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, 1999
|_| 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
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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 20, 1999, the aggregate market value of the voting common
equity of ATEC Group, Inc., held by non-affiliates of the Registrant was
$13,130,589* based on the closing price of $2.344 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 7,327,273 shares of common stock of the
Registrant outstanding.
* Excludes 1,725,486 shares of common stock beneficially owned by Surinder
Rametra, Ashok Rametra, George Eagan, James Charles 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") was incorporated under the laws
of Delaware in July of 1992. ATEC is a leading systems integrator and solution
provider in the field of computer technology and information systems.
Procurement, build to order systems, network design, project implementation,
telecommunications and help desk support are just few of the services ATEC
offers to businesses of all sizes, professionals, government agencies,
educational institutions and home users. In continuation of our effort to
provide end-to-end solutions to our clients, we committed significant resources
in 1999 to establish a PC manufacturing division-Nexar(R), a line of branded
computer products built with state-of-the-art technology. Nexar(R) products are
designed to support new and emerging technologies while at the same time
reducing total cost of ownership by extending the life cycle of the PC with
easy-to-upgrade components. This includes bridging processor generations with a
unique Cross Processor Architecture (XPA) design within the same footprint.
ATEC enters the new millennium with the launch of its e-commerce web site,
www.atecgroup.com. ATEC's web site is designed to ensure its clients seamless
access, security, speed and ease of use. It employs a unique and powerful search
engine and database that was developed in-house. We plan to market this search
engine and e-commerce development capability as a new offering to our clients
while continuing our own expansion into the e-commerce marketplace. Our
e-commerce site will offer over 60,000 information technology (IT) products from
the major PC and peripherals manufacturers along with access to comprehensive
technical specifications on most of these products. Our site will also offer
Nexar products direct to end-users and corporate clients. This will allow buyers
to shop, compare and procure all their IT product needs through one place,
easily and quickly, making ATEC a one-stop solution. We also plan to include
online auctions, corporate buying and a build-to-order configurator.
Along with e-commerce solutions, we initiated atecone.com, our Internet
Service Provider (ISP) division providing boutique Internet solutions, including
virtual web, domain name hosting, DSL, ADSL, dial up, full and fractional T1 &
T3, web-based messaging services, Internet/Intranet design, and integration of
large and small e-commerce solutions.
ATEC is founded on several core competencies including IT systems design,
local and wide area networking (LAN/WAN), telecommunications, PC manufacturing,
software development and Internet/Intranet-ready solutions. As we grow it
becomes necessary to create an enterprise-focused team to deliver the breadth of
these solutions to our clients. As a result, we created the Technology
Integration Services (TIS) division in 1999 as the strategic marketing arm to
call on our corporate clients. TIS offers the entire ATEC family of services and
products and is focused on client acquisition and retention.
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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-1980s, 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 1980s, 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.
We believe 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 on 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. We believe 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
Our strategic focus is to pursue growth in our core business by providing
our clients access to an extensive range of products and services. Significant
price competition and abbreviated product life cycles have driven us to pursue
lower cost integration, assembly and distribution by implementing virtual
warehouses and distribution facilities of major partners such as Synnex,
Pinacor, Merisel, Ingram, Tech Data and many others. Further, to strengthen our
core business as well as to be self-dependent to serve our clients better, we
introduced Nexar(R) branded PC products. For the most part PC manufacturing is
outsourced, using a distinguished ISO9002 certified manufacturing facility,
eliminating the majority of fixed costs, helping to cover the cost of our
systems and allowing us to pass these savings on to our clients.
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We seek to maintain a low-cost overhead structure by automating our management
and operating functions. Additionally, our business model strength lies in our
ability to access an extensive selection of IT products stocked by a number of
major distributors through our integral information systems. This system makes
available to our sales representatives, as well as certain clients, the pricing
and availability of over 60,000 IT products, updated on a daily basis. We
believe that our current business model helps to reduce our working capital
requirements by maintaining limited inventory, employing extensive warehousing
of our allied distributors and achieving revenue growth without a significant
capital investment in inventory.
MARKETING
We are striving to achieve greater client satisfaction and continued
growth despite aggressive competition, with an objective to continually work
with our clients to manage their IT environment by providing solutions that
reduce the total cost of ownership. The Company views these costs as follows:
Usage Cost - The number of times a support process is used
Transaction Cost - The cost of executing a support process or acquiring
technology
Total Cost = Usage Cost + Transaction Cost
We believe that by employing better processes, systems design and
acquisition options, it is possible to reduce the total IT operational costs for
our clients. We deliver these options via our various product and service
groups, each focused on specific cost areas, by providing optimal solutions that
allow the client to take advantage of the technology acquired to complete the
task.
Our marketing strategy is to educate business clients about our ability to
provide a single source, end-to-end solution. To create a unique identity and to
be distinguished from our competition, we have committed our resources to
assisting our clients in the implementation of the latest changing technology.
We also benefit from word of mouth promotion and repeat business from existing
satisfied clients.
PRODUCTS, SERVICES AND SOLUTIONS
Products - Overview
We market a broad selection of products with a focus on microcomputers,
client/servers and peripherals manufactured by major vendors. We are an
authorized sales and service dealer for major manufacturers including, but not
limited to, Compaq, Gateway, Hewlett-Packard, Apple, Novell, Informix, Quest
Communication, AMD, CITRIX, 3 Com, Toshiba, Oracle, Sybase, GM Hughes and
numerous others. The sales of products by major manufacturers such as Apple,
Compaq, Toshiba and Hewlett-Packard generated over 50% of our revenue for the
year
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ended June 30, 1999. Our agreements with these vendors are generally renewed
periodically and permit termination by manufacturers without cause, generally
upon 30 to 90 day's notice. We believe that these provisions are standard in the
computer reseller industry.
We evaluate product assortment based on technological advances,
availability and marketability of the products. We continually seek to expand
our product offerings in response to market conditions. Service and support
offered by us is performed with an emphasis on achieving higher profit margin
and ensuring good quality and service to our clients. We have excellent
vendor/dealer relationships with distributors such as Synnex (formerly
ComputerLand), Pinacor, Merisel, Tech Data, Ingram and many more. These
relationships enable us to source our products from multi-distribution channels.
The PC market underwent major changes during 1998/1999. The major PC
manufacturers, such as IBM, Compaq, Toshiba, Apple and Hewlett Packard, changed
their focus away from the reseller channels and towards direct marketing. As a
result, we experienced difficulties in obtaining products from our vendors
during this period. We believe that we have no control over the continuously
changing market conditions and deteriorating profit margins.
PC Manufacturing
Nexar(R), a new division of the ATEC Group with patents and patent pending
technologies, is an innovative manufacturer of personal computers with a
fundamentally different approach to personal computing. Nexar manufactures PCs
that allow for customization of the system and enable end-users to affordably
upgrade all major system components, including future processor and technology
advances. Nexar is the industry leader in addressing the most common fear
end-users have about investing in personal computing: rapid technology
obsolescence.
Nexar has developed three new lines of personal computers. These products
offer value, flexibility and give clients the ability to extend the life of
their technology investment within the same footprint with built-in protection
to reduce obsolescence. We are continually developing and introducing product
lines to keep ahead of technology. The current new lines of personal computers
are:
o Enable Series: This series captures the true essence of the PC, powered by
the latest class of processors, and is built to the rigorous standards of
ISO9002 specifications. Superior quality and performance are combined to
create top value in the world of desktop computers. Enable is aimed at the
cost-conscious consumer and is currently shipping and available through
major retailers as well as directly from www.nexarusa.com.
o Empower Series: These systems are built to the client's specifications
using widely accepted quality components and peripherals to ensure 100%
compatibility. This line is the ideal solution for clients who demand to
stay on the cutting edge of technology. The Empower line is aimed at
corporate users who require value and the flexibility of standard options
and components. Empower is currently available through the reseller
channel as well as directly from www.nexarusa.com.
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o Infinity Series: From state-of-the-art cross processor architecture (XPA)
to the total cost of ownership, the Infinity Series is aimed at corporate
end-users who buy in large quantities and want to protect their
significant technology investments from technical obsolescence. This
series will incorporate Nexar's patent-pending XPA technology, which uses
standard components but allows for processor and memory upgrades across
processor generations from within the same PC footprint. This product is
expected to be available early next year.
Nexar offers its products through a network of distributors, value-added
resellers, system integrators (including ATEC's TIS group), as well as directly
through the Company's web sites: www.nexarusa.com and www.atecgroup.com.
E-commerce
We launched our e-commerce web site, www.atecgroup.com, in 1999. Our web
site design ensures our customers seamless access, security, speed, flexibility
and ease of use. It employs unique and powerful search engines and a database
that has been developed in-house. Our e-commerce site features over 60,000
information technology products. The site also provides our clients with
technical specifications on many products and incorporates daily updates.
www.atecgroup.com is registered and accessible through over 100 popular
search engines worldwide, including Yahoo, AltaVista, Lycos, Infoseek, Excite
and several others. We will leverage our existing base of over 100,000 clients
nationwide, as well as explore banner advertising on high-traffic search engines
to popularize our new site.
The opening of our e-commerce site marks our entry into the explosive
e-commerce market. The Gartner Group, a leading economic forecaster for the high
tech industry, predicts online consumer sales will reach $20 billion by the year
2000. Gartner further predicts business-to-business online sales volume could
reach as high as $175 billion by 2000.
Technology integration services
Technology Integration Services (TIS), formerly the systems integration
group, is focused on corporate clients to provide value-added solutions that
allow clients to take advantage of the technology they need. TIS acts as a
liaison for our e-commerce, ISP, PC manufacturing and software development
division. Some of the services TIS offers are discussed in the proceeding
paragraphs.
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Traditional Reseller:
We are a technology partner with most of the major vendors and as a
reseller can open- source any IT product. Our distributors include Synnex,
Pinacor, Ingram-Micro, Merisel and Tech Data. These distributors have multiple
warehouse sites and collectively have well over $ 1 billion in inventory at any
point in time. Each of these distributors has access to the best availability,
the deepest discounts and the highest level of technical support. Our account
executives can research, acquire and price products from any of these sources
and compare pricing and availability online to ensure the best service to our
clients.
Build To Order (BTO)/Direct:
We are a full participant in the Hewlett-Packard and Compaq BTO (built to
order) programs. Our PC manufacturing division, Nexar, is set on assembling
systems on BTO for all TIS clients and reseller partners.
Value Products:
We acquire end-of-life products from the manufacturers. These are brand
name, new, fully warranted products that can be serviced by any authorized
provider. Brands include Cisco, Compaq, IBM, HP, View Sonic and many more.
However, the availability of these products is sporadic and the pricing is often
negotiable based on the supplies availability with the manufacturer.
Staff Augmentation and Outsourcing:
Finding qualified individuals has become a significant problem for many of
the IT companies. As an employer, we continually seek qualified marketing, sales
and technical professionals and we have the ability to recruit, hire and
maintain such individuals. Our professionals are exposed to a variety of
technology environments and have skills to correctly implement new technologies,
such as messaging services, systems administration and desktop management. Our
professionals carry advanced certifications from major manufacturers that
include Cisco, Microsoft, Novell and others. We also offer staff augmentation on
a daily, weekly, monthly and longer basis for onsite assignments to our clients
as needed.
Professional and Network Services:
Along with other systems integrators, we are constantly training and
retraining our technicians in fast-changing technologies in order to provide the
latest IT solutions to our clients. Some of the services and project
capabilities that we focus on are Core Services, Design and Migration Expertise,
Project Management and End-User Support.
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SPECIAL TECHNOLOGIES AND MARKETS
Animation and Digital Publishing
ATEC Digital Arts specializes in the fast-moving animation and digital
publishing marketplace. Expertise developed from dealing with some of the
largest advertising and publishing companies gives us the ability to deliver
these unique solutions to our clients. These solutions go beyond the traditional
integrator expertise and require specialized equipment and software skills and
often require specialized technology from high-end manufacturers like Intergraph
and Silicon Graphics. Technology supported includes Unix, NT, MAC, Silicon
Graphics, Intergraph, Softimage, Kinetix, Media 100, Accom, DPS, Sony, Adobe,
Canto and many more. Some of the applications and solutions include:
Digital Publishing, Animation and Multimedia Systems Design
Electronic Publishing and Pre-Press Solutions
Turnkey Solutions including Design, Training and Integration
Telecommunications
Our ATEC/Switch Now alliance provides a unique set of solutions in Voice
Over IP (VOIP) technology that is capable of managing voice, fax, Internet
messaging and other forms of communications traffic. As such, we bring features
previously available only to larger clients and telephone carriers to a broader
market. This solution is highly scalable from 24 to over 3,000 lines and
includes advanced calling features such as call waiting, calling cards, long
distance and using PCs as phones without needing separate handsets. Our unique
approach, which combines systems integration with a carrier business, will
enable us to reach a diverse base of clients that require telecom and data
communications.
Internet Access - atecone.com
As voice and data technologies continue to converge, our goal is to be the
one-stop provider to take advantage of this expanding market. Our approach is to
provide access and all necessary services to integrate this functionality
including LAN/WAN consulting, voice over IP, Internet-based VPN design, turnkey
Internet provisioning, as well as web design and hosting.
Along with the above solutions, atecone.com provides boutique Internet
solutions including virtual web, domain name hosting, web-based messaging
services, DSL, ADSL, dial-up, full and fractional T1 & T3, and integration of
large and small e-commerce solutions. We started this pilot program at one of
our locations and plan to expand to our other locations depending upon the
program's success.
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COMPETITION
The microcomputer market is very competitive. We compete directly with
major PC manufacturers, a variety of local and national distributors, super
stores, retailers, mail order houses and other entities that offer computer
products and services. We seek to compete with our competitors based upon our
commitment to provide a cost-effective, single source "end-to-end" solution to
our clients' data processing needs. While we attempt to competitively price
hardware and software items, we do not focus on pricing as our primary
competitive strength. Before price, management believes that our principal
strength is our ability to offer clients complete and cost-efficient solutions
to their individual computer needs.
Our ability to compete depends in part on several factors including the
ability of our competitors to hire, retain and motivate a large number of
personnel and the price at which others offer comparable services. Many
participants, such as PC manufacturers, computer resellers, software development
and systems integration providers have significantly greater financial,
technical and marketing resources than we do.
BACKLOG
We do not have a significant backlog, as we normally deliver and install
the computer products purchased by our clients within a short time of the date
of order.
GOVERNMENTAL REGULATION AND CONTRACTS
We believe that we are in material compliance with federal and state laws
and regulations that are applicable to our operations. We are not a party to any
government contract that represents a material portion of our revenue or that,
if terminated or renegotiated, would have a material adverse effect on our
business.
PATENTS AND TRADEMARKS
Patented Technology
The U.S. Patent & Trademark Office awarded Nexar a patent for its advanced
PC motherboard and chassis design in September 1997. The patent addresses the
Nexar PC's Inverted Socket Process Architecture (ISPA) designs that place the
processor, system memory and cache sockets on the undercarriage of the
motherboard. We currently have Patent Pending Technology for a "future ready"
XPA design that incorporates highly innovative split motherboard design. XPA is
a substantial enhancement to Nexar's initially awarded ISPA patent because it
supports multiple processor architectures. The XPA design separates the most
stable
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components of a PC from those components that are most susceptible to technology
obsolescence, easily enabling resellers and users to adapt to rapidly changing
technologies.
The XPA's split motherboard using standard NLX design, features a modular
CPU/Logic board that supports the chipset, processor and memory sockets, which
are the most evolutionary in terms of constantly changing technology. The second
half of XPA's split motherboard is the I/O (Input/Output) controller board and
contains the stable PC technology including PCI and ISA expansion slots, and
ports for standard and USB peripheral options. XPA's split motherboard enables
end-users to upgrade any PC component, and provides users with the ability to
seamlessly migrate from one processor platform to another (i.e. Pentium, Pentium
II, Pentium III,) including future processor technology developments, as they
become available.
Trademark
On May 11, 1999, the U.S. Patent and Trademark Office granted the Company
a trademark for Nexar. We plan to use the Nexar mark on our line of computers.
The registration shall remain in force for ten (10) years.
EMPLOYEES
As of the date of this Annual Report, we had an aggregate of approximately
121 employees, including 4 administrators, 20 staff persons, 12 managers, 43
full-time sales persons, 39 technical and 3 warehouse personnel. We have no
collective bargaining agreements and believe that relations with our employees
are good.
ITEM 2. PROPERTIES
Our headquarters and executive offices are located at 90 Adams Avenue,
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. We also maintain 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. Our 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
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expiring in 2002. Our Logix subsidiary has subleased a facility that occupies
8,000 square feet at an annual rental of approximately $92,000, expiring in
1999. We also lease space in Syracuse, NY, Westboro, Massachusetts and Brampton,
Ontario. The Syracuse facility occupies 1300 square feet and requires annual
rental payments of approximately $16,000 per year, plus other expenses under a
lease expiring in 2002. The Westboro facility occupies 3,000 square feet and
requires annual rental payments of $31,500 per year, plus other expenses under a
lease expiring in 2002. The Brampton facility occupies 425 square feet and
requires annual rental payments of $5,083 per year, plus other expenses under a
lease expiring in 2001.
We believe that our current facilities are suitable for our present and
projected needs. We do not own any real property.
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 that 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 that may be obtained
against MH. The case is presently in the discovery stages.
On August 23, 1999, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York on behalf of all persons who
purchased our common stock from October 12, 1998, through May 19, 1999,
inclusive. The complaint charges us and certain of our officers and directors
with violations of Sections 10 (b) and 20 (a) of the Securities Exchange Act of
1934, as well as SEC Rule 10b-5 promulgated thereunder. Plaintiff seeks to
recover damages on behalf of all class members.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1999, we did not submit any matter to the vote
of our shareholders.
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ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the National Association of Security Dealers
Automated Quotation System ("NASDAQ") under the symbol "ATEC". The following
table sets forth the high and low bid prices for our common stock for the
periods indicated as reported by the NASDAQ. Such prices reflect inter-dealer
prices, without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
COMMON STOCK
High Low
---- ---
1997
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
Quarter ended 9/30........................ 7 15/32 3 15/16
Quarter ended 12/31....................... 8 1/8 3 1/4
1999
Quarter ended 3/31........................ 10 7/8 5 7/8
Quarter ended 6/30........................ 8 5/16 2 15/16
On September 20, 1999, there were approximately 245 holders of record of
our common stock, 15 holders of record of Series A preferred shares and 3
holders of record of the Units. The number of record holders does not include
holders whose securities are held in street name.
DIVIDENDS
We do not currently pay dividends on our common stock. It is management's
intention not to declare or pay dividends on our common stock, but to retain
earnings for the operation and expansion of our business.
The holders of its Series A preferred shares are entitled to certain
dividend payments upon declaration by our Board of Directors. (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, 1999, have been derived from our audited financial
statements. 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 1999 1998* 1997* 1996* 1995*
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales $107,435,617 $187,150,614 $100,841,362 $81,812,045 $47,565,542
Income (Loss) from
continuing operations $ (4,299,228) $ 2,740,066 $ 1,667,898 $ 838,346 $(2,251,354)
Income (Loss) per common share:
Basic $ (.62) $ .45 $ .28 $ .20 $ (1.25)
Diluted $ (.62) $ .43 $ .28 $ .20 $ (1.25)
Balance Sheet Data
Total Assets $ 16,004,995 $ 26,634,164 $ 17,147,707 $13,322,133 $11,724,938
Long-term obligations -- -- -- $ 228,322 $ 918,291
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 one for five reverse stock split in November 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
We are a leading system integrator and provider of a full line of IT
service products, as well as a single source "end-to-end" solution provider for
the computer needs of businesses, professionals, government agencies and
educational institutions.
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RESULTS OF OPERATIONS
Fiscal 1999 compared to Fiscal 1998
Our revenues for the 1999 fiscal year ("Fiscal 1999") decreased to $107.4
million from $187.2 million for the prior year, a decrease of approximately 43%.
This decrease is primarily attributable to a significant drop in sales in our
distribution division and a major shift in the marketing philosophy of large
systems manufacturers who are gradually decreasing their distribution network
and increasingly selling directly to end-users and introducing build-to-order
systems, which resulted in less available product. Our revenues are generated by
sales of computer hardware and software, and related support services. Gross
profit for Fiscal 1999 decreased to $11.1 million from $13.7 million for 1998, a
19% decrease due to the decreased revenues. Gross margin for Fiscal 1999 was
10.3% as compared to 7.3% for the prior year. These margins are expected to
increase as we attempt to increase our market share in more profitable sectors
of the business such as PC manufacturing, integration, hardware
service/maintenance, telecommunications, networking and training.
Fiscal 1999 operating expenses exclusive of amortization of intangible
assets increased to $12.7 million as compared to $8.6 million for the prior
year. The 47% increase in operating expenses is related primarily to $2.5
million of additional salaries and expenses for the Y2K division, $700,000 of
start up and financing costs related to the Nexar acquisition and additional
costs to develop E-commerce and hiring additional personnel.
Amortization of intangible assets increased to $443,000 for the year from
$308,000 in the comparable 1998 period, due to the Logix acquisition which was
consummated in April 1998. In addition, in 1999 we incurred one-time charges of
$3,000,000 of goodwill for prior acquisitions. We also earned $124,000 of
interest income and incurred $38,000 of interest expense in 1999 due to our
continued judicious use of working capital.
The provision for income taxes for 1999 was a benefit of $641,000 as
compared to an expense of $2,145,000 for 1998.
As a result of the above, we incurred a loss of $4,300,000 for 1999
compared to net income of $2,740,000 in 1998. For 1999, net loss per share was
$.62 compared to net income of $.43 per share in the prior year. Diluted net
loss per share, exclusive of the one-time charges for the impairment of goodwill
and the start-up costs (net of tax credits) for the Nexar division, amounted to
$.12. Basic and diluted average shares outstanding were 6,885,069 for 1999.
15
<PAGE>
Fiscal 1998 compared to Fiscal 1997
Our 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 was primarily attributable to internal growth. Our revenues
were generated by sales of computer hardware and software, and related support
services. Gross profit for Fiscal 1998 increased to $13.7 million from $9.8
million for 1997, a 40% increase due to the increased revenues. Gross margin for
Fiscal 1998 was 7.3% as compared to 9.7% for the prior year.
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 is 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 a $153,000 reduction in the sales tax
obligation of our predecessor company in 1997. We also earned an additional
$78,000 of interest income and incurred $32,000 less interest expense in 1998
due to our judicious use of working capital.
The provision for income taxes for 1998 was $2,145,000 as compared to
$1,299,000 for 1997.
As a result of the above, our 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 year, an increase of 54%. Basic and diluted average shares
outstanding were 6,079,045 and 6,338,151 respectively, for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $2,247,000 at June 30, 1999, an increase of $462,000
as compared to June 30, 1998. Our working capital at June 30, 1999 was
$9,134,000 as compared to working capital of $8,314,000 at June 30, 1998. The
changes in cash and working capital resulted primarily from operating losses
($590,000), increased investing activities ($1,200,000) and proceeds from the
sale of common stock for $2,700,000.
Cash used for investing activities totaled $1,211,000 primarily for the
purchase of Nexar's patents and trademarks ($392,000), purchase of outstanding
Logix options ($400,000) and for the purchase of property and equipment
($437,000).
16
<PAGE>
To accommodate our financial needs for inventory financing, we have been
granted lines of credit with two financial institutions in the aggregate amount
of $15,750,000. At June 30, 1999, our indebtedness to these institutions was
$1,935,000, or a decrease of $5,064,000 compared to June 30, 1998. Substantially
all of our tangible and intangible assets are pledged as collateral for these
facilities.
YEAR 2000 COMPLIANCE
We recognize the need to ensure Y2K compliance for our operation and
believe we will not be adversely affected by Year 2000 software failure. Further
we are communicating with suppliers, clients and others with which we do
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
Our consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
17
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
JUNE 30, 1999
I N D E X
Page No.
--------
INDEPENDENT AUDITORS' REPORT ........................................ F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 1999 and 1998 ....... F-2
Consolidated Statements of Operations
For the Years Ended June 30, 1999, 1998 and 1997 ............. F-3
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999, 1998 and 1997 ............. F-4 - F-5
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 1999, 1998 and 1997 ............. F-6 - F-8
NOTES TO FINANCIAL STATEMENTS ....................................... F-9 - F-21
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
Stockholders 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, 1999 and 1998, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above pre-sent
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Weinick Sanders Leventhal & Co., LLP
New York, N. Y.
August 20, 1999, except for Note 7 as
to which the date is August 23, 1999
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
June 30,
----------------------------
1999 1998
------------ ------------
Current assets:
Cash $ 2,246,951 $ 1,784,850
Accounts receivable - net 8,666,500 17,634,632
Inventories 1,110,273 1,790,695
Deferred taxes 251,290 37,249
Other current assets 1,405,333 576,677
------------ ------------
Total current assets 13,680,347 21,824,103
Property and equipment - net 750,279 568,026
Goodwill - net 1,519,775 4,168,623
Other assets 54,594 73,412
------------ ------------
$ 16,004,995 $ 26,634,164
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 339,944
Revolving lines of credit 1,934,534 6,998,712
Accounts payable 1,709,763 4,154,143
Notes payable - related parties -- 2,967
Accrued expenses 669,738 1,166,070
Income taxes payable -- 790,882
Other current liabilities 232,768 57,057
------------ ------------
Total current liabilities 4,546,803 13,509,775
------------ ------------
Stockholders' equity:
Preferred stocks 321,090 346,507
Common stock 73,270 67,006
Additional paid-in capital 11,758,235 9,035,615
Discount on preferred stocks ( 288,090) ( 309,105)
Retained earnings (deficit) ( 314,862) 3,984,366
------------ ------------
11,549,643 13,124,389
Less: Treasury stock - at cost 91,451 --
------------ ------------
Total stockholders' equity 11,458,192 13,124,389
------------ ------------
$ 16,004,995 $ 26,634,164
============ ============
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,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 107,435,617 $ 187,150,614 $ 100,841,362
Cost of sales 96,317,894 173,485,484 91,073,358
------------- ------------- -------------
Gross profit 11,117,723 13,665,130 9,768,004
------------- ------------- -------------
Operating expenses:
Selling and administrative 12,679,751 8,439,618 6,698,088
Research and development 10,525 180,759 161,158
Amortization of goodwill 442,577 308,015 224,190
------------- ------------- -------------
Total operating expenses 13,132,853 8,928,392 7,083,436
------------- ------------- -------------
Income (loss) from operations ( 2,015,130) 4,736,738 2,684,568
------------- ------------- -------------
Other income (expense):
Impairment of long-lived assets ( 2,999,075) -- --
Interest income 124,171 164,417 86,699
Interest expense (37,630) (80,341) ( 112,379)
Other income (expense) (12,895) 64,286 308,089
------------- ------------- -------------
Total other income (expense) ( 2,925,429) 148,362 282,409
------------- ------------- -------------
Income (loss) before income taxes ( 4,940,559) 4,885,100 2,966,977
Provision for (benefit from) income taxes ( 641,331) 2,145,034 1,299,079
------------- ------------- -------------
Net income (loss) ($ 4,299,228) $ 2,740,066 $ 1,667,898
============= ============= =============
Earnings (loss) per common share:
Basic ($ .62) $ .45 $ .28
============= ============= =============
Diluted ($ .62) $ .43 $ .28
============= ============= =============
Weighted average shares outstanding:
Basic 6,885,069 6,079,045 5,947,109
============= ============= =============
Diluted 6,885,069 6,338,151 5,960,247
============= ============= =============
</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,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,299,228) $ 2,740,066 $ 1,667,898
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 254,982 173,950 146,123
Amortization of goodwill 442,577 308,015 224,190
Settlements of accrued liabilities -- ( 70,000) ( 120,100)
Reduction of deferred sales tax obligations -- -- ( 183,052)
Compensatory element of issuances of capital stock 24,000 142,500 --
Loss on impairment of long-lived assets 2,999,075 -- --
Provision for doubtful accounts 469,211 -- ( 20,000)
Deferred taxes ( 214,041) -- 5,524
Changes in assets and liabilities:
Accounts receivable 8,498,921 ( 8,468,573) ( 4,074,242)
Receivables from officers and related parties -- -- 6,124
Inventories 680,422 ( 408,459) 1,431,701
Other current assets (828,656) ( 135,208) ( 27,757)
Other assets -- ( 42,159) 51,100
Revolving lines of credit ( 5,064,178) 5,168,353 ( 254,695)
Accounts payable ( 2,444,380) ( 293,452) 3,102,699
Accrued expenses (496,332) 388,685 ( 73,418)
Income taxes payable (790,882) ( 238,134) 750,416
Other current liabilities 175,711 ( 564,355) 320,095
----------- ----------- -----------
Total adjustments 3,706,430 ( 4,038,837) 1,284,708
----------- ----------- -----------
Net cash provided by (used in) operating activities ( 592,798) ( 1,298,771) 2,952,606
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ( 437,235) ( 293,034) ( 70,213)
Security deposits 18,818 -- 14,843
Additions to goodwill ( 792,804) -- --
----------- ----------- -----------
Net cash used in investing activities ( 1,211,221) ( 293,034) ( 55,370)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of capital stock 2,700,482 1,682,033 --
Purchase of preferred stock -- -- ( 1,250,112)
Purchase of treasury stock ( 91,451) -- ( 654,851)
Repayments from related parties -- -- 125,000
Repayments to related parties ( 2,967) ( 125,000) ( 875,355)
Bank overdraft ( 339,944) ( 193,927) 104,600
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,266,120 1,363,106 ( 2,550,718)
----------- ----------- -----------
Net increase (decrease) in cash 462,101 ( 228,699) 346,518
Cash at beginning of year 1,784,850 2,013,549 1,667,031
----------- ----------- -----------
Cash at end of year $ 2,246,951 $ 1,784,850 $ 2,013,549
=========== =========== ===========
</TABLE>
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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Income taxes $1,466,801 $2,422,543 $ 449,404
========== ========== ==========
Interest $ 37,630 $ 83,182 $ 109,538
========== ========== ==========
Supplemental Schedules of Non Cash
Operating and Financing Transactions:
Issuance of common stock for services $ 24,000 $ 142,500 $ 37,500
========== ========== ==========
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
========== ========== ==========
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
========== ========== ==========
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, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stocks Common Stocks Additional Discount on
-------------------------- -------------------------- Paid-In Preferred
Shares Amount Shares Amount Capital Stocks
---------- ------------ ----------- ------------ ------------ ------------
(1) (1) (1)
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 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 July 1, 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>
(l) 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, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stocks Common Stocks 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>
(l) 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
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stocks Common Stocks 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, 1998
(carried forward) 374,029 $ 346,507 6,700,664 $67,006 $ 9,035,615 ($309,105) $ 3,984,366
Purchase of treasury stock -- -- -- -- -- -- --
Shares issued for warrants
exercised -- -- 206,943 2,070 679,227 -- --
Shares issued for options
exercised -- -- 405,058 4,051 2,015,134 -- --
Shares issued in accordance
with employment agreement -- -- 9,697 97 23,903 -- --
Shares issued for conversion
of Preferred Series A and C (44,020) ( 25,417) 4,601 46 4,356 21,015 --
Net loss for the year -- -- -- -- -- -- ( 4,299,228)
-------- --------- --------- ------- ----------- --------- -----------
Balance at June 30, 1999 330,009 $ 321,090 7,326,963 $73,270 $11,758,235 ($288,090) ($ 314,862)
-------- --------- --------- ------- ----------- --------- -----------
<CAPTION>
Treasury Stock Total
------------------- Stockholders'
Shares Amount Equity
------- -------- ------------
<S> <C> <C> <C>
Balance at June 30, 1998
(carried forward) -- $ -- $ 13,124,389
Purchase of treasury stock (18,000) ( 91,451) ( 91,451)
Shares issued for warrants
exercised -- -- 681,297
Shares issued for options
exercised -- -- 2,019,185
Shares issued in accordance
with employment agreement -- -- 24,000
Shares issued for conversion
of Preferred Series A and C -- -- --
Net loss for the year -- -- ( 4,299,228)
------- -------- ------------
Balance at June 30, 1999 (18,000) ($91,451) $ 11,458,192
------- -------- ------------
</TABLE>
(l) Adjusted to reflect a one for five reverse stock split on November 18,
1997.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999, 1998, AND 1997
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 an "end to end" 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 system design, high speed data transmission, LAN/WAN,
video conferencing, internet/intranet technology, digital arts solutions,
PC manufacturing, E-commerce, internet access services and Year 2000
("Y2K") solutions for its customers.
(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-9
<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,
ranging from five to fifteen years. The goodwill is periodically reviewed
to evaluate the future economic benefits and/or potential impairments
which may effect 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) 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.
(8) 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 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies. (Continued)
(9) Asset Impairment:
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This statement requires that the
Company recognize an impairment loss in the event that facts and
circumstances indicate that the carrying amount of an asset may not be
recoverable, and an estimate of future undiscounted cash flows is less
than the carrying amount of the asset. Property and equipment is evaluated
separately within each subsidiary. The recoverability of goodwill is
evaluated on a separate basis for each acquisition. Based on an evaluation
of its goodwill, the Company determined that $2,999,075 of goodwill, net
of accumulated amortization, associated with two of the Company's prior
acquisitions was impaired.
(10) Earnings Per Share:
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share,". 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. For the year ended June 30, 1999, diluted earnings per share
is not presented as it is anti-dilutive. 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:
For the Years Ended June 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income (loss) available to
common stockholders ($4,299,228) $ 2,740,066 $ 1,667,898
=========== =========== ===========
Weighted average shares
outstanding - basic 6,885,069 6,079,045 5,947,109
Employee stock options -- 95,706 --
Acquisition options -- 93,776 --
Warrants -- 56,486 --
Convertible preferred stock -- 13,138 13,138
----------- ----------- -----------
Weighted average shares
outstanding - diluted 6,885,069 6,338,151 5,960,247
=========== =========== ===========
Earnings (loss) per common share:
Basic ($ .62) $ .45 $ .28
=========== =========== ===========
Diluted ($ .62) $ .43 $ .28
=========== =========== ===========
F-11
<PAGE>
NOTE 2 - ACQUISITIONS.
(a) 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.
(b) 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 issued the following securities:
1. 252,000 shares of common stock;
2. Options to purchase up to 548,700 shares of common stock
exercisable at a price of $4.74 per share, expiring on October
10, 1999;
3. Options to purchase up to 176,000 shares of common stock
exercisable at a price of $7.50 per share, expiring on October
10, 1999;
4. Options to purchase up to 252,000 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 and resulted in
goodwill of $907,748. During the year ended June 30, 1999, the Company
purchased $4,536,000 of options issued to the stockholders of Logix in
connection with the acquisition for $400,000 which has been added to
goodwill.
(c) Nexar Technologies, Inc.:
On January 15, 1999 the Company purchased the trademarks and patents
of Nexar Technologies, Inc. resulting in goodwill of $392,805. In May
1999, the Company registered the trademark for the "Nexar" brand name.
F-12
<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, 1999
and 1998 consists of the following:
Shares Shares
Authorized Issued Amount
---------- ---------- --------
June 30, 1999:
Preferred Stocks:
Series A cumulative
convertible 29,233 8,451 $ 845
Series B convertible 12,704 1,458 145
Series C convertible 350,000 320,100 320,100
---------- --------
Total preferred 330,009 $321,090
========== ========
Common stock 70,000,000 7,326,963 $ 73,270
========== ========
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
========== ========
(c) Capital Stock:
(i) Included in the total are 94,930 shares which were issued
subsequent to June 30, 1998.
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.
During the year ended June 30, 1999 the Company purchased 18,000 shares of
the Company's common stock at a cost of $91,451.
F-13
<PAGE>
NOTE 3 - EQUITY SECURITIES. (Continued)
(d) Preferred Stock:
At June 30, 1999 and 1998, 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, 1999 and 1998 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 8,400 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, 1999, the A shareholders were due $1,462 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.
(e) Warrants:
At June 30, 1999, the Company had outstanding warrants entitling the
holders to purchase common stock as follows:
Number of Exercise Expiration
Shares Price Date
--------- -------- ----------
253 15.00 May 14, 2001
18,000 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.
F-14
<PAGE>
NOTE 3 - EQUITY SECURITIES.(Continued)
(f) Options:
At June 30, 1999, there were 2,602,072 options to acquire shares of
the Company's common stock outstanding, comprised of both qualified and
non-qualified 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,
-----------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -----------------------
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 6,786,630 $ 7.68 160,000 $ 3.75 -- $ --
Granted 826,500 4.40 6,694,630 7.73 160,000 3.75
Exercised ( 405,058) 4.99 ( 68,000) 4.30 -- --
Expired ( 70,000) 4.71 -- -- -- --
Cancelled (4,536,000) 8.75 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
end of year 2,602,072 $ 5.26 6,786,630 $ 7.67 160,000 $ 3.75
========== ========== ========== ========== ========== ==========
Exercisable at
end of year 1,875,572 $ 5.73 3,568,000 $ 6.63 -- $ 3.75
========== ========== ========== ========== ========== ==========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
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, 1999 Life Price June 30, 1999 Price
- ------------ ------------- ----------- -------- ------------- --------
$3.75 129,220 7.50 $3.75 129,220 $3.75
$3.125-10.00 1,646,352 3.36 5.82 1,646,352 5.82
$3.375-6.80 826,500 9.49 4.40 100,000 6.80
---------- ----------
2,602,072 1,875,572
========== ==========
F-15
<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 $3.22, $1.99 and $.71 per
option for options granted during the years June 30, 1999, 1998 and 1997,
respectively. Additionally, the weighted average fair value of employee
stock options granted in the years ended June 30, 1999, 1998 and 1997 was
$2.01, $.40 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,
-----------------------------------------
1999 1998 1997
---------- ----------- --------
Expected term:
All stock options 1-10 years 6 months-10 years 10 years
Employee stock options 10 years 10 years 10 years
Interest rate 5.00% 5.00% 5.00
Volatility 83.50% 78.40% 78.40%
Dividends None 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 $2,044,716($1,318,533 net of
taxes), $3,922,560 ($2,200,556 net of taxes), and $5,992 ($3,368 net of
taxes) for the years ended June 30, 1999, 1998 and 1997, respectively. The
pro forma effect on diluted earnings per common share would have been a
reduction of $.26 and $.35 for the years ended June 30, 1999 and 1998,
respectively and no effect for the year ended June 30, 1997. The pro forma
effect on basic earnings per common share would have been a reduction of
$.26 and $.36 for the years ended June 30, 1999 and 1998, respectively and
no effect for the year ended June 30, 1997.
NOTE 5 - OPERATING LEASES.
The Company conducts its operations under various noncancellable
operating leases expiring at various dates through 2003. Future minimum
rent payments are as follows:
For the Year Ending
June 30,
2000 $321,996
2001 237,881
2002 219,301
2003 111,192
--------
Total minimum
annual rental $890,370
========
Total rent expense for the years ended June 30, 1999, 1998 and 1997
amounted to $404,350, $305,554 and $258,000, respectively.
F-16
<PAGE>
NOTE 6 - REVOLVING LINES OF CREDIT.
At June 30, 1999, the Company and its subsidiaries have agreements
with two financial institutions, whereby certain inventory purchases are
financed. The first line grants the Company terms and charges no interest
for 40 days and thereafter at rates ranging from prime plus 1/4% to 6-1/2%
per annum. Borrowings under this line may be up to $15,000,000. The line
is collateralized by all the assets of the Company. At June 30, 1999 and
1998, the borrowings under this line amounted to $1,933,883 and
$6,998,712. The second line grants the Company terms and charges interest
at the prime rate. Borrowings under this line may be up to $750,000. This
line is collateralized by the inventory. At June 30, 1999 and 1998, the
borrowings under this line amounted to $651 and $-0-.
NOTE 7 - LITIGATION.
A third party lawsuit was commenced against the Company's
predecessor ("Hillside Bedding") in 1993 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. The case
is presently in the discovery stages.
Two actions were commenced against the Company alleging breach of
contract seeking damages of approximately $1,662,000. The lawsuits are in
the preliminary discovery stage. In management's opinion the lawsuits have
no merit.
On August 23, 1999, a class action lawsuit was filed on behalf of
all persons who purchased the Company's common stock from October 12, 1998
through May 19, 1999, inclusive. The complaint charges the Company and
certain of its officers and directors with violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as well as SEC Rule
10b-5 promulgated thereunder. Plaintiff seeks to recover damages on behalf
of all class members.
NOTE 8 - INCOME TAXES.
The Company's income tax provision consists of the following:
1999 1998 1997
----------- ---------- ----------
Current tax provision (benefit):
Federal ($ 362,696) $1,651,331 $ 894,365
State (64,594) 493,703 399,190
----------- ---------- ----------
( 427,290) 2,145,034 1,293,555
Deferred tax provision (benefit)
relating to temporary differences ( 214,041) -- 5,524
----------- ---------- ----------
Income tax provision (benefit) ($ 641,331) $2,145,034 $1,299,079
=========== ========== ==========
F-17
<PAGE>
NOTE 8 - INCOME TAXES. (Continued0
A reconciliation of the above effective tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- --------------------
% % %
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory (34.0) (1,679,790) 34.0 1,660,934 34.0 1,008,772
State income tax,
net of federal
tax benefit (1.6) (78,608) 6.8 333,657 8.9 264,345
Effect of nondeducti-
ability of:
Amortization and
impairment
of goodwill 23.7 1,170,163 2.1 104,725 2.6 76,225
Tax expense and loss
limitations ( .2) ( 8,257) ( .1) ( 9,738) ( .4) ( 10,853)
Other ( .8) ( 44,839) 1.1 55,456 (1.3) ( 39,410)
----- ----------- ---- ----------- ---- -----------
(12.9%) ($ 641,331) 43.9% $ 2,145,034 43.8% $ 1,299,079
===== =========== ==== =========== ==== ===========
</TABLE>
The Company's deferred tax assets amounted to $251,290 and $37,249
at June 30, 1999 and 1998 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.
The Company owed one stockholder $2,967 at June 30, 1998, which was paid
during the year ended June 30, 1999.
Interest charged to operations on such loans for the years ended
June 30, 1999, 1998 and 1997 amounted to $-0-, $13,542 and $7,155,
respectively.
The Company has an operating lease for space at its Albany, N.Y.
location with a partnership which is controlled by the Company's CEO and
its President. The lease runs through June 30, 2003 at a minimum annual
rent of $108,192, plus applicable expenses and taxes.
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-18
<PAGE>
NOTE 10 - OTHER FINANCIAL INFORMATION.
(a) Accounts receivable - Net:
Accounts receivable, net at June 30, 1999 and 1998 consists of the
following:
1999 1998
------------ ------------
Accounts receivable $ 9,221,511 $ 17,720,432
Allowance for doubtful
accounts, returns and
discounts ( 555,011) ( 85,800)
------------ ------------
$ 8,666,500 $ 17,634,632
============ ============
For the years ended June 30, 1999, 1998 and 1997, $897,356, $21,000
and $88,402, respectively, was charged to bad debt expense.
(b) Other Current Assets:
Other current assets consist of the following at June 30, 1999 and
1998:
1999 1998
---------- --------
Receivable from suppliers $ 118,009 $537,313
Prepaid expenses 92,352 --
Prepaid and refundable
income taxes 1,007,422 39,364
Sundry loans 187,550 --
---------- --------
$1,405,333 $576,677
========== ========
(c) Goodwill - Net:
Goodwill, net at June 30, 1999 and 1998 consists of the following:
1999 1998
---------- ----------
Goodwill, net of impairment
of $2,999,075 $2,715,498 $4,921,768
Accumulated amortization 1,195,723 753,145
---------- ----------
$1,519,775 $4,168,623
========== ==========
Amortization charged to operations for the years ended June 30,
1999, 1998 and 1997 amounted to $442,577, $308,015 and $224,190,
respectively.
F-19
<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, 1999 and 1998:
1999 1998
---------- ----------
Leasehold improvements $ 478,439 $ 466,982
Furniture and fixtures 226,573 292,708
Office equipment 847,084 510,674
Automobiles 110,598 100,902
1,662,694 1,371,266
---------- ----------
Less: Accumulated depreciation
and amortization 912,415 803,240
---------- ----------
$ 750,279 $ 568,026
========== ==========
Depreciation and amortization charged to operations for the years
ended June 30, 1999, 1998 and 1997 amounted to $254,982, $173,950 and
$146,123, respectively.
(e) Other Current Liabilities:
Other current liabilities consist of the following at June 30, 1999
and 1998:
1999 1998
-------- -------
Payroll tax payable $153,658 $ --
Sales tax payable 72,919 --
Security deposit payable 3,151 --
Customers with credit balances 3,040 57,057
-------- -------
$232,768 $57,057
======== =======
(f) Transactions with Major Customers and Suppliers:
In each of the three years ended June 30, 1999, the Company did not
have sales to any one customer which represented 10% or more of the
Company's net sales during a fiscal year.
During the year ended June 30, 1999, four suppliers accounted for
65% of the Company's purchases. During the years ended June 30, 1998 and
1997, two and one supplier accounted for 50% and 22% 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, $47,000, $30,000,
and $7,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
F-20
<PAGE>
NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically issues new
accounting standards in a continuing effort to improve the quality of
financial information and to promote uniformity in its presentation.
Management has reviewed all such pronouncements made in the last fiscal
year and concluded that none have a material impact on the Company's
presentation of its 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 other 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-21
<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 and the position held by them:
Name Age Position
---- --- --------
Surinder Rametra 59 Chairman of the Board and
Chief Executive Officer
Ashok Rametra 47 President,Treasurer and
Director
James J. Charles 56 Chief Financial Officer
George Eagan 42 Director
David Reback 57 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 in June 1994. Prior to June 1994 Mr. Rametra was president of one of
our subsidiaries. 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 President in January 1999. Prior thereto he
was the Treasurer, Chief Financial Officer and a Director since June 1994. From
June 1994 to March 1995 Mr. Rametra also served as our president. Prior to 1994
Mr. Rametra was the president of one of our subsidiaries. Mr. Rametra received a
Bachelor of Science Degree from St. Johns University in Accounting in 1980.
18
<PAGE>
James J. Charles was appointed Chief Financial Officer in January 1999.
Prior to his appointment he was a financial consultant to several public
companies (1994-1998), Chief Financial Officer of a printing company (1990-1994)
and a partner in the firm of Ernst & Young (1966-1990).
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 as 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 has been partner with Reback & Potash, LLP, a law firm specializing
in litigation, appellate matters and real estate. Mr. Reback received a BA 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 us during our
most recent fiscal year, we believe that there were no Section 16(a) reports
filed untimely during our years ended June 30, 1998 and 1997.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Our Summary Compensation Table for the years ended June 30, 1999, 1998 and
1997 is provided herein. This table provides compensation information on behalf
of our existing officers and directors who earned in excess of $100,000. There
are no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal Year-End
Option/SAR Value Table for the years ended June 30, 1999, 1998 and/or 1997.
There are no long-term incentive plan ("LTIP") awards, or stock option or stock
appreciation rights except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1999, 1998 and 1997
Annual Compensation Awards Payouts
<TABLE>
<CAPTION>
Year Compen- Options/ LTIP
Name Position Ended Salary($) Bonus($) sation($) SARs Payouts
- ---- -------- ----- --------- -------- --------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Surinder Rametra CEO 6/30/99 $202,733 $15,262(5) NONE NONE
6/30/98 $170,020 $14,430(1) NONE NONE
6/30/97 $160,680 $ 6,737(3) NONE NONE
Ashok Rametra President 6/30/99 $174,980 $11,652(6) NONE NONE
6/30/98 $170,000 $14,077(2) NONE NONE
6/30/97 $150,020 $19,372(4) NONE NONE
</TABLE>
(1) Major Medical $6,372, Leased Auto $8,058
(2) Major Medical $4,380, Leased Auto $9,697
(3) Major Medical $6,737
(4) Major Medical $4,727, Leased Auto $4,645, Interest Income 10,000
(5) Major Medical $6,472, Leased auto $8,790
(6) Major Medical $4,484, Leased auto $7,168
20
<PAGE>
Year End Option Table. The following table sets forth certain information
regarding the stock options held as of June 30, 1999, by the individuals named
in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End(#) at Fiscal Year End (3)
Shares Acquired Value --------------------------- ----------------------------
Name on exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Surinder Rametra (1) 0 0 897,000 0 $3,045 0
Ashok Rametra (2) 0 0 145,000 0 $9,950 0
</TABLE>
(1) Represents options to acquire: (i) 500,000 shares at $5.00 per share
exercisable through March 2008; (ii) 7,000 shares at $3.44 per share
exercisable through August 8, 2007; (iii) 250,000 shares at $4.67 per
share exercisable through September 27, 2008; and (iv) 140,000 shares at
$4.26 per share exercisable through June 29, 2009
(2) Represents options to acquire: (i) 10,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 35,000 shares at $3.7125 per
share exercisable through October 8, 2008; and (iii) 100,000 shares at
$6.80 per share exercisable through December 14, 2008
(3) Computation based on $3.875, which was the June 30, 1999 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, 1999,
by us 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
- ---- ----------- ----------- --------- ----
Surinder Rametra 250,000 29.5% $4.67 2008
Surinder Rametra 140,000 16.5% $4.26 2009
Ashok Rametra 35,000 4% $3.7125 2008
Ashok Rametra 100,000 11.8% $6.80 2008
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 20, 1999, certain
information with respect to the beneficial ownership of our voting securities by
(i) any person (including any "group" as that term is used in Section 13(d)(3)
of the Securities Exchange Act known by us to be the beneficial owner of more
than 5% of our voting securities, (ii) each director, (iii) each executive
officer named in the Summary Compensation table appearing herein, and (iv) all
executive officers and directors as a group. The table also sets forth the
respective general voting power of such persons taking into account the voting
power of our common stock and our 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) 751,442 8.7%
1762 Central Avenue
Albany, NY 12205
Surinder Rametra #(3) 1,490,640 17.2%
90 Adams Avenue
Hauppauge, NY 11788
James Charles #(4) 65,000 **
90 Adams Avenue
Hauppauge, NY 11788
George Eagan #(5) 3,500 **
C/O 90 Adams Avenue
Hauppauge, NY 11788
David Reback #(6) 7,500 **
C/O 90 Adams Avenue
Hauppauge, NY 11788
All directors and #(2)(3)(4)(5)(6) 1,725,486 20.5%
executive/officers as a group (5 persons)
----------------
** Less than 1%
22
<PAGE>
(1) Computed based upon a total of 7,327,273 shares of common stock, 8,451
shares of Series A preferred stock, 1,458 shares of Series B preferred
stock, 320,100 shares of Series C preferred stock and options to acquire
1,108,000 shares of common stock. Each share of common stock and preferred
stock possesses one vote per share. Accordingly, the foregoing represents
an aggregate of 8,765,282 votes.
(2) The foregoing figure reflects the ownership of 219,346 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 145,000 shares of the common stock. Mr.
Rametra disclaims beneficial ownership of shares of our securities owned
by other members of the Rametra family.
(3) The foregoing figure reflects the ownership of 388,140 shares of common
stock by Mr. Rametra and 205,500 shares by Mr. Rametra's spouse. In
addition, the foregoing assumes the exercise by Mr. Rametra of options to
acquire 897,000 shares of our common stock. Mr. Rametra disclaims
beneficial ownership of the shares of our securities owned by other
members of the Rametra family including independent children.
(4) The foregoing figure reflects ownership of 10,000 shares of common stock
by Mr. Charles. The foregoing amount also assumes the exercise of by Mr.
Charles of options to acquire 55,000 shares of common stock.
(5) The foregoing figure reflects options for the purchase of 3,500 shares of
common stock.
(6) The foregoing figure reflects options for the purchase of 7,500 shares of
common stock.
ITEM 13. CERTAIN TRANSACTIONS
The Company has not been a party to any significant transactions in the
last fiscal year.
23
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of ATEC Group, Inc. are included:
Independent Auditor's Report
Consolidated Balance Sheets as at June 30, 1999 and 1998
Consolidated Statements of Operations for the years ended June 30,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended June 30,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1999, 1998 and 1997
Notes to Financial Statements
(2) OTHER SCHEDULES
All other schedules are omitted since the required information is not
present or is not present in an amount sufficient to require submission of
schedules, or because the information required is included in the financial
statements and notes thereto.
(3) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Exhibit Index.
(d) Not Applicable.
24
<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/ James J. Charles
------------------------------------------
James J. Charles, Chief Financial Officer
Dated: September 28, 1999
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, 1999
Surinder Rametra, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/ Ashok Rametra
- ----------------------------------------------------- September 28, 1999
Ashok Rametra, President, Treasurer and Director
/s/ George Eagan
- ----------------------------------------------------- September 28, 1999
George Eagan, Director
/s/ David Reback
- ----------------------------------------------------- September 28, 1999
David Reback, Director
25
<PAGE>
Exhibits
Number Description
21.1 List of Subsidiaries
27.1 Financial Data Schedule
26
Exhibit 21.1
ATEC Group, Inc.
List of Subsidiaries
- --------------------------------------------------------------------------------
Name under which business
Name of Subsidiary Jurisdiction conducted if different
- --------------------------------------------------------------------------------
Sun Computer & Software, Inc. New York
- --------------------------------------------------------------------------------
Micro Computer Store, Inc. New York
- --------------------------------------------------------------------------------
American Computer Systems Corporation New York
- --------------------------------------------------------------------------------
CONY Computer Systems, Inc. Connecticut
- --------------------------------------------------------------------------------
Laptop and Office Solutions, Inc. New York
- --------------------------------------------------------------------------------
Innovative Business Micros, Inc. New York
- --------------------------------------------------------------------------------
Global Leasing and Trading Corporation New York
- --------------------------------------------------------------------------------
Logix Solutions, Inc. Colorado
- --------------------------------------------------------------------------------
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
This schedule contains summary financial information extracted from the
consolidated financial statements of ATEC Group, Inc. as at and for the year
ended June 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,246,951
<SECURITIES> 0
<RECEIVABLES> 9,221,511
<ALLOWANCES> 555,011
<INVENTORY> 1,110,273
<CURRENT-ASSETS> 13,680,347
<PP&E> 1,662,694
<DEPRECIATION> 912,415
<TOTAL-ASSETS> 16,004,995
<CURRENT-LIABILITIES> 4,546,803
<BONDS> 0
73,270
0
<COMMON> 321,090
<OTHER-SE> 11,063,832
<TOTAL-LIABILITY-AND-EQUITY> 16,004,995
<SALES> 107,435,617
<TOTAL-REVENUES> 107,435,617
<CGS> 96,317,894
<TOTAL-COSTS> 96,317,894
<OTHER-EXPENSES> 13,132,853
<LOSS-PROVISION> 469,211
<INTEREST-EXPENSE> 37,630
<INCOME-PRETAX> (4,940,559)
<INCOME-TAX> (641,331)
<INCOME-CONTINUING> (4,299,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,299,228)
<EPS-BASIC> (.62)
<EPS-DILUTED> (.62)
</TABLE>
