SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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CURRENT REPORT
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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(State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
90 Adams Avenue, Hauppauge, New York 11788
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (516) 231-2832
---------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
As of the close of business on March 31, 1999, there were 6,881,038 shares of
the Registrant's Common Stock outstanding.
<PAGE>
ATEC GROUP, INC.
TABLE OF CONTENTS
Page
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PART I Financial Information
Item 1 - Consolidated Financial Statements........................1-5
Item 2 - Notes to Consolidated Condensed Financial Statements.....6-8
Item 3 - Management Discussion & Analysis
of Financial Condition and Results
of Operations...........................................9-10
PART II Other Information Required in Report
Item 6 - Other Information.........................................11
Signature Page.....................................................12
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED AUDITED
March 31, 1999 June 30, 1998
-------------- -------------
ASSETS
Current Assets
Cash $305,969 $1,784,850
Accounts receivable, net 10,383,500 17,634,632
Inventories 2,415,377 1,790,695
Prepaid tax 486,119 --
Deferred taxes 37,249 37,249
Other current assets 367,323 576,677
----------- -----------
Total currrent assets 13,995,537 21,824,103
Property and equipment, net 648,164 568,026
Purchased technology, net 955,470 --
Goodwill, net 3,913,623 4,168,623
Other assets 68,131 73,412
----------- -----------
$19,580,925 $26,634,164
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft -- $339,944
Revolving inventory line of credit 2,893,792 6,998,712
Accounts payable 1,580,727 4,154,143
Notes payable - related parties -- 2,967
Accrued expenses 1,146,806 1,166,070
Income taxes payable -- 790,882
Other current liabilities 17,126 57,057
----------- -----------
Total liabilities 5,638,451 13,509,775
----------- -----------
Stockholders' equity
Preferred stocks 346,507 346,507
Common stock 68,810 67,006
Additional paid-in capital 9,607,812 9,035,615
Discount on preferred stock (309,105) (309,105)
Retained earnings 4,269,250 3,984,366
Less: Treasury stock at cost (40,800) --
----------- -----------
Total stockholders' equity 13,942,474 13,124,389
----------- -----------
$19,580,925 $26,634,164
=========== ===========
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ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1999 1998
=========== ===========
Net sales $22,839,467 $45,278,978
Cost of sales 19,589,956 42,210,327
----------- -----------
Gross profit 3,249,511 3,068,651
----------- -----------
Operating expenses
Selling and administrative 3,128,001 1,703,328
Amortization of goodwill 47,094 60,000
----------- -----------
Total operating expenses 3,175,095 1,763,328
----------- -----------
Income from operations 74,416 1,305,323
----------- -----------
Other income (expense)
Interest income 28,219 43,700
Interest expense (1,739) (7,200)
----------- -----------
Total other (expense) income 26,480 36,500
----------- -----------
Income (loss) before provision for income taxes 100,896 1,341,823
Provision for income taxes 40,300 644,075
----------- -----------
Net income (loss) $60,596 $697,748
=========== ===========
Basic and diluted earnings per share $0.01 $0.12
=========== ===========
Weighted average number of shares - diluted 8,201,818 5,874,757
=========== ===========
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ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31,
1999 1998
=========== ============
Net sales $90,457,405 $114,490,400
Cost of sales 81,454,351 105,864,629
----------- ------------
Gross profit 9,003,054 8,625,771
----------- ------------
Operating expenses
Selling and administrative 8,371,548 5,481,547
Amortization of goodwill 227,094 170,000
----------- ------------
Total operating expenses 8,598,642 5,651,547
----------- ------------
Income from operations 404,412 2,974,224
----------- ------------
Other income (expense)
Miscellaneous income -- 70,000
Interest income 107,429 120,922
Interest expense (37,157) (20,865)
----------- ------------
Total other (expense) income 70,272 170,057
----------- ------------
Income (loss) before provision for income taxes 474,684 3,144,281
Provision for income taxes 189,800 1,509,255
----------- ------------
Net income (loss) $284,884 $1,635,02
=========== ============
Basic and diluted earnings per share $0.04 $0.28
=========== ============
Weighted average number of shares - diluted 7,772,714 5,906,330
=========== ============
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ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
1999 1998
========== ==========
Net cash provided by (used in) operating activities $3,220,602 $6,655,094
---------- ----------
Cash flows from investing activities:
Purchase of treasury stock (40,800) --
Purchase of Nexar Technology (967,564) --
Purchase of property and equipment (160,200) (168,156)
---------- ----------
Net cash (used in) provided by investing activities (1,168,564) (168,156)
---------- ----------
Cash flows from financing activities:
Exercise of Options and Warrants 574,001 --
Short term borrowings (4,104,920) 11,243,678
---------- ----------
Net cash (used in) provided by financing activities (3,530,919) 11,243,678
---------- ----------
Net increase (decrease) in cash (1,478,881) 4,420,428
Cash and cash equivalents - Beginning of period 1,784,850 2,013,549
---------- ----------
Cash and cash equivalents - End of period $305,969 $6,433,977
========== ==========
<PAGE>
ATEC GROUP, INC
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Common Value Series Value Additional Discount on Retained
Shares Common Preferred Preferred Paid-In Preferred Earnings
Issued Stock Issued Stock Capital Stock (Deficit)
--------- ------- ------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 6,700,664 $67,006 374,029 $346,507 $9,035,615 ($309,105) $3,984,366
Purchase of Treasury Stock
Shares issued upon exercise of warrants 164,937 1,650 522,659
Shares issued upon exercise of options 15,434 154 49,538
Net Income for the Nine Months Ended
March 31, 1999 -- -- -- -- -- -- 284,884
Balance at March 31, 1999 6,881,035 $68,810 374,029 $346,507 $9,607,812 ($309,105) $4,269,250
--------- ------- ------- -------- ---------- --------- ----------
<CAPTION>
Treasury Stock Total
-------------- Stockholders'
Shares Amount Equity
---------- ---------- -----------
<S> <C> <C> <C>
Balance at June 30, 1998 0 $0 $13,124,389
Purchase of Treasury Stock (8,000) 40,800 (40,800)
Shares issued upon exercise of warrants 524,309
Shares issued upon exercise of options 49,692
Net Income for the Nine Months Ended
March 31, 1999 284,884
Balance at March 31, 1999 (8,000) $40,800 $13,942,474
------ ------- -----------
</TABLE>
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
FORM 10Q
NINE MONTHS ENDED MARCH 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying interim unaudited consolidated financial statements include the
accounts of ATEC Group, Inc. and its wholly owned subsidiaries which are
hereafter referred to as (the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position and the results of operations
and cash flows for the interim periods presented. The results of operations for
these interim periods are not necessarily indicative of the results to be
expected for the full year. These financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company's report on Form 10-K for the year ended June 30, 1998.
6
<PAGE>
2. Equity Securities
Capital Stock
The Company's capital stock consists of the following:
Shares
Issued
Shares and
Authorized Outstanding Amount
---------- ----------- ------
December 31, 1998
- -----------------
Preferred Stocks:
Series A cumulative convertible 29,233 29,121 $ 2,912
Series B convertible 12,704 1,458 145
Series C convertible 350,000 343,450 343,450
---------- ----------
Total preferred 374,029 $ 346,507
========== ==========
Common Stock 70,000,000 6,881,038 $ 68,810
Stock Option Plan and Common Stock Purchase Warrants
In October 1998, the Company awarded 195,000 common stock purchase options to
employees under the 1997 Stock Option Plan at an exercise price of $3.375 per
share (the market price on the date of grant). On October 7, 1998, the Company
entered into a Financial Advisory and Investment Banking Agreement with Prime
Charter Ltd. and issued 125,000 common stock purchase warrants at $3.50 per
share. On March 5, 1999, the Company issued 330,000 common stock purchase
options at an exercise price of $4.50 to $9.00 per share to key employees in the
new Nexar division. Total outstanding common stock purchase options and warrants
at March 31, 1999 were 8,016,196 at prices of $3.13 to $10.00 per share.
3. Computation of Earnings Per Share
Earnings per share are based on the weighted average number of common and common
equivalent shares outstanding. Shares outstanding and earnings per share have
been restated to reflect the 1 for 5 stock split in November 1997.
4. Goodwill
Goodwill is being amortized over its estimated period of benefit, not exceeding
fifteen years.
7
<PAGE>
5. Purchased Technology
In March 1999, the Company acquired the patents and trademarks of Nexar
Technologies from the bankruptcy court for a total of $967,564. The purchased
technology is being amortized over five years.
6. Litigation
A lawsuit was commenced against the Company's predecessor ("Hillside Bedding")
by Mid Hudson Clarklift as a result of a claim filed against them by a former
employee of the Company who sustained an injury while operating a forklift. The
lawsuit consists of four causes of action each for $5,000,000 and one cause of
action by the former employee's wife for $2,000,000. The lawsuit is in the
discovery stages. Management and its counsel have no opinion as to its ultimate
disposition.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ATEC Group, Inc. and Subsidiaries
Background
ATEC is a leading system integrator and provider of a full line of IT
service products. As a single source "end-to-end" solution provider for the
computer needs of businesses, professionals, government agencies and educational
institutions. ATEC enters the new millennium with a technological arsenal that
includes Year 2000 remediation, multimedia products, video conferencing, system
integration, networking, high speed data transmission, Internet, Intranet ready
solutions and personal computer manufacturing. In addition, the Company has
positioned itself for growth in telecommunications, out sourcing of IT
professionals, and offshore software development to provide its clients'
technological needs in a cost effective manner.
Results of Operations
Three Months Ended March 31, 1999 compared to March 31, 1998
The Company's revenues for the third quarter ended March 31, 1999 decreased to
$22.8 million from $45.3 million for the prior year, a decrease of approximately
50%. This decrease is primarily attributable to a decline in wholesale revenues
due to increased price competition and direct sales by computer manufacturers.
Revenues are generated by the Company's sales of computer hardware and software,
and related support services. Gross margin for the period increased to $3.2
million for March 31, 1999 from $3.1 million for the comparable 1998 quarter, a
3% increase. Gross margins as a percentage of revenues for the three months were
14% as compared to 7% for the prior year. The increase is attributable to
growth in the software division. The Company's goal is to increase these margins
as the Company attempts to increase its market share in more profitable sectors
of the business such as integration, hardware service/maintenance, networking,
and training.
March 31, 1999, operating expenses exclusive of amortization of intangible
assets increased to $3.1 million as compared to $1.7 million for the prior year.
The increase resulted from increased operating expenses in the software division
and setup costs relating to its electronic commerce operations and internet
services.
The provision for income taxes was $40,300 for the 1999 quarter as compared to
$644,075 for the 1998 period.
As a result of the above, the Company's net income was $60,596 for the three
months ended March 31, 1999, compared to a profit of $697,748 for the 1998
quarter. For the March 31, 1999 quarter, basic and diluted net income per share
was $.01 compared to $.12 in the prior year. Average shares (diluted)
outstanding were 8,201,818 for 1999 and 5,874,757 for 1998.
9
<PAGE>
Nine Months Ended March 31, 1999 compared to March 31, 1998
Revenues for nine months ended March 31, 1999 decreased to $90.5 million from
$114.5 million for the prior year, a decrease of approximately 21%. This
decrease is primarily attributed to a decline in wholesale revenues due to
increased price competition and direct sales by computer manufacturers. Gross
margins were $9.0 million as compared to $8.6 million for the comparable period
of the prior year. Gross margins as a percentage of revenues for the nine months
were 10% as compared to 7.9% for the prior year. The increase in gross margins
are the result of higher margins in the software divisions. Operating expenses
increased to $8.4 million as compared to $5.4 million for the prior year. The
56% increase is attributed to increased operating expenses related to the
Company's software and internet services group. The provision for income taxes
was $189,800 for 1999 as compared to $1,509,255 for the prior year.
As a result of the above, the Company's net income decreased to $284,884 for the
nine months ended March 31, 1999, as compared to $1,635,026 for the prior year.
Primary and diluted net income per share was $.04 compared to $.28 in the prior
year. Average shares (diluted) outstanding were 7,976,312 for 1999 and 5,906,330
for 1998.
Liquidity and Capital Resources
The Company's cash position was $0.3 million at March 31, 1999, a decrease of
$1.5 million compared to June 30, 1998. The Company's working capital at March
31, 1999 was $8.3 million as compared to a working capital of $8.3 million at
June 30, 1998. Net cash provided by operating activities was $3.8 million. Cash
used in investing activities totaled approximately $1.2 million, including the
purchase of Nexar technology for $968,000, the purchase of treasury stock of
$40,800 and purchase of property and equipment of $160,200.
To accommodate the Company's financial needs for inventory financing, Deutsche
Financial Service has granted a credit line in the amount of $7 million. At
March 31, 1999, indebtedness of the Company to Deutsche Financial was $2.9
million, a decrease of $4.1 million compared to June 30, 1998. Substantially,
all of subsidiary company tangible and intangible assets are pledged as
collateral for this facility.
10
<PAGE>
ATEC Group, Inc. and Subsidiaries
Other Information
March 31, 1999
PART II
Item 6. Exhibits and Reports on form 8-k
a) Exhibits - none
b) Reports on Form 8-K:
The following reports on Form 8K were filed by the Company during the
quarter ended March 31, 1999:
NONE
11
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATEC GROUP, INC.
(REGISTRANT)
Dated: May 14, 1999 By: /s/ Surinder Rametra
-----------------------------------------
Surinder Rametra, in the capacity of both
Chairman and Chief Executive Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 305,969
<SECURITIES> 0
<RECEIVABLES> 10,297,700
<ALLOWANCES> 85,800
<INVENTORY> 2,415,377
<CURRENT-ASSETS> 13,995,537
<PP&E> 1,536,466
<DEPRECIATION> 888,302
<TOTAL-ASSETS> 10,598,490
<CURRENT-LIABILITIES> 5,656,618
<BONDS> 0
346,507
0
<COMMON> 68,810
<OTHER-SE> 13,526,555
<TOTAL-LIABILITY-AND-EQUITY> 19,598,490
<SALES> 90,457,405
<TOTAL-REVENUES> 90,457,405
<CGS> 81,454,351
<TOTAL-COSTS> 8,598,642
<OTHER-EXPENSES> 70,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,157
<INCOME-PRETAX> 474,684
<INCOME-TAX> 189,800
<INCOME-CONTINUING> 284,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284,884
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
