FORM 10 - KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No. 1-14168
Bell Technology Group Ltd.
(Name of small business issuer as specified in its charter)
New York 13-3781263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
295 Lafayette Street, New York, New York 10012
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (212) 334 - 8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 par value Boston Stock Exchange
- ----------------------------- ---------------------
Warrants Boston Stock Exchange
- -------- ----------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Warrants
Title of Class
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Issuer: $8,457,380 (based upon the closing price of Issuer's Common Stock,
$.01 par value, as of December 19, 1997.
<PAGE>
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 3,448,450
(Title of Class) (No. of Shares Outstanding
at December 16, 1997)
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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.
(b) In July 1994, in a private transaction, the Company received
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.
(c) 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 in 1996 as a result of the Bridge
Financing.
(d) 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 that the Company
received from the public offering amounted to approximately
$6,600,000.
(e) 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.
<PAGE>
(f) In September 1997, the Company sold 382,609 shares of its common
stock in a private transaction for a total consideration of
$2,200,000. Form SB-2 was filed with the Securities and Exchange
Commission with respect to these shares on November 6, 1997 and
became effective on November 20, 1997. A fee with respect to the
sale of these shares of $100,000 in cash and 17,391 shares of
common stock was paid to the investors and were offset against
the proceeds of the issuance
(g) Narrative Description of Business
(1) General
Bell Technology Group Ltd. (the "Company"), is a diversified
computer products and service company which focuses its operation on
providing sophisticated computer/Internet business solutions to larger
companies which are engaged primarily in the graphics arts,
advertising, publishing, entertainment and financial industries. The
Company advises clients on the various computer solutions available,
provide, install and service such solutions and then assist the client
in properly utilizing the benefits to be gained from using the World
Wide Web (the "Internet"). The Company has authorizations to sell and
service equipment from hardware manufacturers such as Silicon Graphics,
Inc., Sun Microsystems, Inc. and Cisco Systems, Inc. and software
manufacturers such as Microsoft Corporation, Netscape Corporation,
Alias/Wavefront Inc. and Checkpoint Software Corp. As a result of its
growing experience in the use of the Internet in commercial
applications, the Company has done substantial work in the areas of
video/audio streaming, security in credit card transactions, and the
creation of "shopping carts" for catalog sales companies
The Company operates through two principal "Operating Segments"
consisting of:
a) A Computer Product Sales & Services Division engaged in the
sale of computer hardware, software, networking (LAN and WAN),
computer hardware and software repairs and maintenance and
other product and service sales.
b) An Internet and Media Development Division engaged in the
businesses of Web design, web hosting, training, CD ROM design
and preparation, 3-D and motion capture animation, consulting
and sales of related products and services
COMPUTER PRODUCT SALES AND SERVICES
The Company has been shifting its emphasis from the sale of
low margin products with intense price competition such as Apple to higher-end,
higher margin hardware products such as Silicon Graphics, Integraph, Sun
Microsystems, Cisco, Digital Equipment, and software products such as SoftImage,
Alias/Wavefront, and Avid. These products are 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 services the products which it sells by providing
warranty repair services and contract support of system software and hardware
and product training.
When requested by the client, the Company will prepare all
equipment it sells by loading customer programs, connecting equipment to a
network, and servicing the client's hardware and software. The Company is
authorized to carry out warranty and other repairs on many of the products it
sells. However, the Company does not consider its repair and service activity to
be a mainstream activity but rather a service, which is maintained for the
convenience of its clients.
<PAGE>
INTERNET AND MEDIA DEVELOPMENT
The Internet services industry is comprised of many large, mid-sized,
and small companies engaged in Internet-related activities such as Internet
access, World Wide Web site design, Internet software development and related
consulting services. The Internet is a worldwide network of public and private
computer networks that link individuals, commercial organizations, government
agencies and educational institutions by means of a common communication
standard. Recent technological advances, including improvement in network
topologies and the development of easy-to-use graphical user interfaces,
combined with cultural and business changes, have led to the Internet being
integrated into the activities of individuals and the operations and strategies
of commercial organizations. However, direct access to the Internet is,
prohibitively expensive for many organizations and individuals, without the
assistance of an Internet Access Provider, such as the Company, which has the
technological and other resources necessary to provide the connection. In
addition, while there has been significant media interest in use of the Internet
by consumers, business and professional organizations currently represent a more
significant percentage of Internet use. The Company first started to provide
this type of services in 1995.
During the past fiscal year, the Company has spent over $2 million
expanding and improving its state-of-the-art network operations center at its
new location. The 2,000+ square foot network operations center (which the
Company is presently in the process of expanding) 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
OC-12 on the NYNEX SONET ring, the Company is poised to service the most
demanding companies in New York City. Additionally, the network operations
center offers secure on-premises co-location services for those clients focused
on Internet publishing on the World Wide Web.
With its staff of Internet engineers and systems administrators, the
Company offers multiple platforms for World Wide Web hosting and development,
and is continually working on new and unique approaches to the use of the
Internet for business solutions. The Company's network operations center
provides sophisticated Internet connectivity available for direct, high-speed
Internet connections and World Wide Web hosting and co-location facilities. The
Company assists its clients with web development and hosts their web sites by
providing the appropriate hardware, network and maintenance services. The
Company operates this aspect of its business on a highly personalized level as
opposed to using a mass-market approach, paying particular attention to the
particular needs of its clients. The Company firmly believes that
facilities-based Internet services are the future of the industry. Major
corporations, which have web hosting and/or co-location services, such as MSNBC
Desktop Video and General Media International, work closely with the Company at
its facility.
Among the services and products offered to its clients is video
streaming - a process whereby a user can view video transmissions while
downloading the video file. This allows companies like MSNBC Desktop Video to
distribute live video feeds to its customers. The Company is also working with a
major international magazine publisher to stream multiple channels of video,
each carrying its own content, to the Internet using public. In effect, this
enables the magazine publisher to produce its own "cable-like TV experience"
without regard to geographic boundaries.
Among the marketing approaches 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. The Company is
able to create multi-media web sites and provide high-speed access to the
Internet for the client/user. This technology enables users to make use of the
Internet to complete "on-line" transactions. For example, the Company has
brought a substantial catalog sales company on-line, enabling it to increase
sales and market share by completing transactions over the Internet.
<PAGE>
BASIC INTERNET ACCESS: The Company provides dedicated Internet access to
corporations and other commercial entities. The Company offers four commercial
connection bandwidths: 56 Kbps, 128 Kbps, T-1, and T-3, and the hardware
necessary for basic Internet access, including routers and CSU/DSUs. The
bandwidth or capacity of a physical network to carry traffic, of a dedicated
digital line is far greater than that possible through use of a conventional
modem. Greater bandwidth allows faster connection and downloading capabilities
for subscribers. Businesses with medium to large LANs and WANs often require the
bandwidth offered by dedicated digital lines.
A direct link between a commercial subscriber's LAN or WAN and the
Internet through the Company gives a subscriber the ability to use all the tools
available on the Internet. A direct link involves a leased line, provided by a
local telephone service provider, between the subscriber's location and the
Company's multi-path (or "redundant") backbone connection to the Internet. The
Company derives Basic Internet Access revenues from initial connection charges
and monthly service fees, both of which vary directly with the bandwidth chosen.
Each commercial subscriber receives a numerical Internet address, a descriptive
domain name, and 24-hour access to the Internet.
The Company offers three levels of protection against unauthorized
access to private communications, depending on subscriber needs: (i) router
configuration, (ii) host configuration, and (iii) firewall design and
configuration. Router configuration involves the filtering of information
requests. Host configuration involves the determination of who is authorized to
access information. Firewall design, which is the most secure form of protection
against unauthorized access available, involves the interposition of certain
physical devices and barriers between a LAN and the Internet.
The Company assists subscribers in achieving full integration of their
existing LAN or WAN into the Internet once the basic Internet connection is
established. Where commercial subscribers utilize standard internal e-mail
applications, such as QuickMail or cc:Mail, the Company is able to assist them
with the setup of a mail gateway for proactive mail delivery to the desktop. In
addition, the Company provides a configuration service for LAN-based computers
by installing and configuring Internet-related software needed for applications
such as (i) File Transfer Protocol ("FTP"), an application which allows an
Internet user to retrieve entire files and documents from remote databases and
networks, and (ii) telnet, a utility which allows users to logon to remote
systems easily.
Other services offered by the Company to it's customers include
Internet access, ISDN, leased lines, web hosting, programming, firewall, network
security and system design services. Due to the existence of its 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.
However, the Company does not intend to go into the consumer "dial-up" market.
The Company also provides consulting services in the areas of inter-networking,
computer and network security, and network design and operations.
TRAINING
The Company maintains several classrooms at its headquarters facility,
which it rents out to corporations for the training of their professional staff.
The Company also provides training at the client's site on a national basis. 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.
<PAGE>
In September 1996, 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 that 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's
modern classrooms at its corporate headquarters can accommodate groups of up to
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. In addition, T-1 access is provided in each classroom
for use in teaching Internet usage and programs. Course materials and training
methodology are custom developed to fit each client's specific needs. The
Company markets its training on a value-added basis, rather than as a
price-focused commodity product. The Company intends to expand this operation
into a significant source of revenue. The Company also provides training
sessions at its customers' sites. In such events, it provides trainers,
materials and any software or special hardware required.
The Company is a training center for Alias/Wavefront for the New York
City Metropolitan area. Alias programs are used for high-end (e.g. broadcast and
film) animation, 3-D modeling, and rendering. The Company is also an authorized
training provider for Macromedia Authorware/ Director. Training is provided on
a wide range of platforms, including PC, IRIX and MacOs.
INTERACTIVE DEVELOPMENT
The Company's graphic arts capabilities include creating and assembling
World Wide Web sites, interactive applications such as computer based training
and promotional sales material. The Company works with content providers such as
marketing firms to provide the technical and design aspects of a project for
large-scale multimedia projects including sites to be used on the Internet.
The Company designs internal communications products used by businesses
for computer based in-house training and Intranet development. In addition, the
Company provides front-end interfaces and graphics for database driven web
sites.
The Company's main areas of digital design development include
animation, interactive and web production. The animation capability extends to
working in Alias and SoftImage (the two animation packages with the greatest
market share) and to render work on a state-of the-art render farm from Silicon
Graphics. The Silicon Graphics render farm is made available to major national
broadcast companies which rent time on the farm when the Company is not using
it. The Company's Authorware division is responsible for creating computer-based
training and computer-based sales tools for major corporations. Most recently,
the Company has leveraged its Internet knowledge and instructional design
expertise to develop interactive training applications with rich multi-media
content for delivery over corporate Intranets. The Company recently completed an
intranet based interactive training program utilizing Macromedia Shockwave
technology for an international pharmaceutical company.
The Company provides consulting and project management services for
companies making the transition from print to electronic to Internet
presentations and is currently doing a project for the largest and oldest
industrial directory of products and services in the world.
(2) Competition
The Company engages in an array of technology and computer related
businesses, each of which carries its own particular commercial and financial
risks. All of the businesses in which the Company engages face competition from
significantly larger and better capitalized companies.
<PAGE>
The market for Internet access services is extremely competitive. There
are no substantial barriers to entry in this industry, and the Company expects
that competition will intensify in the future. The Company believes that its
ability to compete successfully depends upon a number of factors including the
pricing policies of its competitors and suppliers; the timing of introductions
of new products and services by the Company and its competitors; and the
Company's ability to maintain or exceed industry service standards. The Company
expects that, because of the specialized nature of the Internet services
business, it may initially enjoy a competitive advantage because of its existing
knowledge of the advertising and publishing industries.
The Company's current and prospective competitors in the Internet
services industry generally may be divided into the following two groups: (1)
other IAPs, such as UUNET, and its strategic partner Microsoft, PSI, NETCOM,
BBN, and other national and regional providers; and (2) telecommunications
companies, such as AT&T, MCI, Sprint, MFS, WilTel, the RBOCs and various cable
companies. All of these competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personal resources
than those available to the Company.
Although most of the established telecommunications companies currently
offer only limited Internet access, many have announced plans to offer expanded
Internet access capabilities. The Company expects that all of the major
telecommunications companies will compete fully in the Internet access market.
The Company believes that new competitors including large hardware, software,
media and other technology and telecommunications companies will enter the
Internet access market, resulting in even greater competition for the Company.
Certain companies, including America On-Line, GTE and PSI, have obtained or
expanded their Internet access products, services and customer bases as a result
of acquisitions. Such acquisitions may permit the Company's competitors to
devote greater resources to the development and marketing of new and existing
competitive products and services. In addition, the ability of some of the
Company's competitors to market other products and services with Internet access
services could place the Company at a competitive disadvantage. For example,
certain of the Company's competitors which are telecommunications companies may
be able to provide customers with reduced communications costs in connection
with their Internet access services, reducing the overall cost of their Internet
access solution and significantly increasing price pressure on the Company.
(3) 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, is 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.
(4) Employees
At November 30, 1997, the Company had 82 full time employees and 9
part-time employees.
<PAGE>
Item 2. Properties
The Company leases approximately 32,000 square feet of space at 295
Lafayette Street, New York, New York. The following table sets forth with
respect to its leased property (no property is owned), the date on which the
lease expires and the use that the Company makes of such facilities:
Expiration Approximate
Address of Lease Date Use Square Feet
- ---------------- ---- --- -----------
295 Lafayette Street executive & sales offices 17,000
New York, New York 2007 training facilities 3,000
service 2,000
shipping and receiving 3,000
Network Operations Center 3,000
Web design, 3-D animation 4,000
The Company considers that, in general, its physical properties are
well maintained, in good operating condition and adequate for its purposes. The
Company surrendered its space at 611 Broadway on February 1, 1997.
Item 3. Legal Proceedings
In January 1997, a company, which allegedly provides website services,
commenced an action in the Supreme Court of the State of New York, County of New
York against General Media International Ltd., the Company and two individuals.
The Complaint alleges that the Company tortiously interfered with the
plaintiff's contractual and business relations with General Media International,
Inc. On April 15, 1997, counsel for the plaintiffs advised the litigation was
put on hold. No further steps have been taken by plaintiffs to pursue their
claims against the Company. In the Company's opinion, plaintiff's claims against
the Company are without merit.
The Company believes that the action against it is without merit and
intends to vigorously defend itself. No papers have been filed in the action
since the original summons and complaint filed by the plaintiff and in January
1997 and the answer by the Company.
As of the date hereof, there are no other legal proceedings pending
against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the Company's fiscal year ended September 30, 1997 there were no
matters submitted to a vote of security holders.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's Common Stock is traded on the NASDAQ
SmallCap Market System. The following table indicates high and low sales
quotations for the periods indicated based upon information supplied by NASDAQ,
Inc. since the Company's initial public offering in January, 1996 Such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
1996 Low High
---- --- ----
second quarter $7.750 $10.500
third quarter 8.625 10.000
fourth quarter 7.500 9.500
1997 Low High
---- --- ----
first quarter $8.875 $ 9.875
second quarter 9.625 13.750
third quarter 9.875 13.875
fourth quarter 5.563 11.375
In September 1997, the Company sold 400,000 shares of its common stock
in a private transaction for a total consideration of $2,200,000. Form SB-2 was
filed with the Securities and Exchange Commission with respect to these shares
on November 6, 1997 and became effective on November 20, 1997. A fee with
respect to the sale of these shares of $100,000 in cash and 17,391 shares of
common stock was paid to Value Management & Research GmbH.
(b) Number of Holders of Common Stock. The number of holders
of record of the Company's Common Stock on December 11 , 1997 was 33, which does
not include individual participants in security position listings.
(c) Dividends. There were no dividends or other distributions
made by the Company during the fiscal year ended September 30, 1997. Future
dividend policy will be determined by the Board of Directors based on the
Company's earnings, financial condition, capital requirements and other then
existing conditions. It is anticipated that cash dividends will not be paid to
the holders of the Company's Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Twelve Months Ended September 30, 1997 Compared With Twelve Months Ended
September 30, 1996
The financial statements contain results of operations for the
twelve-month periods ended September 30, 1997 and September 30, 1996. These
results indicate an overall and rapid expansion of the Company's business.
Total revenues increased from approximately $10,374,000 in fiscal 1996
to approximately $17,400,000 in fiscal 1997. This represents an increase of
67.9%. Revenues from the Computer Products Sales and Service segment of the
business increased from approximately $9,754,000 in fiscal 1996 to approximately
$14,986,000 for an increase of 53.6% over the prior fiscal year.
Revenues from the Internet & Media Development segment of the business
increased from approximately $641,000 in fiscal 1996 to approximately $2,414,000
for an increase of 276.6 % over the prior fiscal year.
<PAGE>
The Company anticipates that the growth, if any, in revenues from
Computer Product Sales and Services will be at a much lower rate in the coming
fiscal year, and that a greater percentage of revenues will result from Internet
& Media Development operations. The Company has begun to cut back on the
computer hardware that it offers for sale and is concentrating more on
specialized software and "high-end" hardware such as Sun Microsystems, Silicon
Graphics, Intergraph, and the like. In the fourth quarter, revenues from
computer hardware sales declined from an average over the first three-quarters
of the fiscal year of $3,800,000 to $2,800,000. The Company believes that while
this change in direction may produce a lower rate of growth in product sales, it
will generate higher profit margins at a reduced administrative cost. On the
other hand, the Company is aggressively marketing its Internet related and
training operations by increasing its sales staff and marketing efforts for
Internet products and services.
Cost of Revenues for the fiscal year ended September 30, 1997 was at
80% as compared to 82% for the fiscal year ended September 30, 1996. The Company
expects this trend to continue as it moves away from lower margin hardware sales
and services and further into its Internet and Media Development operations.
Selling, General and Administrative costs for the fiscal year ended
September 30, 1997 was approximately $6,036,000 or 34.7% of sales as compared to
$3,187,000 or 30.7% of sales for the fiscal year ended September 30, 1996. The
increase in Selling, General and Administrative costs contributed heavily to the
Company's loss for the fiscal year.
For the year ended September 30, 1997, total salary expense increased
approximately $945,000 over the prior fiscal year due in a large part to the
increase in personnel costs for Internet and Media Development sales, marketing
and training necessitated by the growth in such operations. A significant
portion of the increase in personnel costs (approximately $300,000) was due to
the addition of accounting and administrative personnel needed to deal with the
increase in the volume of transactions and the changeover to a new computerized
accounting system.
There was an increase of approximately $265,000 in fiscal 1997 for rent
as a result of the Company's relocation to its present headquarters. However,
this figure includes an accounting adjustment of approximately $145,000 in
excess of its actual rental payments due to the fact that the Company was able
to negotiate a lease with reduced (below market) payments of rent in the initial
years of the lease. In addition, the Company wrote off $31,000 upon the
abandonment of its prior facilities during the fiscal year.
During the fourth quarter of 1997, the Company incurred a net loss of
approximately $1.5 million as compared to a net loss of approximately $1.5
million in the nine months ended June 30, 1997, The Company established an
additional reserve of $360,000 for Returned Merchandise Allowances to properly
reflect the value of its receivables from vendors of merchandise to the Company.
The Company considers this event to be non-recurring and future write-offs to be
significantly lower. The Company also increased its allowance for doubtful
accounts by $50,000.
The Company has a substantial capital investment in computers and
equipment that is being depreciated over a five-year term. This resulted in
depreciation and amortization deductions for the current fiscal year of
approximately $675,000, of which approximately $203,000 is reflected in cost of
goods sold.
As a result of the above, the Company reported a net loss for fiscal
1997 of $3,115,433 or $1.01 per share as opposed to a net loss of $1,893,480 or
$0.72 per share for fiscal 1996.
<PAGE>
SEGMENT RESULTS
The Company's activities presently fall into two main segments. One
segment consists of computer product sales, service, network installation and
maintenance. The second segment consists of all Internet related activities,
including web design, web hosting and interactive CD ROM design and preparation.
The following table details segment information:
Fiscal year ended September 30, 1997
Computer Internet and
Products & Media
Service Sales Development Consolidated
Sales to unaffiliated customers $14,986,417 $2,413,538 $17,399,955
Operating Loss 378,647 84,632 3,010,234*
Identifiable assets 5,781,580 2,105,207 11,024,988**
Fiscal year ended September 30, 1996
Computer Internet and
Products & Media
Service Sales Development Consolidated
Sales to unaffiliated customers $9,732,322 $ 641,342 $10,373,664
Operating Loss 267,482 359,751 1,688,721*
Identifiable assets 3,442,760 1,132,253 7,809,782**
* Includes $2,546,955 for the fiscal year ended September 30, 1997 and
$1,061,488 for fiscal year ended September 30, 1996 of unallocated
corporate overhead including executive salaries of $616,034 for fiscal
year ended September 30, 1997 and $389,000 for fiscal year ended
September 30, 1996 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
$3,138,201 and $3,234,769 for the fiscal years ended September 30, 1997
and 1996, respectively.
Liquidity and Capital Resources
At September 30, 1997, the Company had working capital of $1,980,718,
as compared to working capital of $3,468,482 at September 30, 1996. Working
capital decreased based upon the loss from operations of $3,115,433 offset by
deductions for depreciation and amortization of $686,250, a $145,000 non-cash
deduction resulting from the straight-lining of rent deduction and increased as
a result of the private placement of the Company's common stock in September
1997 which raised $2,200,000 of cash during the fiscal year ended September 30,
1997.
Cash and cash equivalents increased by approximately $59,000 from
September 30, 1996. The increase in cash and cash equivalents is due to the net
proceeds received from a private placement of the Company's common stock of
$1,600,000, less current operating losses and capital expenditures. However,
$600,000 of the $2,200,000 private placement is included in other current assets
and is not included in cash and cash equivalents
The Company's relocation to its present business headquarters resulted
in significant capital expenditures during the current fiscal year. Expenditures
included those to create the Company's network operations center and the
construction and outfitting of training facilities. The Company also acquired
equipment for use in its training
<PAGE>
operations, and the purchase of servers, routers, cabinets, monitors and other
equipment necessary to create and expand the equipment used in its Internet
operations. The Company anticipates additional expenditures in fiscal 1998 to
further improve its Internet operations by purchasing additional equipment and
line capacity, servers, network computers and high-speed telecommunications
lines.
In the opinion of management, the Company will be able to finance its
business as currently conducted from its current working capital, operating
activities and open-end equipment lease commitment from Cisco Systems, Inc. of
$1,000,000 received in December 1997. In addition, the Company has a $3,000,000
credit facility with NationsCredit discussed in note 3 to the financial
statements. Borrowings under the NationsCredit credit facility and security
interests are limited to inventory held primarily for sale to customers and the
availability of current accounts receivable of the Company's hardware sales
subsidiary. The Company is presently discussing an increase in its credit
facility with NationsCredit based upon a pledge of inventory and receivables
held by its other subsidiary corporations. However, in order to continue with
its expansion program, the Company will be required to raise additional debt or
equity capital of several million dollars. The Company is seeking other
financing alternatives to finance its expansion. However, there is no assurance
that the Company will be able to raise such additional cash.
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.
Item 7. Financial Statements
Financial Statements Data are attached hereto following page F-2.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During fiscal years 1996 and 1997 there were no changes in or
disagreements with the Company's principal independent accountant on accounting
or financial disclosure.
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Company
As of December 1, 1997, the Company's directors and executive officers
were as follows:
Position With the Company Held Office
Name and Age and Principal Occupation since
- ---------------- ------------------------- -----------
Marc H. Bell, 30 Chairman (Chief Executive 1989
Officer) and Director
Robert B. Bell, 58 Executive Vice President, 1994
Chief Financial Officer, Director
Tsuyoshi Shiraishi, 53 Director 1995
Martin Fox, 61 Director 1995
Dr. Richard Videbeck, 74 Director 1995
Anthony St. John, 40 Director 1997
Marc Jaffe, 30 Vice-President 1997
Will Jahnke, 43 Vice-President 1997
Alan Levy, 35 Treasurer, Chief Accounting Officer 1997
Scott Safran, 41 Vice-President 1997
Business Experience
MARC H. BELL is the President, Chief Executive Officer, and a Director
of the Company since its inception. 1989.
ROBERT B. BELL has served as Executive Vice President and Chief
Financial Officer and Director of the Company and its corporate predecessor
since 1994. Prior to joining the Company, Mr. Bell was a practicing attorney in
New York City for more than 5 years. Robert Bell is the father of Marc Bell.
TSUYOSHI SHIRAISHI has been a director of the Company since July 1,
1994. Mr. Shiraishi has been the Chairman of Century World PTE Ltd., an
investment consulting firm, and the Managing Director of Harpoon since 1992.
Prior to that, Mr. Shiraishi was the Director of Marketing & Investment for
Kajima Overseas Asia PTE Ltd., a subsidiary of Kajima Corporation, an
international construction company, since 1990. In addition, since 1990, Mr.
Shiraishi has been Vice Chairman of Century International Hotels, which operates
and manages 17 hotels in the Pacific Rim. He is the sole shareholder of Harpoon,
which acquired 50% of the capital stock of the Company as of July 1, 1994. Mr.
Shiraishi is a Japanese citizen and a resident of Singapore.
MARTIN FOX has been a director of the Company since October 1995. Mr.
Fox has been, for more than five years, the President and a director of Initio,
Inc., a publicly owned mail order retailer of consumer products.
<PAGE>
RICHARD VIDEBECK has been a director of the Company since October 1995.
Since 1983, Dr. Videbeck has been an independent consultant in consumer risk
analysis, particularly for retailers and banks. From 1974 until 1986 Dr.
Videbeck was a professor of sociology at the University of Illinois at Chicago.
From 1974 until 1977, Dr. Videbeck was the Dean of the Doctor of Arts Program of
the Graduate College of the University of Illinois at Chicago.
ANTHONY ST. JOHN, LORD ST. JOHN OF BLETSO has been a director of the
Company since October 1997. Lord St. John is a member of the House of Lords of
the Parliament of the United Kingdom. He serves on the European Union Select
Committee A on Trade, Finance and Foreign Affairs. He also serves as a
consultant to Merrill Lynch and is a Registered Representative of the London
Stock Exchange. Lord St. John has a Bachelor of Science Degree in Psychology and
a Bachelor of Arts Degree in Law from Cape Town University, and a Masters of Law
from London University. Lord St. John is a citizen and resident of the United
Kingdom.
WILLIAM T. JAHNKE has been a Vice President of the Company since March
1997 and the Director of Corporate Sales of the Company since August 1995. Prior
to joining the Company, Mr. Jahnke was president and chief operating officer of
Vernon Computer Rentals and Leasing from February 1989 to December 1994, where
he pioneered and implemented a nationwide asset management program for Apple
which is used by several thousand U.S. sales representatives. Mr. Jahnke
received a B.S. Degree in Computer Science from Seneca College in 1975.
MARC JAFFE a Vice President of the Company since March 1997 and
Director of On-Line Services, joined the Company in early 1995 to run the
Company's Internet services business. Prior to joining the Company, Mr. Jaffe
had extensive experience in the use of computers and telecommunications in the
advertising and marketing industry. Mr. Jaffe recently developed an
Internet-focused marketing strategy that won the prestigious CreaTech Award,
presented by ADVERTISING AGE magazine, and has spoken at numerous Internet
conferences sponsored by Apple Computer. Prior to joining the Company, Mr. Jaffe
was a department manager at Sid Patterson Advertising Inc. in New York City
since 1989. Mr. Jaffe graduated from Colgate University in 1989, where he
received a Bachelor of Arts Degree.
ALAN LEVY joined the Company as Treasurer and Chief Accounting Officer
in February 1997. From March 1994, to February 1997, Mr. Levy was the Assistant
to the Vice President of Finance of Del Laboratories, Inc., a manufacturer and
wholesaler of cosmetics and over-the-counter pharmaceuticals. Prior to that, Mr.
Levy was a Technical Manager with the American Institute of Certified Public
Accountants from August 1990 to March 1994. He is a Certified Public Accountant
and received his Bachelor's degree in Public Accounting from Long Island
University, C.W. Post Campus.
SCOTT SAFRAN has been Vice President - Training and Interactive
Development since June 1997 and the Director of Corporate Training since joining
the Company in March 1996. Prior to joining the Company he was a Senior Account
Executive at IBM Skill Dynamics Corporation from December 1994 to October 1995.
From December 1989 to December 1994 Mr. Safran was in various sales positions
with AT&T Networking Systems. Mr. Safran has a Bachelor of Arts in English
Literature and Master of Business Administration degrees from St. John's
University
The Securities and Exchange Commission has adopted rules relating to the filing
ownership reports under Section 16 (A) of the Securities Exchange Act of 1934.
One such rule requires disclosure of filings which under the Commission's rules,
are not deemed to be timely. During its' review, the Company discovered that Mr.
Levy failed to file a timely report regarding the grant of 7500 stock options.
<PAGE>
Item 10. Executive Compensation
The following table sets forth compensation paid to executive officers
whose compensation was in excess of $100,000 for any of the three fiscal years
ended September 30, 1997. No other executive officers received total salary and
bonus compensation in excess of $100,000 during any of such fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation and Grant of Stock Options
Name and
Principal Position Year Salary Options
- ------------------ ---- -------- -------
Marc H. Bell 1997 $200,000 --
President and Chief 1996 $165,000 --
Executive Officer 1995 $ 45,000 --
Robert B. Bell 1997 $125,000 --
1996 100,504 90,000
1995 18,000 --
The Company has not granted any stock options to Marc H. Bell and
Robert B. Bell during the fiscal year ended September 30, 1997. However, the
exercise price for the 90,000 options owned by Robert Bell were reset at
September 30, 1997 to $6.125, the market value of the underlying shares on such
date
Compensation of Directors
Each director of the Company who is not employed by the Company, and
who does not beneficially own more than 5% of the outstanding Common Stock of
the Company, will be entitled to receive (i) the sum of $1,000 per meeting
attended by such outside director and (ii) annually, options to purchase a total
of 3,000 shares of Common Stock. Such options are immediately exercisable, have
a ten-year term, subject to certain restrictions, and are exercisable at the
fair market value of the Common Stock at the date of the grant. Of the current
board members, only Mr. Fox , Dr. Videbeck and Lord St. John are entitled to
receive such compensation. The stock options granted to them expire in October
2005 and are exercisable at $ 6.125. In addition, at the discretion of the Board
of Directors, directors may be reimbursed for reasonable travel expenses in
attending Board and committee meetings. In October 1997, Anthony St. John
received options to purchase a total of 10,000 shares of common stock at a price
of $7.25 per share (the fair market value of the underlying shares on the date
of grant) in lieu of receiving any cash compensation.
During the fiscal year ended September 30, 1997, Martin Fox received
consulting fees of $13,516 for financial services rendered.
Employment Contracts, Termination of
Employment and Change-in-Control Arrangements
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. Mr. Bell's base salary will increase 5% per year
for each year that the Company reports net income. The agreement also provides
for a severance payment to Mr. Bell in the event of a Change of control of the
Company equal to 2.99 times his average annual compensation, including bonus,
during the term of the agreement.
<PAGE>
In addition to base compensation, the Company intends to reserve at the
end of each fiscal year, commencing with the fiscal year ending September 30,
1996, 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).
The Company has also entered into employment contracts with William
Jahnke and Alan Levy. Such agreements are all similar and contain certain
restrictive covenants if employment is terminated by the employee without cause,
or by the Company for cause.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) The following table sets forth, as at September 30, 1997, certain
information concerning stock ownership of the Company by (i) each person who is
known by the Company to own beneficially more than 5% of the outstanding common
shares of the Company, (ii) each of the companies directors and (iii) all
directors and officers of the Company as a group. Except as otherwise indicated,
all such persons have both sole voting and investment power over the shares
beneficially owned by them.
Percent
Number of Shares of
Name and Address (1) Beneficially Owned Class
- -------------------- ------------------ -----
Marc H. Bell (2).......................... 1,802,142 50.5%
Tsuyoshi Shiraishi(2)(3)
Harpoon Holdings, Ltd.
2 Handy Road, #11-09 Cathay Building,
Singapore 229233.......................... 862,500 25.0%
Robert Bell (4) 90,000 2.5%
Martin Fox (4)
2001 Tonnelle Avenue
North Bergen, NJ 07047.................... 6,000 *
Dr. Richard Videbeck (4)
3249 East Angler's Stream
Avon Park, FL 33825 6,000 *
Anthony St. John
97 Cadogan Gardens
London SW32RE 5,000 *
All executive officers and directors as a
group (10 persons)(5) 1,827,142 50.9%
* Less than 1%
<PAGE>
(1) The address of each of the named individuals, other than Mr. Shiraishi, Mr.
Fox Dr. Videbeck and Lord St. John is c/o Bell Technology Group Ltd., 295
Lafayette Street, New York, NY 10012.
(2) Includes the 862,500 Harpoon Shares which are subject to the October 1995
Irrevocable Proxy entered into between Harpoon and Marc H. Bell, pursuant to
which Harpoon has granted Mr. Bell the sole right to vote the Harpoon Shares
with respect to the election of the Company's directors. The Irrevocable
Proxy terminates in October 2005.
(3) Mr. Shiraishi, a director of the Company, is the sole shareholder of Harpoon
(4) The named individual has the right to acquire the number of shares shown
pursuant to a currently exercisable stock option.
(5) Includes currently exercisable stock options to purchase 106,000 shares.
(b) 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.
Item 12. Certain Relationships and Related Transactions
In the 1994 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 1994 Financing allowed the Company to increase its borrowing
capability, expand its sales capacity and finance additional working capital. A
portion of the proceeds of the company's initial public offering was used to
repay the Subordinated Note.
In September 1997, Rickel & Associates, Inc. ("Rickel") ceased doing
business. Rickel had underwritten the Company's initial public offering of its
common stock and warrants, and was a principal market maker for the company's
common stock and warrants. The Company had certain agreements with Rickel,
including an underwriting agreement and a consulting agreement which the Company
considers to be of no further force or effect.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K On July 18, 1997, the Company filed a current
Report on Form 8-K to report the Loan and Security Agreement entered
into with Finova Capital Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 29, 1997 BELL TECHNOLOGY GROUP, LTD..
By: /s/ Marc H. Bell
-------------------------
Marc H. Bell
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: December 29, 1997 /s/ Marc H. Bell
-----------------
Marc H. Bell, Chief
Executive Officer
and Director
Date: December 29, 1997 /s/ Robert B. Bell
------------------
Executive Vice President,
Chief Financial Officer and Director
Date: December 29, 1997 Martin Fox
--------------------
Martin Fox, Director
Date: December 29 ,1997 Tsuyoshi Shiraishi
----------------------------
Tsuyoshi Shiraishi, Director
Date: December 29, 1997 /s/ Richard Videbeck
---------------------
Richard Videbeck, Director
Date: December 29 , 1997 Anthony St. John
----------------
Anthony St. John, Director
Date: December 29, 1997 /s/Alan Levy
------------
Alan Levy, Treasurer and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description No.
<S> <C> <C> <C>
3(a) -- Certificate of Incorporation of the Company, dated
September 29, 1995 (1)
3(b) -- By-laws of the Company.
4(a) Specimen Stock Certificate (3)
4(b) Form of Warrant Agent Agreement (3)
4(c) Form of Underwriter's Warrant (3)
4(d) Specimen Warrant Certificate (3)
10(a)-- Sublease for Penthouse Suite 907D between Rhodes Associates, Rose
Associates, Electric Curtain Inc., Graphics and Stellar Corp.,
dated as of July 1, 1997.
10(b)-- Bell Technology Group Ltd. 1995 Stock Option Plan, adopted
September 29, 1995(1)( (+)
10(c)-- Irrevocable Proxy Agreement between Harpoon Holdings Ltd. and Marc
H. Bell, dated as of October 1, 1995 (1)
10(d)-- Employment Agreement between Marc H. Bell and the Company dated as
of October 1, 1995 (1)(+)
10(e)-- Share Deposit Agreement between Marc H. Bell, Harpoon Holdings
Ltd., the Company, and Rickel & Associates.(3)
10(f)-- Form of Consulting Agreement between the Company, and Rickel &
Associates. (1)
10(g)-- Agreement of Lease between Bell Technology Group Ltd. and Puck
Associates dated as of July 23, 1996. (4)
10(h)-- Security Agreement with NationsCredit, Commercial Corporation of
America and NAFT International Ltd. dated October 1996.(4)
10(i)-- Agreement for Wholesale Financing between NAFT Ltd. and
NationsCredit dated as of October 1996. (4)
10(j)-- Lockbox Service Agreement between Naft, European American Bank and
NationsCredit dated as of October 1996. (4)
10(k) Loan and Security Agreement between Finova Capital Corporation
("Finova") and the Company, dated as of May 1, 1997. (6)
10(l) Guaranty by NAFT in favor Finova, dated as of May 1, 1997. (6)
10(m) Guaranty by NAFT Computer Service Corp. in favor Finova, dated as
of May 1, 1997. (6)
10(n) Guaranty by Bluestreak Digital, Inc., in favor of Finova, dated as
of May 1, 1997 (6)
10(o) Guaranty by PFM Communications , Inc., in favor of Finova, dated
as of May 1, 1997 (6)
<PAGE>
10(p) Promissory Notes to Bell Technology Group Ltd., from Marc H. Bell
dated April 2, 1997 and June 30,1997. (8)
10(q) Agreement by and between Bell Technology Group Ltd., and Value
Management & Research GmbH for the sale of an aggregate of 382,609
shares of Common Stock dated as of September 24, 1997. (7)
10(r)-- Employment Agreement between William T. Jahnke and NAFT
International Ltd. dated as of November 1, 1995. (2)
10(s)-- Employment Agreement between Alan Levy and Bell Technology Group
Ltd. dated as of. June 1, 1997.(*)
10(t) Amendment to Employment Agreement between Marc H. Bell and the
Company dated as of January 1, 1996. (4)
10(u) Agreement between Bell Technology Group Ltd., and Cisco Systems
Capital Corporation granting credit approval for $1,000,000 for
leasing transactions dated as of December 15, 1997.(*)
21 -- List of Subsidiaries.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule
</TABLE>
(*)Filed herewith.
(1) Incorporated by reference to Registration Statement on Form SB-2 (File No.
33-98978) ( the " Registration Statement") filed November 3, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Registration
Statement, filed December 20, 1995.
(3) Incorporated by reference to Amendment No. 2 to the Registration Statement
filed January 23, 1996, declared effective January 24, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A
for the year ended September 30, 1996.
(5) Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed March 13, 1997 (File No. 333-23259)
(6) Incorporated by reference to the Company's Report on Form 8-K/A filed July
18, 1997
(7) Incorporated by reference to the Company's report on Form 8-K filed
October 8, 1997.
(8) Incorporated by reference to Amendment No. 4 filed November 6, 1997 to
Registration Statement (File No. 333- 23259) filed March 13, 1997.
<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 - As of September 30, 1997 and September 30, 1996 .............. F-3
Consolidated Statements of Operations - For the years ended September 30, 1997 and September
30, 1996..................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity - For the years ended September 30,
1997 and September 30, 1996. ................................................................ F-5
Consolidated Statements of Cash Flows - For the years ended September 30, 1997 and September
30, 1996..................................................................................... F-6 - F-7
Notes to Consolidated Financial Statements.................................................. F-8 - F19
</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, 1997
and September 30, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. 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, 1997 and September 30, 1996, the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
December 19, 1997
New York, New York
F-2
<PAGE>
Bell Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, September 30,
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,401,446 $2,342,011
Accounts receivable, net of allowance for
doubtful accounts of $194,684 and $64,842
as of September 30, 1997 and September 30,
1996, respectively 3,259,548 1,847,918
Inventories 487,542 758,353
Prepaid expenses and other current assets 727,765 195,113
---------- ----------
Total current assets 6,876,301 5,143,395
Property and equipment, net 3,548,838 2,151,294
Long-term investment 325,000 400,000
Other assets 274,849 115,093
----------- -----------
Total assets $11,024,988 $ 7,809,782
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short term borrowings $2,001,157 $ --
Current portion of notes payable 335,021 39,152
Accounts payable 2,010,507 1,274,197
Accrued expenses 425,852 194,947
Deferred revenues 123,046 166,617
---------- ---------
Total current liabilities 4,895,583 1,674,913
Long term note payable, net of current portion 923,217 --
Other long term liabilities 191,928 45,169
---------- ----------
Total liabilities 6,010,728 1,720,082
---------- ----------
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; 3,448,450 and 3,083,210
shares issued and outstanding 34,485 30,832
Additional paid-in capital 10,069,474 8,033,134
Accumulated deficit (5,089,699) (1,974,266)
---------- ----------
Total stockholders' equity 5,014,260 6,089,700
---------- ----------
Total liabilities and stockholders'
equity $11,024,988 $ 7,809,782
========== ==========
</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
Year Ended Year Ended
September 30, 1997 September 30, 1996
Revenues $17,399,955 $ 10,373,664
Costs and expenses:
Cost of revenues 13,901,859 8,599,241
Selling, general and administrative 6,036,032 3,186,718
Depreciation and amortization 472,298 219,176
Research and development -- 57,250
---------- ----------
Total costs and expenses 20,410,189 12,062,385
Loss from operations (3,010,234) (1,688,721)
Interest income 72,427 121,256
Interest expense (177,626) (98,520)
Write-off of Debt Issuance Costs -- (257,391)
---------- ----------
Loss before taxes (3,115,433) (1,923,376)
Benefit from taxes -- (29,896)
---------- ----------
Net loss $ (3,115,433) $ (1,893,480)
========== ==========
Net loss per share ($1.01) ($0.72)
Weighted average shares outstanding 3,075,235 2,633,400
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, 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
--------- ------------ ------------ ------------ ------------
Proceeds from Private Placement,
net of expenses of $216,763 400,000 4,000 1,979,241 -- 1,983,241
Proceeds from exercise of stock
options 7,998 80 55,906 -- 55,986
Proceeds from exercise of warrants 100 1 765 -- 766
Correction of outstanding shares (42,858) (428) 428 -- --
Net Loss -- -- -- (3,115,433) (3,115,433)
--------- ------------ ------------ ------------ ------------
Balance, September 30, 1997 3,448,450 $ 34,485 $ 10,069,474 $ (5,089,699) $ 5,014,260
========= ======== ============ ============ ============
</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>
Year Ended Year Ended
September September
30, 1997 30, 1996
<S> <C> <C>
Cash flows from operating activities:
(Loss) income $(3,115,433) $(1,893,480)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 686,250 219,176
Write-off and amortization of debt issuance -- 250,000
Benefit for deferred taxes -- (29,896)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,411,630) (424,370)
Decrease in inventories 270,811 85,551
Decrease (increase) in prepaid expenses
and other current assets 31,348 (183,052)
Decrease (increase) in other assets 36,708 (68,729)
Increase (decrease) in accounts payable 736,310 (45,337)
Increase in accrued expenses 277,664 121,702
(Decrease) increase in deferred revenues (43,571) 91,057
----------- ---------
Net cash used in operations (2,531,543) (1,877,378)
----------- ---------
Cash flows from investing activities:
Purchases of property and equipment,
net of landlord reimbursement (1,542,431) (1,954,646)
Purchase of long-term investment -- (400,000)
----------- ---------
Net cash used in investing activities (1,542,431) (2,354,646)
----------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of)
short term borrowings 2,001,077 (711,952)
Shareholder loan (145,408) --
Repayments of stockholder loan -- (287,000)
Proceeds from notes payable for equipment refinancing 873,610 --
Repayments of notes payable (195,887) (83,763)
Proceeds from private placement, net of offering
Costs of $216,763 1,544,031 --
Proceeds from initial public offering,
net of offering costs of $1,602,175 -- 7,434,383
Proceeds from sale of options 55,986 --
----------- ---------
Net cash provided by financing activities 4,133,409 6,351,668
----------- ---------
Net increase in cash and
cash equivalents 59,435 2,119,644
Cash and cash equivalents,
beginning of period 2,342,011 222,367
----------- ---------
Cash and cash equivalents,
ending of period $2,401,446 $2,342,011
=========== =========
</TABLE>
F-6
<PAGE>
Supplemental disclosure of cash flow information:
Cash paid for interest 165,540 53,887
Cash paid for income taxes 27,881 12,736
Noncash investing and financing activities:
Equipment acquired under capital lease
Obligations 539,764 --
Proceeds receivable associated with
private placement 600,000 --
Issuance of common stock in connection with
private placement 100,000 --
Issuance of common stock in connection with
bridge financing -- 250,000
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. 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.
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. In September 1995, the Company
changed its fiscal year end from December 31 to September 30.
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, preparation and 3-D
animation.
In the opinion of management, the Company will be able to finance its
business as currently conducted from its current working capital, operating
activities and open-end equipment lease commitment from Cisco Systems, Inc. of
$1,000,000 received in December 1997. In addition, the Company has a $3,000,000
credit facility with NationsCredit discussed in note 3 to the financial
statements. Borrowings under the NationsCredit credit facility and security
interests are limited to inventory held primarily for sale to customers and the
availability of current accounts receivable of the Company's hardware sales
subsidiary. The Company is presently discussing an increase in its credit
facility with NationsCredit based upon a pledge of inventory and receivables
held by its other subsidiary corporations. However, in order to continue with
its expansion program, the Company will be required to raise additional debt or
equity capital of several million dollars. The Company is seeking other
financing alternatives to finance its expansion. However, there is no assurance
that the Company will be able to raise such additional cash.
F-8
<PAGE>
Segment Information
The following is a summary of segment information for the fiscal years
ended September 30, 1997 and 1996.
Fiscal year ended September 30, 1997
<TABLE>
<CAPTION>
Computer Internet and
Products & Media
Service Sales Development Consolidated
<S> <C> <C> <C>
Sales to unaffiliated customers $14,986,417 $2,413,538 $17,399,955
Operating Loss 378,647 84,632 3,010,234*
Identifiable assets 5,781,580 2,105,207 11,024,988**
Fiscal year ended September 30, 1996
Computer Internet and
Products & Media
Service Sales Development Consolidated
Sales to unaffiliated customers $9,732,322 $ 641,342 $10,373,664
Operating Loss 267,482 359,751 1,688,721*
Identifiable assets 3,442,760 1,132,253 7,809,782**
</TABLE>
* Includes $2,546,955 for the fiscal year ended September 30, 1997 and
$1,061,488 for fiscal year ended September 30, 1996 of unallocated
corporate overhead including executive salaries of $616,034 for fiscal
year ended September 30, 1997 and $389,000 for fiscal year ended
September 30, 1996 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
$3,138,201 and $3,234,769 for the fiscal years ended September 30, 1997
and 1996.
NET LOSS PER COMMON SHARE
Net 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.
F-9
<PAGE>
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, 1997, the Company had concentrations of
cash in a bank in the form of demand deposits, certificates of deposit and
restricted letter of credit accounts, totaling approximately $2,211,695. 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.
SIGNIFICANT VENDORS
One vendor comprises approximately $2,787,000 or 22% of the Company's
inventory purchases during the fiscal year ended September 30, 1997. If such
vendor ceases to supply the Company, management is confident it can procure
comparable services at similar costs elsewhere.
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 and equipment 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.
September 30, September 30,
1997 1996
Leasehold improvements $ 686,662 $ 510,057
Computer hardware and software
and network equipment 3,724,645 1,862,416
Furniture and delivery equipment 238,014 193,054
Less: Accumulated depreciation (1,100,483) (414,233)
------------ ----------
Property and equipment, net $3,548,838 $2,151,294
============ ==========
F-10
<PAGE>
Included in property and equipment is $1,413,373 and $155,507 of assets
held under capital lease obligations at September 30, 1997 and 1996
respectively. Also included in total property and equipment is $416,667 and
$184,086 representing internally developed software costs as of September 30,
1997 and 1996 respectively. In addition, included in property and equipment is
$153,014 related to the implementation of a new MIS system as of September 30,
1997. Depreciation expense relating to cost of sales is $203,000 and $0 for 1997
and 1996, respectively.
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 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; interactive development 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 and Media Development
businesses consists 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 and labor. For the Computer Products
and Service Sales, the cost of revenues is the cost of the computer products it
sells including parts, internal and third-party labor costs, and training and
certification costs.
RESEARCH & DEVELOPMENT
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees." Under APB No. 25, the Company applies the intrinsic value method
of accounting and therefore does not recognize compensation expense for options
granted, because options are only granted at a price equal to market value on
the day of grant.
During 1996, Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock Based Compensation," became effective for the
Company. SFAS No. 123 prescribes the recognition of compensation expense based
on the fair value of options determined on the grant date. However, SFAS No. 123
allows companies currently applying APB No. 25 to continue using that method.
F-11
<PAGE>
The Company has therefore elected to continue applying the intrinsic value
method under APB No. 25. For companies that choose to continue applying the
intrinsicvalue method, SFAS No. 123 mandates certain pro forma disclosures as if
the fair value method had been utilized. See Note 4 for additional discussion.
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 February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, SFAS 128 requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution; Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock, and is similar to the currently required fully diluted
EPS. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. When adopted, the Company will be required to restate its EPS for
all prior periods presented. The Company does not expect the impact of the
adoption of SFAS 128 to be material to previously reported EPS.
2. Fourth Quarter Adjustments
F-12
<PAGE>
During the fourth quarter of 1997, the Company established an
additional reserve of $360,000 for Returned Merchandise Allowances to properly
reflect the value of its receivables from vendors of merchandise to the Company.
The Company considers this event to be non-recurring and future write-offs to be
significantly lower. The Company also increased its allowance for doubtful
accounts by $50,000.
F-13
<PAGE>
3. Short Term Borrowings
The Company (through its NAFT subsidiary) has a Revolving Credit Agreement with
NationsCredit ("Nations") which may be used to finance its accounts receivable
and inventory up to a maximum of $3 million. The availability of credit is based
upon the balance of collateral available which is 80% of its current accounts
receivable and 100% of its inventory. As of September 30, 1997, the Company had
an outstanding balance of approximately $2 million, which was the maximum
available under the formula. Such obligation is secured by a continuing security
interest in the accounts receivable and inventory of NAFT, and guaranties and
cross guaranties of the Company and its other subsidiaries. The borrowings bear
interest at the prime rate plus 1.75%. Pursuant to the terms of these
agreements, NAFT is required to maintain certain liquidity ratios which it is
currently maintaining: (a) tangible net worth plus indebtedness subordinated to
amounts owed to Nations, less prepaid expenses,officer/employee receivables and
other intangible assets of not less than $1.4 million at the end of each fiscal
quarter, and (b) a ratio of total liabilities to tangible net worth of no
greater than 2.5 to 1 at the end of each fiscal quarter. As of September 30,
1997, NAFT had a tangible net worth of approximately $2.7 million and a ratio of
total liabilities to tangible net worth of 1.8 to 1, therefore keeping the
Company in compliance with all requirements. While the Credit Agreement gives
Nations the right to demand repayment if it deems itself "insecure," Nations has
given the Company no indication that it is considering utilizing this provision.
Furthermore, incurring losses as the Company builds its new businesses was
anticipated in setting its covenants with Nations in October 1996. The Company
deems its relationship with Nations to be normal.
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.
PRIVATE PLACEMENT
In September 1997, the Company sold 382,609 shares of its common stock
in a private transaction for a total consideration of $2,200,000. Form SB-2 was
filed with the Securities and Exchange Commission with respect to these shares
on November 6, 1997 and became effective on November 20, 1997. A fee with
respect to the sale of these shares of $100,000 in cash and 17,391 shares of
common stock was paid to the investors and were offset against the proceeds of
the issuance. Of the total consideration, $1,600,000 was received by the Company
in September 1997. Included in prepaid expenses and other current assets as of
September 30, 1997 is a receivable of $600,000 which was received by the Company
in October 1997.
F-14
<PAGE>
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 expense of $37,149 were incurred by the Company in fiscal 1996 as a
result of the bridge loan transaction.
STOCK OPTIONS
The Company, with the approval of its stockholders, adopted the 1995
Stock Option Plan ("Option Plan") which reserved 360,000 shares of common stock
for issuance under the Option Plan. Under the Option Plan, the term of the
options issued are determined by the stock option committee and range from 5 to
10 years from the date of the grant. Option issued to directors are immediately
exercisable and options issued to employees are exercisable ratably over a three
year period. Options issued before the Company's initial public offering were
issued at the fair value of the stock at the date of grant, in the opinion of
management. The exercise price of the option issued subsequent to the initial
public offering is equal to or greater than 100% of the fair market value of the
stock on the date of grant.
On September 30, 1997, 250,064 options previously issued to employees
and directors with a weighted average exercise price of $8.32 were canceled and
reissued at, $6.125, the fair market value of the Company's common stock on the
date of reissuance. This revaluation did not alter or amend any other provision
of the optionee's original option agreement, including the vesting period and
option term.
The Company accounts for awards granted to employees and directors
under APB No. 25, under which no compensation cost has been recognized for stock
options granted. Had compensation cost for these stock options been determined
consistent with SFAS No. 123, the Company's net loss and loss per share would
have been increased to the following pro forma amounts:
1997 1996
Net loss: As reported $ (3,115,433) $ (1,893,480)
Pro forma (3,307,639) (2,315,808)
Loss per share: As reported (1.01) (0.72)
Pro forma (1.08) (0.88)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
F-15
<PAGE>
Option activity for the two years ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price
of Shares
<S> <C> <C>
Options outstanding, October 1, 1995 $ -- $ --
Granted 202,730 $ 7.04
Canceled -- $ --
Exercised -- --
-------- ----------
Options outstanding, September 30, 1996 202,730 $ 7.04
Granted 361,897 $ 7.41
Canceled (284,065) $ 8.39
Exercised (7,998) $ 7.00
--------- ----------
Options outstanding, September 30, 1997 272,564 $ 6.13
========= ==========
</TABLE>
There were 45,437 options available for future grant at September 30, 1997.
The weighted average fair value of options granted is $3.76 and $2.89 for the
years ended September 30, 1997 and 1996, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
1997 and 1996, respectively: risk-free interest rate of 6.17% and 5.77%;
expected life of 6.00 and 4.09 years; expected volatility of 42% and 42% and
expected dividend yield of 0%.
The following table summarized information with respect to stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Number of Weighted Number of
Options Average Options Weighted
Outstanding at Remaining Weighted Exercisable at Average
Range of September 30, Contractual Average September 31, Exercise
Exercise Prices 1997 Life Exercise Price 1997 Price
--------------- ---- ---- -------------- ---- -----
<S> <C> <C> <C> <C> <C>
$ 6.125 272,564 7.8 $ 6.125 150,410 6.125
</TABLE>
DEPOSIT SHARES
In connection with the Company's initial public offering, Marc H. 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 in January 2004.
F-16
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Company leases office equipment and office space under various
noncancellable operating leases accounted for on a straight line basis. Rent
expense for the year ended September 30, 1997 and 1996 was approximately
$548,897 and $253,402, respectively.
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 reimbursed the Company $500,000
for leasehold improvements. The Company is required by the terms of the lease to
maintain a security deposit in the form of a letter of credit in the amount of
$400,000. In order to obtain a standby letter of credit, the Company maintains a
restricted certificate of deposit presently in the amount of $400,000. As of
March 1998, this amount is to be reduced to $325,000 if the Company is not in
default under the terms of the lease. Therefore $75,000 of this deposit is
classified as other current assets and $325,000 is included in "Long-term
Investment" of the Company's consolidated balance sheets as of September 30,
1997.
The Company has entered into leases for various items of its office
furniture and equipment as well as for its telephone system accounted for as
capital leases. The terms on these leases vary from 36 to 60 month terms.
The Company refinanced certain of its furniture and computer equipment
in April 1997 in the amount of approximately $874,000 from FINOVA Capital
Corporation. Such loan is for a term of three years, bears interest at 12.19%
per annum and is self-liquidating over its term. Future minimum lease and loan
payments under these agreements are as follows:
Year Ending
September 30, Operating Capital
------------ ----------
1998.............................................. $ 332,664 $483,116
1999.............................................. 423,319 483,116
2000.............................................. 447,362 366,732
2001.............................................. 456,310 133,968
2002.............................................. 465,436 70,404
Thereafter ........................... 2,774,953 --
Less: Amount representing interest............ -- (279,098)
------------ -----------
Present value of net minimum lease
payments
$4,900,044 $1,258,238
============ ===========
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.
F-17
<PAGE>
The Company is in an accumulated loss position for both financial
reporting and income tax purposes. The tax benefit recorded by the Company has
been fully reserved against 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 $4.2 million at September 30, 1997. This
carryforward expires between 2001 and 2012. The benefit from the provision for
taxes of $29,896 for the fiscal year ended September 30, 1996 represents the
reversal of deferred taxes provided in prior years.
Income tax benefit consists of the following:
Year Ended Year Ended
September September
30, 1997 30, 1996
------------ -------------
CURRENT:
Federal $ -- $ --
State and local -- --
------------ -------------
Total -- --
------------ -------------
DEFERRED:
Federal -- $ (19,759)
State and local -- (10,137)
------------ -------------
Total -- $ (29,896)
------------ -------------
Total $ -- $ (29,896)
------------ =============
The provision for income taxes on historical net income for the years
ended September 30, 1997 and 1996 differs from the amount computed by applying
the federal statutory rate due to the following:
Year Ended Year Ended
September September
30, 1997 30, 1996
Statutory federal income tax rate (34)% (34)%
State and local taxes, net of federal benefit (11)% (11)%
Other ........................................ (0)% (1)%
Valuation allowance .......................... 45% 44%
-------- --------
Effective income tax rate .................... (0)% (2)%
======== ========
F-18
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30, September 30,
1997 1996
------------- -------------
Deferred tax assets
(liabilities):
Tax depreciation and amortization in
excess of book depreciation and
amortization $ (264,820) $ (12,920)
Net operating loss carry forward 1,908,226 733,393
Allowance for doubtful accounts
and other reserves 255,350 29,176
Deferred Rent 80,795 --
Valuation allowance (1,979,551) (749,649)
----------- ----------
TOTAL NET DEFERRED TAX
LIABILITIES -- --
=========== ==========
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 (50% of the Bonus Pool) to the
extent, if any, that the Bonus Pool exceeds $100,000.
During the third quarter of fiscal 1997, the Company made loans to Mr.
Bell bearing interest at 8.75% per annum in the total amount of $145,408. These
loans are pursuant to his existing employment agreement. The loans mature in
June 2002.
The Company has also entered into employment contracts with William
Jahnke and Alan Levy. Such agreements are all similar and contain certain
restrictive covenants if employment is terminated by the employee without cause,
or by the Company for cause.
8. SUBSEQUENT EVENT
NEW CREDIT AGREEMENT
In December 1997, the Company received a $1,000,000 credit line from
Cisco Systems Capital Corporation ("CSC") to lease Cisco Systems products and
associated peripherals. The credit line is available to the Company for a period
of 180 days, is to be repaid over a 36 month period and is subject to quarterly
financial review by CSC. The Company may not purchase more than $500,000 on the
credit line during any three month period. At the end of the lease term, the
Company has the option of purchasing the equipment for fair market value, renew
the lease of the equipment for the then fair rental value or return the
equipment.
F-19
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of this 1st day of June, 1997, between Bell Technology
Group, Ltd., having an office at 295 Lafayette Street, New York, New York
10012 ("BTG") and Alan Levy, residing at 295 Lafayette Street, New York,
New York 10012, (the "Employee"). As used herein, BTG shall be deemed to
include all affiliated companies of BTG. The parties agree as follows:
1. EMPLOYMENT: BTG hereby hires Employee as Corporate Controller,
Treasurer and Chief Accounting Officer. Employee hereby accepts such
employment subject to the terms and conditions of this agreement.
Employee agrees that during the term of this agreement, Employee shall
work exclusively for BTG and shall not work as an employee, agent, or
representative for any other person, firm or entity, or work as
independent contractor for hire. Provided, however, that Employee may
pursue other business interests during non-business hours, provided
that they do not interfere with his duties as Treasurer and chief
accounting officer of BTG.
2. TERM: This agreement shall commence as of the date hereof and, shall
terminate on December 31, 1998, unless sooner terminated in accordance
with the terms hereof. Provided, however, this agreement shall continue
is full force and effect on a month to month basis unless terminated in
writing by either party hereto.
3. COMPENSATION: Commencing July 1, 1997, Employee shall be paid an
annual salary of eighty thousand ($80,000) dollars. In addition,
Employee shall be entitled to participate in any BTG bonus plan that is
applicable to all executive employees. Employee shall be entitled to
participate in the company's group long-term disability insurance
program so long as the same is in effect and Employee pays his
participation amount as determined from time to time by BTG.
4. EXPENSE REIMBURSEMENT: Employee shall be entitled to reimbursement
of ordinary and necessary business expenses incurred in the course of
employment. All expenses in excess of $100 per week for which
reimbursement is sought must submitted on a BTG Expense Reimbursement
Form and be approved in advance by an officer of BTG.
5. VACATION AND PERSONAL DAYS: Employee shall be entitled to two weeks
paid vacation annually during the term of employment. Vacation time
shall accrue and may be taken in accordance with the rules and
regulations set forth in the BTG Employee Manual. In addition to
vacation days, Employee shall be entitled to personal days and sick
days pursuant to the Bell Technology Group Ltd. Employee Manual.
6. NON-DISCLOSURE/NON-COMPETITION: Employee recognizes that BTG and its
affiliated companies are engaged in an extremely competitive business,
the operation and success of which is dependent upon the protection of
customer lists, economic relationships and certain trade secrets, and
Employee acknowledges the highly sensitive and competitive nature of
such business.
A. Employee hereby agrees that for a period of twelve months
after the termination of Employee's employment with BTG, where such
termination is either initiated by BTG for cause, or is initiated by
Employee without cause, Employee shall not:
1
<PAGE>
(1) work for any client of BTG or any entity, which
operates in direct competition with BTG as an employee,
consultant or independent contractor without the express
written consent of BTG.
(2) ask or suggest to any employee of BTG or any of
its affiliated companies that such employee should terminate
his/her employment with BTG or such affiliated company.
B. Employee hereby agrees that he will not disclose to any
person, party, corporation or other entity any information relating to
the operation or financial condition of BTG which is not already in the
public domain, or communicate to any person or entity the name(s) or
identities of any person or entity to which BTG sells products or
services, unless required by the order of a court.
7. MISCELLANEOUS: Employee represents and warrants to BTG that there is
no employment contract existing or alleged to exist between Employee
and any former employer.
8. TERMINATION: This agreement may be terminated by BTG at any time for
cause. As used herein, "termination for cause" shall include, but not
be limited to: (a) any conduct which is detrimental to the business or
business reputation of BTG; or (b) the use of illegal drugs or the
excessive consumption of alcohol, or (c) excessive lateness or absence
from work; or (d) the failure to follow rules and regulations
established by BTG and which are generally applicable to all employees.
9. GOVERNING LAW: This Agreement shall be construed in accordance with
the laws of the State of New York governing contracts executed and
performed therein, and shall be binding upon and inure to the benefit
of the parties, respective heirs, executors, administrators,
successors, and assigns. The parties agree that New York, New York
shall be the proper place of jurisdiction for the determination of any
disputes arising from this agreement, and the parties consent to
jurisdiction of the Courts of the State of New York.
10. UNENFORCEABLE PROVISION: In the event that any provision of this
agreement is held to be void or unenforceable, the balance of the
agreement shall survive and shall be construed as if the voided
provision contained herein was omitted from the inception; provided
that no party is deprived of the intended benefit of this agreement.
11. CHANGES/MODIFICATIONS: It is understood and agreed that there shall
be no change or modification of this Agreement unless reduced to
writing and signed by the parties hereto.
12. NO WAIVER: No waiver or any breach of this Agreement shall be
construed as a continuing waiver or consent to any subsequent breach
hereof.
13. BELL TECHNOLOGY GROUP, LTD. RULES: Employee agrees to abide by all
rules and regulations of the BELL TECHNOLOGY GROUP, LTD as may from
time to time be set forth in the BELL TECHNOLOGY GROUP, LTD. Employee
Manual.
14. ATTORNEY'S FEES: If any litigation arises out of the breach by
Employee of any term or provision of this agreement, Employee shall be
liable for all reasonable attorney's fees incurred in connection with
any action for damages or the enforcement of any provision of this
agreement brought by BTG and/or the BELL TECHNOLOGY GROUP, LTD in which
BTG and/or BELL TECHNOLOGY GROUP, LTD is successful in whole or in
part. If any litigation arises out of the breach by BTG of any term or
provision of this agreement, BTG shall be liable for all reasonable
attorney's fees incurred in connection with any action for damages or
the
2
<PAGE>
enforcement of any provision of this agreement brought by Employee in
which Employee is successful in whole or in part.
15. NOTICES: All notices under this agreement shall be in writing and
shall be served by mailing postage prepaid, certified mail, return
receipt requested to the address of the party first above written.
16. INDEMNIFICATION: BTG shall indemnify and hold Employee harmless to
the fullest extent permitted by law for any action taken in good faith
and not involving gross negligence or intentional misconduct by
Employee.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this agreement as of the date first above written.
BELL TECHNOLOGY GROUP, LTD.
By: __________________,
Marc H. Bell
__________________
Alan Levy
3
EXHIBIT 10(u)
[CISCO SYSTEMS CAPITAL CORPORATION LOGO]
December 15, 1997
Mr. Alan Levy
Treasurer
Bell Technology Group, LTD.
295 Lafayette Street
New York, NY 10012
Dear Mr. Levy:
Cisco Systems Capital Corporation ("CSC") is pleased to extend an aggregate
total credit approval in the amount of One Million Dollars ($1,000,000.00) to
Bell Technology Group, LTD. ("Lessee") pursuant to the terms and conditions of
the proposed leasing transaction described in the proposal letter dated November
14, 1997 (the "Proposal"), a copy of which is attached hereto and incorporated
herein, (subject to the additional terms and conditions set forth herein).
CSC shall extend a lease commitment (the "Lease Commitment") to Lessee on the
terms and conditions contained in the Proposal, subject to the following:
1. At no time shall the aggregate commitment to Lessee under the Lease
Commitment and the existing direct trade credit facility (the "Trade Credit
Facility") exceed $1,000,000;
2. The Credit Commitment shall be subject to quarterly financial performance
review by CSC and Cisco Systems Worldwide Financial Services Group per
provision in Masterlease (section 3.12);
3. No material adverse change shall have occurred in Lessee's financial
condition.
4. Total credit commitment amount is valid for a period of 180 days from the
date of this letter.
5. Lessee shall make all lease payments to CSC via ACH.
6. No more than $500,000 of this credit facility may be utilized by lessee in
any three (3) month period.
The parties acknowledge that this letter is a commitment subject to the
above-referenced conditions and the execution and delivery of all appropriate
documents (in form and substance satisfactory to CSC) contemplated hereunder and
under the Proposal, including without limitation, to the extent applicable, the
Master Agreement to Lease Equipment ("Master Lease"), any Schedule, Lease
Assignment of Purchase Order, financing statement, legal opinion or other
document or agreement reasonably required by CSC in connection herewith.
This letter is a communication which shall be held in confidence by Lessee and
Lessee's agents and shall be disclosed to no one without CSC's prior written
consent.
If the terms of this letter are acceptable to you please execute a copy of this
letter (in the space set forth below) and return it to me not later than 5:00
p.m. on Monday, December 22, 1997. If CSC has not received a signed counterpart
of this letter by such time, this approval letter shall be of no further force
and effect and neither CSC nor Cisco nor you shall have any rights or
obligations with respect to any lease transaction contemplated hereunder.
Page 1 of 2
<PAGE>
If you have any questions regarding this letter or the proposed leasing
transaction, please call be at (408) 527-1635.
Very truly yours,
Cisco Systems Capital Corporation
/s/ William S. Kammerer
- -----------------------
William S. Kammerer
US Credit Risk Manager
ACKNOWLEDGED AND AGREED:
Bell Technology Group, LTD.
By: /s/ Alan Levy 12/16/97
-------------------------- ---------
Date
Its: Treasurer
------------------------
Page 2 of 2
EXHIBIT 21
BELL TECHNOLOGY GROUP LTD.
LIST OF SUBSIDIARIES
The following is a list of all of the subsidiaries of Bell Technology
Group Ltd. of which all are incorporated in the State of New York. All of the
listed subsidiaries do business under the names presented below:
PFM Communications, Inc.
Naft International Ltd.
Naft Computer Services Corp.
Bluestreak Digital, Inc.
EXHIBIT 23
BELL TECHNOLOGY GROUP LTD.
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the incorporation by reference in Registration
Statement No. 33-09027 of Bell Technology Group, Ltd. on Form S-8 of our report
dated December 19, 1997 appearing in this Annual Report on Form 10-KSB of Bell
Technology Group Ltd. for the year ended September 30, 1997.
Arthur Andersen LLP
December 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,401,446
<SECURITIES> 0
<RECEIVABLES> 3,454,232
<ALLOWANCES> 194,684
<INVENTORY> 487,542
<CURRENT-ASSETS> 6,876,301
<PP&E> 4,649,321
<DEPRECIATION> 1,100,483
<TOTAL-ASSETS> 11,024,988
<CURRENT-LIABILITIES> 4,895,583
<BONDS> 0
0
0
<COMMON> 34,485
<OTHER-SE> 4,979,775
<TOTAL-LIABILITY-AND-EQUITY> 11,024,988
<SALES> 17,399,955
<TOTAL-REVENUES> 17,399,955
<CGS> 13,901,859
<TOTAL-COSTS> 20,410,189
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177,626
<INCOME-PRETAX> (3,115,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,115,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,115,433)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
