FORM 10-KSB/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Fiscal Year Ended September 30, 1996
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. 1-14168
BELL TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its Charter)
DELAWARE
(State of Incorporation)
13-3781263
(I.R.S. Employer Identification Number)
295 Lafayette Street, 3rd Floor, New York, New York
(Address of Principal Executive Offices)
10012
(Zip Code)
(212) 334-8600
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year if changed since last
report)
Indicate by a check mark whether the registrant: (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO _______
1
<PAGE>
PART I
Item 1. Business
(a) General Development of Business. The Company was originally
incorporated in the state of New York in 1989 by Marc H. Bell as NAFT
International Ltd. ("NAFT"). In July 1993, Mr. Bell formed Stellar Graphics
Corp. (now called Bluestreak Digital, Inc.,). In July 1994, the assets and
liabilities of NAFT and Stellar Graphics were acquired by PFM Technologies
Corporation ("PFMT") in a tax-free exchange of common stock. In July 1994, the
Company received a private financing from Harpoon Holdings Ltd. ("Harpoon"), a
British Virgin Islands corporation wholly-owned by Tsuyoshi Shiraishi, a
director of the Company, pursuant to which Harpoon became a principal
stockholder of the Company. Under the terms of such financing, the Company
received from Harpoon the sum of $500,000, $300,000 of which was evidenced by a
seven-year fully subordinated, non-interest bearing promissory note (the
"Subordinated Note"), and $200,000 of which was used to purchase 50% of the
Company's Common Stock. Of the $200,000 contributed to equity, $198,000 was
characterized as additional paid-in capital, and $2,000 was characterized as
capital stock. The amount due under the Subordinated Note was subsequently
reduced to $287,000 after a payment by the Company. The Subordinated Note was
repaid from the proceeds of the initial public offering. The 1994 Financing
allowed the Company to increase its borrowing capability, expand its sales
capacity and finance additional working capital. In September 1995, the Company
was reincorporated by merger into Bell Technology Group Ltd., a Delaware
corporation.
In October 1995, the Company borrowed $250,000 in a Bridge Financing.
The Bridge Notes issued in connection with the Bridge Financing carried interest
at 9% per annum. Such loans were repaid at the closing of the initial public
offering. In connection with the Bridge Financing, the Company issued 35,710
shares of Common Stock to the Bridge Lenders at no cost, which were registered
as part of the initial public offering. Debt issuance costs of $257,391 and
interest expense of $37,149 were incurred by the Company as a result of the
bridge loan transaction.
In January, 1996, the Company sold, in an initial public offering,
1,150,000 shares of Common Stock at an initial offering price of $7.00 per
share, and 575,000 Redeemable Purchase Warrants for $.10 per warrant. Each
warrant entitles the holder to purchase one share of the Company's common stock
for $7.70 per share. The warrants are redeemable by the Company at $.10 per
warrant at any time after January 24, 1997 if certain conditions are met. The
net proceeds which the Company received from the public offering amounted to
approximately $6,600,000.
2
<PAGE>
In March 1996, the underwriter of the initial public offering exercised
its over-allotment option to purchase 129,642 common shares from the Company for
$7.00 per share. The net proceeds amounted to approximately $800,000.
(b) Narrative Description of Business
(1) General
Bell Technology Group Ltd., a Delaware corporation (the "Company")
operates through two principal "Operating Segments", consisting of:
a) Computer Product and Service Sales consisting
of the sale of computer hardware, software,
networking (LAN and WAN), computer hardware
and software repairs and maintenance and
other product and service sales.
b) Internet Operations consisting of Web design,
Web hosting, training, CD ROM design and
preparation, consulting and sales of related
products and services.
The Company commenced its Internet operations in the second half of the
fiscal period ended September 30, 1995. For fiscal 1995 Internet Operations did
not have sufficient Gross Revenues, Operating Income/Loss, or Identifiable
Assets to require reporting on a segment basis.
For the fiscal year ended September 30, 1996 operating results on a
segment basis were:
<TABLE>
<CAPTION>
==========================================================================================================
SALES TO UNAFFILIATED CUSTOMERS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer Product and Service Sales $9,732,322
- ----------------------------------------------------------------------------------------------------------
Internet Operations $641,342
- ----------------------------------------------------------------------------------------------------------
OPERATING LOSS
- ----------------------------------------------------------------------------------------------------------
Computer Product and Service Sales $267,482
- ----------------------------------------------------------------------------------------------------------
Internet Operations $359,751
- ----------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
- ----------------------------------------------------------------------------------------------------------
Computer Product and Service Sales $3,442,760
- ----------------------------------------------------------------------------------------------------------
Internet Operations $1,132,253
==========================================================================================================
</TABLE>
The Company has four principal subsidiaries:
3
<PAGE>
PFM Communications, Inc. is a diversified Internet solutions provider
in New York City. PFM's state-of-the-art Network Operations Center provides
sophisticated Internet connectivity available for direct, high-speed Internet
connections and World Wide Web hosting facilities. PFM also offers a complete
range of Internet consulting services.
Bluestreak Digital, Inc. is a digital media company producing broadcast
quality 2D and 3D animation, interactive CD-ROM presentations, and high-impact
World Wide Web sites. Bluestreak's designers and animators are skilled in using
advanced production tools such as SoftImage, Alias/Wavefront, Macromedia
Authorware and Director. Bluestreak is currently building one of the few motion
capture studios in the New York City area.
Naft International Ltd. is engaged primarily in the sale of computer
hardware, software and peripherals. Among the principal products sold by the
Company are computer operating systems manufactured by Silicon Graphics, Sun,
Apple and Integraph, and computer software systems such as SoftImage and Alias.
In general, Naft International deals primarily with large commercial operations
and systems which require vendor support, and products which cannot be purchased
through mail order catalogues.
Naft Computer Services Corp. ("NCS") is primarily a service support and
training operation. The Company maintains several training rooms at its
headquarters facility which it rents out to corporations for the training of
their professional staff. The Company provides a variety of modern operating
equipment and current programs, together with instructors to teach how to use
such equipment and programs. Some instructors are on staff and others are hired
on a freelance basis as needs dictate. The Company typically charges a fixed
price depending upon the size of the class, the complexity of the group and the
equipment required. NCS also prepares equipment sold to customers, installs
LANs, provides warranty support for major hardware manufacturers, and provides
ongoing service support for its customers in the form of hardware repairs and
software consulting.
(2) Internet Services
During the past fiscal year, the Company has increased its focus on its
Internet operations. The Company has created an intranet to connect both itself
and its clients to each other and to the world-wide Internet through the use of
technology such as fiber optic connectivity, routers, dedicated data service
connections, servers, and other Internet related computer equipment. The Company
will continue to develop, upgrade, monitor and maintain its intent as additional
clients (users) are added to the system and technology improves. During the
fiscal year ended September 30, 1996, the Company hired approximately 9 graduate
engineers and technicians.
4
<PAGE>
The Company has developed multiple platform world wide web hosting and
developing capabilities. The Company is able to create multi-media web sites and
provide high speed access to the Internet for the client/user. Through its
Bluestreak subsidiary, the Company designs the web, and the Company's
subsidiary, PFM, hosts the site by providing the appropriate hardware, network
and maintenance services. Among the proprietary solutions developed by the
Company are an Internet based Commerce Solution, which includes secure credit
card transaction processing, a shopping cart for browsing merchandise on-line,
and a video-streaming technology that allows for pay-per-view programming.
During the current fiscal year, the Company has spent over $1
million building a state-of-the-art network operations center (NOC) at it's new
location. The 2,000 square foot NOC offers customers the ultimate in network
connectivity. Connected to three Tier I Internet carriers via redundant fiber
optics, and providing connectivity to leased line clients via an OCR-48 on the
NYNEX SONET ring, PFM is poised to service the most demanding companies in New
York City. Additionally, the PFM NOC offers lockable cabinet co- location
services for those clients focused on Internet publishing on the World Wide Web.
The Company also offers a wide range of services to it's customers such
as dial-up, ISDN, leased line, web hosting, programming, consulting, firewall,
network security and design services. Because of the sales and service operation
the Company is able to offer customers support and services on all major
operating systems including UNIX, IRIX, Windows NT and Mac OS.
The Company also provides consulting services in the areas of inter -
networking, computer and network security, network design and network operation.
(3) Product Sales
The Company has been shifting its emphasis from the sale of low margin
products with intense price competition to higher-end, higher margin hardware
products such as Silicon Graphics, Integraph, Sun Microsystems, Cisco, Compaq
servers, and software products such as SoftImage, Alias/Wavefront, and Avid.
These products are generally not purchased through mail order (as are Compaq and
Apple products, for example) and require a higher level of sales effort and
after- market support such as training. The Company has continued its original
program of moving away from the more competitive computer sales market into the
area of Internet focused computer solutions.
The great majority of the Company's customers are Fortune 1000
companies which maintain an ongoing relationship with the Company. The goal of
the Company is to convert its product customers to users of the various Internet
and training programs run by the Company.
5
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(4) Service and Training
The Company services the products which it sells by providing warranty
repair services, as well as contract support of system software and hardware.
Hardware contracts are issued for a fixed price and for a fixed term. Contracts
for software support and maintenance are issued on the basis of prepaid hours
where a customer prepays for a block of hours which may be used at any time.
Payments for service contracts are accounted for ratably over the period of the
contract. Payments for prepaid hours are accounted for as the hours are used.
In September, the Company began an aggressive program to market its
in-house training facilities. The Company provides training services for the
more sophisticated computer software programs which it sells. Training is
marketed to large advertising and publishing firms, banks, large financial
institutions, clothing manufacturers, and the like, which send their personnel
to the Company's facility to attend one to five day programs. The Company
maintains modern classrooms at its corporate headquarters for the training of
individual employees of a customer, up to groups of 150. Training rooms are
equipped with modern hardware, computer desks and other appropriate classroom
equipment and various programs are loaded into equipment as required by the
users. The Company intends to expand this operation into a major source of
revenue and include training at the customer's own site.
The Company provides training only to its corporate clients and does
not run any public seminars.
(5) Multimedia and Graphic Arts
Bluestreak Digital, Inc. is the Company's graphic arts arm. It creates
and assembles world-wide web sites, and develops promotional brochures,
interactive applications such as training CDs and promotional CDs, and 2-D and
3-D animation. It works with content providers such as marketing firms to
provide the technical and design aspects of a project for large scale
multi-media projects including sites to be used on the Internet.
Bluestreak designs internal communications products used by businesses
for computer based in-house training and intranet development. In addition the
Company provides front-end graphics for data base driven web sites.
Bluestreak offers a service to its 3-D animation clients in the form of
motion capture studios.
Bluestreak has three main areas of digital design development:
animation, Authorware & web production. The animation department is fully
staffed with creative directors who specialize in Alias & SoftImage (the two
animation packages with the greatest market share)
6
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and render their work on a state-of-the-art render farm from Silicon Graphics.
The Silicon Graphics hardware farm is such an investment & such an asset to an
animator that major national broadcast companies rent time on the farm when
Bluestreak isn't using it. Bluestreak's Authorware division is responsible for
creating computer based training (CBT) and computer based sales tools for
companies such as BMW, Prudential and others. And Bluestreak's Web Design
department is fully staffed with HTML editors, programmers and producers who
have already produced Internet sites for a variety of companies in several
industries. Most recently, Bluestreak has leveraged it's Internet knowledge &
expertise to develop Intranets for companies such as Simon & Schuster.
(6) Competition
There are no substantial barriers to the entry into any of the
Company's lines of business, and the Company encounters significant competition
in each of them. The Company's competitors include (i) value added resellers of
computer, network and peripheral equipment, (ii) computer repair services and
training providers, (iii) computer consultants, (iv) Internet service providers,
and (v) graphic design and consulting firms. Many of the Company's current and
potential competitors have substantially greater financial, technical, marketing
and other resources and larger installed customer bases than the Company. The
Company expects that competition will intensify in each of its lines of
business, particularly in the area of Internet services, as more competitors
enter the marketplace.
(7) Dependence upon Suppliers
The Company relies on other companies to supply certain components of
its computer inventory, service and diagnostic equipment, as well as its network
infrastructure (including telecommunications services and networking equipment)
which, in the quantities and quality required by the Company, are available only
from sole or limited sources. The Company has in the past, and may from time to
time, experience delays in receiving telecommunication services and shipments of
merchandise. There can be no assurance that the Company will be able to obtain
such telecommunication services and merchandise on the scale and at the times
required by the Company at an affordable cost.
(8) Employees
At November 30, 1996, the Company had 81 full time employees
and 5 part-time employees.
7
<PAGE>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Twelve Months Ended September 30, 1996 Compared With Nine Months
Ended September 30, 1995
The financial statements contain results of operations for the twelve
month period ended September 30, 1996 and the nine month period ended September
30, 1995. The Company received the proceeds of its public offering on February
1, 1996. These facts should be considered in reading the following discussion.
Revenues increased from $8,738,410 in fiscal 1995 to $10,363,664 in
fiscal 1996 because of the longer fiscal year. In the fiscal year ended
September 30, 1995, revenues from Internet operations were small, and no other
segment of the Company's business accounted for 10% of Gross Revenues, Operating
Income/Loss and Identifiable Assets of the Company. While the Company's actual
revenues are not steady on a month by month basis, for comparison purposes only,
average monthly revenues in fiscal 1996 were approximately $864,000 as
contrasted with average monthly revenues in fiscal 1995 of approximately
$971,000. This decline is due to a substantial reduction in the sales of Apple
computer products which produced large sales numbers because of the price of the
products being sold. The Company is replacing these sales in part with sales of
other products and with Internet related sales, training and service. The
Company anticipates that, in the future, a greater percentage of revenues will
result from Internet related sales which have higher gross profit margins.
Cost of Revenues remained constant from fiscal 1995 to fiscal 1996 at
approximately 82%. However, gross profit margins for the 3 and 9 month periods
ended June 30, 1996 were 23% and 20%, respectively. The gross profit margin for
the 3 month period ended September 30, 1996 was 7%. The fourth quarter results
of operations were negatively impacted by a number of events and adjustments,
all of which adversely impacted gross margins. In particular, (a) the Company
reflected a reclassification of approximately $100,000 from selling, general and
administration to cost of revenue to more accurately reflect direct expenses of
the Internet operations; (b) established a reserve of $90,000 for returned
merchandise allowances primarily with Apple Computer Company, because of the
Company's de- emphasis of its business with Apple and the Company's assessment
of Apple's financial situation; and (c) various year-end adjustments of
approximately $100,000. In addition, the Company relocated its operations in the
fourth quarter of fiscal 1996, which adversely impacted revenues and gross
profit margins.
Approximately $220,000 of the Company's loss before taxes in 1996 was
due to depreciation and $257,000 was due to the write-off of Debt Issuance Costs
related to a debt incurred prior to the initial public offering. The balance of
the loss (in the amount of
8
<PAGE>
$1,416,480) can be traced directly to Selling, General and Administrative costs.
Within this category, a substantial portion of such costs were related to
payroll. The monthly payroll of the Company increased from $162,233 for the
month of October 1995 to $308,115 for the month of October 1996. In the
Company's Form 10-KSB filed January 13, 1997 the Company attributed the increase
in payroll to the hiring of additional sales staff, engineering staff and
technicians working in the Internet sales and engineering departments of the
Company. More particularly stated: This increase in payroll was primarily for
corporate administrative personnel and sales personnel, technicians and
engineers in all areas of operations. A portion of the Internet engineering
payroll ($130,000) was capitalized. In the initial phases of operation, such
increased payroll resulted in no significant revenue. This negative trend
continued in the fourth quarter so that selling, general and administrative
costs as a percentage of revenues increased from approximately 22% in the
quarter ended December 31, 1995 to approximately 48% in the quarter ended
September 30, 1996. The Computer Product and Service Sales segment in the year
ended September 30, 1996 had an operating loss of approximately $267,000. For
the nine months ended September 30, 1995, the segment had an operating profit of
approximately $71,000. The cost of revenues for Computer Product and Service
Sales for both fiscal years was approximately 85%. The reason for the loss in
1996 can be traced to (a) an increase in payroll of approximately $650,000 for
the hiring of additional sales staff and computer technicians offset by (b) a
decrease in other selling, general and admisistrative expenses of approximately
$150,000 and (c) an increase in gross profits of $200,000 based on increased
revenues of approximately $1,300,000. As noted above, the Company's focus is
shifting toward its Internet operations. The Company believes that the increase
in sales staff and technicians in Computer Sales and Service will lead to future
business for its complimentary Internet segment.
Expenditures for Research and Development increased by $23,250. This
increase was for Internet programming work done by the Company in setting up its
Internet network.
As a result of the above, the Company reported a net loss for 1996 of
$1,893,480 or $0.72 per share as opposed to the reported net income in 1995 of
$38,859 or $0.02 per share. Losses will continue in the first half of the
current fiscal year.
Liquidity and Capital Resources
At September 30, 1996, the Company had working capital of $3,423,313,
as compared to working capital of $179,739 at September 30, 1995. The increase
in working capital of $3,243,574 is primarily due to the net proceeds received
from the Company's initial public offering, less current operating losses and
capital expenditures.
Cash and cash equivalents increased by approximately
9
<PAGE>
$2,119,644 from September 30, 1995. The increase in cash and cash equivalents is
due to the net proceeds received from the Company's initial public offering,
less current operating losses and capital expenditures.
The Company's relocation resulted in significant capital expenditures
to establish the Company's state of the art network operations center,
construction and outfitting of training facilities including several training
rooms and the equipment necessary to provide training to the Company's
customers, and the purchase of servers, routers, cabinets, monitors and other
equipment necessary to create and expand the equipment necessary to host web
sites. The Company anticipates additional expenditures in fiscal 1997 to upgrade
its Internet operations by purchasing additional equipment and line capacity,
servers, network computers and high-speed telecommunications lines. These
expenditures are estimated to be approximately $1,000,000.
The Company generated a positive cash flow of approximately $2.5
million for the year ended September 30, 1996. This was generated primarily from
the net proceeds of the initial public offering of approximately $7.4 million,
offset by the net loss of $1,893,480, less depreciation of $219,176, the
increase in accounts receivable and other current assets of $607,422, the
purchases of fixed assets of $1,954,646 and the write-off of debt issuance and
stock offering costs of $250,000. In addition, the Company repaid notes payable
of $370,763 and the accounts receivable credit line by $711,952.
In the opinion of management, the Company will be able to finance its
business as currently conducted from it's current working capital and the
$3,000,000 credit facility with NationsCredit discussed in note 8 to the
financial statements. As of December 15, 1996 borrowings under this credit
facility have been limited to the purchase of inventory held primarily for sale
to customers. As the Company expands, it may seek additional financing
alternatives.
Forward Looking Statements
The foregoing contains certain forward looking statements. Due to the
fact that the Company faces intense competition in a business characterized by
rapidly changing technology and high capital requirements, actual results and
outcomes may differ materially from any such forward looking statements and, in
general are difficult to forecast.
10
<PAGE>
BELL TECHNOLOGY GROUP LTD.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Statements of Bell Technology Group Ltd.
and Subsidiaries
Report of Independent Public Accountants............................................... F-2
Consolidated Balance Sheets - September 30, 1996 and
September 30, 1995..................................................................... F-3
Consolidated Statements of Operations - For the year ended September 30, 1996
and the nine months ended
September 30, 1995..................................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity - For the year ended September 30, 1996 and
the nine months ended September 30, 1995. ............................................. F-5
Consolidated Statements of Cash Flows - For the year ended September 30, 1996
and the nine months ended
September 30, 1995..................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7 - F16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: BELL TECHNOLOGY GROUP LTD.:
We have audited the accompanying consolidated balance sheets of Bell Technology
Group Ltd. (a Delaware corporation) and Subsidiaries as of September 30, 1996
and September 30, 1995, and the related consolidated statements of operations,
and cash flows for the year and nine months then ended, respectively. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bell Technology Group Ltd.
and Subsidiaries as of September 30, 1996 and September 30, 1995, the results of
its operations and its cash flows for the year and nine months then ended,
respectively, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
December 23, 1996
New York, New York
F-2
<PAGE>
Bell Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, September 30,
Assets 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,342,011 222,367
Accounts receivable, net of allowance for
doubtful accounts of $64,842 and $11,212
as of September 30, 1996 and September 30,
1995, respectively 1,847,918 1,423,548
Inventories 758,353 843,904
Prepaid expenses and other current assets 195,113 12,061
---------- ----------
Total current assets 5,143,395 2,501,880
Property and equipment, net 2,151,294 413,306
Deferred stock offering costs -- 25,000
Long-term investment 400,000 --
Other assets 115,093 21,364
----------- -----------
Total assets $ 7,809,782 $ 2,961,550
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short term borrowings $ -- $ 711,952
Current portion of notes payable 39,152 75,865
Accounts payable 1,274,197 1,319,532
Accrued expenses 240,116 118,414
Deferred revenues 166,617 75,562
Deferred income taxes -- 20,816
---------- ---------
Total current liabilities 1,720,082 2,322,141
Long term note payable, net of current portion -- 47,050
Note payable - Stockholder -- 287,000
Deferred income taxes -- 6,562
---------- ----------
Total liabilities 1,720,082 2,662,753
---------- ----------
Commitments and contingencies Stockholders' equity :
Preferred Stock, $.01 par value; 500,000
shares authorized; no shares issued and
outstanding -- --
Common Stock, $.01 par value; 10,000,000
shares authorized; 3,083,210 and 1,725,000
shares issued and outstanding 30,832 17,250
Additional paid-in capital 8,033,134 362,333
Accumulated deficit (1,974,266) (80,786)
---------- ----------
Total stockholders' equity 6,089,700 298,797
---------- ----------
Total liabilities and stockholders'
equity $ 7,809,782 $ 2,961,550
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
Bell Technology Group Ltd.
and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September 30, 1996 September 30, 1995
<S> <C> <C>
Revenues $10,373,664 $ 8,738,410
Costs and expenses:
Cost of revenues 8,599,241 7,292,232
Selling, general and administrative 3,186,718 1,212,829
Depreciation and amortization 219,176 68,510
Research and development 57,250 34,000
---------- ----------
Total costs and expenses 12,062,385 8,607,571
Net Income (loss) from operations (1,688,721) 130,839
Interest income 121,256 --
Interest expense (98,520) (72,881)
Write-off of Debt Issuance Costs (257,391) --
---------- ----------
Income (loss) before taxes (1,923,376) 57,958
(Benefit from) provision for taxes (29,896) 19,099
---------- ----------
Net income (loss) $ (1,893,480) $ 38,859
========== ==========
Net earnings (loss) per share ($0.72) $0.02
Weighted average shares outstanding 2,633,400 1,725,000
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-4
<PAGE>
Bell Technology Group Ltd. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,725,000 $10,625 $368,958 ($119,645) $259,938
Adjustment related to the
merger of PFMT and the -- 6,625 (6,625) -- --
Company -- -- -- 38,859 38,859
Net income _________ ______ _________ ___________ _________
Balance, September 30, 1995 1,725,000 17,250 362,333 (80,786) 298,797
Stock insurance in connection
with bridge financing 35,710 357 249,643 -- 250,000
Proceeds from Initial Public
Offering, net of expenses
of $1,602,175 1,322,500 13,225 7,421,158 -- 7,434,383
Net Loss -- -- -- (1,893,480) (1,893,480)
--------- ------- --------- ------------ ----------
Balance, September 30, 1996 3,083,210 $30,832 $8,033,134 ($1,974,266) $6,089,700
========= ======= ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-5
<PAGE>
Bell Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September September
30, 1996 30, 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,893,480) $ 38,859
Adjustments to reconcile net (loss) income
to net cash used in operating activities
Depreciation and amortization 219,176 68,510
Write-off and amortization of debt issuance 250,000 0
(Benefit) for deferred taxes (29,896) (838)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (424,370) (111,434)
Decrease (increase) in inventories 85,551 (422,991)
(Increase) decrease in prepaid expenses
and other current assets (183,052) 4,354
(Increase) in other assets (68,729) (31,890)
(Decrease) increase in accounts payable (45,337) 99,211
Increase in accrued expenses 121,702 6,347
(Decrease) in payable due to officers -- (5,250)
Increase in deferred revenues 91,057 48,762
--------- ------
Net cash used in operations (1,877,378) (306,360)
--------- -------
Cash flows from investing activities:
Purchases of property and equipment,
net of landlord reimbursement (1,954,646) (149,917)
Purchase of long-term investment (400,000) --
--------- ----
Net cash used in investing activities (2,354,646) (149,917)
--------- -------
Cash flows from financing activities:
Net (repayments of) proceeds from
short term borrowings (711,952) 417,739
Repayments of stockholder loan (287,000) (13,000)
Repayments of notes payable (83,763) (48,990)
Proceeds from initial public offering,
net of offering costs of $1,602,175 7,434,383 --
--------- -----
Net cash provided by financing activities 6,351,668 355,749
--------- -------
Net increase (decrease) in cash and
cash equivalents 2,119,644 (100,528)
Cash and cash equivalents,
beginning of Period 222,367 322,895
--------- -------
Cash and cash equivalents,
ending of period $2,342,011 $222,367
========= =======
Supplemental disclosure of cash flow information:
Cash paid for interest 53,887 60,157
Cash paid for income taxes 12,736 --
Noncash investing and financing activities:
F-6
<PAGE>
Issuance of common stock in connection
with bridge financing 250,000 --
Equipment acquired under capital lease
obligations -- 121,422
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-7
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Bell Technology Group Ltd. and Subsidiaries (the "Company") was
incorporated in the State of Delaware in September 1995. Shortly
thereafter, the Company succeeded by merger to all the assets and
liabilities of PFM Technologies Corporation ("PFMT"), a New York
corporation (See Note 3). In July 1994, the sole stockholder of NAFT
International Ltd. ("NAFT") and Stellar Graphics Corp. ("Stellar
Graphics") exchanged 100% of the common stock of both companies for
100 shares (100%) of PFMT, then a newly formed corporation, in a tax
free exchange. Subsequent to this transaction, an additional 100
shares of PFMT were issued to Harpoon Holdings, Ltd. ("Harpoon") in
consideration for $200,000, of which $198,000 represented additional
paid-in capital. The Company also owns 100% of the equity of NAFT
Computer Service Corp. ("NCS") a New York corporation formed in
September 1994, PFM Communications Inc. ("PFMC"), a New York
corporation formed in March 1995 and GameNet Corp. ("GameNet"), a New
York corporation formed in March 1995. Prior to the merger of PFMT
into the Company, these entities were wholly owned subsidiaries of
PFMT. During 1996, the Company changed the name of Stellar Graphics
Corp. to Bluestreak Digital Inc. ("Bluestreak").
The consolidated financial statements herein include the accounts of
the Company, NAFT, PFMC, NCS, GameNet and Bluestreak. All material intercompany
accounts and transactions have been eliminated. The activities of NAFT and
Bluestreak from January 1, 1994 until the formation of PFMT are included in
these consolidated financial statements at their carryover basis as they were
under common control prior to the tax free exchange discussed above. In
September 1995, the Company changed its fiscal year end from December 31 to
September 30. Accordingly, the period ended September 30, 1995 is for a nine
month period.
OPERATIONS
The Company's activities presently fall into two main segments. One
segment consists of computer products sales, service, network installation and
maintenance. The second segment consists of all Internet related activities
including Web hosting and interactive CD ROM design and preparation.
SEGMENT INFORMATION
The following is a summary of segment information for the year
ended September 30, 1996. The Company started its Internet
F-8
<PAGE>
operations during the second half of the fiscal period ended September 30, 1995.
For the fiscal year ended September 30, 1995 no operating segment of the Company
had sufficient Gross Revenues, Operating Income/Loss or Identifiable Assets to
require the reporting of results for that period on a Segment basis.
<TABLE>
<CAPTION>
Computer Product Internet
& Service Sales Operations Consolidated
<S> <C> <C> <C>
Sales to unaffiliated $9,732,322 $641,342 $10,373,664
Customers
Operating Loss 267,482 359,751 1,688,721*
Identifiable assets at 3,442,760 1,132,253 7,809,782**
September 30, 1996
</TABLE>
* Includes $1,061,488 of unallocated corporate overhead including
executive salaries of $389,000 and overhead including rent, payroll
charges for administrative staff including accounting, human resources,
MIS and other support personnel and professional fees.
** Including corporate assets not allocable to a particular segment
of $3,234,769.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted average
number of shares outstanding during the periods presented. The impact of
outstanding warrants and stock options has not been included in the calculation
as the effect would be anti-dilutive.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
CONCENTRATIONS OF CASH AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of September 30, 1996, the Company had concentrations of
cash in a bank in the form of demand deposits and money market accounts,
totaling approximately $2,103,416. The Company believes that concentrations of
credit risk with respect to trade accounts receivable are limited due to the
large number of entities comprising the Company's customer base. The Company
primarily operates in the New York City metropolitan area.
F-9
<PAGE>
INVENTORIES
Inventory consists of computer hardware and software, parts and related
items. Inventories are carried at the lower of cost or market determined by the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Furniture, equipment and internally developed software are recorded at
cost and are depreciated on a straight-line basis over their estimated useful
lives, generally five years. Leasehold improvements are recorded at cost and
amortized over the term of the lease or life of the asset, whichever is shorter.
Property and equipment consist of the following.
<TABLE>
<CAPTION>
September September
30, 1996 30, 1996
<S> <C> <C>
Leasehold improvements............................. $ 510,057 $43,935
Computer and network
equipment.......................................... 1,862,416 520,805
Furniture and delivery
equipment.......................................... 193,054 40,312
Less Accumulated
depreciation....................................... (414,233) (191,746)
------- -------
Property and equipment, net........................ $2,151,294 $413,306
========= =======
</TABLE>
Included in computer and network equipment is $155,507 of
assets held under capital lease obligations at September 30, 1996 and 1995. Also
included in computer and network equipment at September 30, 1996 and September
30, 1995 is $184,086 and $28,333, respectively, related to internally developed
software costs.
REVENUE RECOGNITION
Revenues consist primarily of computer hardware sales,
maintenance contracts, Internet access fees, network installation charges and
repair fees. Generally, maintenance contracts are for an agreed upon number of
hours and are prepaid by customers. Repair fees and maintenance charges are
recognized as the service is provided. Payments received in advance of providing
services are deferred until the period such services are provided. Equipment
sales and installation charges are recognized when installation is completed.
Monthly subscription service revenue related to Internet
access is recognized over the period services are provided. Subscription service
and equipment installation revenues, which
F-10
<PAGE>
require the use of Company-provided installation of equipment at a subscriber's
location, are recognized at completion of installation and upon commencement of
service. Revenues related to the Web and to 2-D and 3-D animation are recognized
at the completion of each project. Projects are generally completed within a
three month period.
COST OF REVENUES
Cost of revenues in the Company's Internet businesses, PFMC
and GameNet, consist primarily of local access costs, leased network backbone
circuit costs, the cost of equipment and applications sold to customers and
depreciation of network-related equipment. NAFT's primary cost of revenues is
the cost of the computer products it sells. NCS's cost of revenues consist of
parts, internal and third-party labor costs, and training and certification
costs. Bluestreak's cost of revenues consist primarily of labor, printing
expenses and camera work.
RESEARCH & DEVELOPMENT
Research and development costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), which is effective for financial statements for fiscal years
beginning after December 15, 1995. SFAS 121 requires that long-lived assets and
certain identifiable intangible assets held and used by a company be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. The Company believes
that, as of September 30, 1996, no assets covered by SFAS 121 have been
impaired.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123"). SFAS 123 allows companies to account for
stock-based compensation to employees under either (i) the new provisions of
SFAS 123 or (ii) the provisions of
F-11
<PAGE>
APB 25 with pro forma disclosure in the footnotes to the financial statements as
if the measurement provisions of SFAS 123 had been adopted. The Company intends
to continue accounting for its stock- based compensation to employees in
accordance with the provisions of APB 25. As the Company did not issue options
to non-employees, the implementation of SFAS 123 had no impact on the financial
position, results of operations and cash flows of the Company.
2. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues increased from $8,738,410 in fiscal 1995 to
$10,363,664 in fiscal 1996 because of the longer fiscal year. In the fiscal year
ended September 30, 1995, revenues from Internet operations were small, and no
other segment of the Company's business accounted for 10% of Gross Revenues,
Operating Income/Loss and Identifiable Assets of the Company. While the
Company's actual revenues are not steady on a month by month basis, for
comparison purposes only, average monthly revenues in fiscal 1996 were
approximately $864,000 as contrasted with average monthly revenues in fiscal
1995 of approximately $971,000. This decline is due to a substantial reduction
in the sales of Apple computer products which produced large sales numbers
because of the price of the products being sold. The Company is replacing these
sales in part with sales of other products and with Internet related sales,
training and service. The Company anticipates that, in the future, a greater
percentage of revenues will result from Internet related sales which have higher
gross profit margins.
Cost of Revenues remained constant from fiscal 1995 to fiscal
1996 at approximately 82%. However, gross profit margins for the 3 and 9 month
periods ended June 30, 1996 were 23% and 20%, respectively. The gross profit
margin for the 3 month period ended September 30, 1996 was 7%. The fourth
quarter results of operations were negatively impacted by a number of events and
adjustments, all of which adversely impacted gross margins. In particular, (a)
the Company reflected a reclassification of approximately $100,000 from selling,
general and administration to cost of revenue to more accurately reflect direct
expenses of the Internet operations; (b) established a reserve of $90,000 for
returned merchandise allowances primarily with Apple Computer Company, because
of the Company's de- emphasis of its business with Apple and the Company's
assessment of Apple's financial situation; and (c) various year-end adjustments
of approximately $100,000. In addition, the Company relocated its operations in
the fourth quarter of fiscal 1996, which adversely impacted revenues and gross
profit margins.
Approximately $220,000 of the Company's loss before taxes in
1996 was due to depreciation and $257,000 was due to the write-off of Debt
Issuance Costs related to a debt incurred prior to the initial public offering.
The balance of the loss (in the amount of
F-12
<PAGE>
$1,416,480) can be traced directly to Selling, General and Administrative costs.
Within this category, a substantial portion of such costs were related to
payroll. The monthly payroll of the Company increased from $162,233 for the
month of October 1995 to $308,115 for the month of October 1996. In the
Company's Form 10-KSB filed January 13, 1997 the Company attributed the increase
in payroll to the hiring of additional sales staff, engineering staff and
technicians working in the Internet sales and engineering departments of the
Company. More particularly stated: This increase in payroll was primarily for
corporate administrative personnel and sales personnel, technicians and
engineers in all areas of operations. A portion of the Internet engineering
payroll ($130,000) was capitalized. In the initial phases of operation, such
increased payroll resulted in no significant revenue. This negative trend
continued in the fourth quarter so that selling, general and administrative
costs as a percentage of revenues increased from approximately 22% in the
quarter ended December 31, 1995 to approximately 48% in the quarter ended
September 30, 1996. The Computer Product and Service Sales segment in the year
ended September 30, 1996 had an operating loss of approximately $267,000. For
the nine months ended September 30, 1995, the segment had an operating profit of
approximately $71,000. The cost of revenues for Computer Product and Service
Sales for both fiscal years was approximately 85%. The reason for the loss in
1996 can be traced to (a) an increase in payroll of approximately $650,000 for
the hiring of additional sales staff and computer technicians offset by (b) a
decrease in other selling, general and administrative expenses of approximately
$150,000 and (c) an increase in gross profits of $200,000 based on increased
revenues of approximately $1,300,000. As noted above, the Company's focus is
shifting toward its Internet operations. The Company believes that the increase
in sales staff and technicians in Computer Sales and Service will lead to future
business for its complimentary Internet segment.
Expenditures for Research and Development increased by
$23,250. This increase was for Internet programming work done by the Company in
setting up its Internet network.
As a result of the above, the Company reported a net loss for
1996 of $1,893,480 or $0.72 per share as opposed to the reported net income in
1995 of $38,859 or $0.02 per share. Losses will continue in the first half of
the current fiscal year.
3. DEBT
The Company (through its NAFT subsidiary) has available a
total of $1,400,000 pursuant to a Business Financing Agreement and an Agreement
for Wholesale Financing with Deutsche Financial Services ("DFSO") to finance its
accounts receivable and inventory. On certain inventory purchased from Apple and
financed through DFS, Apple pays the finance charges for a thirty day period. As
of September 30, 1995 and
F-13
<PAGE>
1996, the Company had outstanding a total of $377,261 and $1,386,170,
respectively, under these agreements, of which $377,261 and $674,218,
respectively, represent the portion of the line used for the Wholesale Financing
Agreement and are included in accounts payable in the accompanying balance
sheet. At September 30, 1996, the Company had not drawn upon the Business
Financing Agreement.
The borrowings under these agreements bear interest at the
prime rate plus 1.5% (9.75% as of September 30, 1996) and are secured by a
continuing security interest in substantially all of the assets of NAFT and the
guarantee of the Company. Interest expense related to such agreements was
$45,000 for 1996 and $55,000 for 1995. Pursuant to the terms of these
agreements, NAFT is required to obtain prior written consent from DFS before it
engages in certain transactions outside of NAFT's ordinary course of business.
These agreements also require that NAFT comply with certain financial covenants
and prohibit dividends. NAFT presently has an accumulated deficit. Future
retained earnings will be restricted as to the payment of dividends.
The Company borrowed $300,000 from Harpoon, a stockholder of
the Company, in 1994. The debt incurred by this borrowing was repaid in full
during fiscal year 1996.
4. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
INITIAL PUBLIC OFFERING
In January, 1996. the Company sold, in an initial public
offering, 1,150,000 shares of Common Stock at an initial offering price of $7.00
per share, and 575,000 Redeemable Purchase Warrants for $.10 per warrant. Each
warrant entitles the holder to purchase one share of the Company's common stock
for $7.70 per share. The warrants are redeemable by the Company at $.10 per
warrant at any time after January 24, 1997 if certain conditions are met. The
net proceeds which the Company received from the public offering amounted to
approximately $6,600,000.
In March 1996, the underwriter of the initial public offering
exercised its over-allotment option to purchase 129,642 common shares from the
Company for $7.00 per share. The net proceeds amounted to approximately
$800,000.
BRIDGE FINANCING
In October 1995, the Company borrowed $250,000 in a Bridge
Financing. The Bridge Notes issued in connection with the Bridge Financing
carried interest at 9% per annum. Such loans were repaid at the closing of the
initial public offering. In connection with the Bridge Financing, the Company
issued 35,710 shares of Common Stock to the Bridge Lenders at no cost, which
were registered as part of the initial public offering. Debt issuance costs of
$257,391 and interest
F-14
<PAGE>
expense of $37,149 were incurred by the Company as a result of the
bridge loan transaction.
STOCK OPTIONS
The Company has an Employee Stock Option Plan (the "Stock
Option Plan"). Under the Option Plan, options are exercisable for a period up to
10 years from the date of the grant. The number of shares of Common Stock
reserved for issuance under the Option Plan is 360,000. The purchase price of
the stock will be equal to or greater than 100% of the fair market value at the
date of issue.
As of September 30, 1996, options to purchase approximately
202,730 shares, at exercise prices between $7.00 and $8.75 have been issued
under the plan. In the opinion of management, options were issued at the fair
market value of the Company's Common Stock as of the date of the grant.
MERGER
Pursuant to the terms of the merger of PFMT and the Company,
in September 1995, each of the 200 shares of outstanding common stock of PFMT
was exchangeable for 8,625 shares of common stock of the Company. As a result,
as of September 30, 1996 there was a total of 1,725,000 shares of common stock
of the Company issued and outstanding. All per share amounts have been adjusted
retroactively to reflect this merger.
DEPOSIT SHARES
In connection with the Company's initial public offering, Marc
Bell and Harpoon have each deposited 210,000 shares of the Common Stock owned by
them (the "Deposit Shares") with the Company. The Company will hold such shares
pursuant to a Share Deposit Agreement. The Deposit Shares will be returned to
their respective owners no later than at the end of eight years from the date of
the Prospectus for the initial public offering. However, the Deposit Shares may
be returned prior to such time, if certain levels of profitability are met.
5. COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Company leases office equipment and office space under
various noncancellable operating leases. Rent expense for the year ended
September 30, 1996 and the nine months ended September 30, 1995 was
approximately $253,402 and $81,280, respectively. The Company has entered into
capital leases for computer equipment. These capital lease obligations have been
recorded at interest rates ranging from 8% to 8.75%.
F-15
<PAGE>
In February 1996 the Company entered into a lease for its
corporate headquarters effective July 1996. The lease is for eleven years and
six months starting with an initial annual base rental of $309,250 escalating to
$563,547 in the final year. Under the lease, the landlord is to reimburse the
Company $500,000 for leasehold improvements. The Company was required by the
terms of the lease to maintain a letter of credit in the amount of $400,000 for
the duration of the lease. In order to meet such requirement, the Company
maintains a restricted certificate of deposit in the amount of $400,000 which is
classified as a long-term investment as of September 30, 1996.
Future minimum lease payments under these lease agreements are
as follows:
Year Ending
September 30, Operating Capital
1997.............................................. $ 421,160 $ 54,071
1998.............................................. 392,548 --
1999.............................................. 423,319 --
2000.............................................. 447,362 --
2001.............................................. 456,309 --
Thereafter........................................ 3,240,388 --
Less: Amount
representing interest........................... -- (14,919)
Present value of net
minimum lease payments.......................... $5,381,086 $ 39,152
6. INCOME TAXES
Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The provision for income taxes on
historical net income for the year ended September 30, 1996 and the nine months
ended September 30, 1995 differs from the amount computed by applying the
federal statutory rate due to the effects of state and local taxes, net of
federal tax benefit and for the year ended September 30, 1996, the difference is
also the result of the Company recording a valuation allowance.
The Company is in an accumulated loss position for both
financial reporting and income tax purposes. No current federal tax benefit has
been recorded due to the uncertainty of the Company's ability to realize
benefits by generating taxable income in the future. The Company has a tax loss
carryforward of approximately $1.5 million at September 30, 1996. This
carryforward expires in 2011. The benefit from the provision for taxes of
$29,896 represents the reversal of deferred taxes provided in prior years.
F-16
<PAGE>
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September September
30, 1996 30, 1995
-------------- -------------
<S> <C> <C>
CURRENT: $ 8,410
Federal........................................ --
State and local................................ -- 11,527
------ ------
Total........................................ -- 19,937
------ ------
DEFERRED:
Federal........................................ $(19,759) (398)
------
State and local................................ (10,137) (440)
------ ------
Total........................................ (29,896) (838)
------ ------
Total........................................ (29,896) 19,099
------ ------
</TABLE>
The provision for income taxes on historical net income for the year
ended September 30, 1996 and the nine months ended September 30, 1995 differs
from the amount computed by applying the federal statutory rate due to the
following:
Nine Months
Year Ended Ended
September September
30, 1996 30, 1995
Statutory federal income
tax rate....................................... (34%) 34%
Effect of federal
graduating tax rate............................ -- (18%)
State and local taxes,
net of federal benefit......................... (11%) 14%
Other: ( 1%) 3%
Valuation allowance............................ (44%) --
------- -------
Effective income tax
rate........................................... ( 2%) 33%
Total........................................ (29,896) (838)
------ ------
Total........................................ (29,896) 19,099
------ ------
F-17
<PAGE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
September 30, September 30,
1996 1995
------------------------------------
Deferred tax assets
(liabilities):
Tax depreciation and
amortization in excess
of book depreciation
and amortization........................ $(12,920) $ (6,708)
Income not recognized
due to the change from
the cash to the accrual
method of accounting
for income tax purposes................... -- (25,828)
Net operating loss
carry forward ............................ 733,393 --
Allowance for doubtful
accounts.................................. 29,176 5,158
Valuation allowance (749,649) --
------- -------
Total net deferred tax
liabilities............................... $ -- $(27,378)
------- ------
7. EMPLOYMENT AGREEMENT
In October 1995, the Company entered into an employment agreement with
Marc H. Bell which extends for a period of five years, terminating on September
30, 2000. Pursuant to the terms of the agreement, Mr. Bell receives a base
salary of $200,000 per year and a bonus equal to 5% of the annual pre-tax net
income of the Company in excess of $1 million.
The Company also entered into employment agreements on October 1, 1995
with two officers of the Company, which extend for a period of two years.
Pursuant to the terms of these agreements, annual base salaries totaled $125,000
and $64,000 per annum. In addition to base compensation, the Company intends to
reserve at the end of each fiscal year, a sum equal to ten (10%) percent of the
consolidated net income of the Company (computed before provision for federal
and state income taxes) (the "Bonus Pool"), for allocation among the officers of
the Company and certain key employees (including Marc H. Bell) as the Board of
Directors of the Company may determine. Marc Bell will receive an amount equal
to 5% of the pre-tax income over $1 million (50% of the Bonus Pool) to the
extent, if any, that the Bonus Pool exceeds $100,000.
F-18
<PAGE>
Because the increases in the officer's base salaries did not become
effective until January 1, 1996, the salary expense recognized in the 1996
financial statements for all officers was approximately $330,000, of which
$165,000 related to Marc H. Bell.
8. SUBSEQUENT EVENT
NEW CREDIT AGREEMENT
In October, 1996, the Company entered into a new credit agreement with
NationsCredit, to replace the DFS facility discussed in Note 2. This agreement
provides for a revolving credit line of up to $3,000,000 based upon 100% of
eligible inventory and 80% of eligible trade receivables. On inventory items,
Naft will finance the purchase invoice through the line of credit and pay no
interest for the first 30 days. After the expiration of such 30 day period,
interest will accrue at the prime rate plus 1.75%. Any borrowings under this
agreement are secured by substantially all of the assets of Naft and a cross
guaranty of the Company.
F-19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10KSB/A to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 28, 1997
BELL TECHNOLOGY GROUP LTD.
By: /s/ Marc H. Bell
Marc H. Bell
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Form 10KSB/A has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: April 28, 1997 /S/
Marc H. Bell
President, Chief Executive
Officer and Director
Date: April 28, 1997 /S/
Robert B. Bell
Executive Vice President,
Chief Financial Officer
and Director
Date: April 28, 1997
Martin Fox, Director
Date: April 28, 1997
T. Shiraishi, Director
Date: April 28, 1997 /S/
Richard Videbeck, Director
Date: April 28, 1997 /S/
Alan Levy, Treasurer and
Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,342,011
<SECURITIES> 0
<RECEIVABLES> 1,847,918
<ALLOWANCES> 64,842
<INVENTORY> 758,355
<CURRENT-ASSETS> 5,143,395
<PP&E> 2,565,527
<DEPRECIATION> 414,233
<TOTAL-ASSETS> 7,809,782
<CURRENT-LIABILITIES> 1,720,082
<BONDS> 0
0
0
<COMMON> 30,832
<OTHER-SE> 6,058,868
<TOTAL-LIABILITY-AND-EQUITY> 7,809,782
<SALES> 10,373,664
<TOTAL-REVENUES> 10,494,920
<CGS> 8,599,241
<TOTAL-COSTS> 12,062,385
<OTHER-EXPENSES> 257,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,520
<INCOME-PRETAX> (1,923,376)
<INCOME-TAX> (29,896)
<INCOME-CONTINUING> (1,893,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,893,480)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> 0
</TABLE>
