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OVERVIEW
The Company is a leading provider of information technology solutions, which consist of specialized computer services and complementary products primarily to blue chip corporations and government authorities in the United Kingdom and, to a growing extent, in Continental Europe. The Company's solution include hardware maintenance, help desk support, network services, specialized software services and products and the supply of high-end storage systems.
The Company has grown rapidly due, in large part, to acquisitions. Compass Computer Group ("Compass") was acquired in fiscal 1996, Hammer Distribution Limited ("Hammer") and Datapro Computers Group Limited ("Datapro") were acquired in fiscal 1997 and Firstpoint Limited ("Firstpoint") and Eurosystems France S.A. ("Eurosystems") were acquired in fiscal 1998. Decision Systems ("DS"), Memorex Telex Italia ("Memorex"), Penagen Training Ltd ("Penagen") and I-NEA S.A. ("I-NEA") were acquired in fiscal 1999. On July 28, 1999, the Company entered into an agreement to acquire the SIL ("SIL") group of companies. These acquisitions have been accounted for under the purchase method of accounting and on a consolidated basis in the Company's financial statements for periods ending after the effective date of such acquisitions. As used herein, references to a "fiscal year" refer to January 31 of such year. For example, fiscal 1999 refers to the year ended January 31, 1999.
Because of the effect upon the Company's results of operations for the year ended January 31, 1999 of acquisitions made during that period, direct comparison of the Company's results of operations for the periods ended July 31, 1998 and July 31, 1999 will not, in the view of management of the Company, prove meaningful. Instead, a summary of the elements which management of the Company believes essential to an analysis of the results of operations for such periods is presented below.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999 COMPARED WITH THE THREE MONTHS ENDED JULY 31,
REVENUES
Revenues for the three months ended July 31, 1999 were $58.3 million, an increase of $30.9 million, or approximately 112.8% compared to $27.4 million for the three months ended July 31, 1998. This growth arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA and from organic growth of the services business. Revenues from services were $39.2 million, or 67.2% of the total revenue, with revenues from the supply of products at $19.2 million, or 32.8% of the total revenues. In the comparable period of the prior year, Service revenues were 60.8% of the total revenues and Products revenues were 39.2% of total revenues.
GROSS PROFIT
Gross profit for the three months ended July 31, 1999 was $23.1 million, an increase of $12.3 million, or 113.9% compared to $10.8 million for the three months ended July 31, 1998. This growth arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA and from organic growth of the services business. Gross margin increased from 39.5% for the three months ended July 31, 1998 to 39.6% for the three months ended July 31, 1999. Gross profit for services increased 127.7% from $9.0 million for the three months ended July 31, 1998 to $20.5 million for the three months ended July 31, 1999. Gross profit for products increased 41.1% from $1.8 million for the three months ended July 31, 1998 to $2.6 million for the three months to July 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $18.2 million, an increase of $10.1 million, or 124.7% compared to $8.1 million for the three months ended July 31, 1998. As a percentage of revenues, selling, general and administrative expenses increased to 31.3% from 29.5% in the three months ended July 31, 1999. Selling general and administrative expenses increased primarily as a result of a growth in infrastructure necessary to support the expansion of the Company's businesses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended July 31, 1999 was $1.2 million, an increase of $482,000, or 66.9% compared to $720,000 for the three months ended July 31, 1998. This increase arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in fiscal 1999. Depreciation was $404,000, an increase of $112,000 or 38.4%, from $292,000 for the prior period. Amortization of goodwill from acquisitions was $798,000, an increase of $370,000, or 86.5%, from $428,000 for the prior period. An amortization period of between ten and fifteen years is utilized with respect to acquisitions.
EARNINGS BEFORE INTEREST AND INCOME TAXES
Earnings before interest and income taxes ("EBIT") for the three months ended July 31, 1999 was $3.6 million, an increase of $1.6 million, or 78.4%, as compared to $2.0 million for the three months ended July 31, 1998. As a percentage of revenues, income before interest expense and income taxes decreased to 6.2% in the three months ended July 31, 1999 as compared to 7.4% for the three months ended July 31, 1998.
EBIT before depreciation and amortization ("EBITDA") increased for the three months ended July 31, 1999 to $4.82 million from $2.75 million for the three months ended July 31, 1998, an increase of $2.07 million or 75.3%. As a percentage of revenues, EBITDA decreased to 8.3% for the three month period ended July 31, 1999 from 10.0% for the comparable period ended July 31, 1998.
INTEREST
Interest expense for the three months ended July 31, 1999 was $246,000, an increase of $36,000 or 17% compared to $210,000 for the three months ended July 31, 1998, arising from higher utilization of bank lines of credit during the period. Interest income increased from $108,000 for the three months ended July 31, 1998 to $220,000 an increase of $112,000, arising from higher cash balances on hand during the quarter.
SIX MONTHS ENDED JULY 31, 1999 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1998
REVENUES
Revenues for the six months ended July 31, 1999 were $115.6 million, an increase of $61.5 million, or approximately 113.7% compared to $54.1 million for the six months ended July 31, 1998. This increase arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in 1998. Revenues from services were $77.6 million, or 67.1% of the total revenue, with revenues from the supply of products at $38.0 million, or 32.9% of the total revenues. In the comparable period of the prior year, Service revenues were 61.1% of the total revenues and supply of products were 38.9% of the total revenues.
GROSS PROFIT
Gross profit for the six months ended July 31, 1999 was $45.7 million, an increase of $24.3 million, or 113.7% compared to $21.4 million for the six months ended July 31, 1998. This increase arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in fiscal 1999. Gross margin remained unchanged at 39.5% for the six months ended July 31, 1999 and 1998. Gross profit for services increased 127.5% from $17.8 million for the six months ended July 31, 1998 to $40.5 million for the six months to July 31, 1999. Gross profit for products increased 47.0% from $3.6 million for the six months ended July 31, 1998 to $5.2 million for the six months ended July 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $36.2 million, an increase of $20.1 million, or 124.8% compared to $16.1 million for the six months ended July 31, 1998. As a percentage of revenues, selling, general and administrative expenses increased to 31.4% from 29.7% in the six months ended July 31, 1998. Selling general and administrative expenses increased primarily as a result of the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the six months ended July 31, 1999 was $2.4 million, an increase of $1.0 million or 71.4% compared to $1.4 million for the six months ended July 31, 1998. This increase arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in fiscal 1999. Depreciation was $838,000, an increase of $252,000 or 43.0%, from $586,000 for the prior period. Amortization of goodwill from acquisitions was $1,558,000, an increase of $708,000, or 83.3%, from $850,000 for the comparable period. An amortization period of between five and fifteen years is utilized with respect to acquisitions.
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
Earnings before interest expense and income taxes ("EBIT") for the six months ended July 31, 1999 was $7.0 million, a increase of $3.2 million, or 81.8%, as compared to $3.9 million for the six months ended July 31, 1998. This increase arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in fiscal 1999. As a percentage of revenues, EBIT decreased to 6.1% in the six months ended July 31, 1999 as compared to 7.1% for the six months ended July 31, 1998.
EBIT before depreciation and amortization increased for the six months ended July 31, 1999 to $9.4 million from $5.3 million for the six months ended July 31, 1998 an increase of $4.1 million or 77.4%. This increase arose principally from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in 1998. As a percentage of revenues, EBITDA decreased to 8.1% for the six month period ended July 31, 1999 from 9.8% for the comparable period ended July 31, 1998.
INTEREST
Interest expense for the six months ended July 31, 1999 was $468,000, an increase of $49,000 or 1.7% compared to $419,000 for the six months ended July 31, 1998, arising from higher utilization of bank lines of credit during the period. Interest income increased from $176,000 for the six months ended July 31, 1998 to $484,000 arising from higher cash balances on hand during the period.
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1996, the Company's sources of capital had been cash flows from operations, private placements of securities, primarily from its controlling stockholders and related parties, and borrowings from banks. On June 19, 1996, the Company completed a public offering (the "Offering") of 3,000,000 shares of the Company's Common Stock at a price of $5.75 per share. On July 2, 1998, the Company completed a secondary public offering through a further sale of 2.9 million shares of Common Stock. As a result of this offering, the Company raised net proceeds of $31.0 million.
As of July 31, 1999, the Company had lines of credit with UK, French, Italian and Belgian banks in the aggregate amount of L15 million ($24 million). As of July 31, 1999 $6.8 million was outstanding.
The outstanding credit facilities are secured by the assets of the Company and are periodically reviewed by the issuing institution. Management expects to be able to maintain these credit arrangements for the foreseeable future, although no assurance can be given.
The Company maintains a facility with a UK factoring company, pursuant to which it borrows against eligible trade receivables. The Company pays the factoring company an administrative fee of 0.075% of eligible trade receivables and interest of 9% per annum. At July 31, 1999, $5.9 million under this agreement was outstanding.
Outstanding advances from stockholders are shown on the Company's balance sheet as stockholder advances. Outstanding advances as of July 31, 1999 were $23,000. These outstanding advances do not bear interest, and are payable on demand.
The Company's working capital increased from $22.8 million surplus at January 31, 1999 to a surplus of $24.3 million at July 31, 1999.
Net cash provided by operating activities during the six months ended July 31, 1999 was $0.2 million, which reflected the net effect of an increase in net accounts payable, accounts receivable, and inventories and a decrease in deferred revenues. Net cash used by investing activities was $5.1 million, for the three months ended July 31, 1999, primarily reflecting cash used for the purchase of equipment and the acquisition of SIL. Net cash provided by financing activities was $2.1 million for the six months ended July 31, 1999, resulting primarily from increase of bank lines of credit and payments of outstanding obligations and the receipts from stock options which were exercised during the period.
The Company believes that the net cash flows from operations and borrowing availability under its credit facilities, will satisfy the Company's anticipated working capital requirements through at least the next twelve months. To the extent the Company raises additional capital by issuing equity or convertible debt securities, ownership dilution to the Company's stockholders will result. In the event that adequate funds are not available, the Company's business may be adversely affected.
INFLATION
Inflation has not had a material effect upon the Company's results of operations to date. In the event the rate of inflation should accelerate in the future, it is expected that costs in connection with the provision by the Company of its services and products will increase, and, to the extent such increased costs are not offset by increased revenues, the operations of the Company may be adversely affected.