SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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CURRENT REPORT
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number 0-22710
ATEC GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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(State or other jurisdiction of (IRS. Employer
corporation or organization) Identification Number)
90 Adams Avenue, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (516) 231-2832
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01
par value Series A
Preferred Stock $.01
par value
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES |X| NO |_|
On September 23, 1998, the aggregate market value of the voting common
equity of ATEC Group, Inc., held by non-affiliates of the Registrant was
$20,598,109 * based on the closing price of $4.25 for such common stock on said
date as reported by the National Association of Securities Dealers Small Cap
Market System. On such date, there were 6,764,460 shares of common stock of the
Registrant outstanding.
* Excludes 1,899,846 shares of common stock beneficially owned by Surinder
Rametra, Ashok Rametra, George Eagan and David Reback, the officers and
directors of the Company.
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ITEM 1. BUSINESS
GENERAL
ATEC Group, Inc. ("the Company" or "ATEC"), is a leading system integrator
and provider of a full line of computer and information technology products and
services to business, professionals, government agencies and educational
institutions. The Company has experienced rapid growth over the past few years
on core competencies including system design, high speed data transmission,
local and/or wide area network ("LAN/WAN)", video conferencing,
telecommunications, and Internet/Intranet technology.
ATEC provides end to end solutions acting as the single source for
procurement, custom configuration, delivery, and installation. Further, ATEC
provides integration services that effect after sales support, LAN/WAN design
and selective outsourcing as well as many other services providing solutions in
mission critical environments. The Company's objective is to help its clients
effectively manage their Information Technology ("IT") environments by providing
solutions that reduce the total cost of ownership.
In an effort to create a unique identity and distinguish the Company from
most other resellers in the industry, the Company has committed its resources to
assisting its clients in the implementation of the latest changing technology as
it occurs. This allows ATEC to achieve greater client satisfaction and continued
growth, in spite of aggressive competition.
During October 1997, ATEC created the ATEC Digital Arts division to
provide a wide range of solutions and services in high-end graphics for the
entertainment, publishing, advertising, animation, multimedia and internet
markets, as well as communications and graphics departments in Fortune 1000/2000
companies. Creation of the graphic arts division enhances the existing system
integration capabilities by providing solutions to new applications such as
pre-press and publishing, videos and non-linear editing, animation, special
effects, internet and premier web designs.
On April 7, 1998, ATEC acquired LOGIX Solutions, Inc. ("LOGIX"), a
Colorado based company involved with different facets of Year 2000 such as
assessment, planning, conversion, testing, implementation, and contingency
preparedness. LOGIX has a core team of business management and technical
personal with in-depth experience to evaluate the best products and services
available in the market place to ensure that the Company's clients receive the
most effective solutions for their intellectual property needs. Further,
management believes that Year 2000 involvement will establish ATEC in the
software arena to develop new software and modify existing software or convert
legacy software to workstations and server levels.
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INDUSTRY
Complex computer information processing systems, the foundation on which
business and organizations now function, are continuously being redesigned,
modified and upgraded as new computer and telecommunications technologies are
introduced. Until the mid-1980's, either mid- range or mainframe computer
systems were used to manage an organization's mission-critical,
transaction-oriented commerce and business functions, such as banking, credit
transactions, retail point-of-sale transactions and airline reservations.
Networks supported access to these functions, either within a single site or
from numerous geographically dispersed sites.
In the late 1980's, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in desktop
computers, expanding capabilities of software applications and growing
capabilities of networks. A client/server system typically consists of multiple
intelligent desktop client computers linked with high performance server
computers by a LAN/WAN and is characterized by the flexibility and mobility of
both application and user. In order to take advantage of their established
operational staff and physical plant, many corporations are seeking to
reconfigure their existing mainframe/mid-range computers (sometimes referred to
as "legacy systems) to operate in parallel with client/server networks.
The Company believes that these two information system models - legacy
systems and client/server systems - will continue to coexist, each with
advantages for certain applications. Thus, organizations are faced with complex
decisions concerning the current and future configurations of their information
systems, based upon factors such as the re-engineering of aspects of legacy
systems to function more efficiently with related client/server systems. The
markets for information technology products and services are expected to
continue to experience significant growth over the next few years. The Company
believes that the leading factors driving the growth in the markets are the
continued transition to distributed computing technologies, such as
client/server, increased networking of personal computers into LAN/WAN,
increased use of the Internet and growing use of intranets in corporate
environments.
BUSINESS STRATEGY
The Company's strategic focus is to pursue growth in its core business. To
fuel expansion as well as earnings, additional products and services are
developed internally or through the acquisition of companies. ATEC acquires a
company when it finds an organization with complimentary synergy providing
additional value added services to meet the growing requirements of our clients.
As a result, the Company continually evaluates potential acquisition
opportunities, some of which, may be material in size and scope. The Company
focuses on expense control, including the improvement of the company's internal
processes and procedures, effective asset management, and the addition and
expansion of higher margin services and products.
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The Company seeks to maintain a low over-head structure through the
combination of many of its management and operating functions. Further, the
Company pursues revenue growth in its core business of providing information
technology products and services while continually training its staff to deliver
the latest technology and services to its clients, thereby achieving higher
margins.
Additionally, as part of its growth strategy, the Company pursues
strategic alliances with companies that market products and services that either
complement or expand its existing business.
MARKETING
The Company's marketing strategy is to educate business clients as to the
Company's ability to provide a "single source, end to end solution" for all
computer related products and services. The Company also benefits from the "word
of mouth" promotion of satisfied customers.
The Company believes business technology buying has matured and corporate
customers have become more knowledgeable about integrating new technologies and
how to get the most for their business out of the new technologies. The
Company's objective is to continue to be an industry leader by providing
corporate America with a full range of technology products and services that
effectively reduce information services management's total cost.
PRODUCTS
Computer Hardware and Software
The Company markets a broad selection of products with a focus on the
microcomputer, client/servers and peripherals manufactured by major vendors. The
Company's subsidiaries are authorized sales and service dealers for major
manufacturers, including, but not limited to, Compaq, Gateway, Hewlett-Packard,
Apple, Novell, Informix, 3 Com, Toshiba, Oracle, Sybase, GM Hughes, and numerous
others. The sales of products of three major manufacturers (IBM, Compaq, and
Hewlett-Packard) generated over 50% of the Company's revenues for the year ended
June 30, 1998. The Company's agreement with these vendors generally are renewed
periodically and permit termination by manufacturers without cause, generally
upon 30 to 90 day's notice. The Company believes that these provisions are
standard in the computer reseller industry and any such change in the future
would not adversely affect the company.
The Company evaluates its product assortment based on technological
advances, availability, and marketability of the products. The Company
continually seeks to expand its product offering in response to its market
conditions. Service and support offered by the Company are with emphasis on
achieving higher profit margin, insuring good quality, and service to its
clients. The Company has excellent vendor/dealer relationships with distributors
such as, Synnex (formerly ComputerLand), Micro Age, Merisel, Techdata, Ingram,
and many
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more. These relationships enable the Company to source its products from
multi-distribution channels. The Company purchased approximately 38% of its
products from Synnex during the year ended June 1998. The company did not
experience any material differential in obtaining products from its vendors
during its prior year. The Company believes that other suppliers would be able
to adequately service the Company's needs in the event that an existing
vendor/dealer agreement were terminated. The industry has recently experienced
product shortages as a result of manufacturers' decision to reduce inventory
quantities.
SERVICES AND SOLUTIONS
Digital Arts Division
ATEC Digital Arts delivers complete solutions from sales, installation and
custom integration into customer environments, to ongoing support and
consultation including a full range of client training programs in graphics
using Silicon Graphics/Unix, Macintosh, and Windows NT. In addition, ATEC
Digital Arts provides high-end server and networking solutions, with full
cross-platform networking and interoperability capabilities. Digital Arts has
grown rapidly since its inception and has already won awards for sales in
animation and computer graphics including the "TOP 3D SALES" award in July 1998
from Softimage for the Eastern USA.
Digital Arts is an authorized value-added reseller for a wide range of
workstations, servers, networking equipment, animation, digital video, and
electronic publishing solutions including Silicon Graphics, Compaq, Intergraph,
Apple, Bay Networks, Cisco, Avid Softimage, Kinetix-Discreet Logic, Media 100,
Accom, DPS, Adobe Premium VAR, Xinet, Canto and more. Creation of this graphic
arts and high-end server division enhances the existing system integration
capabilities of the Company by expanding its scope into new media, pre-press and
electronic publishing, video non-linear editing, animation and special effects,
internet, web design, as well into complete unix and NT server and complex 100
BaseT, GigaBit ethernet, and FDDI networking and cross-platform installations.
Year 2000 Solution
Many computer applications that have been developed by corporations during
the past decades will experience failures or glitches associated with the Year
2000 issue. This problem will be unlike any that organizations have experienced
since the dawn of the computer age. The problem is real and huge. Unless systems
are fixed or replaced by December 31, 1999, this problem could cause the
equivalent of a giant computer meltdown. Peter de Jagar, a Year 2000 industry
analyst, describes it as "...the largest management challenge most systems
people will face in their lifetime..." Estimates to cure the Year 2000 problem
run as high as $600 billion. Every business which relies on information systems
is potentially at risk. The basis of the Year 2000 problem is that most computer
systems use a two-digit field in entering the date year. When "00" is entered
for the year 2000, many of these systems will fail to recognize the data and
stop working or recognize the year as 1900. The issue is critical to businesses.
There is not enough
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time and there are not enough resources for every business and government agency
to achieve compliance by December 31, 1999. Companies that start their date
change projects now have a better chance of minimizing exposure in the new
millennium.
The Company acquired LOGIX, a Colorado based Year 2000 solution provider,
to help client's address the complexity of the Year 2000 problem. The Company
offers Year 2000 business solutions to its clients through an array of tools and
procedures that are broad in scope but flexible enough to fit an organization's
individual needs. The Company provides breadth and depth of services that
support long-term success in the following project areas:
o Assessment
o Planning
o Conversion
o Testing
o Implementation
Year 2000 issues do not stop with computer systems; most of today's office
equipment, building systems, elevators, heating, air conditioning, security
systems, medical equipment, etc., rely on data chips. Any equipment with an
embedded microchip using software logic sets in the read-only memory of a
hardware device may fail to compare, calculate, or sequence date data. The
Company recognizes that addressing the Year 2000 embedded chip issue requires
PLC (Programmable Logic Chips) expertise, project management expertise, Year
2000 expertise, and strategic alliances. The Company is ready to address Year
2000 embedded chip issues such as assessment, inventory, analysis, and
implementation.
The Company is equipped to deliver high quality Year 2000 business
solutions, services, and resources including conversion, methodologies,
remediation factory operations, review of previously remediated code, project
management, training, testing, consultation, and process reviews. Among
languages the Company supports are Cobol, PLI, RPG, Focus, and Natural. LOGIX
will continue to evaluate solutions for additional languages.
Telecommunication Products and Services
ATEC signed a co-marketing agreement with Switch Now, a New York company
("Switch Now") to deliver a diversity of telecommunications services through
innovative, low cost "CT2" switching platforms capable of managing voice, fax,
Internet, messaging, and other forms of communications traffic. The Company will
target small and medium size businesses, the departments of large corporations,
and carriers who desire to extend their services to the premises of new
customers. The Company's unique approach that combines systems integration with
a carrier business will enable ATEC to reach a diverse base of clients desiring
to achieve telecom and data communications.
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The CT2 platform enables the user to readily reconfigure the platform's
operation to a variety of applications, that facilitates the insertion of new
calling features and services with a minimum of programming effort or additional
hardware. CT2 platforms will be deployed at the site of ATEC clients and at
Switch Now switching centers.
Support Services
ATEC's support services include a wide range of services designed for its
clients, corporate planners and management needing a single source for
consulting and technical support issues, such as local and wide area networks,
gateways, bridges, system conversion planning, hardware and software
specifications, database/database server development and implementation, video
conferencing and high speed data transmission.
ATEC provides professional network company administrators who determine
managerial requirements and then perform executive functions on a regularly
scheduled basis. Since the Company's technicians provide expertise in a variety
of network administration technologies, ATEC serves as a single, neutral source
of support services, significantly reducing network administration costs while
ensuring that systems remain updated with the latest available application
software.
Outsourcing Services
Outsourcing is defined as the use of an outside service provider to extend
or replace an in-house department. The outsourcing of computer services is a
rapidly growing trend which has allowed the Company to provide those types of
services to our client base. The Company believes that it is generally more
cost-effective and more efficient for its client's to purchase outsourcing
services from the Company than for them to provide equivalent services by hiring
their own service and support personnel.
Product Maintenance
The Company offers its clients complete on-site and off-site product
maintenance and repair services. These services generally provide for the
Company to maintain microcomputer equipment at the client's location during
regular business hours. Most maintenance contracts are renewable annually. In
addition, our service department fulfills warranty requirements and offers
extended maintenance and repair agreements after the expiration of manufacturer
warranties.
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COMPETITION
The microcomputer market is very competitive. The Company competes
directly with a variety of local and national distributors, super stores,
retailers, mail order houses and other entities that offer computer products and
services. The Company seeks to compete with its competitors based upon the
Company's commitment to provide a single source "end-to-end" solution to its
clients' data processing needs in a cost effective manner. While the Company
attempts to competitively price hardware and software items, the Company does
not focus on pricing as its primary competitive strength. Before price,
management believes that the Company's principal strength is its ability to
offer clients complete and cost efficient solutions to their individualized
computer needs.
The systems integration and computer installation industries are both
highly competitive and include participants from a variety of market segments.
The competition in systems integration services includes mid-level and regional
systems integrators. The Company believes it competes favorably with these
systems integrators in the areas of responsiveness, regional and national vendor
contacts and dedication to achieving certification standards to provide its
clients with a higher quality of customer service.
The Company believes that its ability to compete depends in part on a
number of factors outside of its control, including the ability of its
competitors to hire, retain and motivate a large number of personnel and the
development by others of services that are competitive with ATEC's applications
and services, and the price at which others offer comparable service. Many
participants in the computer reseller, software development and systems
integration businesses have significantly greater financial, technical and
marketing resources than does the Company.
BACKLOG
The Company does not have a significant backlog as it normally delivers
and installs the computer products purchased by its clients within a short time
of the date of order.
GOVERNMENTAL REGULATION AND CONTRACTS
The Company believes that it is in material compliance with federal and
state laws and regulations which are applicable to its operations. The Company
is not a party to any government contract which represents a material portion of
the Company's revenues or which, if terminated or renegotiated, would have a
material adverse effect on the Company's business.
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PATENTS AND TRADEMARKS
The Company does not currently rely upon the use of any patents and/or
trademarks in connection with its operations except for references in
advertising materials as an authorized dealer or vendor of specific products of
manufacturers with whom they have agreements. The Company believes however that
the ability to identify itself as the authorized dealer of such manufacturers is
an important aspect of their marketing strategy.
EMPLOYEES
As of the date of this Annual Report, the Company had an aggregate of
approximately 110 employees, including its 7 administrators, 25 staff persons, 6
managers, 42 full-time sales persons, 23 technical and 7 warehouse personnel.
The Company has no collective bargaining agreements and believes the relations
with its employees are good.
ITEM 2. PROPERTIES
The Company's headquarters and executive offices are located at 90 Adams
Ave., Hauppauge, New York. This location occupies approximately 6,000 square
feet leased pursuant to a lease expiring in 2000 providing for annual rental
payments of approximately $44,000 plus certain expenses. ATEC maintains a retail
location and warehouse facility in Albany, New York, consisting of approximately
8,050 square feet. The Albany facility lease expires on June 30, 2003 and
requires annual rental payments of 108,192, plus all expenses and taxes
attributable to the operation of the premises. The Albany facility is leased
from a company controlled by Surinder and Ashok Rametra, officers and directors
of the Company. The Company's New York City operations are located at 143 West
29th Street, New York, New York. This location occupies 4,000 square feet, is
leased on a month to month basis and requires annual rental payments of $39,000,
plus certain expenses. Due to limited space, additional space was leased at 143
West 29th Street, New York, New York. This location occupies 4,000 square feet
and required annual payments of $36,000 per year plus other expenses under a
lease expiring in 2002. Another facility is located in Pinebrook, New Jersey.
This location occupies 5,328 square feet and requires annual payments of
approximately $41,026 per year plus other expenses under a lease expiring in
2002. The Company's LOGIX subsidiary has leased a facility which occupies 8,000
square feet at an annual rental of approximately $92,000 expiring in 1999.
The Company believes that its current facilities are suitable for its
present and projected needs. The Company does not own any real property.
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ITEM 3. LEGAL PROCEEDINGS
A third party action was commenced against the Company's predecessor
("Hillside Bedding") in the Supreme Court, Bronx County in 1993. The action
results from a claim by a former worker who was allegedly injured while
operating a forklift during the course of his employment. The worker commenced
an action against the Company which maintained the forklift, Mid Hudson
Clarklift ("MH"), seeking damages of $7,000,000 for the alleged failure of such
company to properly maintain and service the lift. MH instituted a third party
action seeking judgment for all or part of any verdict or judgment which may be
obtained against MH. The case is presently in the discovery stages.
In 1990, a competitor of the Company commenced an action against it and
one of its advertising agents. This action was dismissed during the year ended
June 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1998, the Company did not submit any matter to
the vote of its shareholders.
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock and Warrants are traded on the National Association
of Security Dealers Automated Quotation System ("NASDAQ") under the symbol
"ATEC" and "ATECW"), respectively. The following table sets forth the high and
low bid prices for the Company's Common Stock and Warrants for the periods
indicated as reported by the NASDAQ. Such prices reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
COMMON STOCK
High Low
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1996
Quarter ended 9/30..................................3 3/4 3 19/32
Quarter ended 12/31.................................4 11/16 4 3/8
1997
Quarter ended 3/31..................................3 9/32 3 1/8
Quarter ended 6/30..................................3 9/32 2 31/32
Quarter ended 9/30................................8 19/32 7 11/32
Quarter ended 12/31.................................3 1/2 3 1/4
1998
Quarter ended 3/31..................................6 1/2 5 5/8
Quarter ended 6/30..................................7 5/8 6 15/16
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WARRANTS
High Low
---- ---
1996
Quarter ended 9/30..................................15/32 5/16
Quarter ended 12/31.................................1 9/16 1 1/4
1997
Quarter ended 3/31..................................15/16 5/16
Quarter ended 6/30..................................15/16 5/16
Quarter ended 9/30................................1 9/16 1 9/16
Quarter ended 12/31.................................1/8 3/32
1998
Quarter ended 3/31..................................7/16 11/32
Quarter ended 6/30..................................1 19/32
On September 23, 1998, the closing prices of the Company's common stock
and warrants was $4.25 and $.25 respectively.
On September 23, 1998, there were approximately 264 holders of record of
the Company's Common Stock; 16 holders of record of the Series A Preferred
Shares; 3 holders of record of the Units and 34 holders of record of the
Warrants. The number of record holders do not include holders whose securities
are held in street name.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings for the operation and expansion of the Company's business.
The holders of its Series A Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board. (See "Item
8-Financial Statements").
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in
the period ended June 30, 1998 have been derived from the audited financial
statements of the Company. This information should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report
and "Management's Discussion and Analysis."
<TABLE>
<CAPTION>
Operating Data 1998* 1997* 1996* 1995* 1994*
- -------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales $ 187,150,614 $ 100,841,362 $ 81,812,045 $ 47,565,542 $ 43,474,764
Income (Loss) from
continuing operations $ 2,740,066 $ 1,667,898 $ 838,346 $ (2,251,354) $ (226,079)
Income (Loss) per common share:
Basic $ .45 $ .28 $ .16 $ (1.25) $ (.20)
Diluted $ .43 $ .28 $ .16 $ (1.25) $ N/A
Balance Sheet Data
Total Assets $ 26,634,164 $ 17,147,707 $ 13,322,133 $ 11,724,938 $ 7,728,352
Long-term obligations -- -- $ 228,322 $ 918,291 $ 1,580,255
Cash dividends per
common share Nil Nil Nil Nil Nil
</TABLE>
* Results have been restated to include the June 1996 acquisition of
Innovative Business Micros, Inc. Shares outstanding and earning per share
for 1996 have been restated to reflect the increase in shares issued upon
the conversion of preferred stock due to market price changes. All
earnings per share reflect the Company's five for one reverse stock split
in November 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
ATEC is a leading system integrator and provider of a full line of IT
service products. As a single source "end-to-end" solution provider for the
computer needs of businesses, professionals, government agencies and educational
institutions, ATEC enters the new millennium with a technological arsenal that
includes Year 2000 remediation, multimedia products, video conferencing, system
integration, networking, high speed data transmission, Internet, and Intranet
ready solutions. In addition, the Company has positioned itself for growth in
telecommunications, outsourcing of IT professionals, and offshore software
development to provide its clients' technological needs in a cost effective
manner.
RESULTS OF OPERATIONS
Fiscal 1998 compared to Fiscal 1997
The Company's revenues for the 1998 fiscal year ("Fiscal 1998) increased
to $187.2 million from $100.8 million for the prior year, an increase of
approximately 86%. This increase is primarily attributable to internal growth.
Revenues are generated by the Company's sales of computer hardware and software,
and related support services. Gross profit for the Fiscal 1998 increased to
$13.7 million from $9.8 million for 1997, a 40% increase due to the increased
revenues. Gross margin for the Fiscal 1998 was 7.3% as compared to 9.7% for the
prior year. These margins are expected to increase as the Company attempts to
increase its market share n more profitable sectors of the business such as
integration, hardware service/maintenance, telecommunications Year 2000
consulting and services, networking and training.
Fiscal 1998 operating expenses exclusive of amortization of intangible
assets increased to $8.6 million as compared to $6.9 million for the prior year.
The 25% increase in operating expenses are related primarily to additional
selling expenses and research and development expenses.
Amortization of intangible assets increased to $308,000 for the year from
$224,000 in the comparable 1997 period. Other income decreased to $148,000 from
$282,000 primarily as a result of $153,000 reduction in the sales tax obligation
of the Company's predecessor in 1997. The Company also earned an additional
$78,000 of interest income and incurred $32,000 less interest expense in 1998
due to management's continued judicious use of working capital.
The provision for income taxes for 1998 was $2,145,000 as compared to
$1,299,0000 for 1997.
As a result of the above, the Company's net income increased to $2,740,000
for 1998 from $1,668,000 in 1997. For 1998, net income per share was $.43
compared to $.28 in the prior
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year, an increase of 54%. Basic and diluted average shares outstanding were
6,079,045 and 6,338,151 respectively, for 1998.
Fiscal 1997 compared to Fiscal 1996
The Company's revenues for the 1997 fiscal year increased to $100.8
million from $81.8 million for the prior year, an increase of approximately 23%.
This increase is primarily attributable to internal growth. Revenues were
generated by the Company's sales of computer hardware and software, and related
support services. Gross profit for the year increased to $9.8 million for 1997
from $7.5 million for 1996, a 31% increase due to the increased revenues. Gross
margin for the year was 9.7% as compared to 9.1% for the prior year.
1997 operating expenses exclusive of amortization of intangible assets
increased to $6.9 million as compared to $6 million for the prior year. The 15%
increase in operating expenses are related primarily to additional selling
expenses and research and development expenses in 1997.
Amortization of intangible assets increased to $224,000 for the year from
$168,000 in the comparable 1995 period. Other income increased $345,000 to
$282,000 primarily as a result of $153,000 reduction in the sales tax obligation
of the Company's predecessor. The Company also earned an additional $41,000 of
interest income and incurred $39,000 less interest expenses in 1997 due to
management's judicious use of working capital.
The provision for income taxes for 1997 was $1,299,000 as compared to
$415,000 for 1996.
As a result of the above, the Company's net income increased to $1,668,000
for 1997 from $838,000 in 1996. For 1997, net income per share was $.28 compared
to $.16 in the prior year. Basic and diluted average shares outstanding were
5,947,109 and 5,960,247, respectively for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $1,785,000 at June 30, 1998, a decrease of
$229,000 as compared to June 30, 1997. The Company's working capital at June 30,
1998 was $8,314,000 as compared to a working capital of $3,753,000 at June 30,
1997. The changes in cash and working capital resulted primarily from operations
and the sale of common stock for $1,682,000.
Cash used for investing activities totaled $293,000 primarily for the
purchase property and equipment.
To accommodate the Company's financial needs for inventory financing,
Deutsche Financial Service has granted a credit line in the amount of
$15,000,000. At June 30, 1998, indebtedness of the Company to Deutsche Financial
was $6,999,000, or an increase of $5,168,000 compared at June 30, 1997.
Substantially, all of subsidiary company tangible and intangible assets are
pledged as collateral for this facility.
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YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operation will not be
adversely affected by Year 2000 software failure. The Company is communicating
with suppliers, customers and others with which it does business to coordinate
Year 2000 conversion. The cost of achieving compliance is estimated to be a
minor increase over the cost of normal software upgrades and replacements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
16
<PAGE>
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current directors
and officers of the Company and the position in the Company held by them:
Name Age Position
---- --- --------
Surinder Rametra 58 Chairman of the Board and
Chief Executive Officer
Ashok Rametra 44 Treasurer, Chief Financial
Officer and Director
Balwinder Singh Bathla 42 Director
George Eagan 41 Director
David Reback 56 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
Surinder Rametra was appointed the Chief Executive Officer and Chairman
of the Board of the Company in June 1994. Prior to June 1994 Mr. Rametra was
president of a subsidiary of the Company. Mr. Rametra received a Bachelor of
Science Degree from the Punjab Engineering College, India and a Masters of
Science Degree in Engineering from the University of I.I.T., India in 1965
and 1969 respectively. In 1976 Mr. Rametra received a Masters of Business
Administration Degree in Finance from New York University.
Ashok Rametra was appointed Treasurer, Chief Financial Officer and
Director of the Company in June 1994. From June 1994 to March 1995 Mr.
Rametra also served as the Company's president. Prior to 1994 Mr. Rametra was
the president of a subsidiary of the Company. Mr. Rametra received a Bachelor
of Science Degree from St. Johns University in accounting in 1980.
17
<PAGE>
Balwinder Singh Bathla was appointed as the President and a Director of
the Company in March, 1995. Prior to 1995, Mr. Bathla was the principal
operating officer of a subsidiary of the Company. Mr. Bathla received a
Masters Degree in Statistics from Punjab University, Chandigar, India in
1979. On August 24, 1998, Mr. Bathla resigned as an officer and director of
the Company.
George Eagan was appointed as a Director in November 1997. Mr. Eagan
serves as president of Waterford Capital. Mr. Eagan has been in the
financial industry for the past twenty years working with both private and
public companies in the capacity of a financial advisor. Mr. Eagan graduated
with a Bachelor of Science in Business Administration/Management from Alfred
University, and an MBA in Finance from McGill University.
David C. Reback was appointed as a Director in November 1997. Since
1969, Mr. Reback is a partner with Reback & Potash, LLP, a law firm
specializing in litigation, appellate matters and real estate. Mr. Reback
received a B.A. from Syracuse University, and in 1965 he received a law
degree from Syracuse University College of Law.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Registrant
during its most recent fiscal year, the Company believes that there were no
Section 16(a) reports filed untimely during the Company's year ended June 30,
1998 or June 30, 1997.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Company's Summary Compensation Table for the years ended June 30,
1998, 1997 and 1996 is provided herein. This table provides compensation
information on behalf of the Company's existing officers and directors. There
are no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal Year-End
Option/SAR Value Table for the Years ended June 30, 1998, 1997 and/or 1996.
There are no long-term incentive plan ("LTIP") awards, or stock option or stock
appreciation rights except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1998, 1997 and 1996
Annual Compensation Awards Payouts
<TABLE>
<CAPTION>
Year Compen- Options/ LTIP
Name Position Ended Salary($) Bonus($) sation($) SARs Payouts
- ---- -------- ----- --------- -------- --------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Surinder Rametra CEO 6/30/98 $170,020 14,430(1) NONE NONE
6/30/97 $160,680 6,737(4) NONE NONE
6/30/96 $156,000 5,680(7) NONE NONE
Ashok Rametra CFO 6/30/98 $170,000 14,077(2) NONE NONE
6/30/97 $150,020 19,372(5) NONE NONE
6/30/96 $150,020 6,508(8) NONE NONE
Balwinder Singh President
Bathla 6/30/98 $170,000 11,221(3) NONE NONE
6/30/97 $158,216 20,806(6) 100,000(10) NONE
6/30/96 $135,000 51,723(9) NONE NONE
</TABLE>
(1) Major Medical $6,372, Leased Auto $8,058
(2) Major Medical $4,380, Leased Auto $9,697
(3) Major Medical $5,196, Leased Auto $6,025
(4) Major Medical $6,737
(5) Major Medical $4,727, Leased Auto $4,645, Interest Income 10,000
(6) Major Medical $4,776, Life Insurance $6,600, Rent Income $5,400, Interest
Income $4,030
(7) Major medical $5,680
(8) Major medical $3,799, Leased Auto $2,710
(9) Major medical $4,465, Leased Auto $9,000, Interest income $38,258
(10) In December 1996, the Company issued to Mr. Bathla options to purchase an
aggregate of 100,000 shares of common stock exercisable at $3.75 per share
through December 2006.
19
<PAGE>
Year End Option Table. The following table sets forth certain information
regarding the stock options held as of June 30, 1998 by the individuals named in
the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End(#) at Fiscal Year End (4)
Shares Acquired Value --------------------------- ---------------------------
Name on exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balwinder Singh
Bathla (1) 0 0 124,000 0 $61,690 0
Surinder Rametra (2) 0 0 507,000 0 $5,233 0
Ashok Rametra (3) 0 0 10,000 0 $7,475 0
</TABLE>
(1) Represents options to acquire: (i) 100,000 shares at $3.75 per share
exercisable through December 19, 2006; and (ii) 24,000 shares at $3.44 per
share exercisable through August 8, 2007.
(2) Represents options to acquire: (i) 500,000 shares at $5.00 per share
exercisable through March 2008; and (ii) 7,000 shares at $3.44 per share
exercisable through August 8, 2007.
(3) Represents options to acquire 10,000 shares at $3.44 per share exercisable
through August 8, 2007.
(4) Computation based on $4.1875 which was the June 30, 1998 closing price for
the Common Stock.
Option Grant Table. The following table sets forth certain information
regarding the stock options granted during the fiscal year ended June 30, 1998
by the Company to the individuals named in the above Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Options
Granted to
Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year $ / Share Date
- ---- ----------- ----------- --------- ----
Balwinder Singh
Bathla 24,000 Less than 1% $3.44 2007
Surinder Rametra 500,000 7.7% $5.00 2008
Surinder Rametra 7,000 Less than 1% $3.44 2007
Ashok Rametra 10,000 Less than 1% $3.44 2007
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 23, 1998 certain
information with respect to the beneficial ownership of the Company's voting
securities by (i) any person (including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") known by the Company to be the beneficial owner of more than 5%
of the Company's voting securities, (ii) each director of the Company, (iii)
each executive officer named in the Summary Compensation table appearing herein,
and (iv) all executive officers and directors of the Company as a group. The
table also sets forth the respective general voting power of such persons taking
into account the voting power of the Common Stock and the Preferred Stock
combined.
Name and Address Amount and Nature
of Beneficial of Beneficial Percentage of
Owner Ownership of Voting Stock
Outstanding Common Stock Outstanding(1)
- ----------- ------------ --------------
Ashok Rametra(2) 677,045 9.5%
1762 Central Avenue
Albany, NY 12205
Surinder Rametra(3) 1,212,801 15.9%
90 Adams Avenue
Hauppauge, NY 11788
George Eagan (4) 5,000 **
C/O 90 Adams Avenue
Hauppauge, NY 11788
David Reback (5) 5,000 **
C/O 90 Adams Avenue
Hauppauge, NY 11788
Balwinder Singh Bathla(6) 497,454 6.9%
143 West 29th Street
New York, NY 10001
Rajnish Rametra (7) 413,070 5.8%
90 Adams Avenue
Hauppauge, NY 11788
All directors and (2)(3)(4)(5) 1,899,846 24.9%
executive/officers as a group
(4 persons)
- ----------------
** Less than 1%
21
<PAGE>
(1) Computed based upon a total of 6,764,460 shares of Common Stock, 12,213
shares of Series A Preferred Stock, 1,458 shares of Series B Preferred
Stock and 330,731 shares of Series C Preferred Stock. Each share is Common
Stock and Preferred Stock possess one vote per share. Accordingly, the
foregoing represents an aggregate of 7,109,380 votes.
(2) The foregoing figure reflects the ownership of 279,949 shares of common
stock by Mr. Rametra and 387,096 common shares owned by Mr. Rametra's
spouse and children. The foregoing amount also assumes the exercise by Mr.
Rametra of options to acquire 10,000 shares of the common stock. Mr.
Rametra disclaims beneficial ownership of shares of the Company's
securities owned by other members of the Rametra family.
(3) The foregoing figure reflects the ownership of 440,140 shares of common
stock by Mr. Rametra and 265,661 shares by Mr. Rametra's spouse. In
addition, the foregoing assumes the exercise by Mr. Rametra to acquire
507,000 shares of the Company's common stock. Mr. Rametra disclaims
beneficial ownership of shares of the Company's securities owned by other
members of the Rametra family including independent children.
(4) The foregoing figure reflects options for the purchase of 5,000 shares
of common stock.
(5) The foregoing figure reflects options for the purchase of 5,000 shares
of common stock.
(6) The foregoing figures reflect the ownership of 272,744 shares of common
stock by Mr. Bathla, 60,000 shares held by American Century Mortgage of
which Mr. Bathla is the sole shareholder and 40,710 shares held by
Charanjit Sidhu, a relative. The foregoing figure also assumes the
exercise by Mr. Bathla of options to acquire 124,000 shares of the
Company's common stock. Mr. Bathla disclaims beneficial ownership of
shares of the Company owned by other members of his family. Mr. Bathla
resigned as an officer and director of the Company in August 1998.
(7) The foregoing figures reflect the ownership by Mr. Rametra of 203,620
shares and an aggregate of 185,450 shares by his spouse and children. The
figure also assumes the exercise by Mr. Rametra of 24,000 stock options.
Mr. Rametra disclaims beneficial ownership of shares of the Company owned
by other members of the Rametra family.
ITEM 13. CERTAIN TRANSACTIONS
In June. 1996, the Company acquired 100% of the outstanding capital
stock of Innovative Business Micros. Inc. a computer integrator located in
Long Island. Innovative was formerly owned by Surinder Rametra and Ashok
Rametra, the Company's Chief Executive Officer and Chief Financial Officer,
respectively. and Rajnish Rametra their brother. The consideration for the
acquisition was the issuance by the Company of an aggregate of 4,900,000
shares of the Company's Common Stock to the former shareholders of
Innovative. The terms of the acquisition were not negotiated in an
arms-length manner and there can be no assurance that an unaffiliated company
would have paid less consideration for Innovative then paid by the Company.
The acquisition was accounted for as a pooling of interest.
In January 1997, the Company issued options to purchase 700,000 shares of
common stock to the former shareholders of Cony and ACS for the amendment to the
purchase and employment agreements, eliminating any future performance payments.
All inter company transaction have been eliminated in consolidation.
22
<PAGE>
LOANS
<TABLE>
<CAPTION>
06/30/98 06/30/97 06/30/96 Interest Maturity
Lender Amount Amount Amount Rate Date
- ------ ------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Balwinder Singh Bathla $2,967 $2,967 $228,322 10% 06/30/98
Rajnish Rametra $ -.- $ -.- $500,000 10% 06/30/98
Ashok Rametra $ -.- $ -.- $150,000 10% 06/30/98
</TABLE>
During the year ended June 30, 1998, Balwinder Singh Bathla advanced the
Company $2,967. The advance bears interest at the rate of 10% per annum.
MCS's office located in Albany, New York is leased pursuant to a lease
expiring in June 2003. The lease requires annual rental payments of
approximately $108,192 plus all expenses and taxes attributable to the operation
of the premises. This facility is leased from 1762 Central Avenue Realty
Associates (a partnership) controlled Surinder Rametra and Ashok Rametra,
Officers and Directors of the Company.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: s\ Surinder Rametra
-----------------------------------------
Surinder Rametra, Chief Executive Officer
Dated: September 28, 1998
Pursuant to the requirements of Section 13 or 15(d) 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.
s\ Surinder Rametra September 28, 1998
- -----------------------------------------------------
Surinder Rametra, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
s\ Ashok Rametra September 28, 1998
- -----------------------------------------------------
Ashok Rametra, Chief Financial Officer, Treasurer and
Director (Principal Financial Officer and
Principal Accounting Officer)
s\ George Eagan September 28, 1998
- -----------------------------------------------------
George Eagan, Director
s\ David Reback September 28, 1998
- -----------------------------------------------------
David Reback, Director
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
I N D E X
Page No.
--------
INDEPENDENT AUDITORS' REPORT ........................................ F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 1998 and 1997 ....... F-2
Consolidated Statements of Operations
For the Years Ended June 30, 1998, 1997 and 1996 ............. F-3
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998, 1997 and 1996 ............. F-4 - F-5
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 1996, 1997 and 1998 ............. F-6 - F-7
NOTES TO FINANCIAL STATEMENTS ....................................... F-8 - F-20
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and have therefore been omitted or
the required information is shown in the Financial Statements or the Notes
thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the accompanying consolidated balance sheets of ATEC Group, Inc.
and Subsidiaries as at June 30, 1998 and 1997, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years ended June 30, 1998. 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 provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years
ended June 30, 1998, in conformity with generally accepted accounting
principles.
New York, New York
August 21, 1998
F-1
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
A S S E T S
Current assets:
Cash $ 1,784,850 $ 2,013,549
Accounts receivable - net 17,634,632 9,246,247
Inventories 1,790,695 1,382,236
Deferred taxes 37,249 37,249
Other current assets 576,677 441,469
------------ ------------
Total current assets 21,824,103 13,120,750
Property and equipment - net 568,026 439,000
Goodwill - net 4,168,623 3,556,704
Other assets 73,412 31,253
------------ ------------
$ 26,634,164 $ 17,147,707
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 339,944 $ 533,871
Revolving line of credit 6,998,712 1,830,359
Accounts payable 4,154,143 4,447,595
Notes payable - related parties 2,967 127,967
Accrued expenses 1,166,070 777,385
Income taxes payable 790,882 1,029,016
Other current liabilities 57,057 621,412
------------ ------------
Total current liabilities 13,509,775 9,367,605
------------ ------------
Stockholders' equity:
Preferred stocks 346,507 353,057
Common stock 67,006 59,657
Additional paid-in capital 9,035,615 7,092,939
Discount on preferred stocks (309,105) (315,000)
Retained earnings 3,984,366 1,244,300
------------ ------------
13,124,389 8,434,953
Less: Treasury stock - at cost -- (654,851)
------------ ------------
Total stockholders' equity 13,124,389 7,780,102
------------ ------------
$ 26,634,164 $ 17,147,707
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 187,150,614 $ 100,841,362 $ 81,812,045
Cost of sales 173,485,484 91,073,358 74,354,590
------------- ------------- -------------
Gross profit 13,665,130 9,768,004 7,457,455
------------- ------------- -------------
Operating expenses:
Selling and administrative 8,439,618 6,698,088 5,962,547
Research and development 180,759 161,158 --
Amortization of goodwill 308,015 224,190 168,285
------------- ------------- -------------
Total operating expenses 8,928,392 7,083,436 6,130,832
------------- ------------- -------------
Income from operations 4,736,738 2,684,568 1,326,623
------------- ------------- -------------
Other income (expense):
Loss on sale of property
and equipment -- -- (8,372)
Dividend and interest income 164,417 86,699 45,866
Interest expense (80,341) (112,379) (150,949)
Other income 64,286 308,089 39,718
------------- ------------- -------------
Total other income (expense) 148,362 282,409 (73,737)
------------- ------------- -------------
Income before income taxes 4,885,100 2,966,977 1,252,886
Provision for income taxes 2,145,034 1,299,079 414,540
------------- ------------- -------------
Net income $ 2,740,066 $ 1,667,898 $ 838,346
============= ============= =============
Earnings per common share:
Basic $ .45 $ .28 $ .16
============= ============= =============
Diluted $ .43 $ .28 $ .16
============= ============= =============
Weighted average shares outstanding -
Basic 6,079,045 5,947,109 5,138,329
============= ============= =============
Diluted 6,338,151 5,960,247 5,145,906
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,740,066 $ 1,667,898 $ 838,346
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 173,950 146,123 104,030
Amortization of goodwill 308,015 224,190 168,285
Settlements of accrued liabilities (70,000) (120,100) --
Reduction of deferred sales-
tax obligations -- (183,052) --
Compensatory element of issuances
of capital stock 142,500 -- 43,000
Loss on sale of property and equipment -- -- 8,372
Provision for doubtful accounts -- (20,000) --
Changes in assets and liabilities:
Accounts receivable (8,468,573) (4,074,242) 758,744
Receivables from officers
and related parties -- 6,124 59,667
Inventories (408,459) 1,431,701 (1,087,396)
Deferred taxes -- 5,524 (27,560)
Other current assets (135,208) (27,757) (93,730)
Other assets (42,159) 51,100 16,742
Revolving lines of credit 5,168,353 (254,695) (875,579)
Accounts payable (293,452) 3,102,699 (1,120,705)
Accrued expenses 388,685 (73,418) 278,783
Deferred sales tax obligation -- -- 51,000
Payables to related parties -- -- (25,000)
Income taxes payable (238,134) 750,416 278,600
Other current liabilities (564,355) 320,095 (22,303)
----------- ----------- -----------
Total adjustments (4,038,837) 1,284,708 (1,485,050)
----------- ----------- -----------
Net cash provided by (used in)
operating activities (1,298,771) 2,952,606 (646,704)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (293,034) (70,213) (206,388)
Security deposits -- 14,843 --
Sale of property and equipment -- -- 13,700
Payments of notes receivable - officer -- -- 110,909
----------- ----------- -----------
Net cash used in investing activities (293,034) (55,370) (81,779)
----------- ----------- -----------
</TABLE>
(Continued)
See accompanying notes to financial statements.
F-4
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of capital stock $ 1,682,033 $ -- $ 1,250,251
Purchase of preferred stock -- (1,250,112) --
Purchase of treasury stock -- (654,851) --
Repayments from related parties -- 125,000 650,000
Repayments to related parties (125,000) (875,355) (689,969)
Bank overdraft (193,927) 104,600 266,137
----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,363,106 (2,550,718) 1,476,419
----------- ----------- -----------
Net increase (decrease) in cash (228,699) 346,518 747,936
Cash at beginning of year 2,013,549 1,667,031 919,095
----------- ----------- -----------
Cash at end of year $ 1,784,850 $ 2,013,549 $ 1,667,031
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Income taxes $ 2,422,543 $ 449,404 $ 292,635
=========== =========== ===========
Interest $ 83,182 $ 109,538 $ 103,357
=========== =========== ===========
Supplemental Schedules of
Non-Cash Transactions:
Issuance of common stock for services $ 142,500 $ 37,500 $ 7,998
=========== =========== ===========
Issuance of common stock in
satisfaction of debt $ -- $ -- $ 45,000
=========== =========== ===========
Issuance of common and preferred stock
in lieu of note and loan repayments $ -- $ -- $ 20,000
=========== =========== ===========
Issuance of shares of common and preferred
stock in connection with the acquisition
of all the outstanding shares of capital
stock of ACS, resulting in the recording
of goodwill $ -- $ 776,690 $ 283,000
=========== =========== ===========
Issuance of shares of common and preferred
stock in connection with the acquisition
of all the outstanding shares of capital
stock of CONY, resulting in the recording
of goodwill $ -- $ 389,510 $ 391,634
=========== =========== ===========
Issuance of preferred stock in settle-
ment of class action suit against
former bedding operation $ -- $ -- $ 35,000
=========== =========== ===========
Issuance of shares of common in connection
with the acquisition of 90% of the
outstanding shares of capital stock of
Logix, resulting in the recording of
goodwill $ 907,748 $ -- $ --
=========== =========== ===========
Retirement of treasury shares $ 654,851 $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Preferred Stocks Common Stock Additional Discount on
--------------------------- --------------------------- Paid-in Preferred
Shares Amount Shares Amount Capital Stocks
------------ ------------ ------------ ------------ ------------ ------------
(1) (1) (1)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 708,736 $ 3,338,193 2,584,470 $ 25,845 $ 3,007,142 ($ 1,167,000)
Shares issued for conversion of
Preferred Series F and G (66,801) (334,000) 68,824 688 216,412 116,900
Shares issued for services -- -- 4,001 40 7,958 --
Shares issued for conversion of
Preferred Series B 1,188,754 5,998,875 223,979 2,240 (1,115) (6,000,000)
Shares issued for conversion of
Preferred Series I 390,000 2,000,000 (80,000) (800) (3,200) (1,996,000)
Shares issued for satisfaction of debts -- -- 23,256 232 64,770 --
Shares issued in a private placement -- -- 372,188 3,722 1,071,029 --
Expenses of private placement -- -- -- -- (49,500) --
Shares issued to shareholder of ACS -- -- 70,569 706 282,294 --
Shares issued to shareholders of CONY -- -- 86,072 861 390,773 --
Issuance of Series C Preferred 350,000 350,000 -- -- -- (315,000)
Warrant exercised -- -- 60,000 600 224,400 --
Net income for the year -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1996 2,570,689 11,353,068 3,413,359 34,134 5,210,963 (9,361,100)
Shares issued for conversion of
Preferred Series I (390,000) (2,000,000) 333,333 3,333 667 1,996,000
Purchase of treasury shares -- -- -- -- -- --
Purchase and retirement of
Preferred Series D, J and K (294,120) (1,470,600) -- -- (955,880) 1,176,480
Shares issued for conversion of
Preferred Series D, E, J and K (1,505,880) (7,529,400) 1,943,071 19,431 1,636,349 5,873,620
Shares issued to shareholders of ACS -- -- 134,545 1,345 775,345 --
Shares issued to shareholders of CONY -- -- 67,475 675 388,835 --
Shares issued for downside protection
of Preferred Series I -- -- 61,869 619 (619) --
Shares issued in settlement
of a liability -- -- 12,000 120 37,380 --
Purchase and retirement of
Preferred Series A (110) (11) -- -- (101) --
Net income for the year -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 380,579 353,057 5,965,652 59,657 7,092,939 (315,000)
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
Retained Treasury Stock Total
Earnings --------------------------- Stockholders'
(Deficit) Shares Amount Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 ($ 1,261,944) -- $ -- $ 3,942,236
Shares issued for conversion of
Preferred Series F and G -- -- -- --
Shares issued for services -- -- -- 7,998
Shares issued for conversion of
Preferred Series B -- -- -- --
Shares issued for conversion of
Preferred Series I -- -- -- --
Shares issued for satisfaction of debts -- -- -- 65,002
Shares issued in a private placement -- -- -- 1,074,751
Expenses of private placement -- -- -- (49,500)
Shares issued to shareholder of ACS -- -- -- 283,000
Shares issued to shareholders of CONY -- -- -- 391,634
Issuance of Series C Preferred -- -- -- 35,000
Warrant exercised -- -- -- 225,000
Net income for the year 838,346 -- -- 838,346
------------ ------------ ------------ ------------
Balance at June 30, 1996 (423,598) -- -- 6,813,467
Shares issued for conversion of
Preferred Series I -- -- -- --
Purchase of treasury shares -- (144,600) (654,851) (654,851)
Purchase and retirement of
Preferred Series D, J and K -- -- -- (1,250,000)
Shares issued for conversion of
Preferred Series D, E, J and K -- -- -- --
Shares issued to shareholders of ACS -- -- -- 776,690
Shares issued to shareholders of CONY -- -- -- 389,510
Shares issued for downside protection
of Preferred Series I -- -- -- --
Shares issued in settlement
of a liability -- -- -- 37,500
Purchase and retirement of
Preferred Series A -- -- -- (112)
Net income for the year 1,667,898 -- -- 1,667,898
------------ ------------ ------------ ------------
Balance at June 30, 1997 1,244,300 (144,600) (654,851) 7,780,102
------------ ------------ ------------ ------------
</TABLE>
(1) Adjusted to reflect a one for five reverse stock split on November 18, 1997.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Preferred Stocks Common Stock Additional Discount on Retained
-------------------- --------------------- Paid-in Preferred Earnings
Shares Amount Shares Amount Capital Stocks (Deficit)
-------- --------- ---------- -------- ----------- --------- ----------
(1) (1) (1)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997
(carried forward) 380,579 $ 353,057 5,965,652 $ 59,657 $ 7,092,939 ($315,000) $1,244,300
Shares issued to stockholders of ACS -- -- 100,701 1,007 (1,007) -- --
Shares issued to stockholders of CONY -- -- 94,930 949 (949) -- --
Shares issued in accordance with
employment agreement -- -- 11,130 111 79,889 -- --
Shares issued for the conversion of
Preferred Series C (6,550) (6,550) 131 1 654 5,895 --
Shares issued for options exercised -- -- 68,000 680 291,820 -- --
Sale of common stock -- -- 327,720 3,277 1,386,256 -- --
Shares issued for the acquisition
of Logix Solutions, Inc. -- -- 252,000 2,520 777,168 -- --
Retirement of treasury shares -- -- (144,600) (1,446) (653,405) -- --
Shares issued for services -- -- 25,000 250 62,250 -- --
Net income for the year -- -- -- -- -- -- 2,740,066
-------- --------- ---------- -------- ----------- --------- ----------
Balance at June 30, 1998 374,029 $ 346,507 6,700,664 $ 67,006 $ 9,035,615 ($309,105) $3,984,366
======== ========= ========== ======== =========== ========= ==========
<CAPTION>
Treasury Stock Total
-------------------- Stockholders'
Shares Amount Equity
-------- --------- -----------
<S> <C> <C> <C>
Balance at June 30, 1997
(carried forward) (144,600) ($654,851) $ 7,780,102
Shares issued to stockholders of ACS -- -- --
Shares issued to stockholders of CONY -- -- --
Shares issued in accordance with
employment agreement -- -- 80,000
Shares issued for the conversion of
Preferred Series C -- -- --
Shares issued for options exercised -- -- 292,500
Sale of common stock -- -- 1,389,533
Shares issued for the acquisition
of Logix Solutions, Inc. -- -- 779,688
Retirement of treasury shares 144,600 654,851 --
Shares issued for services -- -- 62,500
Net income for the year -- -- 2,740,066
-------- --------- -----------
Balance at June 30, 1998 -- $ -- $13,124,389
======== ========= ===========
</TABLE>
(1) Adjusted to reflect a one for five reverse stock split on November 18, 1997
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE 1 - GENERAL AND ACCOUNTING POLICIES.
(a) Organization and Presentation of Financial Statements:
ATEC Group, Inc. (the "Company" or "ATEC") was incorporated
under the laws of the State of Delaware on July 17, 1992. The
accompanying consolidated financial statements include the accounts
of ATEC Group, Inc. and all of its wholly owned subsidiaries and a
90% owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
(b) Principal Business Activity:
The Company is a system integrator and provider of a full line
of computer and information technology products and services to
business, professionals, government agencies and educational
institutions. The Company focuses on core competencies including
system design, high speed data transmission, LAN/WAN, video
conferencing and internet/intranet technology. The Company has
recently expanded its business to include digital arts solutions and
Year 2000 ("Y2K") solutions for its customers. Revenues derived from
services are not significant.
(c) Summary of Significant Accounting Policies:
(1) Inventories:
Inventories are stated at the lower of cost or market using
the first-in, first-out method. Inventories consist of microcomputer
hardware, software and related peripherals, accessories and finished
products.
(2) Property and Equipment:
Property and equipment are carried at cost less accumulated
depreciation. When assets are sold or retired, the cost and related
accumulated depreciation are eliminated from the accounts, and any
resulting gain or loss is reflected in income for the period. The
cost of maintenance and repairs is charged to expense as incurred.
Significant renewals and replacements which substantially extend the
lives of the assets are capitalized.
Depreciation is computed on either straight-line or
accelerated methods over useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the shorter of the useful
life of the improvement or the life of the related lease.
F-8
<PAGE>
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies: (Continued)
(3) Goodwill:
The Company amortizes goodwill over its estimated period of
benefit, not exceeding fifteen years. The goodwill is periodically
reviewed to evaluate the future economic benefits and/or potential
impairments which may affect recorded values.
(4) Revenue Recognition:
The Company recognizes revenue at the time products are
shipped to its customers, or when sales are made on a "cash and
carry" basis.
(5) Research and Development Costs:
Research and development costs are charged to expense as
incurred.
(6) Income Taxes:
The Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" which utilizes a
balance sheet approach for financial accounting and reporting of
income taxes, and requires that deferred tax assets and liabilities
be established at income tax rates expected to apply to taxable
income in periods in which the deferred tax asset or liability is
expected to be settled or realized.
(7) Earnings Per Share:
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," in the year ended June 30,
1998. Basic earnings per share is based on the weighted effect of
all common shares issued and outstanding, and is calculated by
dividing net income available to common stockholders by the weighted
average shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income available to common
stockholders by the weighted average number of common shares used in
the basic earnings per share calculation plus the number of common
shares that would be issued assuming conversion of all potentially
dilutive securities outstanding. All historical earnings per share
data have been restated to conform to this presentation. Below is
the calculation of basic and diluted earnings per share for each of
the past three fiscal years:
F-9
<PAGE>
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies: (Continued)
(7) Earnings Per Share: (Continued)
For the Years Ended June 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net income available to
common stockholders $2,740,066 $1,667,898 $ 838,346
========== ========== ==========
Weighted average shares
outstanding - basic 6,079,045 5,947,109 5,138,329
Employee stock options 95,706 -- --
Acquisition options 93,776 -- --
Warrants 56,486 -- --
Convertible preferred stock 13,138 13,138 7,577
---------- ---------- ----------
Weighted average shares
outstanding - diluted 6,338,151 5,960,247 5,145,906
========== ========== ==========
Earnings per common share:
Basic $ .45 $ .28 $ .16
========== ========== ==========
Diluted $ .43 $ .28 $ .16
========== ========== ==========
(8) Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and trade accounts receivable. The Company places its cash with
high credit quality financial institutions which at times, may be in
excess of the FDIC insurance limit.
Concentrations of credit risk with respect to trade accounts
receivable are generally limited due to the large number of
customers comprising the Company's customer base. A substantial
portion of the Company's revenue is derived from customers located
in the northeastern region of the United States. An economic
downturn in the geographic region could have an adverse effect on
the Company's operations. Management continually reviews its trade
receivables credit risk and has adequately allowed for potential
losses.
(9) Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
F-10
<PAGE>
NOTE 2 - ACQUISITIONS.
(a) Innovative Business Micros, Inc.:
On June 14, 1996, the Company, pursuant to the terms of a
stock purchase agreement, issued 980,000 shares of its common stock
in exchange for all of the outstanding capital stock of Innovative
Business Micros, Inc. ("Innovative"). The acquisition was accounted
for under the pooling of interests method and, accordingly, the
Company's consolidated financial statements were restated to include
the operations of Innovative for the nine months ended June 30,
1996.
(b) Global Trading & Leasing Corporation:
On November 19, 1997, the Company acquired 100% of the issued
and outstanding capital stock of Global Trading & Leasing
Corporation ("Global"), a New York corporation, for $29,751 in cash.
The purchase of Global resulted in additional goodwill of $12,186.
(c) Logix Solutions, Inc.:
On April 7, 1998, the Company, pursuant to the terms of a
stock purchase agreement, acquired 90% of the issued and outstanding
capital stock of Logix Solutions, Inc. ("Logix"), a Colorado
corporation, which provides solutions to the Y2K problem. In
consideration for the shares acquired, the Company agreed to issue
the following securities:
1. 252,000 shares of restricted common stock;
2. Options to purchase up to 756,000 shares of common stock
exercisable at a price of $4.71 per share, expiring on
October 10, 1998;
3. Options to purchase up to 2,520,000 shares of common
stock exercisable at a price of $7.50 per share,
expiring on October 10, 1998;
4. Options to purchase up to 2,520,000 shares of common
stock exercisable at a price of $10 per share, expiring
on December 31, 2000.
The acquisition was accounted for as a purchase. The Company's
investment in Logix resulted in additional goodwill of $907,748
which is being amortized over a seven year period.
F-11
<PAGE>
NOTE 3 - EQUITY SECURITIES.
(a) Reverse Stock Split:
On November 18, 1997, the Company's shareholders approved a
reverse split of the Company's $.01 par value common stock,
resulting in the exchange of one share of common stock for each five
shares then outstanding. All share and per share information
included in these consolidated financial statements have been
adjusted to reflect this reverse split retroactively to the
beginning of all periods presented.
(b) Capital Stock:
The Company's authorized and issued capital stock at June 30,
1998 and 1997 consists of the following:
Shares Shares
Authorized Issued Amount
---------- --------- --------
June 30, 1998:
Preferred Stocks:
Series A cumulative
convertible 29,233 29,121 $ 2,912
Series B convertible 12,704 1,458 145
Series C convertible 350,000 343,450 343,450
--------- --------
Total preferred 374,029 $346,507
========= ========
Common stock 70,000,000 6,700,664 (i) $ 67,006
========= ========
June 30, 1997:
Preferred Stocks:
Series A cumulative
convertible 29,233 29,121 $ 2,912
Series B convertible 12,704 1,458 145
Series C convertible 350,000 350,000 350,000
--------- --------
Total preferred 380,579 $353,057
========= ========
Common stock 70,000,000 5,965,652 (ii) $ 59,657
========= ========
(i) Included in the total are 94,930 shares which were issued
subsequent to June 30, 1998.
(ii) Included in the total are 2,206,960 shares which were issued
subsequent to June 30, 1997.
In November 1996, the Company's Board of Directors authorized
a common stock buy-back program, which resulted in the
purchase of 144,600 shares of the Company's common stock in
the market at a cost of $654,851. In January 1998, the
Company's Board of Directors authorized the retirement of
these treasury shares to authorized but unissued stock.
F-12
<PAGE>
NOTE 3 - EQUITY SECURITIES. (Continued)
(c) Preferred Stock:
At June 30, 1998 and 1997, the Company had three authorized
series of preferred stock; Series A Cumulative Convertible (par
value $.10), Series B Convertible (par value $.10) and Series C
Convertible (par value $1) (hereinafter referred to as the "A", "B"
and "C" Shares, respectively). The authorized and issued shares for
each of the Series at June 30, 1998 and 1997 are described in detail
in Note 3(b) above.
Each of the A, B and C shares has the right to one vote on all
matters in which shareholders are entitled to vote. The A, B and C
shares may be converted into shares of common stock at an exchange
rate of five, five and fifty shares, respectively, for each share of
common stock or approximately 15,400 shares. Each of the A, B and C
shares carry dissolution rights amounting to $100, $10 and $5 per
share, respectively. The A shares grant the Company the right to
redeem such shares at a price of $100 per share.
The A shares have a annual dividend rate of 10% of the par
value, which is cumulative. They are senior to all other series or
classes of common stock. At June 30, 1998, the A shareholders were
due $1,168 in dividends in arrears. The B shares have a
non-cumulative stated annual dividend rate of $1 each and are senior
to all but the rights of the A shareholders. The C shares have no
dividend rights, except as may be authorized at the sole discretion
of the Company's Board of Directors.
(d) Warrants:
At June 30, 1998, the Company had outstanding warrants
entitling the holders to purchase common stock as follows:
Number of Exercise
Shares Price Expiration Date
--------- ------------ -----------------
5 Warrants
and
620,000 $5 per share December 31, 1998
75,000 $4.25 August 20, 2000
50,000 5.25 August 20, 2000
60,000 3.75 July 22, 2002
60,000 3.75 July 22, 2002
60,000 3.75 July 22, 2002
The warrants are not valued in the financial statements as the
amounts are immaterial. 60,000 of the above warrants are not vested
at June 30, 1998.
F-13
<PAGE>
NOTE 3 - EQUITY SECURITIES. (Continued)
(e) Options:
At June 30, 1998, the Company has outstanding options to
acquire 6,786,630 shares of the Company's common stock, comprised of
both qualified and non-qualified stock options as those terms are
defined by Internal Revenue Codes.
The following table summarizes the activity relating to the
option grants:
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------------------------
1998 1997 1996
-------------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 160,000 $3.75 -- $ -- -- $ --
Granted 6,694,630 7.73 160,000 3.75 -- --
Exercised (68,000) 4.30 -- -- -- --
Cancelled -- -- -- -- -- --
---------- -------
Outstanding at end of year 6,786,630 $7.67 160,000 $3.75 -- $ --
========== ===== ======= ===== ===== =====
Exercisable at end of year 3,568,000 $6.63 -- $3.75 -- $ --
========== ===== ======= ===== ===== =====
</TABLE>
The following table summarizes information concerning
currently outstanding and exercisable stock options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices June 30, 1998 Life Price June 30, 1998 Price
- --------- ------------- ------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
$3.75 142,000 8.5 years $3.75 142,000 $3.75
$3.13-$10 6,644,630 2.1 years 7.76 3,426,000 6.75
--------- ---------
6,786,630 3,568,000
========= =========
</TABLE>
F-14
<PAGE>
NOTE 4 - ACCOUNTING FOR STOCK - BASED COMPENSATION.
In accordance with Statement of Financial Accounting Standard
No. 123, the following information is provided. The weighted average
fair value of all stock options at date of grant was $1.99, $.71 and
$-0- per option for options granted during the years June 30, 1998,
1997 and 1996, respectively. Additionally, the weighted average fair
value of employee stock options granted in the years ended June 30,
1998, 1997 and 1996 was $.40, $-0- and $-0-, per option,
respectively. The weighted average fair value of options was
determined based on the Black-Scholes model, utilizing the following
weighted average assumptions:
For the Years Ended June 30,
---------------------------------------
1998 1997 1996
----------------- -------- ----
Expected term:
All stock options 6 months-10 years 10 years --
Employee stock options 10 years 10 years --
Interest rate 5.00% 5.00% --
Volatility 78.40% 78.40% --
Dividends None None --
Had the Company accounted for its stock option by recording
compensation expense based on the fair value at the grant date on a
straight-line basis over the vesting period, stock-based
compensation costs would have reduced pretax income by $2,425,491
($1,360,700 net of taxes), $5,992 ($3,368 net of taxes), and $-0-
for the years ended June 30, 1998, 1997 and 1996, respectively. The
pro forma effect on diluted earnings per common share would have
been a reduction of $.21 for the year ended June 30, 1998 and no
effect for the years ended June 30, 1997 and 1996. The pro forma
effect on basic earnings per common share would have been a
reduction of $.22 for the year ended June 30, 1998 and no effect for
the years ended June 30, 1997 and 1996.
NOTE 5 - OPERATING LEASES.
The Company conducts its operations under five noncancellable
operating leases expiring at various dates through 2003. Future
minimum rent payments are as follows:
<TABLE>
<CAPTION>
For the
Year
Ending
June 30, MCS CONY ACS Innovative Logix Total
- ---------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999 $108,192 $ 41,026 $ 36,000 $44,017 $ 91,696 $ 320,931
2000 108,192 41,026 36,000 38,267 45,848 269,333
2001 108,192 41,026 36,000 -- -- 185,218
2002 108,192 34,188 36,000 -- -- 178,380
2003 108,192 -- 3,000 -- -- 111,192
-------- -------- ------- ------- -------- ----------
Total minimum
annual rentals $540,960 $157,266 $147,000 $82,284 $137,544 $1,065,054
======== ======== ======== ======= ======== ==========
</TABLE>
F-15
<PAGE>
NOTE 5 - OPERATING LEASES. (Continued)
MCS leases its premises from a partnership which is controlled
by two officers and directors of the company under a triple net
lease arrangement.
Total rent expense for the years ended June 30, 1998, 1997 and
1996 amounted to $305,554, $258,000 and $264,000, respectively.
NOTE 6 - REVOLVING LINE OF CREDIT.
At June 30, 1998, the Company and it's subsidiaries have an
agreement with Deutsche Financial Services ("Deutsche"), whereby
certain inventory purchases are financed. Deutsche grants the
Company terms and charges no interest for 30 days and thereafter at
rates of prime plus 1/4% - 6-1/2% per annum. Borrowings under the
line may be up to $15,000,000. As of June 30, 1998 and 1997,
borrowings under the line amounted to $6,998,712 and $1,830,359,
respectively. The lines are collateralized by all the assets of the
Company.
NOTE 7 - LITIGATION.
During 1990, a competitor of the Company commenced an action
against it and one of its advertising agents. The action was
dismissed during the year ended June 30, 1998.
A third party lawsuit was commenced against the Company's
predecessor ("Hillside Bedding") by Mid Hudson Clarklift ("MH") as a
result of a claim against them by a former employee of the Company
who sustained an injury while operating a forklift maintained by MH.
The lawsuit consists of four alternative causes of action each for
$5,000,000 and one cause of action by the former employee's wife for
$2,000,000. MH is seeking judgement for all or part of any verdict
or judgement which may be obtained against them. The lawsuit is in
the discovery stages. Management and its counsel have no opinion as
to its ultimate disposition.
NOTE 8 - INCOME TAXES.
The Company's income tax provision consists of the following:
1998 1997 1996
---------- ---------- ---------
Current tax provision:
Federal $1,651,331 $ 894,365 $ 223,386
State 493,703 399,190 218,714
---------- ---------- ---------
2,145,034 1,293,555 442,100
Deferred tax provision (benefit)
relating to temporary differences -- 5,524 (27,560)
---------- ---------- ---------
Income tax provision $2,145,034 $1,299,079 $ 414,540
========== ========== =========
F-16
<PAGE>
NOTE 8 - INCOME TAXES. (Continued)
A reconciliation of the above effective tax rate to the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory 34.0% $ 1,660,934 34.0% $ 1,008,772 34.0% $ 426,000
State income tax, net of
federal tax benefit 6.8 333,657 8.9 264,345 (4.1) (51,284)
Effect of nondeducti-
bility of:
Amortization and charge
off of goodwill 2.1 104,725 2.6 76,225 4.6 57,217
Tax expense and loss
limitations (.1) (9,738) (.4) (10,853) -- --
Other 1.1 55,456 (1.3) (39,410) (1.4) (17,393)
----- ----------- ----- ----------- ----- ---------
43.9% $ 2,145,034 43.8% $ 1,299,079 33.1 $ 414,540
===== =========== ===== =========== ===== =========
</TABLE>
The Company's deferred tax assets amounted to $37,249 at June
30, 1998 and 1997 which resulted from the temporary differences
relating to the allowance for doubtful accounts.
NOTE 9 - RELATED PARTY TRANSACTIONS.
In the normal course of business the Company periodically
borrows funds from stockholder/officers and pays interest on those
loans at rates which are comparable to rates which could be obtained
from third parties. At June 30, 1998 and 1997, Company owed one
stockholder $2,967 and at June 30, 1997, $125,000 to another
stockholder.
Interest charged to operations on such loans for the years
ended June 30, 1998, 1997 and 1996 amounted to $13,542, $7,155 and
$38,258, respectively.
The Company also periodically enters into transactions with
entities which are owned or controlled by officers of the Company.
Such transactions are in the normal course of business and are on
terms at least as favorable as those which could be obtained from
third parties. All such transactions were immaterial in the
aggregate, when compared to the results of operations taken as a
whole, for all periods presented.
F-17
<PAGE>
NOTE 10 - OTHER FINANCIAL INFORMATION.
(a) Accounts Receivable - Net.
Accounts receivable, net at June 30, 1998 and 1997 consists of
the following:
1998 1997
------------ -----------
Accounts receivable $ 17,720,432 $ 9,332,047
Allowance for doubtful
accounts, returns and
discounts (85,800) (85,800)
------------ -----------
$ 17,634,632 $ 9,246,247
============ ===========
For the years ended June 30, 1998, 1997 and 1996, $21,000,
$88,402 and $164,487, respectively, was charged to bad debt expense.
(b) Other Current Assets:
Other current assets consist of the following at June 30, 1998
and 1997:
1998 1997
---------- ----------
Receivable from suppliers $ 537,313 $ 400,991
Prepaid expenses -- 30,678
Prepaid income taxes 39,364 4,800
Sundry loans -- 5,000
---------- ----------
$ 576,677 $ 441,469
========== ==========
(c) Goodwill - Net:
Goodwill, net at June 30, 1998 and 1997 consists of the
following:
1998 1997
------------ ------------
Goodwill $ 4,921,768 $ 4,001,834
Accumulated amortization 753,145 445,130
------------ ------------
$ 4,168,623 $ 3,556,704
============ ============
Amortization charged to operations for the years ended June
30, 1998, 1997 and 1996 amounted to $308,015, $224,190 and $168,285,
respectively.
F-18
<PAGE>
NOTE 10 - OTHER FINANCIAL INFORMATION. (Continued)
(d) Property and Equipment:
Property and equipment are carried at cost and consist of the
following at June 30, 1998 and 1997:
1998 1997
------------ ------------
Leasehold improvements $ 466,982 $ 494,418
Furniture and fixtures 292,708 277,669
Office equipment 510,674 296,445
Automobiles 100,902 123,385
------------ ------------
1,371,266 1,191,917
Less: Accumulated depreciation
and amortization 803,240 752,917
------------ ------------
$ 568,026 $ 439,000
============ ============
Depreciation and amortization charged to operations for the
years ended June 30, 1998, 1997 and 1996 amounted to $173,950,
$146,123 and $104,030, respectively.
(e) Other Current Liabilities:
Other current liabilities consist of the following at June 30,
1998 and 1997:
1998 1997
---------- ----------
Deferred sales tax obligation $ -- $ 300,000
Customers with credit balances 57,057 321,412
---------- ----------
$ 57,057 $ 621,412
========== ==========
(f) Transactions with Major Customers and Suppliers:
During the year ended June 30, 1998, two customers accounted
for 25% of the Company's sales and during the years ended June 30,
1997 and 1996, no one customer accounted for 10% or more of the
Company's net sales.
During the year ended June 30, 1998, two suppliers accounted
for 50% of the Company's purchases and during the years ended June
30, 1997 and 1996, one supplier accounted for 22% and 42% of the
Company's purchases, respectively.
(g) Deferred Compensation Plan:
The Company has 401(k) deferred compensation plans to which
the Company may make discretionary contributions. The Company made
contributions to these plans amounting to approximately, $30,000,
and $7,000 and $16,000 for the years ended June 30, 1998, 1997 and
1996, respectively.
F-19
<PAGE>
NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income", No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information", No. 132 (SFAS
132), Employer's Disclosures about Pension and other Postretirement
Benefits and No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. Management does not believe that
the effect of implementing these new standards will be material to
the Company's financial position, results of operations and cash
flows.
NOTE 12 - YEAR 2000.
The Company recognizes the need to ensure its operation will
not be adversely affected by Year 2000 software failures. The
Company is communicating with suppliers, customers and others with
which it does business to coordinate Year 2000 conversion. The cost
of achieving compliance is estimated to be a minor increase over the
cost of normal software upgrades and replacements.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from June 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,784,850
<SECURITIES> 0
<RECEIVABLES> 17,720,432
<ALLOWANCES> 85,800
<INVENTORY> 1,790,695
<CURRENT-ASSETS> 21,824,103
<PP&E> 1,371,266
<DEPRECIATION> 803,240
<TOTAL-ASSETS> 26,634,164
<CURRENT-LIABILITIES> 13,509,775
<BONDS> 0
0
346,507
<COMMON> 67,006
<OTHER-SE> 12,710,876
<TOTAL-LIABILITY-AND-EQUITY> 26,634,164
<SALES> 187,150,614
<TOTAL-REVENUES> 187,379,317
<CGS> 173,485,484
<TOTAL-COSTS> 173,485,484
<OTHER-EXPENSES> 8,928,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,341
<INCOME-PRETAX> 4,885,100
<INCOME-TAX> 2,145,034
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,740,066
<EPS-PRIMARY> .45
<EPS-DILUTED> .43
</TABLE>
