ATC II INC /DE/
10QSB, 1996-07-30
MOTION PICTURE & VIDEO TAPE DISTRIBUTION
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                   FORM 10-QSB



(Mark One)
   [X]    Quarterly report under Section 13 or 15(d) of the Securities  Exchange
          Act of 1934 for the quarterly period ended March 31, 1996

   [ ]    Transition report under Section 13 or 15(d) of the Securities Exchange
          Act  of  1934  (No  fee  required)  for  the  transition  period  from
          ____________________ to _____________________



Commission file number:  0-19069



                                  ATC II, INC.
                 (Name of Small Business Issuer in Its Charter)



             Delaware                                            75-2395356
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)




                 6701 Baum Drive, Suite 345, Knoxville, TN 37919
               (Address of Principal Executive Offices) (Zip Code)


                                 (423) 588-1018
                (Issuer's Telephone Number, Including Area Code)




Check whether the 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 registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.


                                  Yes __ No XX


The number of shares  outstanding  of the issuer's  common stock ($0.01 par
value), as of July 30,1996 was 4,996,811.

<PAGE>

                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  FINANCIAL STATEMENTS..................................................3

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............3

                                     PART II

ITEM 1.  LEGAL PROCEEDINGS.....................................................4
ITEM 2.  CHANGES IN SECURITIES.................................................4
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.......................................4

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................4
ITEM 5.  OTHER INFORMATION.....................................................4

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K......................................5

         SIGNATURES............................................................6

         INDEX TO EXHIBITS.....................................................7

<PAGE>


                                     PART I



ITEM 1.           FINANCIAL STATEMENTS



         Unless otherwise  indicated,  the term "Company" refers to ATC II, Inc.
and its predecessors. Interim financial statements including a balance sheet for
the Company as of the end of the fiscal  quarter ended March 31, 1996 and income
statements and statements of cash flows for the interim period up to the date of
such balance sheet and the  comparable  period of the preceding  fiscal year are
attached  hereto  on Pages  F-1  through  F-3 and  incorporated  herein  by this
reference.
<PAGE>
                                     PART I


                          ITEM 1. FINANCIAL STATEMENTS

                       INDEX TO FINANCIAL STATEMENTS PAGE
Balance Sheets...............................................................F-1

Statements of Operations.....................................................F-2

Statements of Stockholders' Deficit..........................................F-3

Statements of Cash Flows.....................................................F-4

Notes to Financial Statements................................................F-5


<PAGE>
<TABLE>
<CAPTION>
                                  ATC II, INC.
                                 BALANCE SHEETS
                  MARCH 31, 1996 (UNAUDITED) AND JUNE 30, 1995



                                                                March 31,        June 30,
ASSETS                                                           1996             1995
                                                             ------------    ------------

<S>                                                          <C>             <C>         
   Film distribution rights (net amortization) ...........   $    267,963    $    315,250
                                                             ------------    ------------

Total Assets .............................................   $    267,963    $    315,250
                                                             ============    ============


LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
   Accounts payable ......................................   $    315,263    $    187,260
   Accrued expenses ......................................        374,096         358,323
   Notes payable-current .................................        157,500         157,500
                                                             ------------    ------------

Total Current Liabilities ................................        846,859         703,083
                                                             ------------    ------------

Redeemable Preferred Stock
   Series B Redeemable, Convertible, (7%) Cumulative,
     Preferred Stock; 900,000 shares authorized, 900,000
     issued and outstanding; redeemable at $1.00 per share           --           900,000
   Dividends in arrears ..................................           --            31,500
                                                             ------------    ------------

Total Redeemable Preferred Stock .........................           --           931,500
                                                             ------------    ------------

Total Liabilities and Redeemable Preferred Stock .........        846,859       1,634,583
                                                             ------------    ------------

STOCKHOLDERS' DEFICIT

   Common stock-$.01 par value;
     20,000,000 shares authorized;
     11,505,481 shares issued and outstanding ............        115,055         115,055
   Paid - in capital .....................................     23,196,172      23,196,172
   Accumulated deficit ...................................    (23,890,123)    (24,630,560)
                                                             ------------    ------------

Total Stockholders' Deficit ..............................       (578,896)     (1,319,333)
                                                             ------------    ------------

Total Stockholders' Deficit and Liabilities ..............   $    267,963    $    315,250
                                                             ============    ============

                       See Notes to Financial Statements
                                      F-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   ATC II, INC
                            STATEMENTS OF OPERATIONS



                                                    Three Months Ended               Nine Months Ended
                                                          March 31,                       March 31,
                                                        (Unaudited)                     (Unaudited)
                                               ----------------------------    ----------------------------
                                                   1996             1995          1996             1995
                                               --------------  ------------    --------------   -----------

<S>                                            <C>             <C>             <C>             <C>         
Net revenue ................................   $       --      $     12,974    $       --      $     43,024
Cost of revenue ............................           --              --              --              --
                                               ------------    ------------    ------------    ------------

    Gross Profit (Loss) ....................           --            12,974            --            43,024
                                               ------------    ------------    ------------    ------------
Selling, general and administrative expenses         63,177         247,067         171,041       2,220,216
                                               ------------    ------------    ------------    ------------

    Operating Profit (Loss) ................        (63,177)       (234,093)       (171,041)     (2,177,192)
                                               ------------    ------------    ------------    ------------

Other income (expense):

       Interest income (expense) ...........         (5,257)        (11,213)        (15,772)       (196,161)
       Gain (loss) from investments ........           --          (164,063)           --          (164,063)
       Gain (loss) from sale of assets .....           --             2,200            --           (57,716)
       Other income (expense) ..............           --              --              --             7,000
                                               ------------    ------------    ------------    ------------

    Total other income (expense) ...........         (5,257)       (173,076)        (15,772)       (410,940)
                                               ------------    ------------    ------------    ------------

Net (loss) before discontinued operations ..        (68,434)       (407,169)       (186,813)     (2,588,132)

Gain (loss) from discontinued operations ...           --              --              --            45,883
                                               ------------    ------------    ------------    ------------

Net (loss) before extraordinary items ......        (68,434)       (407,169)       (186,813)     (2,542,249)

Extraordinary Items:
    Cancellation of Series B Preferred Stock           --              --           927,250            --
    Loss from settlement of prior claim ....           --              --          (601,500)
                                               ------------    ------------    ------------    ------------

Net Profit (Loss) ..........................   $    (68,434)   $   (407,169)   $    740,437    $ (3,143,749)
                                               ============    ============    ============    ============

Gain (Loss) per share:
    From continuing operations .............   $      (0.01)   $      (0.16)   $      (0.02)   $      (1.54)
    From discontinued operations ...........           --              --              --              0.03
    From extraordinary items ...............           --              --              0.08           (0.36)
                                               ------------    ------------    ------------    ------------

Gain (Loss) per share ......................   $      (0.01)   $      (0.16)   $       0.06    $      (1.87)
                                               ============    ============    ============    ============

Weighted average shares outstanding ........     11,505,481       2,540,272      11,505,481       1,685,853
                                               ============    ============    ============    ============



                                                 See Notes to Financial Statements
                                                                F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                             ATC II, INC
                                            UNAUDITED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                                  Nine Months Ended March 31, 1996



                           Series B        Series B     Common       Common                                             Total
                          Preferred      Preferred      Stock         Stock           Paid In       Accumulated     Stockholders'
                           Shares         Amount        Shares       Amount          Capital          Deficit          Deficit

<S>                       <C>          <C>             <C>            <C>            <C>           <C>                 <C>          
Balances, June 30, 1995   900,000      $  900,000      11,505,481     $ 115,055      $ 23,196,172  $(24,630,560)       $ (1,319,333)

Cancellation of Series B (900,000)     $ (900,000)        --             --             --             --              $       --
preferred stock

Net Income, March 31, 1996    --             --           --             --             --         $ 740,437           $     740,437

                          ============   ===========   ============   ============   ============   ============       ============
Balances, March 31, 1996            0   $    --        11,505,481     $ 115,055      $ 23,196,172  $ (23,890,123)      $   (578,896)
                          ============   ===========   ============   ============   ============   ============       ============

                                                  See Notes to Financial Statements
                                                                F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                  ATC II, INC.
                            STATEMENTS OF CASH FLOWS



                                                                                     Nine months ended
                                                                                          March 31,
                                                                                       (Unaudited)
                                                                              ---------------------------
                                                                                  1996           1995
                                                                              -----------    ------------
<S>                                                                           <C>            <C>
Cash flow from operations:
       Net gain (loss) ....................................................   $   740,437    $(3,143,749)

       Adjustments to reconcile loss to net cash
       provided by (used for) operations:
              Depreciation and amortization ...............................        47,287         26,727
              Extraordinary loss - settlement of claim ....................          --          601,500
              Extraordinary gain - Cancellation of Series B Preferred Stock      (927,250)          --
               Loss on investments ........................................          --          164,063
              Stock issued for services ...................................          --          876,309

       Change in assets and liabilities:
              Accounts receivable .........................................          --            9,539
              Other current assets ........................................          --           16,357
              Accounts payable and accrued expenses .......................       143,776         63,690
                                                                              -----------    -----------
                    Cash provided by (used for) operations ................         4,250     (1,385,564)

Cash flow from investing activities:
              Preferred Dividends .........................................        15,750           --
              Settlement Payment ..........................................       (20,000)          --
                                                                              -----------    -----------
              Cash provided by (used for) investing activities ............        (4,250)          --

Cash flow from financing activities:
       Proceeds from issuance of stock ....................................          --        1,388,462
                                                                              -----------    -----------
              Cash provided by (used for) financing activities ............          --        1,388,462

Net increase (decrease) in cash ...........................................           -0-          2,898
Cash, beginning of year ...................................................           -0-          2,249
                                                                              -----------    -----------
              Cash, end of period .........................................   $      --            5,147
                                                                              ===========    ===========

                       See Notes to Financial Statements
                                      F-4
</TABLE>
<PAGE>
                                    ATC II, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                 March 31, 1996


NOTE 1:  Basis of Presentation

The accompanying unaudited financial statements have been prepared by management
in accordance with the instructions in Form 10-QSB and therefore, do not include
all  information  and  footnotes  required  by  generally  accepted   accounting
principles  and should  therefore,  be read in  conjunction  with the  Company's
Annual  Report to  Shareholders  on Form  10-KSB for fiscal  year ended June 30,
1995.

In management's opinion, the accompanying unaudited financial statements contain
all adjustments, consisting only of normal recurring adjustments necessary for a
fair  statement of the results for the interim  periods  presented.  The interim
operation  results are not necessarily  indicative of the results for the fiscal
year ending June 30, 1996.

NOTE 2:  Additional footnotes included by reference

Except as  indicated  in the  footnotes  above there has been no other  material
change in the  information  disclosed in the notes to the  financial  statements
included in the Company Annual Report on Form 10-KSB for the year ended June 30,
1995.
Therefore those footnotes are included herein be reference.




































                                       F-5

<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.



Plan of Operation

         The Company has not had any revenue  from  operations  in either of the
last two fiscal years. The following discussion should be read together with the
Company's  consolidated  financial statements and notes thereto included in this
Form 10-QSB.

         From 1984 to 1993, the Company's business was in telecommunications and
producing and  distributing  feature length motion  pictures.  In June 1992, the
Company  began to divest its  interests  in certain  unprofitable  subsidiaries.
Similar  divestitures  followed in fiscal  1993 and 1994.  In fiscal  1994,  the
Company  focused  its  efforts on  discontinuing  or winding  down  unsuccessful
operations  and resolving  existing and potential  liabilities.  Since 1994, the
Company has been searching for an attractive merger or acquisition candidate and
potentially profitable business opportunities.

         Effective June 30, 1995, the Company entered into a Purchase  Agreement
with Turner, Turner & Associates, a Washington corporation ("TTA").  Pursuant to
the  agreement,  the  Company  was to acquire  from TTA the  exclusive  right to
license  products  produced under U.S.  Patents Numbers  5,296,216 and 5,306,509
(the "Patents").  The Patents relate to an oral lavage, the trademark of certain
products,  and a protocol known as  STOMASTAT(TM).  In  development  since 1983,
STOMASTAT(TM)  is a  peroxide  and  bicarbonate-based  solution  that  cleanses,
irrigates, and protects the oral cavity from stomatitis, a process which results
in mouth ulcers or canker sores. The Purchase Agreement was ultimately rescinded
in  February  1996  because  several  conditions  had not  been met and both the
Company and TTA desired an alternative structure for the purchase. After several
months of unsuccessful  negotiation with TTA, the Company decided not to further
pursue this acquisition.

         Since the acquisition of TTA is no longer being considered, the Company
has resumed its search for an attractive merger or acquisition candidate.  As of
the date of this  filing,  the  Company  has  identified  potential  merger  and
acquisition  candidates,  but no definitive  agreements  have been reached.  The
Company  hopes  that it will  successfully  negotiate  a merger  or  acquisition
agreement that will enable it to generate  sufficient  cash flows to satisfy its
cash needs, although no such assurances can be given.

         The  Company  has no full time  employees.  However,  the  Company  has
continued its relationship  with a financial  consulting firm,  Canton Financial
Services  Corporation,  a Nevada corporation ("CFS"), on a month to month basis.
CFS renders  consulting,  administrative  and other services to the Company from
time to time as needed. The Company  anticipates hiring additional  personnel if
an acquisition or merger agreement is eventually reached.



<PAGE>


                                     PART II



ITEM 1.           LEGAL PROCEEDINGS



         The  Company  is not aware of any  material  developments  in any legal
proceedings  involving the Company or its subsidiaries during the period covered
by this report. However, due to recent resignations of officers and directors of
the Company and the  discontinuation  of the businesses of some of the Company's
subsidiaries,   there  may  be  other  material  legal  proceedings  pending  or
threatened  against  the  Company,  its  subsidiaries  or  former  officers  and
directors of which the current management is not aware. The text below discloses
all material developments of legal proceedings, known to the Company, which have
occurred subsequent to the third quarter.

         On March 8, 1995, Xeta Corporation,  an Oklahoma corporation  ("Xeta"),
filed suit  against  the Company in the United  States  District  Court,  in the
Central  District of Utah,  case number  95CV-218G.  In this suit, Xeta seeks to
recover $116,500 which it contends was  fraudulently  conveyed by the Company in
order to  avoid  payment  on a  $119,379.42  judgment  (exclusive  of costs  and
attorney fees) which the Company owes to Xeta. The Company  brought suit against
The  Canton  Industrial  Corporation  ("CIC"),  the  alleged  recipient  of  the
fraudulent  conveyance,  and Richard Surber and Gerald Curtis, both directors of
the  Company  at the  time of the  conveyance.  On April  16,  1996,  the  Court
announced its decision to grant Xeta's Motion for Summary  Judgment against CIC,
but denied the motion as it pertained to the Company's former directors. CIC has
appealed the grant of Summary Judgment, claiming that there is a genuine dispute
of fact as to  whether  CIC  performed  bona fide  services  to the  Company  in
consideration for the money transferred.  That appeal is currently  pending.  If
Xeta   ultimately   prevails   in  this   litigation,   CIC  will   likely  seek
indemnification against the Company for the full $116,500.



ITEM 5.           OTHER INFORMATION



         On January 19,  1996,  James L.  Thompson  resigned as president of the
Company.  Mr.  Thompson was initially  appointed as president  because he helped
introduce the Company to Turner,  Turner & Associates ("TTA") and negotiated the
Purchase  Agreement  with TTA. As a finders fee, Mr.  Thompson,  along with Jack
Hartgrove,  received a quantity  of shares of the  Company's  common  stock that
constitued a controlling  interest in the Company.  When the Purchase  Agreement
was rescinded, all shares issued to Mr. Thompson and Mr. Hartgrove were canceled
by the Company. Mr. Thompson's resignation was a result of the rescission of the
Purchase  Agreement,  and did not reflect any disagreements with the Company. He
remained with the Company in the capacity of director.

         Upon the resignation of Mr. Thompson,  the Company appointed Richard H.
Turner as  president  and a director.  Mr.  Turner was the  president of TTA and
helped  develop the patents that the Company was attempting to acquire from TTA.
Mr. Turner was appointed to help facilitate negotiations between the Company and
TTA, and because of his familiarity with the patents that the Company was trying
to acquire. No agreement was ever reached between TTA and the Company,  however,
and the parties have since terminated all  negotiations in furtherance  thereof.
Accordingly,  Richard  Turner  resigned as the Company's  president and director
effective May 6, 1996.

         On  July  11,  1996,  Leslie  Carter  was  appointed  as the  company's
president and director by  resolution  of the board of  directors.  The board of
directors  appointed Ms. Carter because it believed Ms. Carter's  experience and
contacts would assist the Company in its attempt to acquire a suitable operating
subsidiary.

         In January 1996, the Company relocated its corporate  headquarters from
6701  Baum  Drive,  Suite  345,  Knoxville,  Tennessee,  37919  to  1001 A South
Interstate 45, Post Office Box 729, Hutchins, Texas 75141-0729. In May 1996, the
Company moved its  headquarters  back to 6701 Baum Drive,  Suite 345,  Knoxville
Tennessee,  37919.  Corporate  offices were returned to Tennessee as a result of
the termination of negotiations between TTA and the Company.



ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K



(a)      Index to  Exhibits.  Exhibits  required  to be  attached by Item 601 of
         Regulation S-B are listed in the Index to Exhibits  beginning on page 7
         of this Form 10-QSB, which is herein incorporated by reference.

(b)      Reports on Form 8-K.  The Company did not make any filings on Form 8-K
         during the third quarter of the fiscal year.



<PAGE>



                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, this 12TH day of July 1996.

         ATC II, INC.

         /s/ Leslie Carter
         Leslie Carter

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

Signature                   Title                                      Date


/s/ Leslie Carter     President and Director                       July 15, 1996
Leslie Carter


/s/ Jack Hartgrove    Chief Financial Officer/Secretary            July 15, 1996
Jack E. Hartgrove     and Director


/s/ James Thompson    Director                                     July 15, 1996
James Thompson



<PAGE>



                                INDEX TO EXHIBITS

 EXHIBIT      PAGE
 NUMBER      NUMBER      DESCRIPTION
  3(a)         *         Articles  of  Incorporation  of the  Company,  filed as
                         Exhibit 3(i) to Registrant's  Registration Statement on
                         Form S-4 filed June 2, 1990, as amended.
  
  3(b)         *         Bylaws  of the  Company,  filed  as  Exhibit  3(ii)  to
                         Registrant's * Registration Statement on Form S-4 filed
                         June 2, 1990, as amended.
 
 10(i)(a)     **         Purchase  Agreement  between  the  Company  and Turner,
                         Turner &  Associates,  Richard  H.  Turner,  Robert  E.
                         Turner and Sherry Ruxer  effective  June 30, ** -------
                         -- 1995,  filed as Exhibit 10 to Registrant's  Form 8-K
                         Current Report dated September 26, 1995.

 10(i)(b)                Rescission  Agreement  between the  Company,  Robert E.
                         Turner,  Richard H. Turner,  and Sherry L. Ruxer signed
                         February  21,  1996,  filed as Exhibit  *** ------- ---
                         10(i)(b) to the Registrant's Form 10-QSB for the period
                         ending September 30, 1995.

              *                Incorporated   herein  by   reference   from  the
                               Company's  Form 10-KSB for period  ended June 30,
                               1994,  filed  with the  Commission  on August 23,
                               1994.

             **                Incorporated   herein  by   reference   from  the
                               Company's Form 8-K Current Report dated September
                               26, 

           *** **              Incorporated   herein  by   reference   from  the
                               Company's  Form 10-KSB for period  ended June 30,
                               1995, filed with the Commission on June 15, 1996.
<PAGE>

<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
     THIS  SCHEDULE  CONTAINS  SUMMARY  FINANCIAL   INFORMATION  EXTRACTED  FROM
CONSOLIDATED  UNAUDITED CONDENSED FINANCIAL  STATEMENTS FILED WITH THE COMPANY'S
MARCH 31, 1996 ANNUAL  REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK>                         0000865286
<NAME>                        ATC II, Inc.
<MULTIPLIER>                                   1
<CURRENCY>                                     U.S. Dollar
       
<S>                             <C>
<PERIOD-TYPE>                   9-mos
<FISCAL-YEAR-END>                              Jun-30-1995
<PERIOD-START>                                 Jul-01-1995
<PERIOD-END>                                   Mar-01-1996
<EXCHANGE-RATE>                                      1
<CASH>                                               0
<SECURITIES>                                         0
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                     0
<PP&E>                                               0
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                 267,963
<CURRENT-LIABILITIES>                          846,859
<BONDS>                                              0
                                0
                                          0
<COMMON>                                       115,055
<OTHER-SE>                                    (693,951)
<TOTAL-LIABILITY-AND-EQUITY>                   267,963
<SALES>                                              0
<TOTAL-REVENUES>                                     0
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                               171,041
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              15,772
<INCOME-PRETAX>                               (186,813)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                           (186,813)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                927,250
<CHANGES>                                            0
<NET-INCOME>                                   740,437
<EPS-PRIMARY>                                     0.06
<EPS-DILUTED>                                     0.06
        

</TABLE>


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