global Services
State Farm Mutual Automobile Insurance Company Qwest Communications International Inc.
The Chubb Corporation Verizon
The Home Depot, Inc. Vertical Networks
Toys "R" Us, Inc.
Walgreen Co.
During each of the past three fiscal years, revenue from the Company's services
to a limited number of customers has accounted for a substantial percentage of
the Company's total revenue. For the years ended April 30, 2000, 2001 and 2002
the Company's 15 largest customers accounted for approximately 73%, 82% and 82%
of the Company's revenue, respectively. For the year ended April 30, 2000,
Lowe's Companies, Inc. accounted for approximately 19% of the Company's revenue.
For the year ended April 30, 2001, IBM Global Services and Lowe's Companies,
Inc. accounted for approximately 27% and 21% of the Company's revenue,
respectively. For the year ended April 30, 2002, Lowe's Companies, Inc.
accounted for approximately 30% of the Company's revenue. This concentration of
customers can cause the Company's revenue and earnings to fluctuate from
quarter to quarter, based on customer requirements and the timing of service
delivery.
COMPETITION
Datatec competes with other companies involved in the design, sale,
installation, integration and servicing of computer and 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 services and a large number of small companies
that in turn carry out small amounts of deployment. Although no one company
dominates the deployment market, many of the Company's competitors are larger
and have substantially more resources than the Company. In addition to direct
competition, the Company faces indirect competition from end users, many of whom
internally design, integrate and deploy their own technologies. The Company,
however, knows of no other company that offers as its primary business rapid IT
deployment services or software tools designed to support the delivery of
complex IT solutions.
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 eDeploy trademark is protected for ten years from February
1, 2000 under United States Trademark laws.
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. The Company
invested $2.8 million, $1.4 million and $0.5 million in product related research
8
and development activities during the fiscal years ended April 30, 2000, 2001
and 2002, respectively. The Company did not engage in any customer sponsored
research and development activities during these fiscal years.
EDEPLOY.COM, INC.:
On November 2, 2001 the Company acquired 100,000 shares of Series A Preferred
Stock of eDeploy.com, Inc. (the "Shares"), a wholly owned subsidiary
("eDeploy.com"), held by Cisco Systems, Inc. ("Cisco") through an exchange of
1,021,382 shares of Datatec's common stock. Dividends payable to Cisco during
the period it held the 100,000 shares of Series A Preferred Stock of
eDeploy.com, Inc. are included in accrued and other liabilities and annual
dividends, recorded prior to the exchange, are reflected as minority interest in
the statements of operations.
EMPLOYEES
As of April 30, 2002, the Company had approximately 525 full-time employees. Of
these full-time employees, approximately 235 are employed under contracts with
the International Brotherhood of Electrical Workers and the International
Brotherhood of Electrical Workers Local 3. The current contract with the Union
expires on December 31, 2004.
The Company's success 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, or sales personnel could materially
adversely affect the Company's business, operating results, and financial
condition. The Company believes that its relationship with its employees is
satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in leased facilities aggregating
39,570 square feet 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 two (2) Configuration Centers. In addition to
its headquarters building, the Company leases throughout the United States
approximately 224,000 square feet of space in 13 locations for its sales and
field operations and configuration centers. Also, the Company leases
approximately 2,000 square feet of space in one location in Canada. The Company
believes that it has sufficient space to meet its operating needs.
ITEM 3. LEGAL PROCEEDINGS
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. The Company is not a party
to legal proceedings that individually or in the aggregate are believed to be
material to the Company's business.
On September 22, 2000, Petsmart, Inc. filed a complaint against the Company in
the Superior Court of Maricopa County, Arizona. Petsmart has alleged that it has
been damaged by the Company's failure to satisfactorily complete work
contemplated by an agreement between the parties. Damages were unspecified. At a
settlement meeting held on April 17, 2002, discussions were held in which
9
Petsmart proposed a series of settlement offers under which the Company would
pay damages ranging between $7,000,000 and $8,000,000. In a letter to the
Company dated May 3, 2002, Petsmart proposed settlement offers under which the
Company would pay damages ranging between $5,000,000 and $7,000,000. The Company
believes that it has meritorious defenses to the claims and it intends to defend
this vigorously. Datatec has further counter-claimed against Petsmart for
amounts owing to the Company under the contract. These amounts have been
reserved as part of the allowance for uncollectable accounts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 11, 2002, the Company held its Annual Meeting of Stockholders for the
year ended April 30, 2001 whereby the stockholders (a) elected seven (7)
directors and (b) approved the Amended and Restated 1998 Employee Stock Purchase
Plan. The vote on such matters was as follows:
(a) Election of Directors:
For Withheld
--- --------
Isaac J. Gaon 32,426,400 87,264
William J. Adams, Jr. 32,425,675 87,989
Frank P. Brosens 32,426,400 87,264
Robert H. Friedman 32,426,400 87,264
David M. Milch 32,425,675 87,989
Walter Grossman 32,426,400 87,264
Mark L. Berenblut 32,426,400 87,264
(b) Approval of Amended and Restated 1998 Employee Stock Purchase Plan
For Against Abstain
--- ------- -------
32,116,415 391,458 5,791
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Nasdaq 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, 2000 - July 31, 2000 $9.25 $3.13
August 1, 2000 - October 31, 2000 $5.56 $2.69
November 1, 2000 - January 31, 2001 $4.63 $1.41
February 1, 2001 - April 30, 2001 $2.97 $0.44
May 1, 2001 - July 31, 2001 $1.29 $0.43
August 1, 2001 - October 31, 2001 $0.82 $0.48
November 1, 2001 - January 31, 2002 $1.31 $0.55
February 1, 2002 - April 30, 2002 $1.45 $0.83
Pursuant to a letter from the Nasdaq Stock Market, Inc. ("Nasdaq") dated August
15, 2002, the Company received notification that its securities would be subject
to delisting for failure to file its Form 10-K in a timely manner as required by
Nasdaq rules and regulations. The Company requested a hearing, as permitted by
Nasdaq rules and regulations, which hearing occurred on September 19, 2002.
Pursuant to a subsequent letter dated September 6, 2002, the Company received
notification from Nasdaq that, in addition to the filing delinquency, the
Company does not comply with the bid price requirement for its Common Stock.
This issue was also heard at the hearing which occurred on September 19, 2002.
The Company has not yet received a determination by Nasdaq as to the continued
listing of its securities subsequent to the September 19th hearing. While the
Company's filing of its Form 10-K on the date hereof will satisfy the filing
delinquency, and its bid price met or exceeded $1.00 per share for ten
consecutive days prior to September 19th, no assurance can be given that Nasdaq
will rule favorably on the Company's request for continued listing. In addition,
with respect to the fiscal year ended April 30, 2002, the Company does not meet
Nasdaq's minimum stockholder equity requirement. Consequently, the Company may
receive an additional notice of delisting, as to which it anticipates filing
another appeal.
As of August 31, 2002, there were approximately 222 holders of record of the
Company's Common Stock.
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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.
SUBORDINATED SECURED CONVERTIBLE DEBENTURES. On April 3, 2002 the Company raised
$2.0 million of financing (less transaction costs of $0.170 million) to be used
for working capital purposes by issuing an aggregate of $2.0 million principal
amount of Subordinated Secured Convertible Debentures and Warrants to purchase
an aggregate of 270,000 shares of the Company's common stock at $1.416 per
share. The debentures mature on July 2, 2003 and bear interest at a rate of 5%
per annum. The interest is due quarterly on March 31, June 30, September 30, and
December 31 of each year (with the first interest payment due and payable on
September 30, 2002) and is payable in cash or Common Stock at the Company's
option. The Company recorded a discount of $582,000 in connection with the
issuance of the Debentures. The warrants have been valued at approximately
$291,000, based on the Black Scholes Pricing Model utilizing the following
assumptions: expected life of 5.0 years; volatility of 119%; risk free borrowing
rate of 4.4%. This amount has been recorded as a discount against the debt and
will be accreted as interest expense over the remaining life of the debt. In
addition, in accordance with Emerging Issues Task Force 98-5, an embedded
beneficial conversion feature of approximately $291,000 has been recognized as
additional paid-in-capital and will be accreted as additional interest expense
over the remaining life of the debt. Through April 30, 2002, $36,800 of the
above discounts has been accreted. The Debentures are secured by all assets of
the Company, which security interest is junior to the security interest granted
to the Company's existing senior lender.
The holder of each Debenture is entitled, at its option, to convert at any time
the principal amount of the Debenture or any portion thereof, together with
accrued but unpaid interest, into shares of the Company's Common Stock at a
conversion price for each share of common stock equal to the lower of (a) $1.16
or (b) 100% of the average of the two lowest closing bid prices of the Common
Stock on the principal market during the twenty consecutive trading days ending
with the last trading day prior to the date of conversion. The conversion price
may not be less than the floor price of $0.65, except to the extent that the
Company does not exercise its right to redeem the Debentures.
The agreement with the investors contains a requirement for the Company to have
effected the registration of a sufficient number of shares of its common stock
by July 2, 2002 or incur penalties equal to: (1) 2% of the product obtained by
multiplying the average closing sale price for the immediately preceding 30 day
period times the number of registrable securities the investor holds or may
acquire pursuant to conversion of the Convertible Debenture and the exercise of
Warrants on the last day of the applicable 30 day period (without giving effect
to any limitation on conversion or exercise) and (2) 3% of the product for all
continuing or subsequent registration defaults.
Although the Company filed the required registration statement with the
Securities and Exchange Commission within the required time period, such
registration statement has not yet been declared effective and as such, the
Company is currently in default of its Registration Rights Agreement with the
Debenture holders and is incurring the penalties described herein. Pursuant to
an agreement dated September 27, 2002, the Company has agreed to issue an
aggregate of 60,736 shares of Common Stock to the investors in exchange for the
cancellation of approximately $48,600 of the penalties incurred through
September 1,2002.
Also, the Debentures contain a provision which reduces the conversion price by
five percent (5%) if the Company's common stock into which the Debenture is
converted is not listed on NASDAQ National Market or NASDAQ Smallcap Market on
the conversion date and will be reduced by an additional five percent (5%) on
such date if the Common Stock is also not listed on the Over-The-Counter
Bulletin Board (without, in either such case, regard to the Floor Price). The
conversion price is subject to further reduction in the event the Company sells
common stock below the applicable conversion price.
For the "Equity Compensation Plan Information" table, please refer to Item 12,
which begins on page 77.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of the Company for
the years ended and at April 30, 1998, 1999, 2000, 2001 and 2002.
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 per share data)
Operating Results: 1998 (a) 1999 (a) 2000 (a) 2001 (a) 2002
-------- -------- -------- -------- ----
Revenue $ 76,804 $ 91,799 $ 93,316 $ 94,352 $ 70,277
Operating income (loss) 517 (3,432) (244) (17,461) 1,944
Minority interest -- -- -- (682) (318)
Loss from continuing
Operations (1,218) (5,285) (1,924) (19,858) (4,387)
Discontinued operations (2,768) (315) -- -- --
Net loss (3,986) (5,600) (1,924) (19,858) (4,387)
Per Share Amounts
Net loss:
Basic and Diluted:
Loss from continuing
operations $ (0.05) $ (0.18) $ (0.06) $ (0.59) $ (0.12)
Discontinued operations (0.10) (0.01) -- -- --
-------- -------- -------- -------- --------
Net loss per share $ (0.15) $ (0.19) $ (0.06) $ (0.59) $ (0.12)
======== ======== ======== ======== ========
Share Information:
Average common and potentially
dilutive shares Basic and Diluted 26,451 29,517 31,541 33,608 35,162
Balance Sheet Data:
Working capital (deficit) $ 1,022 $ (2,797) $ 10,773 $ (6,396)(b) $ (4,942)(b)
Total assets 37,813 40,585 53,180 40,864 34,619
Long-term debt 2,415 607 226 1,428 2,873
Total stockholders' equity (deficit) 10,068 9,235 15,260 (3,629) 2,279(c)
(a) As restated. See Note 2 to the consolidated financial statements included
elsewhere herein. Also, see prior comments on restatement on page 4.
(b) Includes a $3.0 million Term Loan due in 2003, required under loan
agreement to be classified as current.
(c) Includes conversion of minority interest to common stock investment during
fiscal 2002.
13
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 two (2)
regional staging and configuration centers and its own field deployment team of
approximately 250 people operating out of 15 offices, the Company conducts
multiple simultaneous large-scale deployments for organizations throughout the
United States and Canada. The Company believes its consistent, rapid deployment
model enables its 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 began utilizing software tools as the main driver of its
configuration and integration services when it acquired Computer Aided Software
Integration, Inc. ("CASI") in 1996. This acquisition brought with it IW2000, a
suite of software tools used in the configuration and integration processes.
During fiscal 1999 the Company began expanding its development of software tools
to incorporate several new applications in addition to IW2000 and has
incorporated them into a new product, eDeploy(TM). These applications include:
Preparation and Design, Configuration and Integration, DeploymeNt Management and
Transition and Maintenance. During that year the Company brought 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"). Subsequently, the Company realized that it
was more efficient to manage all of its activities under one operating unit. As
a result, the activities of eDeploy.com, Inc. were integrated into the
operations of Datatec. The Company fully integrated the application of eDeploy
into its operations during the later part of the fiscal year ended April 30,
2001.
RESTATEMENT OF FINANCIAL STATEMENTS
During fiscal 2002 the Company determined that it should have included indirect
costs as a component of cost of revenue in its previously issued financial
statements. Also, the Company identified certain errors in its previously issued
financial statements related to total estimated contract values, total costs
incurred with certain long term contracts and certain accrued and prepaid
expenses. As a result, the Company has restated its previously issued financial
statements for the years ended April 30, 2000 and 2001 and has recorded a prior
adjustment to its accumulated deficit as of April 30, 1999. The Company
previously reported a net loss of $1.633 million, or $(0.05) per share, and
$21.145 million, or $(0.63) per share for the years ended April 30, 2000 and
2001, respectively. The restatements resulted in the Company reporting net loss
of $1.924 million, or $(0.06) per share and net loss of $19.858 million, or
$(0.59) per share for the years ended April 30, 2000 and 2001, respectively. The
following management's discussion and analysis of financial condition and
results of operations gives effect to the restatement.
14
A summary of the significant effects of the restatements for fiscal 2000 and
fiscal 2001 is set forth below and discussed in Notes 2 and 19 to the
Consolidated Financial Statements.
Fiscal Year Ended Fiscal Year Ended
April 30, 2000 April 30, 2001
-------------- --------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Consolidated statements of operations data:
Revenue $ 95,148 $ 93,316 $ 94,285 $ 94,352
Cost of revenue 60,381 66,244 66,476 78,581
Gross margin 34,767 27,072 27,809 15,771
Selling, general and administrative expenses 34,720 27,316 46,157 33,232
Operating income (loss) 47 (244) (18,348) (17,461)
Net income (loss) (1,633) (1,924) (21,145) (19,858)
Net loss per share:
Basic $ (0.05) $ (0.06) $ (0.63) $ (0.59)
Consolidated balance sheet data:
Receivables, net $ 23,849 21,732 $ 22,181 20,024
Prepaid expenses and other current assets 1,301 1,936 792 1,126
Accrued and other liabilities 3,482 7,413 6,790 9,555
Accumulated deficit (20,908) (26,693) (42,053) (46,551)
Stockholders' equity 21,045 15,260 869 (3,629)
RECENT DEVELOPMENTS
SUBORDINATED SECURED CONVERTIBLE DEBENTURES. On April 3, 2002 the Company raised
$2.0 million of financing (less transaction costs of $0.170 million) to be used
for working capital purposes by issuing an aggregate of $2.0 million principal
amount of Subordinated Secured Convertible Debentures and Warrants to purchase
an aggregate of 270,000 shares of the Company's common stock at $1.416 per
share. The debentures mature on July 2, 2003 and bear interest at a rate of 5%
per annum. The interest is due quarterly on March 31, June 30,
15
September 30, and December 31 of each year (with the first interest payment due
and payable on September 30, 2002) and is payable in cash or Common Stock at the
Company's option. The Company recorded a discount of $582,000 in connection with
the issuance of the Debentures. The warrants have been valued at approximately
$291,000, based on the Black Scholes Pricing Model utilizing the following
assumptions: expected life of 5.0 years; volatility of 119 percent; risk free
borrowing rate of 4.405 percent. This amount has been recorded as a discount
against the debt and will be accreted as interest expense over the remaining
life of the debt. In addition, in accordance with Emerging Issues Task Force
98-5, an embedded beneficial conversion feature of approximately $291,000 has
been recognized as additional paid-in-capital and will be accreted as additional
interest expense over the remaining life of the debt. Through April 30, 2002,
$36,800 of the above discounts has been accreted. The Debentures are secured by
all assets of the Company, which security interest is junior to the security
interest granted to the Company's existing senior lender.
The holder of each Debenture is entitled, at its option, to convert at any time
the principal amount of the Debenture or any portion thereof, together with
accrued but unpaid interest, into shares of the Company's Common Stock at a
conversion price for each share of common stock equal to the lower of (a) $1.16
or (b) 100% of the average of the two lowest closing bid prices of the Common
Stock on the principal market during the twenty consecutive trading days ending
with the last trading day prior to the date of conversion. The conversion price
may not be less than the floor price of $0.65, except to the extent that the
Company does not exercise its right to redeem the Debentures.
The agreement with the investors contains a requirement for the Company to have
effected the registration of a sufficient number of shares of its common stock
by July 2, 2002 or incur penalties equal to: (1) 2% of the product obtained by
multiplying the average closing sale price for the immediately preceding 30 day
period times the number of registrable securities the investor holds or may
acquire pursuant to conversion of the Convertible Debenture and the exercise of
Warrants on the last day of the applicable 30 day period (without giving effect
to any limitation on conversion or exercise) and (2) 3% of the product for all
continuing or subsequent registration defaults.
Although the Company filed the required registration statement with the
Securities and Exchange Commission within the required time period, such
registration statement has not yet been declared effective and as such, the
Company is currently in default of its Registration Rights Agreement with the
Debenture holders and is incurring the penalties described herein. Pursuant to
an agreement dated September 27, 2002, the Company has agreed to issue an
aggregate of 60,736 shares of Common Stock to the investors in exchange for the
cancellation of approximately $48,600 of teh penalties incurred through
September 1,2002.
Also, the Debentures contain a provision which reduces the conversion price by
five percent (5%) if the Company's common stock into which the Debenture is
converted is not listed on NASDAQ National Market or NASDAQ Smallcap Market on
the conversion date and will be reduced by an additional five percent (5%) on
such date if the Common Stock is also not listed on the Over-The-Counter
Bulletin Board (without, in either such case, regard to the Floor Price). The
conversion price is subject to further reduction in the event the Company sells
common stock below the applicable conversion price.
16
SENIOR CREDIT FACILITY. The Company's existing credit facility with IBM Credit
Corporation consists of (i) a $16 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. Both the revolving line of credit and the term loan bear interest at
prime plus 4.25%.
The credit facility initially required the Company to comply with the following
financial ratios, percentages and amounts as of the last day of the fiscal
period under review by IBM Credit Corporation:
17
COVENANT COVENANT REQUIREMENT
- -------- --------------------
Revenue on an Annual Basis (i.e., Greater than zero and equal
the current fiscal year-to-date to or less than 40.0:1.0
Revenue annualized) to Working Capital
Net Profit to Revenue Equal to or greater than zero
percent
Total Liabilities to Tangible Net Worth Greater than zero and equal to or
less than 6.0:1.0
Fixed Charge Coverage Ratio Equal to or greater than
1.25:1.0 for fiscal year ended
April 30, 2000; 1.50:1.0 for
fiscal year ended April 30,
2001; 1.75:1.0 for fiscal year
ended April 30, 2002 and
thereafter. Covenants are
measured quarterly.
The covenants have been revised on several occasions. The following is a summary
of the covenants currently in place:
COVENANT COVENANT REQUIREMENT
-------- --------------------
Revenue on an Annual Basis (i.e., Greater than 5.0:1.0 and equal
annualized current fiscal revenue to or less than 25.0:1.0
year-to-date) to Working Capital
Net Profit to Revenue Equal to or greater than 0.10
percent
Tangible Net Worth Equal to or greater than $2.5
million
Debt Service Ratio Equal to or greater than 2.0:1.0
Total Liabilities to Total Net Worth Equal to or less than 5.0:1.0
The Company was not in compliance with one or more of the financial covenants of
its credit facility as of the quarters ended January 31, 2001 and April 30, 2001
of fiscal 2001 and as of each quarter end of fiscal 2002. The amounts
outstanding under the revolving credit facility and term loan as of April 30,
2001 and 2002 have been classified as current in the Company's consolidated
balance sheets. The Company and IBM Credit Corporation entered into an
18
Acknowledgment, Waiver and Amendment to the Inventory and Working Capital
Financing Agreement as of the end of each quarter. The following is a summary of
the covenant violations for each quarter:
PERIOD COVENANT REQUIREMENT ACTUAL
- ------ -------- ----------- ------
Jan 31 2001 Net Profit to Revenue Equal to or greater than 0.0% Net loss
Apr 30 2001 Annual Revenue to Greater than 0 and equal to or (25.5) to 1.0
Working Capital less than 25.0 to 1.0
Jul 31 2001 Annual Revenue to Greater than 0 and equal to or (4.5) to 1.0
Working Capital less than 25.0 to 1.0
Net Profit to Revenue Equal to or greater than 0.1% (1.7)%
Tangible Net Worth Equal to or greater than $(1.1) million
$2.5 million
Oct 31 2001 Annual Revenue to Greater than 0 and equal to (22.2) to 1.0
Working Capital or less than 25.0 to 1.0
Net Profit to Revenue Equal to or greater than 0.1% (1.7)%
Tangible Net Worth Equal to or greater than $(3.8) million
$2.5 million
Jan 31 2002 Net Profit to Revenue Equal to or greater than 0.1% (9.0)%
Apr 30 2002 Net Profit to Revenue Equal to or greater than 0.1% (10.7)%
Debt Service Ratio Equal to or greater than 2.0 (2.5) to 1.0
to 1.0
19
IBM Credit Corporation has notified the Company that it does not intend to renew
the existing revolving credit facility upon its expiration in November 2002 or
the term loan upon its expiration in February 2003. Such expiration dates will
be extended to August 1, 2003 in the event the Company fails to secure
replacement financing before that date. Accordingly, the Company is in the
process of seeking a replacement for these facilities. Although the Company is
confident that it will be able to refinance this debt, there can be no assurance
that it will be able to do so.
CONVERSION OF MINORITY INTEREST. On November 2, 2001, the Company exchanged
100,000 shares of Series A Preferred Stock of eDeploy.com, Inc. ("eDeploy.com"),
a wholly owned subsidiary, held by Cisco Systems, Inc. ("Cisco") for 1,021,382
shares of Datatec's common stock in a stock for stock transaction. This exchange
was made pursuant to a stock Purchase Agreement by and between the Company and
Cisco.
CRITICAL ACCOUNTING POLICIES
The Company's deployment services are generally provided at a fixed contract
price pursuant to purchase orders or other agreements with its customers, while
its software licensing is done on a "per seat" basis over a specified period of
time and its Application Service Provider ("ASP") activities are based on usage.
Services from deployment activities are performed primarily under long-term
contracts, but may be performed under short-term workorders or time and material
arrangements. The Company's typical long-term contract contains multiple
elements designed to track the various services required under the arrangement
with the customer. These elements are used to identify components of progress
billings, but are combined for revenue recognition purposes. The Company
recognizes revenue earned under long-term contracts utilizing the percentage of
completion method of accounting by measuring direct labor costs incurred to
total estimated labor costs. Under the percentage of completion method of
accounting, revenue, costs and gross margin are recognized as work is performed
based on the relationship between direct labor incurred and total estimated
labor.
Contracts are reviewed at least quarterly and if necessary, revenue, costs and
gross margin are adjusted prospectively for revisions in estimated total
contract value and total estimated contract costs. Estimated losses are
recognized when identified.
Payment milestones differ according to the customer and the type of work
performed. Generally, the Company invoices customers and payments are received
throughout the deployment process and, in certain cases, in advance of work
performed if a substantial amount of up front costs is required. In certain
cases payments are received from customers after the completion of site
installation. However, revenue and costs are only recognized on long-term
contracts to the extent of the contracts' percentage of completion. Unbilled
revenue, which is classified as a current asset, is recorded for the amount of
revenue earned in excess of billings to customers. Deferred revenue is recorded
as a current liability for the amount of billings in excess of revenue earned.
Costs incurred in excess of percentage of completion are deferred and classified
as a current asset, while accrued costs are classified as current liabilities.
20
The Company's cost of deployment services consists of four main categories:
labor, materials, project expenses and allocated indirect costs. The Company
estimates progress toward completion of its contracts by applying the percentage
of direct labor incurred to total estimated direct labor. Direct costs (labor,
materials, and project expenses) are charged directly to projects as they are
incurred. Indirect costs are then applied to projects and a gross margin is
determined. This enables management to track all costs associated with
delivering services to its customers. Project managers and other field
supervisors manage and are evaluated, in part, on how projects' actual direct
costs compare to their estimated direct costs. Operations management manages and
is evaluated, in part, on how projects' actual gross margins compare to targeted
gross margins.
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, conduits, 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 or materials costs. In addition, indirect costs, such
as software amortization, warehouse expense, material handling costs, etc., are
allocated to projects on bases that reflect management's estimate of
absorption of these costs by each project (generally direct labor hours).
The Company capitalizes certain computer software costs incurred in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Also, the
Company 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." Once
technological feasibility has been established, software development costs are
captured in the Company's job costing system under specific projects related to
the development effort. Costs related to software developed for external use are
amortized using the greater of the ratio that current gross revenue for a
product bears 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.
Costs related to internal use software are amortized over a period not to exceed
three years.
As of April 30, 2002, the Company had net operating loss carryforwards for
Federal tax purposes of approximately $53 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 does not believe that it
incurred a change of ownership that limits its ability to utilize its net
operating loss carryforwards as of April 30, 2002, although ownership changes in
future periods may pose limitations on the Company's use of net operating loss
carry forwards. During fiscal 2001 and 2002, the Company determined that it was
unlikely that it would realize net operating loss carry forwards, and as such,
has provided a valuation allowance offsetting these carryforwards.
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 liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates underlying the accompanying consolidated
financial statements include estimated revenues under long-term contracts,
estimated costs to complete long-term contracts, recoverability of intangibles
and other long-lived assets, allowance for doubtful accounts and inventory
carrying values. Actual results could differ from those estimates.
The Company elected to early adopt the provisions of SFAS 142 "Goodwill and
Other Intangible Assets." (See Note 1). These provisions require that goodwill
no longer be subject to amortization but rather be reviewed periodically for
impairment and that other identifiable intangibles be separated and those with
finite lives be amortized over their useful lives. Goodwill and intangible
assets with indefinite lives must be assessed once a year for impairment, and
more frequently if circumstances indicate a possible impairment. Based on its
evaluation, which, in part, was based on certain fair value assumptions, the
Company determined that there is no impairment to its goodwill and other
intangible assets.
21
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere herein.
RESULTS OF OPERATIONS
The consolidated statements of operations for the Company are summarized below.
April 30, 2000 April 30, 2001 April 30, 2002
-------------- -------------- --------------
% Of % Of % Of
Net Net Net
Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ --------
Revenue $ 93,316 100.00% $ 94,352 100.00% $ 70,277 100.00 %
Cost of revenue 66,244 70.99% 78,581 83.28% 48,102 68.45 %
--------- ------ -------- ------ -------- ------
Gross margin 27,072 29.01% 15,771 16.72% 22,175 31.55 %
Selling, general
and administrative
expenses 27,316 29.27% 33,232 35.22% 24,119 34.32 %
--------- ------ -------- ------ -------- ------
Operating income (loss) (244) (0.26)% (17,461) (18.51)% (1,944) (2.77)%
Interest expense (1,680) (1.80)% (1,715) (1.82)% (2,125) (3.02)%
--------- ------ -------- ------ -------- ------
Loss before
minority interest (1,924) (2.06)% (19,176) (20.32)% (4,069) (5.79)%
Income taxes -
Minority interest - (682) (0.72)% (318) (0.45)%
--------- ------ -------- ------ -------- ------
Net loss $ (1,924) (2.06)% $(19,858) (21.05)% $(4,387) (6.24)%
========= ===== ======== ====== ======= =====
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 2002 AND 2001
REVENUE
Datatec has a direct and indirect sales strategy. Its direct sales are mainly to
"Fortune 2000" customers which have significant numbers of geographically
dispersed sites and where the technology being implemented is complex. As such,
Retail, Insurance, Hospitality and Financial Services are Datatec's target
market segments. These market segments are highly challenging for most small
sized integrators, but Datatec's software tools, processes and national
22
operations allow it to operate successfully within these segments. When Datatec
adopted an indirect model in 1998 by selling its service offerings through
Technology Partners to their clients that fall within Datatec's target market
segments, Datatec decided to reduce channel conflict by adopting a
"preservation" strategy with its direct accounts and opted to grow its
operations primarily through its Indirect channel. Therefore the revenue growth
within each market segment was not dependent upon the segment's relative
economic environment, but was the result of the new strategy adopted by Datatec.
REVENUE: Revenue for the year ended April 30, 2002 was $70.3 million compared to
$94.4 million for the year ended April 30, 2001, representing a decrease of
approximately 26%. Deployment Services revenue decreased to $68.3 million in
fiscal 2002 from $92.5 million in fiscal 2001, a decrease of 26%, while software
licensing revenue increased to $2.0 million from $1.9 million for the same
period. The decrease in revenue was attributed to the continued slowdown in
technology deployment across industries through the quarter ended January 31,
2002, which delayed business decisions until the Company's fourth fiscal
quarter. Revenue from Technology Providers decreased 51%, going from $47.5
million in 2001 to $23.3 million in 2002, as these companies were severely
impacted by the slowdown in technology spending. Revenue from Enterprise
customers increased by $0.1 million, going from $46.9 million in 2001 to $47.0
million in fiscal 2002, as the slowdown in technology spending had less of an
impact on the retailing sector than on other sectors.
GROSS MARGIN. Gross margin for the years ended April 30, 2001 and 2002 were as
follows (in thousands):
April 30,
---------------------------
2001 2002
-------- --------
Revenue $94,352 $70,277
------- -------
Cost of revenue:
Direct labor 33,678 21,814
Materials 18,023 11,364
Project expenses 12,847 9,597
Amortization of software development 1,544 1,723
Other indirect costs 12,489 3,604
------ -----
Total cost of revenue 78,581 48,102
------ ------
Gross margin $15,771 $22,175
======== =======
Gross margin as a percentage of revenue increased for the year ended April 30,
2002 from the year ended April 30, 2001 to 32% from 17% while the amount of
gross margin increased to $22.2 million from $15.8 million. The increase in
gross margin was primarily due to an approximate 50% reduction in indirect
salary costs during fiscal year 2002, a more efficient delivery of services and
lower materials costs. These were partially offset by a decrease in revenue for
the year ended April 30, 2002 from April 30, 2001 of approximately $24.1
million.
Labor costs as a percent of revenue for the years ended April 30, 2002 and 2001
were approximately 31% and 36%, respectively. The decrease in direct labor
during fiscal 2002 was the result of personnel cutbacks started during fiscal
2001 caused by lower revenue. Materials costs as a percentage of revenue over
the same periods were approximately 16% and 19%, respectively. The decrease in
23
materials costs was directly related to the decrease in overall revenue. Project
expense costs as a percentage of revenue over the same periods were
approximately 14% for both years. These costs remained relatively constant as a
percentage of revenue generated as the overall components of a typical
deployment contract remained unchanged. Occasionally, the materials component of
a contract may vary depending upon the deployment requirements.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the years ended April 30, 2002 and 2001 were $24.1
million and $33.2 million respectively, representing a decrease of 27%. As a
percentage of revenue, selling, general and administrative expenses represented
34% of revenue for the year ended April 30, 2002 compared to 35% for the year
ended April 30, 2001. The decrease in selling, general and administrative
expenses was due to cost savings programs, primarily personnel reductions,
initiated during the fiscal year ended April 30, 2001 but fully realized in the
current year.
Interest expense. Interest expense for the year ended April 30, 2002 was $2.1
million, including $38,793 interest accreted in connection with the Subordinated
Secured Convertible Debentures and Warrants, compared to $1.7 million for the
year ended April 30, 2001. The increase is attributable to higher average
borrowings and borrowing costs.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 2001 AND 2000
Revenue: Revenue for the year ended April 30, 2001 was $94 million compared to
$93.3 million for the year ended April 30, 2000, representing an increase of
approximately 1%. Deployment Services revenue increased to $92.5 million in
fiscal 2001 from $92.2 million in fiscal 2000, while software licensing revenue
increased to $1.9 million from $1.1 million for the same period. The decrease in
revenue was attributed to the slowdown in technology deployment across
industries. Revenue from Technology Providers more than doubled, going from
$23.6 million in 2000 to $47.5 million in 2001, as the Company's focus on this
segment began to show results. Revenue from Enterprise customers decreased 33%,
going from $69.7 million in 2000 to $46.9 million in fiscal 2001, as the Company
changed its marketing focus towards Technology Providers.
GROSS MARGIN. Gross margin for the years ended April 30, 2000 and 2001 were as
follows (in thousands):
April 30,
------------------------
2000 2001
Revenue $93,316 $94,352
------- -------
Cost of revenue:
Direct labor 30,288 33,678
Materials 13,726 18,023
Project expenses 14,799 12,847
Amortization of software development 594 1,544
Other indirect costs 6,837 12,489
----- ------
Total cost of revenue 66,244 78,581
------ ------
Gross margin $27,072 $15,771
======= =======
24
Gross margin as a percentage of revenue decreased for the year ended April 30,
2001 from the year ended April 30, 2000 to 17% from 29% while the gross margin
decreased to $15.8 million from $27.1 million. The decrease in gross margin was
primarily due to higher labor costs, a more significant materials cost component
and an approximate 33% increase in indirect salary costs during fiscal year
2001.
Labor costs as a percent of revenue for the years ended April 30, 2001 and 2000
were approximately 36% and 33%, respectively. The increase in direct labor was
the result of hiring additional labor in anticipation of additional volume and
not reacting quickly enough to the dramatic reduction in orders that occurred
during the second half of fiscal 2001. Materials costs as a percentage of
revenue over the same period were approximately 19% and 15%, respectively.
During fiscal 2001 the materials component of revenue was similar to that of
fiscal 2000, but the Company greatly reduced its margin on materials revenues in
response to a strong competitive environment. Project expense costs as a
percentage of revenue over the same period were approximately 14% and 16%,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended April 30, 2001 were $33.2 million
compared to $27.3 million for the year ended April 30, 2000, representing an
increase of 22%. As a percentage of revenues, selling, general and
administrative expenses represented 35% for the year ended April 30, 2001
compared to 29% for the year ended April 30, 2000. The increase in selling,
general and administrative expenses was 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.
INTEREST EXPENSE. Interest expense for the year ended April 30, 2001 was $1.72
million, compared to $1.68 million for the year ended April 30, 2000.
BACKLOG
Backlog for the Company's services as of August 31, 2000, 2001 and 2002 was
$46.6 million, $48.6 million and $75.6 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 effect 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.
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN MAJOR BALANCE SHEET CLASSIFICATIONS
CURRENT ASSETS: Current assets as of April 30, 2002 and 2001 amounted to
approximately $24.5 million and $27.0 million, respectively. The decrease of
approximately $2.5 million is the result
25
of lower revenue generated during the year ended April 30, 2002, causing a
decrease in accounts receivable and cash, and a requirement for lower inventory
levels.
PROPERTY AND EQUIPMENT: Property and equipment as of April 30, 2002 and 2001
amounted to approximately $3.3 million and $5.3 million, respectively. The
decrease of approximately $2.0 million reflects a decrease in capital
expenditures as the Company adjusted its spending levels to reflect current
business activity.
OTHER ASSETS: Other assets as of April 30, 2002 and 2001 amounted to
approximately $4.2 million and $6.0 million, respectively. The decrease of
approximately $1.8 million reflects the decrease in the investment in software
development as the Company adjusted its spending levels to reflect current
business activity.
CURRENT LIABILITIES: Current liabilities as of April 30, 2002 and 2001 amounted
to approximately $29.5 million and $33.4 million, respectively. The decrease of
approximately $3.9 million is attributable to the decrease in activity during
fiscal 2002 and the use of proceeds from the sale of Subordinated Secured
Convertible Debentures to pay down current obligations. This decrease was
partially offset by an increase in the Company's short-term borrowings.
MINORITY INTEREST: As previously described, minority interest was eliminated
during the year ended April 30, 2002 due to the conversion of Cisco's investment
in eDeploy.com, Inc. into Common Stock of the Company.
CASH FLOW: Cash used in operating activities decreased to $4.7 million for the
fiscal year ended April 30, 2002 from $9.8 million for the fiscal year ended
April 30, 2001 primarily as a result of aggressive cost-cutting initiated during
fiscal 2001, but more fully realized during the year ended April 30, 2002. A
decrease in inventory, resulting from the decrease in revenue and more
aggressive cash management contributed to the cash flow from operations.
Cash used in investing activities decreased by approximately $3.6 million to
$1.2 million for the year ended April 30, 2002 from $4.8 million for the year
ended April 30, 2001. The decrease was the result of the cost reduction program
by the Company initiated during fiscal 2001 and carried through to fiscal 2002
and of a reduction in the investment in software development during fiscal 2002
as the development of the Company's eDeploy(TM) solution wAs substantially
completed in the prior year.
Cash provided from financing activities increased by approximately $0.35
million for the year ended April 30, 2002 to $5.4 million from $5.1 million for
the year ended April 30, 2001. Cash was generated primarily from the sale of
Subordinated Secured Convertible Debentures ($1.83 million, net) and short-term
borrowings ($3.6 million) for the fiscal year ended April 30, 2002, while cash
generated during the year ended April 30, 2001 primarily arose from short-term
borrowings ($4.8 million) and the sale of common stock ($0.973 million), offset
by the repayment of debt of approximately $0.778 million.
LIQUIDITY
The net loss of $19.9 million incurred during the fiscal year ended April 30,
2001 resulted in a strain on the Company's cash resources and the net loss of
$4.4 million for the fiscal year ended April 30, 2002 added to this strain.
Although the Company took dramatic measures to cut costs, the Company's working
capital line has been close to its maximum allowable levels and the average days
26
outstanding of its trade payables have extended beyond normal credit terms
granted by vendors. The loss for the fiscal year ended April 30, 2002 was
substantially less than the prior year's loss and the Company's operating plan
for the fiscal year ending April 30, 2003 projects profitable results. However,
the Company continues to experience tight liquidity and extended days
outstanding of its trade payables. It is aggressively managing its cash as it
works to return to profitability. Furthermore, IBM Credit Corp., the Company's
working capital lender, has notified the Company that it does not intend to
renew its working capital line and term loan beyond August 1, 2003 (see Note 6
of the Consolidated Financial Statements). As a result, the Company is actively
seeking replacement financing.
Achievement of its fiscal 2003 operating plan depends upon the timing of work
performed by the Company on existing projects, the ability of the Company to
gain and perform work on new projects, the ability of the Company to maintain
positive relations with its key vendors and the ability of the Company to
replace its current working capital financing line. Multiple project
cancellations, delays in the timing of work performed by the Company on existing
projects, the inability of the Company to gain and perform work on new projects,
or the inability of the Company to replace its current working capital financing
line could have an adverse impact on the Company's liquidity and on its ability
to execute its operating plan.
The Company has taken action to ensure its continuation as a going concern. A
summary of recent events and the Company's completed or planned actions follow:
Demand for the Company's services has increased dramatically and the
backlog of contracted business as of August 31, 2002 was at a record $75.6
million.
The Company initiated and completed substantial cost saving measures during
the fiscal years ended April 30, 2001 and 2002 and now has a cost structure
in line with its expected revenue.
As a result of the increase in demand for the Company's services and the
cost reduction measures initiated over the past two years, the Company
achieved profitability during the fourth quarter of fiscal 2002 and expects
to maintain profitability throughout fiscal 2003.
Management has been seeking to replace its working capital line and raise
additional capital to support its growth in business. It is encouraged by
the preliminary response it has received from the financial community and
it expects to raise the necessary financing.
The Company was not in compliance with one or more of the financial covenants of
its credit facility as of the quarters ended January 31, 2001 and April 30, 2001
of fiscal 2001 and as of each quarter end of fiscal 2002. The Company and IBM
Credit Corporation entered into an Acknowledgment, Waiver and Amendment to the
Inventory and Working Capital Financing Agreement as of the end of each quarter.
The following is a summary of the covenant violations for each quarter:
27
PERIOD COVENANT REQUIREMENT ACTUAL
- ------ -------- ----------- ------
Jan 31 2001 Net Profit to Revenue Equal to or greater than 0.0% Net loss
Apr 30 2001 Annual Revenue to Greater than 0 and equal to or
Working Capital less than 25.0 to 1.0 (25.5) to 1.0
Jul 31 2001 Annual Revenue to Greater than 0 and equal to or
Working Capital less than 25.0 to 1.0 (4.5) to 1.0
Net Profit to Revenue Equal to or greater than 0.1% (1.7)%
Tangible Net Worth Equal to or greater than $(1.1) million
$2.5 million
Oct 31 2001 Annual Revenue to Greater than 0 and equal to or (22.2) to 1.0
Working Capital less than 25.0 to 1.0
Net Profit to Revenue Equal to or greater than 0.1% (1.7)%
Tangible Net Worth Equal to or greater than $2.5 $(3.8) million
million
Jan 31 2002 Net Profit to Revenue Equal to or greater than 0.1% (9.0)%
Apr 30 2002 Net Profit to Revenue Equal to or greater than 0.1% (10.7)%
Debt Service Ratio Equal to or greater than 2.0 (2.5) to 1.0
to 1.0
28
IBM Credit Corporation, the Company's working capital lender, has notified the
Company that it does not intend to renew its working capital line and term loan
beyond August 1, 2003 (see Note 7 of the Consolidated Financial Statements). As
a result, the Company is actively seeking replacement financing.
INFLATION: In the opinion of management, inflation has not had a material
adverse effect on its results of operations.
SEASONALITY: The Company's business is affected on a seasonal basis to the
extent of its activity with the retail sector. As a result, the Company
generally generates lower revenue in its third fiscal quarter (November 1
through January 31).
QUARTERLY FLUCTUATIONS: Although the Company has recently secured a substantial
30-month contract, generally it does not have contracts that last beyond 12 to
18 months. Its ability to generate net revenue is dependent upon obtaining many
new projects each year. Period-to-period comparisons between years may not be
meaningful or indicative of operating results over a longer period.
29
RELATED PARTY TRANSACTIONS
Mr. William J. Adams, Jr., a Director of the Company, is the President of
WhiteSpace, Inc., which company had been retained by the Company to provide
consulting services to the Company. Fees paid to WhiteSpace, Inc. during the
years ended April 30, 2000, 2001 and 2002 amounted to $57,000, $93,000 and
$125,000, respectively. This relationship has concluded and the Company
anticipates no fees to be paid in the future.
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 revenue.
CONTINGENCIES
On September 22, 2000, Petsmart, Inc. filed a complaint against the Company in
the Superior Court of Maricopa County, Arizona. Petsmart has alleged that it has
been damaged by the Company's failure to satisfactorily complete work
contemplated by an agreement between the parties. Damages were unspecified. At a
settlement meeting held on April 17, 2002, discussions were held in which
Petsmart proposed a series of settlement offers under which the Company would
pay damages ranging between $7,000,000 and $8,000,000. In a letter to the
Company dated May 3, 2002, Petsmart proposed settlement offers under which the
Company would pay damages ranging between $5,000,000 and $7,000,000. The Company
believes that it has meritorious defenses to the claims and it intends to defend
this vigorously. Datatec has further counter-claimed against Petsmart for
amounts owing to the Company under the contract.
30
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following is a summary of obligations and commitments to make future
payments under short-term borrowing, long-term debt, capital lease obligations,
unconditional purchase obligations and other obligations (see Notes 7, 8, 10, 13
and 15 of the Consolidated Financial Statements).
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS (IN THOUSANDS)
LESS
THAN 1
TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- ---- --------- --------- -------------
Short-term borrowings 17,464 17,464
Long-Term Debt 1,414 1,414
Capital Lease Obligations 44 42 2
Operating Leases 12,608 2,623 4,729 1,894 3,362
Unconditional Purchase Obligations 1,659 1,659
Other Long-Term Obligations 1,457 1,457
Total Contractual Cash Obligations 34,646 21,788 7,602 1,894 3,362
31
NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 no longer be subject to amortization but rather be reviewed
periodically for impairment, and that other identifiable intangibles be
separated and those with finite lives be amortized over their useful lives.
Goodwill and intangibles with indefinite lives 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
elected to adopt the Standards on May 1, 2001 and evaluated the carrying value
of its Goodwill and other intangible assets. Based on its evaluation, which, in
part, was based on certain fair market value assumptions, the Company determined
that there is no impairment to its Goodwill and other intangible assets.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and normal operation of long-lived assets, except for certain
obligations of lessees. The provisions of this Statement are required to be
applied starting with fiscal years beginning after June 15, 2001. Earlier
application is encouraged. The Company is currently evaluating the impact of the
new accounting standard and plans to adopt the new accounting standard in its
financial statements for the fiscal year ending April 30, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. This
Statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The provisions of this
Statement are required to be applied starting with fiscal years beginning after
December 15, 2001. The Company is currently evaluating the impact of the new
accounting standard on existing long-lived assets and plans to adopt the new
accounting standard in its financial statements for the fiscal year ending April
30, 2003.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
APB Opinion No. 30. This Statement also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This Statement will be effective for the Company for
the fiscal year ending
32
April 30, 2004. The Company does not believe that the adoption of this Statement
will have a material effect on the Company's results of operations or financial
position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 will supersede Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated
with an exit or disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fair Value of Financial Instruments - The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
The Company has not entered into, and does not expect to enter into, financial
instruments for trading or hedging purposes.
The Company is currently exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt obligations since the
majority of the Company's long-term debt obligations are at variable rates. The
Company does not currently anticipate entering into interest rate swap and/or
similar instruments.
The following methods and assumptions were used to estimate the fair value of
the financial instruments:
Trade accounts receivable and payables and accrued expenses. The fair
value of these receivables and payables equal their carrying value because
of their short maturities.
Revolving Credit Line and Terms Loans. Interest rates that are currently
available the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for debt issues for
which no market quotes are available. The carrying amount of these debt
facilities is believed to be a reasonable estimate of fair value. The fair
market value of the Company's short and long-term debt is not contingent
upon interest rates.
Interest Rates. The Company is exposed to market risk from changes in the
interest rates on a significant portion of its outstanding indebtedness.
Certain outstanding balances under the Credit Agreement bear interest at a
variable rate based on a margin over Prime. Based on the amount
outstanding as of April 30, 2002, a 100 basis point change in interest
rates would result in an approximate $169,000 change to the Company's
annual interest expense. For fixed rate debt interest rate changes affect
the fair market value of such debt, but do not impact the Company's
earnings or cash flows. Based on the amount outstanding as of April 30,
2002 and scheduled payments to debtholders, a 10 percent increase in
market rates would result in an approximate 1 percent decrease in the fair
market value of these obligations. The table below provides information
about the Company's debt obligations that are sensitive to changes in
interest rates (amounts in thousands).
33
Fair Market Fair Market
Expected Value(1) At Value(1) At
Rate and Maturity Market Adjusted %
Facility Principal Payment Terms Date Rate Rate(2) Change
- --------------------------------------------------------------------------------------------------------------
Subordinated 5.0%; quarterly interest payments
Secured beginning on 9/30/02 and continuing
Convertible $2,000 until principal is repaid at maturity. 7/2/03 $1,992(3) $1,976 (1)%
Debentures
Note to former
executive 17.5%; monthly interest payments,
officer 1,414 principal due at maturity. 4/15/04 1,659(4) 1,638 (1)%
1. Fair market value is calculated by discounting the scheduled cash payments
at the market or adjusted rate.
2. Market rate increased by 10%.
3. Commercial and industrial loan rate of 6.75% for moderate risk, 31 to
365-day loans (Federal Reserve Survey of Terms of Business Lending, May
6-10, 2002).
4. Commercial and industrial loan rate of 7.46% for moderate risk, over
365-day loans (Federal Reserve Survey of Terms of Business Lending, May
6-10, 2002).
34
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 . . . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets as of April 30, 2001 (restated) and 2002 . . . . 37
Consolidated Statements of Operations For the Years Ended
April 30, 2000 (restated), 2001 (restated) and 2002 . . . . . . . . . . . .38
Consolidated Statements of Comprehensive Income Loss For the Years
ended April 30, 2000 (restated), 2001 (restated) and 2002. . . . . . . . . 39
Consolidated Statements of Changes in Stockholders' Equity, (Deficit)
For the Years Ended April 30, 2000 (restated), 2001 (restated) and 2002. . 40
Consolidated Statements of Cash Flows For the Years Ended
April 30, 2000 (restated), 2001 (restated) and 2002. . . . . . . . . . . . 41
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 42
SCHEDULES
Schedule II -Valuation and Qualifying Accounts . . . . . . . . . . . . . . . 68
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.
35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Datatec Systems, Inc.
Fairfield, New Jersey
We have audited the accompanying consolidated balance sheets of Datatec Systems,
Inc. (the "Company") as of April 30, 2002 and 2001, and the related consolidated
statements of operations, comprehensive loss, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended April
30, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of April 30, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended April 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2, the consolidated financial statements for the years
ended April 30, 2001 and 2000 have been restated.
Deloitte & Touche LLP
New York, New York
October 2, 2002
36
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
April 30,
-------------------
2001 2002
-------- --------
(AS RESTATED -
SEE NOTE 2)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 571 $ 49
Receivables, net 20,024 17,204
Inventory 5,273 3,176
Prepaid expenses and other current assets 1,126 4,096
-------- --------
Total current assets 26,994 24,525
Property and equipment, net 5,252 3,259
Goodwill, net 2,665 2,665
Other assets 5,953 4,170
-------- --------
Total assets $ 40,864 $ 34,619
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings $ 13,912 $ 17,464
Current portion of long-term debt 210 42
Accounts payable 9,713 7,789
Accrued expenses and other liabilities 9,555 4,172
-------- --------
Total current liabilities 33,390 29,467
-------- --------
LONG-TERM DEBT:
Due to related parties 1,414 1,414
Other long-term debt 14 2
Subordinated secured convertible debentures, net
of unamortized discount of $543 -- 1,457
-------- --------
TOTAL LONG-TERM DEBT 1,428 2,873
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 9,675 --
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.001 par value (authorized
4,000,000 shares, none issued and
outstanding as of April 30, 2001 and 2002) -- --
Common stock, $.001 par value (authorized 75,000,000
shares; issued and outstanding 33,754,000 shares
and 35,591,000 shares as of April 30, 2001 and
2002, respectively) 34 35
Additional paid-in capital 43,241 53,532
Accumulated deficit (46,551) (50,938)
Accumulated other comprehensive loss (353) (350)
-------- --------
Total stockholders' equity (deficit) (3,629) 2,279
-------- --------
Total liabilities and stockholders' equity (deficit) $ 40,864 $ 34,619
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
37
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
For the Year Ended
April 30,
----------------------------------------------
2000 2001 2002
---- ---- ----
(AS RESTATED - (AS RESTATED -
SEE NOTE 2) SEE NOTE 2)
Revenue $ 93,316 $ 94,352 $ 70,277
Cost of revenue 66,244 78,581 48,102
------------ ------------ ------------
Gross margin 27,072 15,771 22,175
Selling, general and administrative expenses 27,316 33,232 24,119
------------ ------------ ------------
Operating loss 244 17,461 1,944
Interest expense (1,680) (1,715) (2,125)
------------ ------------ ------------
Loss before income taxes and
minority interest 1,924 19,176 4,069
Income taxes -- -- --
Minority interest -- (682) (318)
------------ ------------ ------------
Net loss $ 1,924 $ 19,858 $ 4,387
============ ============ ============
Net Loss Per Share - Basic and Diluted $ (0.06) $ (0.59) $ (0.12)
============ ============ ============
Weighted average common shares
outstanding - Basic and Diluted 31,541,000 33,608,000 35,162,000
The accompanying notes are an integral part of these consolidated financial statements.
38
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
For the Year Ended
April 30,
----------------------------------------------
2000 2001 2002
------- -------- -------
(AS RESTATED - (AS RESTATED -
SEE NOTE 2) SEE NOTE 2)
Net loss $ 1,924 $ 19,858 $ 4,387
Other comprehensive (income) loss -
foreign currency translation adjustment 5 5 (3)
------- -------- -------
Comprehensive loss $ 1,929 $ 19,863 $ 4,384
======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements.
39
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
Total
Additional Additional Accumulated Stock-
Preferred Preferred Common Common Paid-in Paid-in Other holders'
Stock Stock Stock Stock Capital Capital Accumulated Comprehensive Equity
Shares Amount Shares Amount Preferred Common Deficit Loss (Deficit)
--------- --------- ------- ------ --------- ------- ----------- ------------- --------
Balance at May 1, 1999
as previously reported 120 -- 30,489,000 $30 $935 $33,382 $(19,275) $(343) $14,729
Prior period adjustments
(see Note 2) (5,494) (5,494)
--- ---- ---------- --- ---- ------- -------- ----- -------
Balance at May 1, 1999 (as
restated - see Note 2) 120 -- 30,489,000 30 935 33,382 (24,769) (343) 9,235
Exercise of warrants and
options -- -- 2,263,000 2 -- 7,543 -- -- 7,545
Issuance of common stock
under Employee Stock
Purchase Plan -- -- 188,000 -- -- 409 -- -- 409
Conversion of preferred
stock into common stock (120) -- 473,000 1 (935) 934 -- -- --
Net loss (as restated -
see Note 2) -- -- -- -- -- -- (1,924) -- (1,924)
Effect of exchange rate
changes -- -- -- -- -- -- -- (5) (5)
Balance at April 30, 2000 --- ---- ---------- --- ---- ------- -------- ----- -------
(as restated - see Note 2) -- -- 33,413,000 33 -- 42,268 (26,693) (348) 15,260
Exercise of warrants and
options -- -- 106,000 -- -- 325 -- -- 325
Issuance of common stock
under Employee Stock
Purchase Plan -- -- 235,000 1 -- 648 -- -- 649
Net loss (as restated -
see Note 2) -- -- -- -- -- -- (19,858) -- (19,858)
Effect of exchange rate
changes -- -- -- -- -- -- -- (5) (5)
Balance at April 30, 2001 --- ---- ---------- --- ---- ------- -------- ----- -------
(as restated - see Note 2) -- -- 33,754,000 34 -- 43,241 (46,551) (353) (3,629)
Exercise of warrants and
options -- -- 405,000 -- -- 32 -- -- 32
Issuance of common stock in
connection with eDeploy
transaction -- -- 1,021,000 1 -- 9,617 -- -- 9,618
Issuance of warrants in
connection with Debenture
Financing -- -- -- -- -- 412 -- -- 412
Issuance of common stock
under Employee Stock
Purchase Plan -- -- 411,000 -- 230 -- -- 230
Net loss -- -- -- -- -- -- (4,387) -- (4,387)
Effect of exchange rate changes -- -- -- -- -- -- -- 3 3
--- ---- ---------- --- ---- ------- -------- ----- -------
Balance at April 30, 2002 -- -- 35,591,000 $35 -- $53,532 $(50,938) $(350) $2,279
=== ==== ========== === ==== ======= ======== ===== =======
The accompanying notes are an integral part of these consolidated financial statements.
40
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Year Ended April 30,
----------------------------
2000 2001 2002
-------- -------- --------
(AS RESTATED -(AS RESTATED -
SEE NOTE 2) SEE NOTE 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,924) $(19,858) $ (4,387)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization 3,702 5,316 4,274
Accretion of subsidiary preferred stock -- 82 38
Changes in operating assets and liabilities --
(Increase) decrease in receivables, net (1,514) 1,708 2,820
(Increase) decrease in inventory (1,877) (144) 2,097
(Increase) decrease in prepaid expenses and other assets 215 722 (2,254)
Decrease in net assets from discontinued operations 447 -- --
Increase (decrease) in accounts payable and accrued and
other liabilities 460 2,404 (7,307)
-------- -------- --------
Net cash used in operating activities (1,411) (9,770) (4,719)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,256) (2,421) (397)
Investment in software development (3,091) (2,371) (817)
-------- -------- --------
Net cash used in investing activities (5,347) (4,792) (1,214)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 447 4,842 3,552
Net payments of indebtedness (1,388) (778) (180)
Cost incurred in connection with issuance
of subordinated secured convertible debentures (170)
Net proceeds from subordinated secured convertible debentures -- -- 2,000
Net proceeds from stock issuances 7,954 973 264
Net decrease due to conversion of preferred stock -- -- (58)
Net increase in due to related parties -- 23 --
Net proceeds from preferred stock offering of subsidiary 9,593 -- --
-------- -------- --------
Net cash provided by financing activities 16,606 5,060 5,408
-------- -------- --------
Net effect of foreign currency translation adjustments (5) (4) 3
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 9,843 (9,506) (522)
CASH AND CASH EQUIVALENTS at beginning of year 234 10,077 571
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year $ 10,077 $ 571 $ 49
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
41
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 technology deployment services and licensing software tools to
support Technology Providers and Enterprises in the delivery of complex IT
solutions.
During the fiscal year ended April 30, 2000, the Company changed the name of its
subsidiary from CASI, Inc. to eDeploy.com, Inc. ("eDeploy.com"). During the
fiscal year ended April 30, 2002 the Company integrated eDeploy.com's activities
into Datatec Systems, Inc. These activities include developing, marketing and
managing the licensing of software tools to support Technology Providers and
Enterprises in the delivery of complex IT solutions. (See Note 9.)
The net loss of $19.858 million incurred during the fiscal year ended April 30,
2001 resulted in a strain on the Company's cash resources and the net loss of
$4.387 million for the fiscal year ended April 30, 2002 added to this strain.
Although the Company took dramatic measures to cut costs, the Company's working
capital line has been close to its maximum allowable levels and the average days
outstanding of its trade payables have extended beyond normal credit terms
granted by vendors. The loss for the fiscal year ended April 30, 2002 was
substantially less than the prior year's loss and the Company's operating plan
for the fiscal year ending April 30, 2003 projects profitable results. However,
the Company continues to experience tight liquidity and extended days
outstanding of its trade payables. It is aggressively managing its cash as it
works to return to profitability. Furthermore, IBM Credit Corporation, the
Company's working capital lender, has notified the Company that it does not
intend to renew its working capital line and term loan beyond August 1, 2003
(see Note 6). As a result, the Company is actively seeking replacement
financing.
Achievement of its fiscal 2003 operating plan depends upon the timing of work
performed by the Company on existing projects, the ability of the Company to
gain and perform work on new projects, the ability of the Company to maintain
positive relations with its key vendors and the ability of the Company to
replace its current working capital financing line. Multiple project
cancellations, delays in the timing of work performed by the Company on existing
projects, the inability of the Company to gain and perform work on new projects,
or the inability of the Company to replace its current working capital financing
line could have an adverse impact on the Company's liquidity and on its ability
to execute its operating plan.
The Company has taken action to ensure its continuation as a going concern. A
summary of recent events and the Company's completed or planned actions follow:
Demand for the Company's services has increased dramatically and the
backlog of contracted business as of August 31, 2002 was at a record $75.6
million.
The Company initiated and completed substantial cost saving measures during
the fiscal years ended April 30, 2001 and 2002 and now has a cost structure
in line with its expected revenue.
As a result of the increase in demand for the Company's services and the
cost reduction measures initiated over the past two years, the Company
achieved profitability during the fourth quarter of fiscal 2002 and expects
to maintain profitability throughout fiscal 2003.
Management has been seeking to replace its working capital line and raise
additional capital to support its growth in business. It is encouraged by
the preliminary response it has received from the financial community and
it expects to raise the necessary financing.
42
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 of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenue from: (1) providing technology deployment
services, including configuring Internetworking and computing devices to meet
the specific needs of its customers, integrating these devices as well as
operational and application software with a customer's existing hardware and
software, and physically installing the technology on the customer's network and
(2) from licensing its software to third parties.
Services from deployment activities are performed primarily under long-term
contracts, but may be performed under short-term workorders or time and material
arrangements. The Company's typical long-term contract contains multiple
elements designed to track the various services required under the arrangement
with the customer. These elements are used to identify components of progress
billings, but are combined for revenue recognition purposes. The Company
recognizes revenue earned under long-term contracts utilizing the percentage of
completion method of accounting by measuring direct labor costs incurred to
total estimated labor costs. Under the percentage of completion method of
accounting, revenue, costs and gross margin are recognized as work is performed
based on the relationship between direct labor incurred and total estimated
labor.
Contracts are reviewed at least quarterly and, if necessary, revenue, costs and
gross margin are adjusted prospectively for revisions in estimated total
contract value and total estimated contract costs. Estimated losses are
recognized when identified.
Payment milestones differ according to the customer and the type of work
performed. Generally, the Company invoices customers and payments are received
throughout the deployment process and, in certain cases, in advance of work
performed if a substantial amount of up front costs is required. In certain
cases payments are received from customers after the completion of site
installation. However, revenue and costs are only recognized on long-term
contracts to the extent of the contracts' percentage of completion. Unbilled
revenue, which is classified as a current asset, is recorded for the amount of
revenue earned in excess of billings to customers. Deferred revenue is recorded
as a current liability for the amount of billings in excess of revenue earned.
Costs incurred in excess of percentage of completion are deferred and classified
as a current asset, while accrued costs are classified as current liabilities.
Revenue earned under short-term workorders and time and material arrangements is
recognized as the work is completed. Billings under these arrangements are
typically done when the work is completed.
Revenue from software licensing arrangements is 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 are 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
reasonably assured, revenue is recognized when the fee is collected. Maintenance
revenue, if applicable, is negotiated separately and the contract identifies the
specific charges related to this service. This revenue is recognized ratably
over the contract maintenance period. The Company also recognizes revenue as an
Application Service Provider ("ASP"). Under these arrangements, the Company does
not license the software, but provides access to the software through its
hosting activities. For this access, the Company bills its customers and
recognizes revenue over the period of access.
43
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, which is comprised of parts and materials to be installed as part of
the Company's deployment services, is stated at the lower of average cost or
market. The Company has written down the inventory for the years ended April 30,
2001 and 2002 by $560,000 and $1,189,000, respectively to reflect estimated
market value.
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
method over the estimated useful lives or lease terms of the related assets
whichever is shorter.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain computer software costs, including 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 revenue for a product bears 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 $3,459,000 and $2,208,000 of net capitalized
software costs are included in Other Assets in the accompanying consolidated
financial statements as of April 30, 2001 and 2002, respectively. (See Note 6.)
Amortization expense of capitalized software costs for the years ended April 30,
2000, 2001 and 2002 was $577,000, $1,544,000 and $1,722,000, respectively, and
is included in project costs. Costs incurred prior to technological feasibility
have been charged to general and administrative expense as incurred.
44
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. Impairment losses are recognized when a long-lived
asset's carrying amount may not be recoverable. Impairment losses are recognized
when a long-lived asset's carrying value exceeds the expected undiscounted
future cash flows related to that asset. The amount of the impairment loss is
the difference between the carrying value and the fair value of the asset. The
fair value of the asset is determined based upon discounted cash flows. Due to
the losses incurred for the fiscal years ended April 30, 2001 and 2002, the
Company has assessed its long-lived assets for impairment. Based on estimated
undiscounted future cash flows, the Company believes that there is no impairment
of its long-lived assets as of April 30, 2001 and 2002.
RESTRICTED CASH
At April 30, 2001, the Company had approximately $132,000 in restricted cash in
the form of certificates of deposit that served as collateral for letters of
credit issued as security deposits for certain property leases. These amounts
are included in other assets.
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. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and the tax effects of net operating loss carry-forwards. A
valuation allowance is recorded against deferred tax assets if it is more likely
than not that such assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable, deferred income and the current portion of long-term debt approximate
fair value due to the short maturities of such instruments. The carrying value
of the long-term debt obligations approximate fair value based on current rates
offered to the Company for debt with similar collateral and guarantees, if any,
and maturities.
FOREIGN CURRENCY TRANSLATION
The local currency of the Company's foreign subsidiary is its functional
currency. Assets and liabilities of the Company's foreign subsidiary are
translated into 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
other comprehensive loss in stockholders' equity.
45
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 Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The
Company continues to account for employee stock-based compensation using the
intrinsic value based method and is required to make pro forma disclosures of
net income (loss) and related per share amounts as if the fair value based
method of accounting under SFAS 123 had been applied (see Note 14).
INTERNAL USE SOFTWARE
In accordance 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, 2001 and 2002 approximately $893,000 and $357,000 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 $351,000,
$733,000 and $770,000 of amortization expense was incurred during the years
ended April 30, 2000, 2001 and 2002, respectively and is included in general,
administrative and selling expense. The Company has expensed costs incurred
during the preliminary and post implementation phases in the periods in which
these costs were incurred.
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 consist of foreign
currency translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board ("FASB") 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 no longer be subject to
amortization but rather be reviewed periodically for impairment and that other
identifiable intangibles be separated and those with finite lives be amortized
over their useful lives. Goodwill and intangible assets with indefinite lives
must be assessed once a year for impairment, and more frequently if
circumstances indicate a possible impairment. The first step of the two-step
impairment assessment identifies potential impairment and compares the fair
value of the applicable reporting unit with its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying value,
goodwill of the reporting unit is not considered impaired, and the second step
of the impairment test is not necessary. If the carrying value of the reporting
unit exceeds its fair value, the second step of the impairment test shall be
performed to measure the amount of impairment loss, if any. The Company was
required to adopt these provisions on May 1, 2002; however, it elected to early
adopt the Standards on May 1, 2001 as permitted and evaluated the carrying value
of its Goodwill and other intangible assets. Based on its evaluation, which, in
part, was based on certain fair value assumptions, the Company determined that
46
there is no impairment to its goodwill and other intangible assets. Subsequent
impairment tests will be performed, at a minimum, in the fourth quarter of each
fiscal year, in conjunction with the Company's annual planning process.
The Company was assisted in its measurement of fair value by an independent
valuation firm. The measurement of fair value was based on an evaluation of
future discounted cash flows, public company trading multiples and merger and
acquisition transaction multiples. This evaluation utilized the best information
available in the circumstances, including reasonable and supportable assumptions
and projections. The Company's discounted cash flow evaluation used range of
discount rates that corresponds to the Company's weighted average cost of
capital. This discount range is consistent with that used for investment
decisions and takes into account the specific and detailed operating plans and
strategies of the reporting unit.
The Company has adopted SFAS No. 142 effective May 1, 2001. Under SFAS No. 142
goodwill is no longer amortized. Amortization expense of goodwill for the fiscal
years ended April 30, 2000, 2001 and 2002 was $0.4 million, $0.4 million and $0,
respectively. Amortization expense of internal use software and software
development for the fiscal years ended April 30, 2000, 2001 and 2002 was $0.8
million, $2.4 million and $2.1 million, respectively. For fiscal years ending
April 30, 2003, 2004 and 2005 and 2006, the amortization expense relating to
these defined intangibles will be approximately $2.1 million, $1.0 million, $0.4
million and $0.1 million, respectively. The effect of the adoption of SFAS No.
142 as of May 1, 2001 and April 30, 2002 is summarized in the following table
(in thousands):
May 1, 2001 April 30, 2002
------------------------------ ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Goodwill $4,370 $(1,705) $4,370 $(1,705)
Internal Use Software 2,862 (1,160) 3,626 (2,166)
Software Development 5,832 (2,373) 6,303 (4,095)
As required by SFAS No. 142 the results for the prior year have not been
restated to reflect the impact of adopting SFAS No. 142. A reconciliation of net
income as if SFAS No. 142 had been adopted is presented below for the year ended
April 30, 2001:
Fiscal year ended
April 30, 2001
-----------------
Reported net loss $(19,858)
Add back: Goodwill amortization 437
---------
Adjusted net loss $(19,421)
=========
Net loss per share - Basic and Diluted
Reported net loss: $(0.59)
Adjusted net loss: $(0.58)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
47
retirement costs. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and normal operation of long-lived assets, except for certain
obligations of lessees. The provisions of this Statement are required to be
applied starting with fiscal years beginning after June 15, 2001. Earlier
application is encouraged. The Company is currently evaluating the impact of the
new accounting standard and plans to adopt the new accounting standard in its
financial statements for the fiscal year ending April 30, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This Statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001. The Company is currently
evaluating the impact of the new accounting standard on existing long-lived
assets and plans to adopt the new accounting standard in its financial
statements for the fiscal year ending April 30, 2003.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
APB Opinion No. 30. This Statement also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This Statement will be effective for the Company for
the fiscal year ending April 30, 2004. The Company does not believe that
adoption of this Statement will have a material effect on the Company's results
of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 will supersede Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated
with an exit or disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
SEGMENT REPORTING
The Company operates its business as one segment, therefore segment information
is not presented.
(2) RESTATEMENT OF FINANCIAL STATEMENTS
During fiscal 2002 the Company determined that it should have included indirect
costs as a component of cost of revenue in its previously issued financial
statements. Also, the Company identified certain errors in its previously issued
48
financial statements related to total estimated contract values, total costs
incurred with certain long term contracts and certain accrued and prepaid
expenses. As a result, the Company has restated its previously issued financial
statements for the years ended April 30, 2000 and 2001 and has recorded a prior
period adjustment to its accumulated deficit as of April 30, 1999. The Company
previously reported a net loss of $1.633 million, or $(0.05) per share, and
$21.145 million, or $(0.63) per share for the years ended April 30, 2000 and
2001, respectively. The restatements resulted in the Company reporting net loss
of $1.924 million, or $(0.06) per share and net loss of $19.858 million, or
$(0.59) per share for the years ended April 30, 2000 and 2001, respectively.
49
A summary of the significant effects of the restatements is set forth below.
April 30, 2000 April 30, 2001
--------------------- ----------------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Consolidated statements of operations data
for the year ended:
Revenue $ 95,148 $ 93,316 $ 94,285 $ 94,352
Cost of revenue 60,381 66,244 66,476 78,581
Gross margin 34,767 27,072 27,809 15,771
Selling, general and administrative expenses 34,720 27,316 46,157 33,232
Operating income (loss) 47 (244) (18,348) (17,461)
Net loss 1,633 1,924 21,145 19,858
Net loss per share - basic and diluted $ (0.05) $ (0.06) $ (0.63) $ (0.59)
Consolidated balance sheet data as of:
Receivables, net $ 23,849 21,732 $ 22,181 20,024
Prepaid expenses 1,301 1,936 792 1,126
Accrued and other liabilities 3,482 7,413 6,790 9,555
Accumulated deficit (20,908) (26,693) (42,053) (46,551)
Stockholders' equity 21,045 15,260 869 (3,629)
(3) 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 or loss applicable to common stockholders
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing income available to common
stockholders by the weighted average number of common and potentially dilutive
common shares outstanding during the period.
In accordance with SFAS No. 128, the following table reconciles net loss and per
share amounts used to calculate basic and diluted loss per share:
50
For the Year Ended April 30
(in thousands)
------------------------------
2000 2001 2002
---- ---- ----
Numerator:
Net loss $ 1,924 $ 19,858 $ 4,387
======= ======== ========
Denominator:
Weighted average common shares
outstanding - Basic and Diluted 31,541 33,608 35,162
======= ======== ========
Net Loss Per Share $ (0.06) $ (0.59) $ (0.12)
======= ======== ========
Outstanding options and warrants totaling 4,141,238, 5,335,991 and 5,163,672,
for the fiscal years ended April 30, 2000, 2001 and 2002, respectively, have
been excluded from the computation of diluted EPS as their inclusion would have
been anti-dilutive.
(4) RECEIVABLES:
Accounts receivable are comprised of amounts due from customers in connection
with services provided by the Company in its normal course of business. Amounts
billed are shown separately from unbilled amounts determined under the
percentage of completion method of accounting. Average days outstanding for
billed accounts receivable at April 30, 2002 was 76 days, whereas the average
days outstanding for the year ended April 30, 2001 was 67 days. Receivables
consist of the following:
As of April 30,
--------------------
2001 2002
--------- --------
Billed accounts receivable $ 16,756 $ 15,257
Costs and estimated earnings in excess of amounts
billed under percentage of completion accounting 3,840 2,626
Allowance for doubtful accounts (572) (679)
-------- --------
Receivables, net $ 20,024 $ 17,204
======== ========
(5) PROPERTY AND EQUIPMENT:
The following is a summary of property and equipment:
As of April 30,
-----------------
2001 2002
------- -------
Equipment $ 3,543 $ 3,706
Computer equipment 8,064 7,724
Furniture, fixtures and leasehold improvements 5,330 5,472
------- -------
16,937 16,902
Less -- Accumulated depreciation and amortization 11,685 13,643
------- ------
Property and equipment, net $ 5,252 $ 3,259
======= =======
Depreciation and amortization expense for the years ended April 30, 2000, 2001
and 2002 amounted to $2.3 million, $2.5 million and $2.2 million, respectively.
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 14 years
51
(6) OTHER ASSETS:
Other assets consist of the following:
As of April 30,
---------------------
2001 2002
------ ------
Internal use software $2,862 $3,626
Less accumulated amortization 1,160 2,166
------ ------
Net 1,702 1,460
------ ------
Software development 5,832 6,303
Less accumulated amortization 2,373 4,095
------ ------
Net 3,459 2,208
------ ------
Security deposits and other 792 502
------ ------
Total other assets $5,953 $4,170
====== ======
Amortization expense of internal use software and software development for the
years ended April 30, 2000, 2001 and 2002 amounted to $0.9 million, $2.3 million
and $2.1 million, respectively.
(7) 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 $16.0 million that was
increased from $14.0 million 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. The amounts outstanding as of April 30, 2002 and 2001 were $14.5
million and $10.9 million, respectively. The amount of additional available
borrowings, as defined, was $448,000 as of April 30, 2002. The revolving loan
accrues interest at the prime rate plus 4.25% and matures in November 2002, but,
as described below, has been extended to no later than August 1, 2003.
The Company was not in compliance with one or more of the financial covenants of
its credit facility as of the quarters ended January 31, 2001 and April 30, 2001
of fiscal 2001 and as of each quarter end of fiscal 2002. The Company and IBM
Credit Corporation entered into an Acknowledgment, Waiver and Amendment to the
Inventory and Working Capital Financing Agreement as of the end of each quarter.
The following is a summary of the covenant violations which have been waived by
IBM Credit Corporation for each quarter:
- ---------------------------------------------------------------------------------------------------------------------
PERIOD COVENANT REQUIREMENT ACTUAL
- ---------------------------------------------------------------------------------------------------------------------
Jan 31 2001 Net Profit to Revenue Equal to or greater than 0.0% Net loss
Apr 30 2001 Annual Revenue to Greater than 0 and equal to or
Working Capital less than 25.0 to 1.0 (25.5) to 1.0
Annual Revenue to Greater than 0 and equal to or
Jul 31 2001 Working Capital less than 25.0 to 1.0 (4.5) to 1.0
Jul 31 2001 Net Profit to Revenue Equal to or greater than 0.1% (1.7)%
Jul 31 2001 Tangible Net Worth Equal to or greater than $2.5 $(1.1) million
million
52
Oct 31 2001 Annual Revenue to Greater than 0 and equal to or
Working Capital less than 25.0 to 1.0 (22.2) to 1.0
Oct 31 2001 Net Profit to Revenue Equal to or greater than 0.1% (1.7)%
Oct 31 2001 Tangible Net Worth Equal to or greater than $2.5 $(3.8) million
million
Jan 31 2002 Net Profit to Revenue Equal to or greater than 0.1% (9.0)%
Apr 30 2002 Net Profit to Revenue Equal to or greater than 0.1% (10.7)%
Apr 30 2002 Debt Service Ratio Equal to or greater than 2.0 to
1.0 (2.5) to 1.0
The Company has a $3,000,000 term loan with IBM Credit Corporation that is due
in February 2003 but, as described above, has been extended to no later than
August 1, 2003. The term loan accrues interest at the prime rate plus 4.25% and,
beginning in August 2002 is payable in monthly installments of principal and
interest of $300,000.
IBM Credit Corporation, has notified the Company that it does not intend to
renew its working capital line and term loan beyond August 1, 2003. As a result,
the Company is actively seeking replacement financing.
53
(8) ACCRUED AND OTHER LIABILITIES:
Accrued and other liabilities consist of:
As of April 30,
------------------
2001 2002
---- ----
Accrued payroll and related costs $3,550 $1,946
Taxes, interest and other 3,107 1,685
Accrued costs under percentage of completion 1,338 48
Deferred revenue under percentage of completion 1,560 493
------- -------
Total accrued and other liabilities $ 9,555 $4,172
======= =======
(9) EDEPLOY.COM, INC.:
On November 2, 2001 the Company acquired 100,000 shares of Series A Preferred
Stock of eDeploy.com, Inc. (the "Shares"), a wholly owned subsidiary
("eDeploy.com"), held by Cisco Systems, Inc. ("Cisco") through an exchange of
1,021,382 shares its common stock. Dividends payable to Cisco during the period
it held the 100,000 shares of Series A Preferred Stock of eDeploy.com, Inc. are
included in accrued and other liabilities and annual dividends, recorded prior
to the exchange, are reflected as minority interest in the statements of
operations.
(10) SUBORDINATED SECURED CONVERTIBLE DEBENTURES:
On April 3, 2002 the Company raised $2.0 million of financing (less transaction
costs of $0.170 million) to be used for working capital purposes by issuing an
aggregate of $2.0 million principal amount of Subordinated Secured Convertible
Debentures and Warrants to purchase an aggregate of 270,000 shares of the
Company's common stock at $1.416 per share. The debentures mature on July 2,
2003 and bear interest at a rate of 5% per annum. The interest is due quarterly
on March 31, June 30, September 30, and December 31 of each year (with the first
interest payment due and payable on September 30, 2002) and is payable in cash
or Common Stock at the Company's option. The Company recorded a discount of
$582,000 in connection with the issuance of the Debentures. The warrants have
been valued at approximately $291,000, based on the Black Scholes Pricing Model
utilizing the following assumptions: expected life of 5.0 years; volatility of
119 percent; risk free borrowing rate of 4.405 percent. This amount has been
recorded as a discount against the debt and will be accreted as interest expense
over the remaining life of the debt. In addition, in accordance with Emerging
Issues Task Force 98-5, an embedded beneficial conversion feature of
approximately $291,000 has been recognized as additional paid-in-capital and
will be accreted as additional interest expense over the remaining life of the
debt. Through April 30, 2002, $36,800 of the above discounts has been accreted.
The Debentures are secured by all assets of the Company, which security interest
is junior to the security interest granted to the Company's existing senior
lender.
The holder of each Debenture is entitled, at its option, to convert at any time
the principal amount of the Debenture or any portion thereof, together with
accrued but unpaid interest, into shares of the Company's Common Stock at a
conversion price for each share of common stock equal to the lower of (a) $1.16
or (b) 100% of the average of the two lowest closing bid prices of the Common
Stock on the principal market during the twenty consecutive trading days ending
with the last trading day prior to the date of conversion. The conversion price
may not be less than the floor price of $0.65 per share, except to the extent
that the Company does not exercise its right to redeem the Debentures.
54
The agreement with the investors contains a requirement for the Company to have
effected the registration of a sufficient number of shares of its common stock
by July 2, 2002 or incur penalties equal to: (1) 2% of the product obtained by
multiplying the average closing sale price for the immediately preceding 30 day
period times the number of registrable securities the investor holds or may
acquire pursuant to conversion of the Convertible Debenture and the exercise of
Warrants on the last day of the applicable 30 day period (without giving effect
to any limitation on conversion or exercise) and (2) 3% of the product for all
continuing or subsequent registration defaults.
Although the Company filed the required registration statement with the
Securities and Exchange Commission within the required time period, such
registration statement has not yet been declared effective and as such, the
Company is currently in default of its Registration Rights Agreement with the
Debenture holders and is incurring the penalties described herein. As of
September 1, 2002 penalties under this default amounted to approximately
$125,500. Pursuant to an agreement dated September 27, 2002, the Company has
agreed to issue an aggregate of 60,736 shares of Common Stock to the investors
in exchange for the cancellation of approximately $48,600 of the penalties
incurred through September 1,2002.
Also, the Debentures contain a provision which reduces the conversion price by
five percent (5%) if the Company's common stock into which the Debenture is
converted is not listed on NASDAQ National Market or NASDAQ Smallcap Market on
the conversion date and will be reduced by an additional five percent (5%) on
such date if the Common Stock is also not listed on the Over-The-Counter
Bulletin Board (without, in either such case, regard to the Floor Price). The
conversion price is subject to further reduction in the event the Company sells
common stock below the applicable conversion price.
(11) STOCKHOLDERS' EQUITY:
PREFERRED STOCK
In May 1998, the Company issued 300 shares of Series E Cumulative Convertible
Preferred Stock. At the same time the Company also issued warrants to purchase
165,000 shares of the Company's common stock at $6.29 per share. During the
fiscal years ended April 30, 1999 and 2000, 180 of the preferred shares were
converted into 718,860 shares of common stock. The remaining 120 shares were
converted into 473,124 shares of common stock in fiscal year ended April 30,
2000.
55
WARRANTS
The following table is a summary and status of warrants issued by the Company:
Outstanding Warrants
------------------------------------------
Number Weighted Average
of Warrants Exercise Price
----------- ---------------
May 1, 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
Grants 270,000 $1.416
Cancellations (525,000) $5.25
----------- --------
April 30, 2002 345,000 $2.48
=========== ========
Outstanding Warrants
-----------------------------------------------------
Weighted Average
Range of Exercise Number Warrants Contractual Life Weighted Average
Prices of Warrants Exercisable (in years) Exercise Price
------------------- ----------------- ------------------- ------------------------- -----------------------
$1.416 270,000 270,000 4.93 $1.416
======= ======= ====
$6.29 75,000 75,000 1.00 $6.29
====== ====== ====
(12) INCOME TAXES:
56
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,
For The Year Ended April 30,
2000 2001 2002
---- ---- ----
US Federal Statutory tax rate
(34.0%) (34.0%) (34.0%)
State and foreign income taxes
(6.0%) (6.0)% (6.0%)
Change in valuation allowance on deferred tax assets
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:
For The Year Ended April 30,
2001 2002
---- ----
Deferred tax asset:
Net operating loss carryforwards $ 21,300 $ 21,343
Allowance for doubtful accounts 228 272
Inventory Reserve 224 716
Revenue recognition 1,852 525
Other 653 900
-------- --------
Total deferred tax assets 24,257 23,756
Deferred tax liability:
Depreciation (438) (307)
-------- --------
Net deferred tax asset 23,819 23,449
Valuation allowance (23,819) (23,449)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
During fiscal 2000, 2001 and 2002, the Company determined that it was not likely
it would realize the benefits of net operating loss carryforwards, and as such,
has provided a valuation allowance. As of April 30, 2002, the Company has
approximately $53,000,000 of net operating loss carryforwards, of which
approximately $10,000,000 is subject to separate return year limitations. These
net operating loss carryforwards begin to expire in 2009.
There are no undistributed earnings in the Company's foreign subsidiaries.
(13) DUE TO RELATED PARTY:
The Company owes a former executive officer $1,414,000. The original note, which
bore an annual interest rate of 12.5%, was renegotiated on April 15, 2001. Under
the new terms, the maturity date was extended to April 15, 2004, principal
payments are not due until maturity, the interest rate was reset at 17.5% per
annum and interest payments are due monthly. The note is subordinated to the
working capital line and term loan with IBM Credit Corporation, the Company's
primary lender.
57
(14) INCENTIVE PLANS:
At April 30, 2002, 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, because the
exercise price equaled the fair value on the date of grant for all options
granted. Had compensation cost for the Company's stock-based plans been
determined at 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:
58
2000 2001 2002
---- ---- ----
(IN THOUSANDS , EXCEPT PER SHARE DATA
Net loss:
As reported $ (1,924) $ (19,858) $ (4,387)
Pro Forma (2,492) (20,999) (6,184)
Net loss per share - Basic and Diluted:
As reported $ (0.06) $ (0.59) $ (0.12)
Pro Forma $ (0.08) $ (0.62) $ (0.18)
The per share weighted-average fair value of stock options granted during 2000,
2001 and 2002 was $2.63, $2.45 and $0.60 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, average risk free interest rate of 5.9% in 2000, 5.6% in 2001
and 4.4% in 2002 and average annualized volatility of 122% for 2000, 113% for
2001 and 113% for 2002.
COMMON STOCK OPTIONS
The 1990 Stock Option Plan (the "1990 Plan") provides for grants of 1,500,000
common stock options to employees, directors, and consultants to purchase common
stock at a price at least equal to 100% of the fair market value of such shares
on the grant date. The exercise price of any options granted to a person owning
more than 10% of the combined voting power of all classes of stock of the
Company ("10% shareholder"), shall be at least equal to 110% of the fair market
value of the share on the grant date. The options are granted for no more than a
10-year term (5 years for 10% shareholders) and the vesting periods range from 2
to 4 years. Options granted under this plan during the years ended April 30,
2000 and 2001 were 47,750 and 15,300, respectively. There were no options
granted under this plan during the year ended April 30, 2002. As of April 30,
2002, 50,731 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 were
exercisable at any time prior to January 1, 2002. Options for 1,016,332 shares
of common stock have been exercised as of April 30, 2002. In April 1993, the
Company granted options, which expire in April 2003, to a consultant/advisor to
the Company to purchase 109,755 shares of common stock at an exercise price of
$.005 per share. As of April 30, 2002, all options to the consultant/advisor
have been exercised.
59
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 periods. During the years ended April 30, 2000, 2001 and
2002, no options were granted under this plan. As of April 30, 2002, 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. During the year
ended April 30, 2000, 96,000 options were granted under this plan. No options
were granted under this plan during the years ended April 30, 2001 and 2002. As
of April 30, 2002, 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 Board of Directors determines the vesting periods. During the year
ended April 30, 2000, 336,987 options were granted under this plan. No options
were granted under this plan during the years ended April 30, 2001 and 2002. As
of April 30, 2002, 156,525 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. No options were granted under this plan during
the years ended April 30, 2000, 2001 and 2002. As of April 30, 2002, 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. No options were granted under this plan during
the years ended April 30, 2000,2001 and 2002. As of April 30, 2002, 64,523
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.
60
The options are granted for no more than a 10-year term and the Board of
Directors determines the vesting periods. During the years ended April 30, 2000,
2001 and 2002, 24,000, 2,017,771 and 600,834 options, respectively were granted
under this plan. As of April 30, 2002, 628,057 shares remain reserved for future
issuance.
61
Summary of the status of stock option activity follows:
Outstanding Options
-------------------
Options Available Number Weighted Average
for Future Grants Of Shares Exercise Price
----------------- --------- --------------
Balance as of May 1, 1999 649,158 4,772,747 $ 3.35
Grants (504,737) 504,737 $ 2.88
Exercises -- (1,572,877) $ 2.75
Cancellations 255,001 (255,001) $ 3.16
2000 Stock Option Plan 3,000,000 -- --
---------- ---------- --------
Balance as of April 30, 2000 3,399,422 3,449,606 $ 3.59
Grants (2,033,071) 2,033,071 $ 3.20
Exercises -- (106,316) $ 3.07
Cancellations 415,634 (415,634) $ 3.45
---------- ---------- --------
Balance as of April 30, 2001 1,781,985 4,960,727 $ 3.47
Grants (600,834) 600,834 $ 0.74
Exercises -- (405,578) $ 0.08
Cancellations 337,311 (337,311) $ 3.96
Expired (2,163) -- $ 0.05
---------- ---------- --------
Balance as of April 30, 2002 1,516,299 4,818,672 $ 3.38
========== ========== ========
Options exercisable at April 30, 2002 4,062,143 $ 3.47
========== ========
Outstanding Options
---------------------------------
Weighted Average
Number Contractual Life Weighted Average
Range of Exercise Prices of Shares (in years) Exercise Price
------------------------ --------- ---------- --------------
$.005 - $0.99 533,834 9.41 $ 0.71
$1.00 - $1.99 622,209 7.07 $ 1.41
$2.00 - $2.99 595,806 5.62 $ 2.63
$3.00 - $3.99 1,458,918 7.20 $ 3.18
$4.00 - $4.99 1,080,334 4.94 $ 4.03
>$499 527,571 4.22 $ 8.49
----- --------
TOTAL 4,818,672 $ 3.38
========= ========
Exercisable Options
Exercisable Options Weighted Average
Range of Exercise Prices Number of Shares Exercise Price
- --------------------------------------------------------------------------------
$.005 - $0.99 363,250 $0.71
$1.00 - $1.99 491,041 $1.41
$2.00 - $2.99 571,473 $2.64
$3.00 - $3.99 1,129,806 $3.21
$4.00 - $4.99 1,072,334 $4.03
>$4.99 434,239 $8.54
------- -----
TOTAL 4,062,143 $3.47
========= =====
62
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 1,750,000 shares of common stock have been reserved for issuance under
the plan. During the years ended April 30, 1999, 2000, 2001 and 2002, the
Company issued 190,000, 188,000, 229,000 and 415,000 shares, respectively, of
common stock to participants of the stock plan. As of April 30, 2002, 728,000
shares are available for issuance under 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. The Company is not required to
contribute to this Plan.
(15) 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:
Fiscal Year
Ending April 30, Amount
------------------------------------------------------
2003 $2,069
2004 1,662
2005 1,587
2006 1,371
2007 1,111
Thereafter 4,145
--------
Total $ 11,945
========
Rent expense was $2,207,000, $2,367,000 and $2,332,000 for the years ended April
30, 2000, 2001 and 2002, 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 $2,497,000, $2,634,000 and $1,711,000 for the years ended
April 30, 2000, 2001 and 2002, respectively. All existing vehicle leases expire
within fiscal year 2003. In the future the Company expects to enter into similar
leases at a comparable cost level. Future commitments are not reflected in the
amounts above but are expected to approximate the 2002 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
63
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.
On September 22, 2000, Petsmart, Inc. filed a complaint against the Company in
the Superior Court of Maricopa County, Arizona. Petsmart has alleged that it has
been damaged by the Company's failure to satisfactorily complete work
contemplated by an agreement between the parties. Damages were unspecified. At a
settlement meeting held on April 17, 2002, discussions were held in which
Petsmart proposed a series of settlement offers ranging between $7,000,000 and
$8,000,000. In a letter to the Company dated May 3, 2002, Petsmart proposed
settlement offers ranging between $5,000,000 and $7,000,000. The Company
believes that it has meritorious defenses to the claims and it intends to defend
this vigorously. Datatec has further counter-claimed against Petsmart for
amounts owing to the Company under the contract.
(16) 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, 2001 and 2002, the
Company's customers were primarily within the continental United States.
For the year ended April 30, 2002, one customer accounted for approximately 30%
of revenue. 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.
(17) 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
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
64
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 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 or convertible into Common
Stock or any other security of the Company.
(18) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash transactions:
2000 2001 2002
------- ------- ------------
Exchange of minority interest for common stock $ -- $ -- $ 9,618,000
Issuance of warrants in connection with subordinated
secured convertible debentures $ -- $ -- $291,000
Beneficial conversion feature in connection with
subordinated secured convertible debentures $ -- $ -- $291,000
Cash paid during the year for:
2000 2001 2002
----------- ----------- -----------
Interest $ 1,489,000 $ 1,495,000 $ 1,912,000
Income taxes $ 36,000 $ 149,000 $ 52,000
65
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The Company's quarterly results for each of the quarterly periods in fiscal 2001
and for the quarterly periods ended July 31, 2001, October 31, 2001 and January
31, 2002 have been restated to reflect the correction of an accounting error
(see Note 2). The quarterly periods ended July 31, 2001, October 31, 2001 and
January 31, 2002 have also been restated to reflect the effect of the Company's
change in method of determining percentage of completion (see Note 1). A summary
of quarterly financial information for fiscal 2001 and 2002 is as follows (in
thousands, except per share data):
As Previously Reported
Year Ended April 30, 2001
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 24,663 $ 32,696 $ 21,279 $ 15,647
Gross margin 9,473 12,085 3,447 2,804
Net income (loss) (924) 723 (10,051) (10,893)
Basic and diluted income (loss) per (0.03) 0.02 (0.30) (0.32)
share
As Restated
Year Ended April 30, 2001
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 22,737 $ 33,908 $ 21,540 $ 16,167
Gross margin 5,781 9,633 (254) 611
Net income (loss) (1,352) 1,672 (10,305) (9,873)
Basic and diluted income (loss) per
share (0.04) 0.05 (0.31) (0.29)
As Previously Reported
Year Ended April 30, 2002
------------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
Revenue $ 18,248 $ 19,274 $ 16,318
Gross margin 6,374 7,306 4,911
Income (loss) before minority
interest (1,611) (176) (1,921)
Minority interest (170) (148) --
Net Income (loss) (1,781) (324) (1,921)
Basic income (loss) per share
Before minority interest (0.04) (0.005) (0.05)
Minority interest (0.01) (0.005) --
Basic income (loss) per share (0.05) (0.01) (0.05)
Diluted income (loss) per share
Before Minority interest (0.04) (0.005) (0.05)
Minority interest (0.01) (0.005) --
Diluted income (loss) per share (0.05) (0.01) (0.05)
66
As Restated
Year Ended April 30, 2002
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 15,902 $ 17,906 $ 14,179 $ 22,290
Gross margin 4,818 5,810 2,855 8,692
Income (loss) before Minority
interest (1,944) (613) (2,985) 1,473
Minority interest (170) (148) -- --
Net income (loss) (2,114) (761) (2,985) 1,473
Basic income (loss) per share
Before minority interest (0.05) (0.02) (0.08) 0.04
Minority interest (0.01) -- -- --
Basic income (loss) per share (0.06) (0.02) (0.08) 0.04
Diluted income (loss) per share
Before minority interest (0.05) (0.02) (0.08) 0.04
Minority interest (0.01) -- -- --
Diluted income (loss) per share (0.06) (0.02) (0.08) 0.04
67
DATATEC SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II, Valuation and Qualifying Accounts
Accounts Receivable
Balance,
beginning Charges to cost Balance, end
of period and expenses Deductions (a) of period
--------- ------------ -------------- ---------
Year ended April 30, 2002
Allowance for doubtful accounts $572,000 $226,000 $(119,000) $679,000
Year ended April 30, 2001
Allowance for doubtful accounts $235,000 $608,000 $ (271,000) $ 572,000
Year ended April 30, 2000
Allowance for doubtful accounts $269,000 $ -- $ (34,000) $ 235,000
(a) Represents the net of write-off and recovery of uncollectable accounts.
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 11, 2002, the Board of Directors of the Company rescinded its earlier
decision to engage Arthur Andersen LLP ("Andersen") and dismissed Andersen as
independent public accountants for the fiscal year ended April 30, 2002.
The audit reports of Andersen on the consolidated financial statements of the
Company and its subsidiaries for each of the fiscal years ended April 30, 2001
and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles.
The decision to dismiss Andersen as independent public accountants was made by
the Board of Directors following the recommendation of its Audit Committee.
During the fiscal years ended April 30, 2001 and 2000 and the subsequent interim
period through April 11, 2002, there were no disagreements between the Company
and Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to Andersen's satisfaction would have caused them to make reference to
the subject matter of the disagreement in connection with their reports.
During the fiscal year ended April 30, 2001 and 2000 and the subsequent interim
period through April 11, 2002, there were no "reportable events" as defined by
Item 304(a)(1)(v) of Regulation S-K.
The Company engaged Deloitte & Touche LLP ("Deloitte") as its new principal
independent accountants on April 11, 2002.
Neither the Company nor anyone on its behalf has consulted Deloitte during the
Company's two most recent fiscal years, or any subsequent interim period, prior
to the engagement of Deloitte.
69
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 53 Chairman of the Board and Chief Executive
Officer and acting Chief Financial Officer
Raymond R. Koch 57 Chief Operating Officer
Albert G. Pastino 60 Chief Financial Officer, Secretary and Treasurer
David M. Milch 47 Executive Director - Office of the Chairman and Director
William J. Adams, Jr. 53 Director
Frank P. Brosens 45 Director
Robert H. Friedman 49 Director
Walter Grossman 58 Director
Mark L. Berenblut 46 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.
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.
Albert G. Pastino, Chief Financial Officer, began his business career at
Deloitte & Touche LLP where as a senior partner he served in a variety of
positions including partner in charge of that firm's High Technology Group. Mr.
Pastino gained investment banking experience while working at Alex. Brown &
Sons, Incorporated where he was involved in a number of IPOs, M&A
assignments and private equity placements. Mr. Pastino was with Kohlberg and
Company, a private equity Investment Company, where he served in a variety of
positions, including as the President of Kisco Capital Company, Inc., an
affiliate of Kohlberg and Company, and as a board member of a number of Kohlberg
& Company's portfolio companies. From 1989 through 1992,
70
Mr. Pastino served as Senior Vice President and Chief Operating Officer of
Fortis Private Capital, Inc., a private equity investment company specializing
in expansion financings and management buyouts. He has been Chief Financial
Officer and Treasurer for a variety of public and private companies.
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 and has served as a partner of
Taconic Capital Partners since June 1999. 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.
Mark L. Berenblut, Director since June 2001, has also been a managing partner of
Carnegie Hill Investment Partners, a venture capital investment fund, since
March 2001 and the managing partner of Berenblut Consulting, a strategy, finance
and economics consulting firm, since January 2001. He is qualified as a
Chartered Accountant and Chartered Business Valuator. He was an equity partner
with Arthur Andersen LLP from 1992 to November 2000. Mr. Berenblut is also a
member of the advisory boards of a technology investment fund and a charitable
endowment fund.
71
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act 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, 2002, that there was compliance with all
Section 16(a) filing requirements applicable to its officers, directors and 10%
stockholders, with the exception of (a) Isaac Gaon whose exercise of options in
one transaction was inadvertently reported late, (b) Isaac Gaon whose
acquisition of Common Stock in one transaction was inadvertently reported late,
(c) David Milch whose acquisition of Common Stock in one transaction was
inadvertently reported late, (d) Walter Grossman whose acquisition of Common
Stock in one transaction was inadvertently reported late, (e) Frank Brosens
whose acquisition of options in one transaction was inadvertently reported late,
(f) Raymond Koch whose acquisition of options in two transactions were
inadvertently reported late and (g) Mark Berenblut whose initial Form 3 was
inadvertently reported late.
72
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for the fiscal years ended April 30,
2000, 2001 and 2002 with respect to annual and long-term compensation for
services in all capacities to the Company of (i) the chief executive officer and
(ii) the most highly compensated executive officers of the Company at April 30,
2002 who received compensation of at least $100,000 (collectively, the "Named
Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation (1) Compensation
---------------------------------------------------------------------
Awards
------
Securities Underlying Other
Name and Position Year Salary Bonus Options (#) Compensation
- ----------------- ---- ------ ----- ----------- ------------
Isaac J. Gaon, Chairman of the Board 2002 $350,000 -- -- --
and Chief Executive Officer 2001 $346,772 -- 700,000 --
2000 $266,000 -- -- --
Raymond R. Koch, Chief Operating 2002 $187,654 $28,125 125,000 --
Officer (3)
(1) The value of personal benefits for executive officers of the Company during
Fiscal 2002 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 $50,000 or
10% of the total annual salary and bonus reported for any individual named
above.
(2) Mr. Koch joined the Company in July 2001.
73
OPTION GRANTS TABLE
The following table sets forth certain information regarding stock option grants
made to each of the Named Officers during Fiscal 2002.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Rates of Annual
Rates of Stock Price
Individual Grants Appreciation for Option (1)
- ---------------------------------------------------------------------------------------------------------------------
Percent of
Total Options
Shares of Common Granted to Exercise or
Stock Underlying Employees in Base Price Expiration
Name Options Granted Fiscal Year (%) ($/Sh) Date 5% 10%
---- --------------- --------------- ------ ---- -- ---
Raymond Koch 100,000 17% 0.76 07/27/11 47,796 121,124
Raymond Koch 25,000 4% 0.64 10/15/11 10,162 25,500
(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.
74
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES TABLE
The following table sets forth certain information concerning stock options
exercised during Fiscal 2002 and stock options that were unexercised at the end
of Fiscal 2002 with respect to the Named Officers.
AGGREGATED OPTION EXERCISES
DURING THE MOST RECENTLY COMPLETED
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Shares Value Number of Securities Value of Unexercised In-The-
Acquired on Realized Underlying Unexercised Money Options at Fiscal Year-End
Name Exercise (#) ($) Options Held at Fiscal Year-End (#) ($) (1)
- -------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Isaac J. Gaon 368,245 $261,000 1,215,488 183,333 --
Raymond Koch -- -- 41,666 83,334 $5,600 $11,200
(1) Represents the total gain that would be realized if all in-the-money
options held at April 30, 2002 were exercised, determined by multiplying
the number of shares underlying the options by the difference between the
per share option exercise price and $0.87 per share, which was the closing
bid price per share of the Company's Common Stock on April 30, 2002. 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 the United States Internal Revenue
75
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 on a part time basis 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.
Raymond Koch is employed as the Company's Chief Operating Officer pursuant to a
letter agreement dated July 5, 2001, for an unspecified term. The agreement
provides for an annual base salary of $225,000. Pursuant to the agreement, Mr.
Koch has been granted options to purchase an aggregate of 125,000 shares of
Common Stock. Mr. Koch is also entitled to a bonus of up to 25% of his base
salary and annual option grants to purchase up to 50,000 shares of Common Stock
based on the Company achieving certain performance goals. Upon termination by
the Company without cause, Mr. Koch is entitled to six months severance pay and
benefits.
76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information concerning ownership of the Common
Stock outstanding as of September 10, 2002, 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) 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) 1,838,424 4.9%
Raymond Koch (4) 75,000 *
William J. Adams, Jr. (5) 48,000 *
Frank P. Brosens (6) 450,873 1.3%
David M. Milch (7) 1,007,305 2.8%
Robert H. Friedman (8) 170,946 *
Walter Grossman (9) 679,975 1.9%
Mark L. Berenblut (10) 24,000 *
Robert F. Gadd (11) 0 *
All directors and officers as a
group (9 persons) (12) 4,294,523 11.3%
- --------------
* Less than 1%
77
(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 from September 10, 2002.
(3) Mr. Gaon's beneficial ownership includes options exercisable within sixty
(60) days from September 10, 2002 to purchase an aggregate of 1,445,301
shares of Common Stock.
(4) Mr. Koch's beneficial ownership consists of options exercisable within
sixty (60) days from September 10, 2002 to purchase an aggregate of 75,000
shares of Common Stock.
(5) Mr. Adams' beneficial ownership consists of options exercisable within
sixty (60) days from September 10, 2002 to purchase 48,000 shares of Common
Stock. Mr. Adams' address is c/o WhiteSpace, Inc., 555 East Main Street,
Chester, New Jersey 07930.
(6) Mr. Brosens' beneficial ownership includes options exercisable within sixty
(60) days from September 10, 2002 to purchase 88,000 shares of Common
Stock. Mr. Brosens' address is 63 East Field Drive, Bedford, New York
10506.
(7) Dr. Milch's beneficial ownership includes options exercisable within sixty
(60) days from September 10, 2002 to purchase 520,000 shares of Common
Stock. Dr. Milch's address is c/o Davco Consultants, Inc., 114 East 13th
Street, New York, New York 10003.
(8) Mr. Friedman's beneficial ownership includes options exercisable within
sixty (60) days from September 10, 2002 to purchase 136,000 shares of
Common Stock. Mr. Friedman's address is c/o Olshan Grundman Frome
Rosenzweig & Wolosky LLP, 505 Park Avenue, New York, New York 10022-1170.
(9) Mr. Grossman's beneficial ownership includes (a) 125,000 shares of Common
Stock held by Carlisle Capital LLC, of which Mr. Grossman is the sole
managing member, (b) 190,975 shares of Common Stock owned by his spouse,
(c) 40,000 shares of Common Stock held by trusts for the benefit of his
daughters, and (d) options exercisable within sixty (60) days from
September 10, 2002 to purchase an aggregate of 24,000 shares of Common
Stock. Mr. Grossman's address is c/o Brookehill Capital Partners, Inc.,
1221 Post Road East, Westport, Connecticut 06880.
(10) Mr. Berenblut's beneficial ownership consists of options exercisable within
sixty (60) days from September 10, 2002 to purchase 24,000 shares of Common
Stock. Mr. Berenblut's address is 27 Shelborne Avenue, Toronto, Ontario,
Canada M5N 1Y8.
(11) Mr. Gadd is a former Senior Vice President and Chief Technology Officer of
the Company.
(12) Includes options and warrants exercisable within sixty (60) days from
September 10, 2002 to purchase an aggregate of 2,360,301 shares of Common
Stock held by the directors and executive officers of the Company.
78
Equity Compensation Plan Information
Number of securities remaining
available for future issuance under
Number of securities to be equity compensation plans
issued upon exercise of Weighted-average exercise (excluding securities reflected in
outstanding options, price of outstanding column (a))
warrants and rights options warrants and rights
Plan category
(a) (b) (c)
Equity compensation plans approved 4,818,672 $3.38 1,516,299
by security holders
Equity compensation plans not -- -- --
approved by security holders
Total 4,818,672 $3.38 1,516,299
79
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. William J. Adams, Jr., a Director of the Company, is the President of
WhiteSpace, Inc., which company had been retained by the Company to provide
consulting services to the Company. Fees paid to WhiteSpace, Inc. during the
years ended April 30, 2000, 2001 and 2002 amounted to $57,000, $93,000 and
$125,000, respectively, but this relationship has concluded so the Company
anticipates no fees to be paid in the future.
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 revenue.
80
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
Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of April 30,
2001 (restated) and 2002
Consolidated Statements of Operations for
the years ended April 30, 2000 (restated), 2001
(restated) and 2002.
Consolidated Statements of Comprehensive
Loss for the years ended April 30, 2000
(restated), 2001 (restated) and 2002.
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended April 30, 2000
(restated), 2001 (restated) and 2002.
Consolidated Statements of Cash Flows for the
years ended April 30, 2000 (restated), 2001
(restated) and 2002.
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 2002:
Report on Form 8-K filed April 3, 2002 disclosing the
issuance of $2.0 million principal of Subordinated
Secured Convertible debentures.
Report on Form 8-K filed April; 11, 2002 disclosing the
appointment of Deloitte & Touche LLP as its independent
auditors.
(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.
81
3.2 -- Bylaws of the Company, incorporated by reference to
the Company's Form 10-K for the fiscal year ended
April 30, 1996.
4.1 -- Specimen Common Stock Certificate, incorporated by
reference to the Company's registration statement
on Form S-1 (File No. 333-39985) filed with the
Commission on November 12, 1997.
4.2 -- Certificate of Designations defining the powers,
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series D
Preference Stock, incorporated by reference to the
Company's form 8-A filed with the Commission on
February 24, 1998.
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.
82
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.
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.
83
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.
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.
84
*10.27 -- Inventory and Working Capital Financing Agreement
dated November 10, 2000 by and between the Company
and IBM Credit Corporation.
*10.28 -- Guaranty of Datatec Systems, Inc. in favor of IBM
Credit Corporation dated November 8, 2000.
*10.29 -- Acknowledgment, Waiver and Amendment to Financing
Agreement dated May 2, 2001 by and between the
Company and IBM Credit Corporation.
*10.30 -- Collateralized Guaranty of Datatec Systems, Inc.
dated May 2, 2001 in favor of IBM Credit
Corporation.
*10.31 -- Acknowledgment, Waiver and Amendment to Financing
Agreement dated July 26, 2001 by and between the
Company and IBM Credit Corporation.
10.32 -- Amended and Restated 1998 Employee Stock Purchase
Plan, incorporated by reference to the Company's
registration statement on Form S-8 (File No.
333-71274) filed with the Commission on October 10,
2001.
*10.33 -- Stock Purchase Agreement by and between Datatec
Systems, Inc. and Cisco Systems, Inc. dated
November 2, 2001.
*10.34 -- Investor Rights Agreement by and between Datatec
Systems, Inc. and Cisco Systems, Inc. dated
November 2, 2001.
*10.35 -- Promissory Note by Datatec Systems, Inc. in favor
of Cisco Systems, Inc. dated November 2, 2001.
10.36 -- Acknowledgment, Waiver and Amendment to Financing
Agreement by and between Datatec Industries, Inc.
and IBM Credit Corporation dated December 14, 2001,
incorporated by reference to the Company's Form
10-Q for the fiscal quarter ended October 31, 2001.
*10.37 -- Acknowledgment, Waiver and Amendment to Financing
Agreement by and between Datatec Industries, Inc.
and IBM Credit Corporation dated March 14, 2002.
10.38 -- Subordinated Secured Convertible Debentures and
Warrants Purchase Agreement, dated as of April 3,
2002, by and among the Company and the investors
signatory thereto, incorporated by reference to the
Company's Form 8-K dated April 5, 2002.
85
10.39 -- Form of 5% Subordinated Secured Convertible
Debenture, dated as of April 3, 2002, incorporated
by reference to the Company's Form 8-K dated April
5, 2002.
10.40 -- Form of Stock Purchase Warrant, dated as of April
3, 2002, incorporated by reference to the Company's
Form 8-K dated April 5, 2002.
10.41 -- Registration Rights Agreement, dated as of April 3,
2002, by and among the Company and the investors
signatory thereto, incorporated by reference to the
Company's Form 8-K dated April 5, 2002.
10.42 -- Security Agreement, dated as of April 3, 2002, by
and among the Company and the investors signatory
thereto, incorporated by reference to the Company's
Form 8-K dated April 5, 2002.
*21.1 -- Subsidiaries of the Company.
24.1 -- Power of Attorney, included on the signature page
of this Form 10-K.
*99.1 -- Certification of Chief Executive Officer.
*99.2 -- Certification of Chief Financial Officer.
- ---------------------------
* Filed herewith.
86
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.
By: /s/ Isaac J. Gaon
--------------------------
Name: Isaac J. Gaon
Title: Chairman of the Board and
Chief Executive Officer
Dated: October 3, 2002
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints ISAAC J. GAON his true and lawful
attorney-in-fact with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute may lawfully do or cause to be done by
virtue hereof.
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 October 3, 2002
- ------------------------------ Executive Officer (principal
Isaac J. Gaon executive officer)
/s/ Albert G. Pastino Chief Financial Officer, Secretary October 3, 2002
- ------------------------------ and Treasurer (principal financial
Albert G. Pastino and accounting officer)
/s/ William Adams Director October 3, 2002
- ------------------------------
William Adams
/s/ Mark Berenblut Director October 3, 2002
- ------------------------------
Mark Berenblut
/s/ Robert H. Friedman Director October 3, 2002
- ------------------------------
Robert H. Friedman
/s/ Walter Grossman Director October 3, 2002
- ------------------------------
Walter Grossman
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Isaac J. Gaon, certify that:
(1) I have reviewed this annual report on Form 10-K of Datatec
Systems, Inc., a Delaware corporation (the "registrant");
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
Date: October 3, 2002
By: /s/ Isaac J. Gaon
---------------------------------
Isaac J. Gaon
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Isaac J. Gaon, certify that:
(1) I have reviewed this annual report on Form 10-K of Datatec
Systems, Inc., a Delaware corporation (the "registrant");
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
Date: October 3, 2002
By:/s/ Isaac J. Gaon
---------------------------------
Isaac J. Gaon
Chief Financial Officer
with respect to this Certification