SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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CURRENT REPORT
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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(State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
90 Adams Avenue, Hauppauge, New York 11788
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (516) 231-2832
---------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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
requirements for the past 90 days.
YES |X| NO |_|
As of the close of business on December 31, 1998, there were 6,700,664 shares of
the Registrant's Common Stock outstanding.
<PAGE>
ATEC GROUP, INC.
TABLE OF CONTENTS
Page
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PART I Financial Information
Item 1 - Consolidated Financial Statements.......................1-5
Item 2 - Notes to Consolidated Condensed Financial Statements....6-8
Item 3 - Management Discussion & Analysis of Financial
Condition and Results of Operations....................9-10
PART II Other Information Required in Report
Item 6 - Other Information........................................11
Signature Page....................................................12
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ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED AUDITED
December 31, 1998 June 30, 1998
----------------- -----------------
ASSETS
Current Assets
Cash $3,693,384 $1,784,850
Accounts receivable, net 7,106,251 17,634,632
Loan receivable 597,016 --
Inventories 1,694,568 1,790,695
Prepaid taxes 425,709 --
Deferred taxes 37,249 37,249
Other current assets 302,909 576,677
----------------- -----------------
Total currrent assets 13,857,086 21,824,103
Property and equipment, net 510,385 568,026
Goodwill, net 3,998,623 4,168,623
Other assets 68,522 73,412
----------------- -----------------
$18,434,616 $26,634,164
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft -- $339,944
Revolving inventory line of credit 1,545,640 6,998,712
Accounts payable 2,736,147 4,154,143
Notes payable - related parties -- 2,967
Accrued expenses 683,776 1,166,070
Income taxes payable -- 790,882
Other current liabilities 161,177 57,057
----------------- -----------------
Total liabilities 5,126,740 13,509,775
----------------- -----------------
Stockholders' equity
Preferred stocks 346,507 346,507
Common stock 67,006 67,006
Additional paid-in capital 9,035,615 9,035,615
Discount on preferred stock (309,105) (309,105)
Retained earnings 4,208,653 3,984,366
Less: Treasury stock at cost (40,800) --
----------------- -----------------
Total stockholders' equity 13,307,876 13,124,389
----------------- -----------------
$18,434,616 $26,634,164
================= =================
1
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ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMER 31,
1998 1997
------------ ------------
Net sales $32,797,105 $36,138,869
Cost of sales 30,299,606 33,282,776
------------ ------------
Gross profit 2,497,499 2,856,093
------------ ------------
Operating expenses
Selling and administrative 2,363,445 1,840,963
Amortization of goodwill 105,000 60,000
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Total operating expenses 2,468,445 1,900,963
------------ ------------
Income from operations 29,054 955,130
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Other income (expense)
Interest income 43,982 42,816
Interest expense (13,062) (7,089)
------------ ------------
Total other (expense) income 30,920 35,727
------------ ------------
Income (loss) before provision for income taxes 59,974 990,857
Provision for income taxes 36,500 411,460
------------ ------------
Net income (loss) $23,474 $579,397
============ ============
Basic and diluted earnings per share $0.00 $0.10
============ ============
Weighted average number of shares 7,192,285 5,963,168
============ ============
2
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ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMER 31,
1998 1997
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Net sales $67,617,938 $69,211,424
Cost of sales 61,864,395 63,654,305
------------ ------------
Gross profit 5,753,543 5,557,119
------------ ------------
Operating expenses
Selling and administrative 5,243,547 3,768,216
Amortization of goodwill 180,000 120,000
------------ ------------
Total operating expenses 5,423,547 3,888,216
------------ ------------
Income from operations 329,996 1,668,903
------------ ------------
Other income (expense)
Miscellaneous income -- 70,000
Interest income 79,209 77,222
Interest expense (35,418) (13,665)
------------ ------------
Total other (expense) income 43,791 133,557
------------ ------------
Income (loss) before provision for income taxes 373,787 1,802,460
Provision for income taxes 149,500 751,960
------------ ------------
Net income (loss) $224,287 $1,050,500
============ ============
Basic and diluted earnings per share $0.03 $0.18
============ ============
Weighted average number of shares 7,192,285 5,898,668
============ ============
3
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ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31,
1998 1997
----------- -----------
Net cash provided by (used in) operating activities $8,353,635 ($2,823,669)
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Cash flows from investing activities:
Increase in loans receivable (597,016) --
Purchase of treasury stock (40,800) --
Purchase of property and equipment (11,302) (107,449)
----------- -----------
Net cash (used in) provided by investing activities (649,118) (107,449)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft (339,944) --
Notes payable - related parties (2,967) --
Short term borrowings (5,453,072) 4,470,485
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Net cash (used in) provided by financing activities (5,795,983) 4,470,485
----------- -----------
Net increase (decrease) in cash 1,908,534 1,539,367
Cash and cash equivalents - Beginning of period 1,784,850 2,013,549
----------- -----------
Cash and cash equivalents - End of period $3,693,384 $3,552,916
=========== ===========
4
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ATEC GROUP, INC
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Value Series Value Additional Discount on Retained Treasury Stock Total
Shares Common Preferred Preferred Paid-In Preferred Earnings --------------- Stockholders'
Issued Stock Issued Stock Capital Stock (Deficit) Shares Amount Equity
------ ------- --------- --------- ---------- ----------- --------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1998 6,700,664 $67,006 374,029 $346,507 $9,035,615 ($309,105) $3,984,366 0 $0 $13,124,389
Purchase of
Treasury Stock (8,000) 40,800 (40,800)
Net Income for the
Six Months Ended
December 31, 1998 -- -- -- -- -- -- 224,287 224,287
Balance at
December 31, 1998 6,700,664 $67,006 374,029 $346,507 $9,035,615 ($309,105) $4,208,653 (8,000) $40,800 $13,307,876
--------- ------- ------- -------- ---------- --------- ---------- ------ ------- -----------
</TABLE>
5
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
FORM 10Q
SIX MONTHS ENDED DECEMBER 31, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying interim unaudited consolidated financial statements include the
accounts of ATEC Group, Inc. and its wholly owned subsidiaries which are
hereafter referred to as (the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position and the results of operations
and cash flows for the interim periods presented. The results of operations for
these interim periods are not necessarily indicative of the results to be
expected for the full year. These financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company's report on Form 10-K for the year ended June 30, 1998.
6
<PAGE>
2. Equity Securities
Capital Stock
The Company's capital stock consists of the following:
Shares
Issued
Shares and
Authorized Outstanding Amount
---------- ----------- ------
December 31, 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 6,692,664 $67,006
Stock Option Plan and Common Stock Purchase Warrants
In October 1998, the Company awarded 195,000 common stock purchase options to
employees under the 1997 Stock Option Plan at an exercise price of $3.375 per
share (the market price on the date of grant). On October 7, 1998, the Company
entered into a Financial Advisory and Investment Banking Agreement with Prime
Charter Ltd. and issued 125,000 common stock purchase warrants at $3.50 per
share. Total outstanding common stock purchase options and warrants at December
31, 1998 were 7,350,630 at prices of $4.25 to $10.00 per share.
3. Computation of Earnings Per Share
Earnings per share are based on the weighted average number of common and common
equivalent shares outstanding. Shares outstanding and earnings per share have
been restated to reflect the 1 for 5 stock split in November 1997.
4. Goodwill
Goodwill is being amortized over its estimated period of benefit, not exceeding
fifteen years.
7
<PAGE>
5. Litigation
A lawsuit was commenced against the Company's predessor ("Hillside Bedding") by
Mid Hudson Clarklift as a result of a claim filed against them by a former
employee of the Company who sustained an injury while operating a forklift. The
lawsuit consists of four causes of action each for $5,000,000 and one cause of
action by the former employee's wife for $2,000,000. The lawsuit is in the
discovery stages. Management and its counsel have no opinion as to its ultimate
disposition.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ATEC Group, Inc. and Subsidiaries
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, out sourcing of IT professionals, and offshore software
development to provide its clients' technological needs in a cost effective
manner.
Results of Operations
Three Months Ended December 31, 1998 compared to December 31, 1997
The Company's revenues for the second quarter ended December 31, 1998 decreased
to $32.8 million from $36.1 million for the prior year, a decrease of
approximately 9%. This decrease is primarily attributable to a decline in
wholesale revenues due to increased price competition and direct sales by
computer manufacturers. Revenues are generated by the Company's sales of
computer hardware and software, and related support services. Gross margin for
the period decreased to $2.5 million for December 31, 1998 from $2.8 million for
the comparable 1997 quarter, a 13% decrease due to the decreased revenues. Gross
margins as a percentage of revenues for the three months were 7.6% as compared
to 7.9% for the prior year. The Company's goal is to increase these margins as
the Company attempts to increase its market share in more profitable sectors of
the business such as integration, hardware service/maintenance, networking, and
training.
December 31, 1998 operating expenses exclusive of amortization of intangible
assets increased to $2.4 million as compared to $1.8 million for the prior year.
The increase resulted from increased operating expenses in the Y2k division and
setup costs relating to its electronic commerce operations.
The provision for income taxes was $36,500 for the 1998 quarter as compared to
$223,018 for in the 1997 period.
As a result of the above, the Company's net income was $23,474 for the three
months ended December 31, 1998 compared to a profit of $579,397 for the 1997
quarter. For the December 31, 1998 quarter, basic and diluted net income per
share was $.00 compared to $.10 in the prior year. Average shares outstanding
were 7,192,285 for 1998 and 5,963,168 for 1997.
9
<PAGE>
Six Months Ended December 31, 1998 compared to December 31, 1997
Revenues for six months ended December 31, 1998 decreased to $67.6 million from
$69.2 million for the prior year, a decrease of approximately 2%. This decrease
is primarily attributed to a decline in wholesale revenues due to increased
price competition and direct sales by computer manufacturers. Gross margins were
$5.7 million as compared to $5.5 million for the comparable period of the prior
year. Gross margins as a percentage of revenues for the six months were 8.4% as
compared to 7.9% for the prior year. The increase in gross margins are the
result of a shift in the customer mix away from wholesalers. Operating expenses
increased to $5.2 million as compared to $3.7 million for the prior year. The
40% increase is attributed to increased operating expenses related to the
Company's Y2k division. In addition, the Company incurred approximately $400,000
in setup costs relating to its electronic commerce operations. The provision for
income taxes was $149,500 for 1998 as compared to $751,960 for the prior year.
As a result of the above, the Company's net income decreased to $224,287 for the
six months ended December 31, 1998 as compared to $1,050,500 for the prior year.
Primary and diluted net income per share was $.03 compared to $.18 in the prior
year. Average shares outstanding were 7,192,285 for 1998 and 5,898,668 for 1997.
Liquidity and Capital Resources
The Company's cash position was $3.7 million at December 31, 1998, an increase
of $1.9 million compared to June 30, 1998. The Company's working capital at
December 31, 1998 was $8.7 million as compared to a working capital of $8.3
million at June 30, 1998. The increase in working capital primarily resulted
from increased profits. Net cash provided by operating activities was $8.4
million. Cash used in investing activities totaled approximately $650,000,
including an increase in loans receivable of $597,000, the purchase of treasury
stock of $41,000 and purchase of property and equipment of $11,000.
To accommodate the Company's financial needs for inventory financing, Deutsche
Financial Service has granted a credit line in the amount of $7 million. At
December 31, 1998, indebtedness of the Company to Deutsche Financial was $1.5
million, a decrease of $5.5 million compared to June 30, 1998. Substantially,
all of subsidiary company tangible and intangible assets are pledged as
collateral for this facility.
10
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ATEC Group, Inc. and Subsidiaries
Other Information
December 31, 1998
PART II
Item 6. Exhibits and Reports on form 8-k
a) Exhibits - none
b) Reports on Form 8-K:
The following reports on Form 8K were filed by the Company during the
quarter ended December 31, 1998:
NONE
11
<PAGE>
Signatures
Pursuant to the requirements 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.
(REGISTRANT)
Dated: February 12, 1999 By: /s/ Surinder Rametra
--------------------
Surinder Rametra, in the capacity of both
Chairman and Chief Executive Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,693,384
<SECURITIES> 0
<RECEIVABLES> 7,192,051
<ALLOWANCES> 85,800
<INVENTORY> 597,016
<CURRENT-ASSETS> 13,857,086
<PP&E> 1,357,640
<DEPRECIATION> 847,255
<TOTAL-ASSETS> 18,434,616
<CURRENT-LIABILITIES> 5,126,740
<BONDS> 0
346,507
0
<COMMON> 67,006
<OTHER-SE> 12,894,363
<TOTAL-LIABILITY-AND-EQUITY> 18,434,616
<SALES> 67,617,938
<TOTAL-REVENUES> 67,617,938
<CGS> 61,864,395
<TOTAL-COSTS> 5,423,547
<OTHER-EXPENSES> 43,791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,418
<INCOME-PRETAX> 373,787
<INCOME-TAX> 149,500
<INCOME-CONTINUING> 224,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224,287
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>