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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
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, 1997
[ ] 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
(State or other jurisdiction of (IRS. 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
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
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 19, 1997, the aggregate market value of the voting stock of
Atec Group, Inc., consisting of Common Stock, $.01 par value, held by
non-affiliates of the Registrant was approximately $16,556,527(1) based on the
average of the bid and ask prices ($.83) 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 29,887,677 shares of Common Stock of the
Registrant outstanding.
(1) Excludes 9,940,054 shares of common stock beneficially owned by Surinder
Rametra, Ashok Rametra and Balwinder Singh Bathla, the officers and directors of
the Company.
2
ITEM 1. BUSINESS
General
ATEC Group, Inc. ("the Company" or "ATEC"), is a leading system integrator
and provider of a full line of computer and information technology products and
services to business, professionals, government agencies and educational
institutions. The Company has experienced rapid growth over the past few years.
The Company focuses on core competencies including system design, high speed
data transmission, LAN/WAN, video conferencing and Internet/Intranet technology.
Some projects currently under review are Year 2000 Modifications and ATM
Re-Engineering of Fiber- Optic Backbone Networks.
ATEC offers a full spectrum of services and support which, it believes is
of critical importance in the current market environment to the Company's
customers. The integration of networks, multimedia, video conferencing, high
volume storage information and communication systems, has necessitated technical
support and continued client relations after the initial purchase. In today's
market, Atec believes that most consumers and business users do not possess the
time to investigate and locate the various computer components necessary to
establish an integrated computer system. The Company therefore strives to
provide "one-stop solutions" to its clients' technology needs in a cost
effective manner.
ATEC's marketing strategy is to educate business clients of the Company's
ability to provide a "one-stop solution" to all its computer needs from the
initial purchase and installation processes through required service and
maintenance and future expansion requirements. The Company's subsidiaries are
authorized sales and service dealers for all major manufacturers. The Company
sells to its customers an extensive selection of computer products at a
competitive combination of price and service. The Company offers over 10,000
computer products from over 500 manufactures including IBM, Compaq, Hewlett
Packard, Apple, DEC, Hughes Networks, Microsoft, Novell, Oracle, Sybase, Toshiba
and many more.
Industry
Complex computer information processing systems, the foundation on which
business and organizations now function, are continuously being redesigned,
modified and upgraded as new computer and telecommunications technologies are
introduced. Until the mid-1980's, either mid- range or mainframe computer
systems were used to manage an organization's mission-critical,
transaction-oriented commerce and business functions, such as banking, credit
transactions, retail point-of-sale transactions and airline reservations.
Client/server networks, otherwise known as "hub and spoke" networks, supported
access to these functions, either within a single site or from numerous
geographically-dispersed sites.
3
In the late 1980's, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in desktop
computers, expanding capabilities of software applications and growing
capabilities of networks. A client/server system typically consists of multiple
intelligent desktop client computers linked with high performance server
computers by a local and/or wide area network ("LAN" and/or "WAN") and is
characterized by the flexibility and mobility of both application and user. In
order to take advantage of their established operational staff and physical
plant, many corporations are seeking to reconfigure their existing
mainframe/mid-range computers (sometimes referred to as "legacy systems) to
operate in parallel with client/server networks.
The Company believes that these two information system models - legacy
systems and client/server systems - will continue to coexist, each with
advantages for certain applications. Thus, organizations are faced with complex
decisions concerning the current and future configurations of their information
systems, based upon factors such as the re-engineering of aspects of legacy
systems to function more efficiently with related client/server systems, the
explosive growth of the Internet (and related World Wide Web) and stand-alone
intranets, the convergence of computer and telecommunications technologies and
the universal recognition of information systems as the medium for commerce,
finance, education and administration.
Business Strategy
The Company's strategic focus is to pursue revenue growth in its core
products and services which will fuel earning expansion.. As part of its growth
strategy, the Company pursues the acquisition of companies that market products
and services that either complement or expand its existing business. As a
result, the Company continually evaluates potential acquisition opportunities,
some of which may be material in size and scope. The Company focuses on expense
control, including the improvement of the company's internal processes and
procedures, effective asset management, and the addition and expansion of higher
margin products and services
Marketing
The Company markets its products and services by distributing brochures,
direct mail solicitation, print advertisements, participation in seminars,
presentations and trade shows. The Company's marketing strategy is to educate
business clients as to the Company's ability to provide a "one-stop solution"
for all computer related needs.
The Company believes business technology buying has matured and corporate
customers have become more knowledgeable about integrating new technologies and
how to get the most for their business out of the new technologies. Rather than
running out to purchase and install new systems, they are carefully considering
their business goals and how technology can help them achieve these goals. The
Company's objective is to continue to be a leading provider of a complete range
of PC network infrastructure products and services to large businesses.
4
Products and Services
The microcomputer industry is characterized by numerous hardware systems
that utilize different and often incompatible standards for hardware and
software. The Company has the capability to design systems and support services
which include products or components manufactured by numerous manufacturers that
address most applicable industry standards.
ATEC's support services include a wide range of services designed for its
clients, corporate planners and management needing a single source for technical
support issues, such as local and wide area networks, gateways, bridges, system
conversion planning, hardware and software specifications, database / database
server development and implementation, video conferencing and high speed data
transmission.
ATEC provides a full spectrum of products and value added services to
deliver custom, integrated solutions for the PC network infrastructure
requirement of its clients. The Company deals with over 10,000 computer products
from over 500 manufactures to serve its clients. The company's subsidiaries are
authorized dealers for all major manufactures such as Apple, Compaq, Epson,
Hewlett Packard, Hughes Networks, IBM, Microsoft, NEC, Novel, Oracle, Sybase,
Toshiba, and numerous more.
The Company purchased approximately 28% of its hardware and software
products from Computerland Corporation (hereafter called "Computerland").
Computerland is the only vendor who accounted for 10% or more of the purchases
of the Company. In addition to its agreements with Computerland, the Company has
dealer/vendor agreements with Ingram, Merisel, Intelligence Electronics, Micro
Age and Tech Data. The Company did not experience any material difficulties in
obtaining products from its vendors during its prior year. The Company believes
that other suppliers would be able to adequately service the Company's needs in
the event that its existing vendor/dealer agreements were terminated.
Competition
The microcomputer market is very competitive. The Company competes directly
with a variety of local and national distributors, super stores, retailers, mail
order houses and other entities that offer computer products and services. The
Company seeks to compete with its competitors based upon the Company's
commitment to provide a "one -stop solution" to its clients' data processing
needs in a cost effective manner. While the Company attempts to competitively
price hardware and software items, the Company does not focus on pricing as its
primary competitive strength. Management believes that the Company's principal
strength is its ability to offer customers complete and cost efficient solutions
to their individualized computer needs, including system design and integration,
local area network (LAN), data communications, and internet access.
5
The systems integration and computer installation industries are both
highly competitive and include participants from a variety of market segments.
The competition in systems integration services includes mid-level and regional
systems integrators. The Company believes it competes favorably with these
systems integrators in the areas and level of responsiveness, regional and
national vendor contacts and dedication to achieving certification standards to
provide its clients with a higher quality of customer service.
The Company believes that its ability to compete depends in part on a
number of factors outside of its control, including the ability of its
competitors to hire, retain and motivate a large number of personnel and the
development by others of services that is competitive with Atec's applications
and services, and the price at which others offer comparable service. Many
participants in the computer reseller, software development and systems
integration businesses have significantly greater financial, technical and
marketing resources than does the Company.
Backlog
The Company does not have a significant backlog as it normally delivers and
installs the computer products purchased by its customers within a short time of
the date of order.
Governmental Regulation and Contracts
The Company believes that it is in material compliance with federal and
state laws and regulations which are applicable to its operations. The Company
is not a party to any government contract which represents a material portion of
the Company's revenues or which, if terminated or renegotiated, would have a
material adverse effect on the Company's business.
Patents and Trademarks
The Company does not currently rely upon the use of any patents and/or
trademarks in connection with its operations except for references in
advertising materials as an authorized dealer or vendor of specific products of
manufacturers with whom they have agreements. The Company believes however that
the ability to identify itself as the authorized dealer of such manufacturers is
an important aspect of their marketing strategy.
Employees
As of the date of this Annual Report, the Company had an aggregate of
approximately 79 employees, including its 7 administrators, 13 staff persons, 5
managers, 32 full-time sales persons, 14 technical and 8 warehouse personnel.
The Company has no collective bargaining agreements and believes the relations
with its employees are good.
6
ITEM 2. PROPERTIES
The Company's headquarters and executive offices are located at 90 Adams
Ave., Hauppauge, New York. This location occupies approximately 6,000 square
feet leased pursuant to a lease expiring in 1998 providing for annual rental
payments of approximately $40,090 plus certain expenses. ATEC maintains a retail
location and warehouse facility in Albany, New York, consisting of approximately
8,050 square feet. The Albany facility lease expires on June 30, 2003 and
requires annual rental payments of $96,600 through 1998 and $108,192 thereafter,
plus all expenses and taxes attributable to the operation of the premises. The
Albany facility is leased from a company controlled by Surinder and Ashok
Rametra, officers and directors of the Company. The Company's New York
operations located at 143 West 29th Street, New York, New York. This location
occupies 4,000 square feet and requires annual rental payments of $39,000, plus
certain expenses. A facility is located in Pinebrook, New Jersey. This location
occupies 5,328 square feet and requires annual payments of approximately $41,026
per year plus other expenses under a lease expiring in 2002.
The Company believes that its current facilities are suitable for its
present and projected needs. The Company does 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 which maintained the forklift, Mid Hudson
Clarklift ("MH"), seeking damages of $7,000,000 for the alleged failure of such
company to properly maintain and service the lift. MH instituted a third party
action seeking judgment for all or part of any verdict or judgment which may be
obtained against MH. The case is presently in the discovery stages.
In 1990, an action entitled Bedding Discount Center, Inc., MJR Bedding Co.,
Inc., Hapat Bedding Corp. v. Sid Patterson, Hillside Bedding Corporation and
Robert Martire were brought against the Company in Supreme Court, Nassau County,
Index No. 3720-90. The suit seeks damages in the amount of $1,000,000 for
alleged disclosure of certain trade secrets and confidential information to the
Company, together with punitive damages in the amount of $10,000,000 and similar
monetary damages based upon the allegations that defendants interfered with and
impaired plaintiffs' contractual and business relations and the plaintiffs have
engaged in acts constituting a prima facie tort. The action has been nearly
inactive since commencement. The Company believes that the action has no merit.
There can be no assurances however that the Company will prevail in any such
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1997, the Company did not submit any matter to
the vote of its shareholders.
7
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock and Warrants are traded on the National Association
of Security Dealers Automated Quotation System ("NASDAQ") under the symbol
"ATEC" and "ATECW"), respectively. The following table sets forth the high and
low bid prices for the Company's Common Stock and Warrants for the periods
indicated as reported by the NASDAQ. Such prices reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
COMMON STOCK
High Low
---- ---
1995
Quarter ended 9/30........................... 1 19/32 11/16
Quarter ended 12/31.......................... 1 3/8 13/16
1996
Quarter ended 3/31........................... 1 1/2 7/8
Quarter ended 6/30........................... 1 7/16 15/16
Quarter ended 9/30........................... 3/4 23/32
Quarter ended 12/31.......................... 15/16 7/8
1997
Quarter ended 3/31........................... 21/32 10/16
Quarter ended 6/30........................... 21/32 19/32
WARRANTS
High Low
---- ---
1995
Quarter ended 9/30........................... 5/32 5/32
Quarter ended 12/31.......................... 5/32 1/16
1996
Quarter ended 3/31........................... 1/2 1/16
Quarter ended 6/30........................... 11/32 1/8
Quarter ended 9/30........................... 3/32 1/16
Quarter ended 12/31.......................... 10/32 1/4
1997
Quarter ended 3/31........................... 3/16 1/16
Quarter ended 6/30........................... 3/16 1/16
8
On September 19, 1997, the closing bid and ask prices of the Company's
Common Stock were 27/32 and 13/16 respectively and the closing prices of the
Company's Warrants were 1/8 and 1/8, respectively.
On September 19, 1997, there were approximately 252 holders of record of
the Company's Common Stock; 16 holders of record of the Series A Preferred
Shares; 5 holders of record of the Units and 33 holders of record of the
Warrants. The number of record holders do not include holders whose securities
are held in street name.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings for the operation and expansion of the Company's business.
The holders of its Series A Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board. (See "Item
8-Financial Statements").
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in
the period ended June 30, 1997 have been derived from the audited financial
statements of the Company. This information should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report
and "management's Discussion and Analysis."
Operating Data 1997* 1996* 1995* 1994* 1993*
- --------------- ----- ----- ----- ----- -----
Net Sales $100,841,362 $81,812,045 $47,565,542 $43,474,764 $49,474,764
Income (Loss) from
continuing operations $ 1,667,898 $ 838,346 $(2,251,354) $ (226,079) $ 215,552
Income (Loss) per
common share:
Primary $ .06 $ .03 $ (.25) $ (.04) $ .04
Fully Diluted $ .06 $ .03 $ (.25) $ N/A $ .02
Balance Sheet Data
Total Assets $ 17,147,707 $13,322,133 $11,724,938 $ 7,728,352 $ 8,989,255
Long-term obligations -- $ 228,322 $ 918,291 $ 1,580,255 $ 245,000
Cash dividends per
common share Nil Nil Nil Nil Nil
* 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.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background
ATEC Group, Inc. (the "Company") is engaged in the sale of computer
hardware and software products to business, professionals, government agencies
and educational institutions. In addition, the Company provides its clients with
a full spectrum of computer services and technical support including designing
and installing computer systems, local area networks, high volume data
communications and Internet ready solutions.
RESULTS OF OPERATIONS
Fiscal 1997 compared to Fiscal 1996
The Company's revenues for the 1997 fiscal year increased to $100.8 million
from $81.8 million for the prior year, an increase of approximately 23%. This
increase is primarily attributable to internal growth. Revenues are generated by
the Company's sales of computer hardware and software, and related support
services. Gross profit for the year increased to $9.8 million for 1997 from $7.5
million for 1996, a 31% increase due to the increased revenues. Gross margin for
the year was 9.7% as compared to 9.1% for the prior year. These margins are
expected to increase as the company attempts to increase their market share in
more profitable sectors of the business such as integration, hardware
service/maintenance, year 2000 consulting and services, networking and training.
1997 operating expenses exclusive of amortization of intangible assets
increased to $6.9 million as compared to $6 million for the prior year. The 15%
increase in operating expenses are related primarily to additional selling
expenses and research and development expenses in 1997.
Amortization of intangible assets increased to $224,000 for the year from
$168,000 in the comparable 1996 period. Other income increased to $356,000 to
$282,000 primarily as a result of $153,000 reduction in the sales tax obligation
of the Company's predecessor. The Company also earned an additional $41,000 of
interest income and incurred $39,000 less interest expense in 1997 due to
management's judicious use of working capital.
The provision for income taxes for 1997 was $1,299,000 as compared to
$415,000 for 1996.
As a result of the above, the Company's net income increased to $1,668,000
for 1997 from $838,000 in 1996. For 1997, net income per share was $.06 compared
to $.03 in the prior year. Primary and fully diluted average shares outstanding
were 29,801,232 for 1997.
10
Fiscal 1996 compared to Fiscal 1995
The Company's revenues for the 1996 fiscal year increased to $81.8 million
from $47.6 million for the prior year, an increase of approximately 72%. This
increase is primarily attributable to the Company's acquisition of ACS and CONY
in February and March 1995, respectively, as well as its own internal growth.
Revenues are generated by the Company's sales of computer hardware and software,
and related support services. Gross profit for the year increased to $7.5
million for 1996 from $4.7 million for 1995, a 58% increase due to the increased
revenues. Gross margin was 9.1% as compared to 9.9% for the prior year.
1996 operating expenses exclusive of amortization of intangible assets
increased 31% to $6 million as compared to $4.6 million for the prior year. The
increase in operating expenses are related to expanded business operations
through the 1995 acquisitions and the opening of a sales office in New Jersey in
the third quarter.
Amortization of intangible assets increased 217% to $168,000 for the year
from $53,000 in the comparable 1995 period. Other expenses decreased
approximately $1.7 million primarily due to the 1995 write-off of all costs
associated with the 1994 reorganization and the satisfaction of debts of the
former bedding operations.
The provision for income taxes for 1996 was $415,000 as compared to
$152,000 for 1995. The provision for income taxes in 1996 was lower than the
federal and state combined statutory rate of 46% primarily due to the effect of
deductible charges associated with the charge-off.
The Company's net income increased to $838,000 for 1996 from a loss of
$2,251,000 in 1995. The primary reason for the 1995 loss resulted from costs
associated with the write-off of various items related to the Company's former
bedding business, the 1994 acquisition, and the reorganization of the Company's
business. For 1996, net income per share was $.03 compared to a loss of $.25 in
the prior year. Primary and fully diluted average shares outstanding were
25,729,527 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $2,013,549 at June 30, 1997, an increase of
$346,518 as compared to June 30, 1996. The Company's working capital at June 30,
1997 was $3,753,142 as compared to a working capital of $3,815,238 at June 30,
1996. The changes in cash and working capital resulted primarily from operations
offset by the Company purchase of shares of its common and preferred stock for
$1.9 million and repayment of loans from related parties of approximately
$900,000.
Cash used for investing activities totaled $55,370 primarily for the
purchase property and equipment.
11
To accommodate the Company's financial needs for inventory financing,
Deutsche Financial Service (formerly ITT Commercial Finance) has granted a
credit line in the amount of $6,000,000. At June 30, 1997, indebtedness of the
Company to Deutsche Financial was $1,830,359, or a decrease of $254,695 compared
at June 30, 1996. Substantially, all of subsidiary company tangible and
intangible assets are pledged as collateral for this facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In April 1996, ATEC Group, Inc. engaged Weinick Sanders Leventhal & Co.,
LLP ("WSL") to audit the Registrant's consolidated financial statements for the
year ended June 30, 1996. The decision to change independent auditors was
recommended and approved by the Company's Board of Directors. The accounting
firm of Yohalem Gillman & Company, ("Yohalem"), which served as the Company's
independent auditor for the fiscal year ended June 30, 1995 was dismissed.
During fiscal 1995 and the interim periods up until the date of dismissal of
Yohalem, the Registrant had no disagreement with Yohalem and there were no
"reportable events" with the exception of a disagreement with Yohalem on the
accounting method to be applied to the proposed acquisition of Innovative. The
proposed acquisition of Innovative contemplated the payment to Innovative
Shareholders of shares of the Company's common stock over a three year period
depending upon performance criteria ("Initial Acquisition Term"). Innovative was
owned by Surinder Rametra and Ashok Rametra the Company's principal executive
officer and principal financial officer, respectively, and their brother,
Rajnish Rametra. Surinder and Ashok Rametra owned 25% of the common stock and
Rajnish Rametra owned 75%. Surinder Rametra gave direction and guidance to
Rajnish Rametra for the operations of Innovative. A member of the board of
directors discussed the matter with Yohalem. The Company authorized Yohalem to
respond fully to the inquiries of WSL concerning the subject matter of the
disagreement. The accountant's reports on the Registrant's financial statements
for the years ended June 30, 1995 did not contain an adverse opinion or a
disclaimer of opinion nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
Management was of the opinion that APB 16 did not apply to the Initial
Acquisition Term. APB 16, paragraph 5 excludes transfers and exchanges between
companies under common control and assets and liabilities would be accounted for
at historical cost in a manner similar to that in pooling of interest
accounting. Management also consulted with the AICPA's technical hotline prior
to formulating their opinion on the appropriate accounting.
12
Yohalem, the Company's former independent accountants has expressed
reservations concerning the accounting method applied in the pro forma financial
presentations included in the Company's Current Report on Form 8-K dated April
1, 1996 based on the Initial Acquisition Terms and the application of this
method to the pro forma financial statements. Yohalem believed, based on a
literal reading on the applicable authoritative accounting standards, that the
proposed accounting for Innovative based on the Initial Acquisition Terms was
not in accordance with those accounting standards, as currently written,
inasmuch as the Rametra family did not own a majority of the voting shares of
the Company before the acquisition. Yohalem is aware the Financial Accounting
Standards Board is reconsidering the requirements for consolidations and,
accordingly have suggested that the company discuss this matter with the staff
of the SEC.
The Company requested WSL's views on the proposed accounting for the
Innovative transaction based on the Initial Acquisition Terms. Based on the
facts as they existed at that point in time, it was their view that APB 16 did
not apply and the appropriate accounting would be the carryover of Innovative's
cost.
In June 1996, the Company negotiated new acquisition terms "New Acquisition
Terms" with the Rametras, pursuant to which the Company would acquire 100% of
Innovative's shares in exchange for 4,900,000 shares of the Company's Common
Stock all of which shares were payable at the Closing of the Acquisition. The
New Acquisition Terms did not involve the payment of any future consideration to
the Innovative Shareholders. In June 1996 the Acquisition was consummated based
of the New Acquisition Terms. The Company, in concurrence with WSL accounted for
the Acquisition as a pooling of interests.
13
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current directors
and officers of the Company and the position in the Company held by them:
Name Age Position
---- --- --------
Surinder Rametra 57 Chairman of the Board and
Chief Executive Officer
Ashok Rametra 43 Treasurer, Chief Financial
Officer and Director
Balwinder Singh Bathla 41 President and Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
Surinder Rametra was appointed the Chief Executive Officer and Chairman of
the Board of the Company in June 1994. Prior to June 1994 Mr. Rametra was
president of a subsidiary of the Company. Mr. Rametra received a Bachelor of
Science Degree from the Punjab Engineering College, India and a Masters of
Science Degree in Engineering from the University of I.I.T., India in 1965 and
1969 respectively. In 1976 Mr. Rametra received a Masters of Business
Administration Degree in Finance from New York University.
Ashok Rametra was appointed Treasurer, Chief Financial Officer and Director
of the Company in June 1994 . From June 1994 to March 1995 Mr. Rametra also
served as the Company's president. Prior to 1994 Mr. Rametra was the president
of a subsidiary of the Company. Mr. Rametra received a Bachelor of Science
Degree from St. Johns University in accounting in 1980.
Balwinder Singh Bathla was appointed as the President and a Director of the
Company in March, 1995. Prior to 1995, Mr. Bathla was the principal operating
officer of a subsidiary of the Company. Mr. Bathla received a Masters Degree in
Statistics from Punjab University, Chandigar, India in 1979.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Registrant
during its most recent fiscal year, the Company believes that there were no
Section 16(a) reports filed untimely during the Company's year ended June 30,
1997 or June 30, 1996.
14
ITEM 11. EXECUTIVE COMPENSATION
The Company's Summary Compensation Table for the years ended June 30, 1997,
1996 and 1995 is provided herein. This table provides compensation information
on behalf of the Company's existing officers and directors. There are no
Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal Year-End Option/SAR
Value Table for the years ended June 30, 1997, 1996 and/or 1995. 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, 1997, 1996 and 1995
Annual Compensation Awards Payouts
Year Compen- Options/ LTIP
Name Position Ended Salary($) Bonus($) sation($) SARs Payouts
- ---- -------- ----- --------- -------- --------- ---- -------
Surinder Rametra CEO 6/30/97 $160,680 6,737(1) NONE NONE
6/30/96 $156,000 5,680(7) NONE NONE
6/30/95 $150,850 21,624(2) NONE NONE
Ashok Rametra CFO 6/30/97 $150,020 19,372(3) NONE NONE
6/30/96 $150,020 6,508(8) NONE NONE
6/30/95 $180,520 8,113(4) NONE NONE
Balwinder Singh President
Bathla 6/30/97 $158,216 20,806(3) 500,000(10) NONE
6/30/96 $135,000 51,723(9) NONE NONE
6/30/95 $58,650 86,470(5) 14,177(6) NONE NONE
(1) Major Medical $6,737
(2) Major Medical $4,727, Leased Auto $4,645, Interest Income 10,000
(3) Major Medical $4,776, Life Insurance $6,600, Rent Income $5,400, Interest
Income $4,030
(4) Major Medical $1,129, Leased Auto $6,984
(5) Represents 70,768 shares of common stock issued pursuant to Mr. Bathla's
Employment Agreement.
(6) Major Medical $2,185, Interest Income $11,992
(7) Major medical $5,680
(8) Major medical $3,799, Leased Auto $2,710
(9) Major medical $4,465, Leased Auto $9,000, Interest income $38,258
(10) In December 1996, the Company issued to Mr. Bathla options to purchase an
aggregate of 500,000 shares of common stock exercisable at $.75 per share
through December 2006.
15
Year End Option Table. The following table sets forth certain information
regarding the stock options held as of June 30, 1997 by the individuals named in
the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End(#) at Fiscal Year End (2)
Shares Acquired Value ------------------------------ ----------------------------
Name on exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ---------- ------------ -------------- ----------- -------------
Balwinder Singh
Bathla (1) 0 0 500,000 0 0 0
(1) Represents an option to acquire 500,000 shares at $.75 per share
exercisable through December 19, 2006.
(2) Computation based on $.625 which was the June 30, 1997 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, 1997
by the Company to the individuals named in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
% of Total
Options
Granted to
Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year $ / Share Date
- ---- ----------- ----------- -------------- ----------
Balwinder Singh
Bathla (1) 500,000 62.5% $.75 December 19, 2006
(1) Represents an option to acquire 500,000 shares at $.75 per share
exercisable through December 19, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 9, 1997 certain information
with respect to the beneficial ownership of the Company's voting securities by
(i) any person (including any "group" as that term is used in Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") known by
the Company to be the beneficial owner of more than 5% of the Company's voting
securities, (ii) each director of the Company, (iii) each executive officer
named in the Summary Compensation table appearing herein, and (iv) all executive
officers and directors of the Company as a group. The table also sets forth the
respective general voting power of such persons taking into account the voting
power of the Common Stock and the Preferred Stock combined.
16
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) 3,490,220 11.5%
1762 Central Avenue
Albany, NY 12205
Surinder Rametra(3) 3,955,307 13.1%
90 Adams Avenue
Hauppauge, NY 11788
Balwinder Singh 3,214,527 10.4%
Bathla (4)
143 West 29th Street
New York, NY 10001
Rajnish Rametra (5) 2,470,941 8.3%
90 Adams Avenue
Hauppauge, NY 11788
All directors and (2)(3)(4) 10,660,054 34.3%
executive/officers
as a group (3 persons)
(1) Computed based upon a total of 29,887,677 shares of Common Stock, 29,232
shares of Series A Preferred Stock, 1,458 shares of Series B Preferred
Stock and 338,790 shares of Series C Preferred Stock. Each share is Common
Stock and Preferred Stock possess one vote per share. Accordingly, the
foregoing represents an aggregate of 30,257,157 votes.
(2) The foregoing figure reflects the ownership of an aggregate of 1,400,379
shares of common stock by Mr. Rametra and 2,039,184 common shares owned by
Mr. Rametra's spouse and children. The foregoing amount also assumes the
exercise by Mr. Rametra of options to acquire 50,000 shares of the common
stock. Mr. Rametra disclaims beneficial ownership of shares of the
Company's securities owned by other members of the Rametra family.
(3) The foregoing figure reflects the ownership of 2,134,947 shares of common
stock by Mr. Rametra and 1,770,360 shares by Mr. Rametra's wife and minor
son. In addition, the foregoing assumes the exercise by Mr. Rametra to
acquire 50,000 shares of the Company's common stock. Mr. Rametra disclaims
beneficial ownership of shares of the Company's securities owned by other
members of the Rametra family including independent children..
(4) The foregoing figure assumes the exercise by Mr. Bathla of options to
acquire 620,000 shares of the Company's common stock. Mr. Bathla disclaims
beneficial ownership of shares of the Company owned by other members of his
family.
17
(5) The foregoing figures reflect the ownership by Mr. Rametra of 812,286
shares and an aggregate of 1,528,615 shares by his spouse and children. The
figure also assumes the exercise by Mr. Rametra of 130,000 options. Mr.
Rametra disclaims beneficial ownership of shares of the Company owned by
other members of the Rametra family.
ITEM 13. CERTAIN TRANSACTIONS
In June. 1996, the Company acquired 100% of the outstanding capital stock
of Innovative Business Micros. Inc. a computer integrator located in Long
Island. Innovative was formerly owned by Surinder Rametra and Ashok Rametra, the
Company's Chief Executive Officer and Chief Financial Officer, respectively. and
Rajnish Rametra their brother. The consideration for the acquistion was the
issuance by the Company of an aggregate of 4,900,000 shares of the Company's
Common Stock to the former shareholders of Innovative. The terms of the
acquistion were not negotiated in an arms-length manner and there can be no
assurance that an unaffiliated company would have paid less consideration for
Innovative then paid by the Company. The acquisition was accounted for as a
pooling of interest.
In January 1997, the Company issued options to purchase 700,000 shares of
common stock to the former shareholders of Cony and ACS for the amendment to the
purchase and employment agreements, eliminating any future performance payments.
All inter company transaction have been eliminated in consolidation.
LOANS
06/30/97 06/30/96 06/30/95 Interest Maturity
Lender Amount Amount Amount Rate Date
- ------ -------- -------- -------- -------- --------
Balwinder Singh Bathla $ 2,967 $228,322 $396,246 10% 06/30/98
Rajnish Rametra $ -.- $500,000 $230,000 10% 06/30/97
Ashok Rametra $ -.- $150,000 $ -.- 10% 06/30/97
During the year ended June 30, 1997, Balwinder Singh Bathla advanced the
Company $2,967. The advance bears interest at the rate of 10% per annum.
MCS's office located in Albany, New York is leased pursuant to a lease
expiring in June 2003. The lease requires annual rental payments of
approximately $96,600 through 1998 and $108,192 thereafter, plus all expenses
and taxes attributable to the operation of the premises. This facility is leased
from 1962 Central Avenue Realty Associates (a partnership) controlled Surinder
Rametra and Ashok Rametra, Officers and Directors of the Company.
18
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)(2) Financial Statements and Schedules - See index to financial
statements and financial statement schedule on page 23 of this
Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) During the last quarter of Fiscal 1997 the Company has filed a
report on Form 8K dated June 30, 1997 reporting in Item 5
thereof the conversion of certain classes of preferred stock
into common stock.
(c) The following exhibits were filed by the Company with the
Securities and Exchange Commission as exhibits to various
filings as indicated below. Exhibits marked with an asterisk
are filed herewith:
Exhibit No. Description
(1) 3.1 Certificate of Incorporation of the Company
(1) 3.2 Certificate of Amendment of Certificate of Incorporation, filed
October 21, 1992
(1) 3.3 By-laws of the Company
(1) 3.4 Certificate of Amendment of Certificate of Incorporation, filed
December 22, 1992
(1) 3.5 Form of Certificate of Powers, Designations, Preferences and Rights
of the Series A 10%
Cumulative Convertible Preferred Stock
(1) 4.1 Revised Form of Unit Purchase Option
(1) 4.2 Form of Warrant Agreement between the Company and North American
Transfer Co.
(1) 4.3 Purchase Agreement dated as of July 16, 1992 between the Company
and certain of the Selling
Stockholders
(1) 4.4 Purchase Agreement dated as of July 17, 1992 between the Company
and certain of the Selling
Stockholders
(1) 4.5 Purchase Agreement dated as of July 20, 1992 between the Company
and certain of the Selling
Stockholders
(1) 4.6 Purchase Agreement dated as of November 10, 1992 between the
Company and
certain of the Selling Stockholders
(1) 4.7 Form of Common Stock Certificate
(1) 4.8 Form of Warrant Certificate
(1) 4.9 Form of Preferred Stock Certificate
(1) 10.1 1992 Stock Option Plan of the Company
(1) 10.2 Form of Incentive Stock Option Agreement
(1) 10.3 Form of Non-Incentive Stock Option Agreement
(1) 10.4 Employment Agreement between Robert Martire and the Company
dated October 30, 1992
19
(1) 10.5 Employment Agreement between Morton Swirsky and the Company dated
as of July 31, 1992
(1) 10.6 Assignment Agreement between LLJ Enterprises Corp. and the Company
dated October 30, 1992
(1) 10.7 Form of Standard Franchise Agreement
(1) 10.8 Revised Form of Financial Advisory and Investment Banking Agreement
between the Company and Elliot Allen & Co., Inc.
(1) 10.9 Option Agreement dated October 23, 1992 between the Company and
certain of the Company's franchisees
(1) 10.10 Option Agreement dated October 16, 1992 by and among the Company,
Steinbock Braff, Inc., G-MAT Distributors, Inc. and
Corey Steinbock
(1) 10.11 Rights Termination Agreement dated January 12, 1993 by and among
the Company, H.B. Franchising Corp. and G-MAT Dist. Inc.
(1) 10.12 Deferred Payment Agreement dated January 15, 1993 between the
Company and the New York State Sales Tax Authority
(2) 10.13 Consulting Agreement dated May 27, 1993 between the Company and the
Winthrop Group,Inc.
(3) 10.14 Consulting Agreement dated July 22, 1993 between the Company and
White Sands Properties, Inc.
(3) 10.15 Consulting Agreement dated July 22, 1993 between the Company and
Xanadu International,Inc.
(3) 10.16 Consulting Agreement dated July 22, 1993 between the Company and
Victima International, Inc.
(3) 10.17 Consulting Agreement dated April 1, 1993 between the Company and
White Sands Properties, Inc.
(1) 10.18 Stock Purchase Agreement dated as of October 6, 1993 by
and among the Company, Today's World, Inc., Paul A. Reece,
Marilyn Reece, Dennis Moody and Earl Oltz.
(1) 10.19 Mortgage dated February 26, 1993 between Eritram Realty Corp.
and Emmanuel Ciminello,Jr.
(1) 10.20 Security Agreement dated February 26, 1993 between Eritram Realty
Corp. and Emmanuel Ciminello, Jr.
(1) 10.21 Collateral Assignment of Lease and Rents dated February 26, 1993
between Eritram Realty Corp. and Emmanuel Ciminello, Jr.
(1) 10.22 Lease dated February 26, 1993 between Eritram Realty Corp. and the
Company
(4) 10.23 Agreement between the Company and Sun Corporation (2000) Ltd.
(5) 10.24 Agreement between the Company, Balwinder Singh Bathla and American
Computer
Systems Corporation
(6) 10.25 Agreement between the Company, Arvinder Gulati, Patrick Hegarty,
Kenneth Bohacks and CONY Computers, Inc.
21* Subsidiaries of the Company
20
(1) Incorporated by reference from Registration Statement on Form SB-2
(registration no. 33-54356) filed by the Company with the Securities and
Exchange Commission on November 9, 1992.
(2) Incorporated by reference from Registration Statement on Form S-8
(registration no. 33-63740) filed by the Company with the Securities and
Exchange Commission on July 26, 1993.
(3) Incorporated by reference from Registration Statement on Form S-8
(registration no. 33-54356) filed by the Company with the Securities and
Exchange Commission on July 26, 1993.
(4) Incorporated by reference from Current Report on Form 8K dated June 23,
1994.
(5) Incorporated by reference from Current Report on Form 8K dated February 20,
1995.
(6) Incorporated by reference from Current Report on Form 8K dated March 31,
1995.
(d) Financial Statement Schedules required by this Item are identified on page
23 of this Annual Report.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: /s/ Surinder Rametra
-----------------------------------------
Surinder Rametra, Chief Executive Officer
Dated: September 25, 1997
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 25, 1997
- ---------------------------------------------
Surinder Rametra, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/ Ashok Rametra September 25, 1997
- ---------------------------------------------
Ashok Rametra, Chief Financial Officer, Treasurer and
Director (Principal Financial Officer and
Principal Accounting Officer)
/s/ Balwinder Singh Bathla September 25, 1997
- ---------------------------------------------
Balwinder Singh Bathla, President and Director
22
ATEC GROUP, INC. AND SUBSIDIARIES
I N D E X
Page No.
--------
INDEPENDENT AUDITORS' REPORT OF WEINICK SANDERS LEVENTHAL & CO., LLP. F-1
INDEPENDENT AUDITOR'S REPORT OF YOHALEM GILLMAN & COMPANY LLP ....... F-2
INDEPENDENT AUDITOR'S REPORT OF STEWART H. BENJAMIN, CPA, P.C. ...... F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 1997 and 1996 ........ F-4
Consolidated Statements of Operations
For the Years Ended June 30, 1997, 1996 and 1995 ............. F-5
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1997, 1996 and 1995 ............. F-6 - F-8
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 1997, 1996 and 1995 ............. F-9 - F-10
NOTES TO FINANCIAL STATEMENTS .......................................F-11 - F-31
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.
23
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the accompanying consolidated balance sheets of ATEC Group, Inc.
and Subsidiaries as at June 30, 1997 and 1996, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Weinick, Sanders Leventhal & Co., LLP
New York, New York
August 18, 1997
F-1
Independent Auditor's Report
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows for the year ended June 30, 1995 of ATEC Group, Inc.
(formerly Hillside Bedding, Inc.) and Subsidiaries (before restatement for the
1996 pooling-of-interests, and not presented separately herein). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of ATEC Group, Inc. and Subsidiaries for the year ended June 30,
1995 in conformity with generally accepted accounting principles.
/s/ Yohalem Gillman & Company LLP
New York, New York
October 4, 1995
F-2
STEWART H. BENJAMIN
CERTIFIED PUBLIC ACCOUNTANT, P.C.
----------------
490 MAIN STREET
NORTHPORT, NEW YORK 11768-1953
(516) 754-0060 FAX (516) 754-0180
Member
American Institute of Certified Public Accountants
New York State Society of Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
ATEC Group, Inc.
I have audited the accompanying statements of operations, stockholders' equity
and cash flows for the year ended September 30, 1995 of Innovative Business
Micros, Inc. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I
believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the results of its operations and its cash flows of
Innovative Business Micros, Inc. for the year ended September 30, 1995 in
conformity with generally accepted accounting principles.
/s/ Stewart H. Benjamin, CPA, PC
Stewart H. Benjamin
Certified Public Accountant, P.C.
(Successor to the practice of George S. Goldberg, deceased)
Roslyn Heights, New York
December 12, 1995
F-3
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
June 30,
------------------
1997 1996
---- ----
Current assets:
Cash $ 2,013,549 $ 1,667,031
Accounts receivable - net 9,246,247 5,152,005
Inventories 1,382,236 2,813,937
Due from officers and related parties -- 6,124
Deferred taxes 37,249 42,773
Other current assets 441,469 413,712
----------- -----------
Total current assets 13,120,750 10,095,582
Property and equipment - net 439,000 514,910
Goodwill - net 3,556,704 2,614,445
Other assets 31,253 97,196
----------- -----------
$17,147,707 $13,322,133
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 533,871 $ 429,271
Revolving lines of credit 1,830,359 2,085,054
Accounts payable 4,447,595 1,274,896
Notes payable - related parties 127,967 650,000
Accrued expenses 777,385 1,008,154
Income taxes payable 1,029,016 278,600
Other current liabilities 621,412 554,369
----------- -----------
Total current liabilities 9,367,605 6,280,344
Notes payable - related parties -- 228,322
----------- -----------
Total liabilities 9,367,605 6,508,666
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stocks 353,057 11,353,068
Common stock 346,380 218,765
Additional paid-in capital 6,806,216 5,026,332
Discount on preferred stocks (315,000) (9,361,100)
Retained earnings (deficit) 1,244,300 (423,598)
----------- -----------
8,434,953 6,813,467
Less: Treasury stock - at cost (654,851) --
----------- -----------
Total stockholders' equity 7,780,102 6,813,467
----------- -----------
$17,147,707 $13,322,133
=========== ===========
See accompanying notes to financial statements.
F-4
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
----------------------------------------
1997 1996 1995
---- ---- ----
Net sales $ 100,841,362 $ 81,812,045 $ 47,565,542
Cost of sales 91,073,358 74,354,590 42,860,603
------------- ------------- -------------
Gross profit 9,768,004 7,457,455 4,704,939
------------- ------------- -------------
Operating expenses:
Selling and administrative 6,698,088 5,962,547 4,563,337
Research and development 161,158 -- --
Amortization of goodwill -
computer businesses 224,190 168,285 52,655
Write-off of media advertising credit -- -- 448,011
------------- ------------- -------------
Total operating expenses 7,083,436 6,130,832 5,064,003
------------- ------------- -------------
Income (loss) from operations 2,684,568 1,326,623 (359,064)
------------- ------------- -------------
Other income (expense):
Charge-off of goodwill relating to
the acquisition of Hillside -- -- (2,045,628)
Loss on marketable securities -- -- (4,136)
(Loss) gain on sale of property
and equipment -- (8,372) 4,432
Dividend and interest income 86,699 45,866 22,708
Interest expense (112,379) (150,949) (138,553)
Management fees -- -- 375,000
Other income 308,089 39,718 45,433
------------- ------------- -------------
Total other income (expense) 282,409 (73,737) (1,740,744)
------------- ------------- -------------
Income (loss) before income taxes 2,966,977 1,252,886 (2,099,808)
Provision for income taxes 1,299,079 414,540 151,546
------------- ------------- -------------
Net income (loss) $ 1,667,898 $ 838,346 ($ 2,251,354)
============= ============= =============
Net earnings (loss) per share:
Primary $ .06 $ .03 ($ .25)
============= ============= =============
Fully diluted $ .06 $ .03 ($ .25)
============= ============= =============
Weighted average number of shares -
primary and fully diluted 29,801,232 25,729,527 8,872,333
============= ============= =============
See accompanying notes to financial statements.
F-5
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,667,898 $ 838,346 ($2,251,354)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 146,123 104,030 81,837
Amortization of goodwill -
computer businesses 224,190 168,285 52,655
Charge-off of goodwill relating to
the acquisition of Hillside -- -- 2,045,628
Settlements of accrued liabilities (120,100) -- --
Write-off of media advertising credits -- -- 448,011
Reduction of deferred sales
tax obligations (183,052) -- --
Expenses incurred and charged to earn-
ings by issuance of capital stock -- 43,000 204,319
Loss on sale of marketable securities -- -- 4,136
Loss (gain) on sale of property
and equipment -- 8,372 (4,432)
Provision for doubtful accounts (20,000) -- --
Changes in assets and liabilities, net in 1995
of effects from purchase of ACS and CONY:
Accounts receivable (4,074,242) 758,744 (99,488)
Receivables from officers
and related parties 6,124 59,667 --
Inventories 1,431,701 (1,087,396) (11,848)
Deferred taxes 5,524 (27,560) (8,928)
Other current assets (27,757) (93,730) (371,029)
Other assets 51,100 16,742 (49,666)
Revolving lines of credit (254,695) (875,579) 1,800,254
Accounts payable 3,102,699 (1,120,705) (1,532,065)
Accrued expenses (73,418) 278,783 3,322
Deferred sales tax obligation -- 51,000 58,840
Payables to related parties -- (25,000) --
Income taxes payable 750,416 278,600 (55,129)
Other current liabilities 320,095 (22,303) (44,438)
----------- ----------- -----------
Total adjustments 1,284,708 (1,485,050) 2,521,979
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,952,606 (646,704) 270,625
----------- ----------- -----------
(Continued)
See accompanying notes to financial statements.
F-6
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended June 30,
----------------------------------
1997 1996 1995
---- ---- ----
Net cash provided by (used in)
operating activities (brought forward) $ 2,952,606 (646,704) $ 270,625
----------- ----------- -----------
Cash flows from investing activities:
Addition to goodwill relating to
the acquisition of Hillside -- -- (156,475)
Addition to goodwill relating to
the acquisition of ACS and CONY -- -- (22,528)
Purchase of property and equipment (70,213) (206,388) (89,733)
Security deposits 14,843 -- --
Sale of marketable securities -- -- 6,864
Sale of property and equipment -- 13,700 13,195
Payments of notes receivable - officer -- 110,909 ( - )
----------- ----------- -----------
Net cash used in investing activities (55,370) (81,779) (248,677)
----------- ----------- -----------
Cash flows from financing activities:
Payment of bank overdraft assumed
net of cash acquired in ACS and
CONY acquisitions -- -- (112,113)
Issuance of capital stock -- 1,250,251 --
Purchase of preferred stock (1,250,112) -- --
Purchase of treasury stock (654,851) -- --
Proceeds from notes payable -
related party -- -- 618,975
Repayments from related parties 125,000 650,000 --
Advances from related parties -- -- 928,180
Repayments to related parties (875,355) (689,969) (933,101)
Bank overdraft 104,600 266,137 163,134
----------- ----------- -----------
Net cash provided by (used in)
financing activities (2,550,718) 1,476,419 665,075
----------- ----------- -----------
Net increase in cash 346,518 747,936 687,023
Cash at beginning of year 1,667,031 919,095 232,072
----------- ----------- -----------
Cash at end of year $ 2,013,549 $ 1,667,031 $ 919,095
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Income taxes $ 449,404 $ 292,635 $ 228,559
=========== =========== ===========
Interest $ 109,538 $ 103,357 $ 81,121
=========== =========== ===========
(Continued)
See accompanying notes to financial statements.
F-7
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended June 30,
-------------------------------
1997 1996 1995
---- ---- ----
Supplemental Schedules of
Non-Cash Transactions:
Issuance of common stock for services $ 37,500 $ 7,998 $ 24,000
=========== =========== ==========
Issuance of common stock in
satisfaction of debt $ -- $ 45,000 $ --
=========== =========== ==========
Issuance of common and preferred
stock in lieu of note and loan
repayments $ -- $ 20,000 $1,220,223
=========== =========== ==========
Issuance of shares of common and preferred
stock in connection with the
acquisition of all the outstanding
shares of capital stock of ACS,
resulting in the recording of goodwill $ 776,690 $ 283,000 $1,496,000
=========== =========== ==========
Issuance of shares of common and preferred
stock in connection with the
acquisition of all the outstanding
shares of capital stock of CONY,
resulting in the recording of goodwill $ 389,510 $ 391,634 $ 665,000
=========== =========== ==========
Issuance of preferred stock in
settlement of class action suit
against former bedding operation $ -- $ 35,000 $ --
=========== =========== ==========
Issuance of common stock in exchange
for cancellation of employment
agreement $ -- $ -- $ 179,716
=========== =========== ==========
Issuance of preferred stock in
satisfaction of terms of an
employment agreement $ -- $ -- $ 86,470
=========== =========== ==========
Conversion of Series H preferred
stock resulting in additional
stockholders' equity $ -- $ -- $ 7,517
=========== =========== ==========
Acquisition of all outstanding shares
of common stock of SCSI and MCS for
shares of common and preferred stock
of the Company, resulting in
the recording of goodwill $ -- $ -- $ 836,000
=========== =========== ==========
See accompanying notes to financial statements.
F-8
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
Preferred Stocks Common Stock Additional Discount on Retained
---------------------- -------------------- Paid-in Preferred Earnings
Shares Amount Shares Amount Capital Stocks (Deficit)
------ ------ ------ ------ ------- ------ ---------
Balance at June 30, 1994 58,978 $ 5,898 5,434,422 $102,441 $ 507,346 $ - $1,086,021
Stock dividend on Preferred
Series A 3,100 310 - - - - (310)
Conversion of Preferred Series A
for common stock (1,947) (195) 1,947 20 175 - -
Shares issued for the cancellation
of an employment agreement - - 88,968 890 178,826 - -
Shares issued for conversion of
Preferred Series B (18,196) (1,820) 4,400,609 44,006 (42,186) - -
Shares issued on conversion of
notes payable, including interest - - 181,335 1,813 453,496 - -
Shares issued for services - - 40,000 400 23,600 - -
Shares of Preferred stock issued
for the acquisition of American
Computer Systems, Inc.:
Series D 200,000 1,000,000 - - - (500,000) -
Series E - issued February 6, 1996 200,000 1,000,000 - - - - -
Series F - issued October 6, 1995 66,800 334,000 - - - (167,000) -
Shares issued for conversion
of notes payable - - 520,000 5,200 155,875 - -
Shares Preferred Series H - issued
for conversion of notes payable 83,520 835 - - 449,548 - -
Shares issued for the acquisition
of CONY Computer Systems, Inc.:
Common stock - - 437,990 4,380 443,570 - -
Preferred Series D 100,000 500,000 - - - (250,000) -
Preferred Series D - issued
September 30, 1995 100,000 500,000 - - - (250,000) -
Shares issued for conversion
of loans payable - - 981,878 9,819 598,946 - -
Shares of Preferred stock issued for
compensation per employment
agreement:
Series G issued in July 1995 1 - - - 86,470 - -
Shares issued for conversion of
Preferred Series H (83,520) (835) 835,200 8,352 - - -
Net loss for the year - - - - - - ( 2,347,655)
--------- ----------- ---------- -------- ---------- ---------- ----------
Balance at June 30, 1995
(carried forward) 708,736 3,338,193 12,922,349 177,321 2,855,666 ( 1,167,000) ( 1,261,944)
--------- ----------- ---------- -------- ---------- ---------- ----------
Treasury Stock Total
------------------ Stockholders'
Shares Amount Equity
------ ------ ------
Balance at June 30, 1994 - $ - $1,701,706
Stock dividend on Preferred
Series A - - -
Conversion of Preferred Series A
for common stock - - -
Shares issued for the cancellation
of an employment agreement - - 179,716
Shares issued for conversion of
Preferred Series B - - -
Shares issued on conversion of
notes payable, including interest - - 455,309
Shares issued for services - - 24,000
Shares of Preferred stock issued
for the acquisition of American
Computer Systems, Inc.:
Series D - - 500,000
Series E - issued February 6, 1996 - - 1,000,000
Series F - issued October 6, 1995 - - 167,000
Shares issued for conversion
of notes payable - - 161,075
Shares Preferred Series H - issued
for conversion of notes payable - - 450,383
Shares issued for the acquisition
of CONY Computer Systems, Inc.:
Common stock - - 447,950
Preferred Series D - - 250,000
Preferred Series D - issued
September 30, 1995 - - 250,000
Shares issued for conversion
of loans payable - - 608,765
Shares of Preferred stock issued for
compensation per employment
agreement:
Series G issued in July 1995 - - 86,470
Shares issued for conversion of
Preferred Series H - - 7,517
Net loss for the year - - ( 2,347,655)
------- ------- ----------
Balance at June 30, 1995
(carried forward) - - 3,942,236
------- ------- ----------
See accompanying notes to consolidated financial statements.
F-9
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
Preferred Stocks Common Stock Additional Discount on Retained
---------------------- -------------------- Paid-in Preferred Earnings
Shares Amount Shares Amount Capital Stocks (Deficit)
------ ------ ------ ------ ------- ------ ---------
Balance at June 30, 1995
(carried forward) 708,736 $ 3,338,193 12,922,349 $177,321 $2,855,666 ($1,167,000) ($1,261,944)
Shares issued for conversion of
Preferred Series F and G (66,801) (334,000) 344,119 3,441 213,659 116,900 -
Shares issued for services - - 20,004 200 7,798 - -
Shares issued for conversion of
Preferred Series B 1,188,754 5,998,875 1,119,897 11,199 (10,074) ( 6,000,000) -
Shares issued for conversion of
Preferred Series I 390,000 2,000,000 (400,000) (4,000) - ( 1,996,000) -
Shares issued for satisfaction of debts - - 116,281 1,163 63,839 - -
Shares issued in a private placement - - 1,860,941 18,609 1,056,142 - -
Expenses of private placement - - - - (49,500) - -
Shares issued to shareholder of ACS - - 352,847 3,528 279,472 - -
Shares issued to shareholders of CONY - - 430,359 4,304 387,330 - -
Issuance of Series C Preferred 350,000 350,000 - - - (315,000) -
Warrant exercised - - 300,000 3,000 222,000 - -
Net income for the year - - - - - - 838,346
--------- ----------- ---------- -------- ---------- ---------- ----------
Balance at June 30, 1996 2,570,689 11,353,068 17,066,797 218,765 5,026,332 (9,361,100) (423,598)
Shares issued for conversion of
Preferred Series I (390,000) (2,000,000) 1,666,665 16,667 (12,667) 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) 9,715,355 97,154 1,558,626 5,873,620 -
Shares issued to shareholders of ACS - - 672,727 6,727 769,963 - -
Shares issued to shareholders of CONY - - 337,373 3,374 386,136 - -
Shares issued for downside protection
of Preferred Series I - - 309,343 3,093 (3,093) - -
Shares issued in settlement of a
liability - - 60,000 600 36,900 - -
Purchase and retirement of
Preferred Series A (110) (11) - - (101) - -
Net income for the year - - - - - - 1,667,898
--------- ----------- ---------- -------- ---------- -------- ----------
Balance at June 30, 1997 380,579 $ 353,057 29,828,260 $346,380 $6,806,216 ($315,000) $1,244,300
========= =========== ========== ======== ========== ======== ==========
Treasury Stock Total
------------------ Stockholders'
Shares Amount Equity
------ ------ ------
Balance at June 30, 1995
(carried forward) - $ - $3,942,236
Shares issued for conversion of
Preferred Series F and G - - -
Shares issued for services - - 7,998
Shares issued for conversion of
Preferred Series B - - -
Shares issued for conversion of
Preferred Series I - - -
Shares issued for satisfaction of debts - - 65,002
Shares issued in a private placement - - 1,074,751
Expenses of private placement - - (49,500)
Shares issued to shareholder of ACS - - 283,000
Shares issued to shareholders of CONY - - 391,634
Issuance of Series C Preferred - - 35,000
Warrant exercised - - 225,000
Net income for the year - - 838,346
------- -------- ----------
Balance at June 30, 1996 - - 6,813,467
Shares issued for conversion of
Preferred Series I - - -
Purchase of treasury shares (723,000) (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
------- -------- ----------
Balance at June 30, 1997 (723,000) ($654,851) $7,780,102
======= ======== ==========
See accompanying notes to consolidated financial statements.
F-10
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
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 under
the name Hillside Bedding, Inc. ("Hillside"). On December 14,
1995. The Company's shareholders approved a change of the
Company's name to ATEC Group, Inc.
(b) Principal Business Activity:
The Company is a system integrator and provider of a full
line of computer and information technology products and services
to business, professionals, government agencies and educational
institutions. The Company focuses on core competencies including
system design, high speed data transmission, LAN/WAN, video
conferencing and internet/intranet. Revenues derived from
services are not significant.
(c) Summary of Significant Accounting Policies:
(1) Consolidation Policy:
The accompanying consolidated financial statements include
the accounts of ATEC Group, Inc. and all its wholly owned
subsidiaries. All significant intercompany transactions and
balances have been eliminated.
(2) 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 peripheral, and
accessory finished products.
F-11
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies: (Continued)
(3) 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.
(4) Goodwill:
Goodwill is being amortized over a period of fifteen years.
The Company periodically reviews goodwill to evaluate the future
economic benefits or potential impairments which may affect their
recorded values.
(5) 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.
(6) Research and Development Costs:
Research and development costs are charged to expense as
incurred.
(7) 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.
F-12
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies: (Continued)
(8) Earnings Per Share:
The primary income (loss) per share for 1997, 1996 and 1995
has been calculated based on the weighted average number of
common shares outstanding during the year. Earnings per share
have been restated to give retroactive effect to all periods
presented for the conversion and purchase of preferred stocks.
Common stock equivalents (consisting of convertible preferred
stocks and contingent common stock issuances) were considered in
the primary and fully diluted per share data in 1997 and 1996 and
were excluded in 1995 as their effect would be anti-dilutive. The
assumed exercise of the warrants and options outstanding were
excluded in the primary and fully diluted earnings per share
computations as they were not dilutive in 1997 and 1996 and
anti-dilutive in 1995.
Had the conversions of debt and preferred stocks in 1995
taken place at the beginning of the year, the primary loss per
share for 1995 would have been ($.18).
(9) Reclassification:
Certain reclassifications have been made to the 1996 and
1995 financial statements to conform to the 1997 presentation.
(10) 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. Management
continually reviews its trade receivables credit risk and has
adequately allowed for potential losses.
Accounts receivable at June 30, 1997 were concentrated in
Long Island (44%) and New York City (39%) areas. Accounts
receivable at June 30, 1996 were concentrated in the Long Island
(58%), New York City (22%) and Albany (14%) areas.
(11) 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-13
NOTE 2 - ACQUISITIONS.
(a) Sun Computers and Software, Inc. and Micro Computer Systems,
Inc.:
On June 23, 1994, the Company exchanged 94,413 shares of its
common stock and 30,900 of its Series B Convertible voting
preferred stock for 100% of the outstanding stock of Sun
Computers and Software, Inc. ("SCSI") and Mirco Computer Systems,
Inc. ("MCS"). Each of the preferred shares was convertible to
241.86 shares of common stock and has the equivalent current
voting rights for the first two years subsequent to issuance;
thereafter, the conversion ratio is one-to-one with each
preferred share receiving one vote.
At the date of acquisition, the Company had liabilities in
excess of its assets in the amount of approximately $900,000.
Additionally, the Company incurred transaction expenses amounting
to $310,000. Accordingly, these amounts resulted in goodwill of
$1,210,000 at June 30, 1994. Preacquisition contingency
adjustments and other previously contingent transaction expenses
amounting to approximately $836,000 were recognized during the
year ended June 30, 1995. These amounts, totalling approximately
$2,046,000, were recorded as goodwill, which is viewed as
organizational costs and were amortized entirely during the year
ended June 30, 1995.
(b) American Computer Systems Corp.:
On February 6, 1995, ATEC acquired 100% of the issued and
outstanding capital stock of American Computer Systems Corp., a
New York corporation, and its wholly owned subsidiary, Laptop and
Office Solutions, Inc. (hereinafter collectively referred to as
"ACS"). As consideration for the shares of ACS stock, the Company
agreed to issue the Company's preferred stock as follows:
1. $1,000,000 at par value of Series D Preferred Stock;
2. $334,000 at par value of Series F Preferred Stock;
3. $1,000,000 at par value of Series E Preferred Stock.
The preferred shares have been valued based on the specified
dollar amount equivalents of common stock of the Company into
which they are convertible (see Note 5), resulting in a discount
from par value on their issuance.
The acquisition has been accounted for under the purchase
method. The cost of the ACS acquisition at the closing date
amounted to approximately $1,690,000. The investment in ACS
exceeded the net assets acquired by approximately $1,496,000
which has been recorded as goodwill.
The Company also agreed to issue shares of the Company's
common stock up to a maximum value of $1,664,000 over a three
year period, subject to ACS meeting certain performance criteria.
Pursuant to the terms of the stock purchase agreement, which has
been amended during fiscal 1997, the Company issued an additional
672,727 and 352,847 shares of its common stock valued at $776,690
and $283,000 for 1997 and 1996, respectively. These additional
costs of the acquisition have been recorded as goodwill.
F-14
NOTE 2 - ACQUISITIONS. (Continued)
(c) CONY Computer Systems, Inc.:
On March 31, 1995, ATEC acquired 100% of the issued and
outstanding capital stock of CONY Computer Systems, Inc. ("CONY")
in exchange for 437,990 shares of its common stock and $1,000,000
at par value of Series D Preferred Stock (see Note 5). The
preferred shares were valued in the same manner as those
described in the ACS acquisition.
The acquisition has been accounted for under the purchase
method. The cost of the CONY acquisition amounted to
approximately $948,000. The investment in CONY exceeded the net
assets acquired by approximately $665,000 which has been recorded
as goodwill.
The Company also agreed to issue shares of the Company's
common stock up to a maximum value of $1,000,000 over a three
year period subject to CONY meeting certain performance criteria.
Pursuant to a Board of Directors resolution in June 1996, the
Company issued 77,512 shares of its common stock valued at
$108,634 to the former stockholders of CONY as an adjustment of
the original purchase price. Additionally, pursuant to the terms
of the stock purchase agreement, which has been amended during
fiscal 1997, the Board authorized the issuance of an additional
337,373 and 352,847 shares valued at $389,510 and $391,634 for
1997 and 1996, respectively. These additional costs of the
acquisition have been recorded as goodwill.
(d) Innovative Business Micros, Inc.:
On June 14, 1996, the Company, pursuant to the terms of a
stock purchase agreement, issued 4,900,000 shares of its common
stock in exchange for all of the outstanding capital stock of
Innovative Business Micros, Inc. ("Innovative"). The acquisition
has been accounted for under the pooling of interests method and,
accordingly, the Company's consolidated financial statements have
been restated to include the accounts and operations of
Innovative for the nine months ended June 30, 1996 and for the
year ended September 30, 1995.
F-15
NOTE 2 - ACQUISITIONS. (Continued)
(e) Pro Forma Information:
The following summary combines the consolidated results of
operations as if ACS and CONY had been acquired as of the
beginning of fiscal 1995, after including the impact of certain
adjustments such as elimination of intercompany transactions,
amortization of intangibles and related income tax effects. The
summary also includes the results of operations of Innovative for
the year ended September 30, 1995.
1995
(Unaudited)
-----------
Net sales $70,865,000
Net loss ($539,000)
Net loss per share - Primary ($.06)
The pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in
effect for the entire periods presented. In addition, they are
not intended to be a projection of future results.
NOTE 3 - NONMONETARY TRANSACTION.
In February 1994, the Company entered into an agreement with
the Intrac Group (a wholesale advertising agency/broker) under
which it exchanged inventory for various credits including
advertising and other business items. These credits were recorded
based on management's estimate of the credits' fair market value
of $448,000.
In June 1995, the Company tried to utilize a portion of the
media advertising credits and discovered that the cash required
was in excess of the cost of acquiring the product in the market
place. The Company therefore concluded that the credits were
worthless. Accordingly, they were written off as a direct charge
to operations in 1995. In May 1996, the Company sold the media
advertising credits for $5,000.
F-16
NOTE 4 - DEFERRED SALES TAX OBLIGATION.
In April, 1994, the Company negotiated a settlement with the
New York State Department of Taxation and Finance regarding
certain sales tax obligations whereby penalties were abated
leaving a balance due of approximately $843,000. The agreement
required an initial payment of $400,000 (which was paid on April
26, 1994) and subsequent monthly payments of $500 per month
commencing on November 15, 1994 ($-0- and $3,000 was paid in
fiscal years 1996 and 1995). Interest at 10% per annum accrued on
balances outstanding. The aforementioned agreement provided for
the parties to negotiate a formal deferred payment agreement on
any balances outstanding as of April 25, 1995. During 1997, the
Company renegotiated a proposed settlement of the sales tax
obligation with the local taxing authority and accordingly,
reduced the liability by $253,052 including interest (see Note
12). In connection with the settlement, the Company accrued
professional fees of $70,000 which is included in accrued
expenses. The net reduction of the liabilities of $183,052 is
included in other income. The proposed settlement is in the
process of being finalized by the approval of the New York State
taxing authority.
NOTE 5 - EQUITY SECURITIES.
(a) Capital Stock:
The Company's capital stock consists of the following:
Shares Amount
Issued (including
Shares and shares to
Authorized Outstanding be issued)
---------- ----------- ----------
June 30, 1997
Preferred Stocks:
Series A cumulative
convertible 29,233 29,121 $ 2,912
Series B convertible 12,704 1,458 145
Series C convertible 350,000 350,000 350,000
Series D convertible 400,000 -- --
Series E convertible 200,000 -- --
Series F convertible 66,800 -- --
Series G convertible 1 -- --
Series H convertible -- -- --
Series I convertible 390,000 -- --
Series J convertible 800,000 -- --
Series K convertible 400,000 -- --
----------- -----------
Total preferred 380,579 $ 353,057
----------- -----------
Common stock 70,000,000 29,828,260(*) $ 346,380
----------- -----------
(*) Included in the total are 11,034,798 shares which were issued subsequent to
June 30, 1997.
F-17
NOTE 5 - EQUITY SECURITIES. (Continued)
(a) Capital Stock: (Continued)
Shares Amount
Issued (including
Shares and shares to
Authorized Outstanding be issued)
---------- ----------- ----------
June 30, 1996
Preferred Stocks:
Series A cumulative
convertible 29,233 29,231 $ 2,923
Series B convertible 12,704 1,458 145
Series C convertible 350,000 350,000 350,000
Series D convertible 400,000 400,000 2,000,000
Series E convertible 200,000 200,000 1,000,000
Series F convertible 66,800 -- --
Series G convertible 1 -- --
Series H convertible -- -- --
Series I convertible 390,000 390,000 2,000,000
Series J convertible 800,000 800,000 4,000,000
Series K convertible 400,000 400,000 2,000,000
----------- -----------
Total preferred 2,570,689 $11,353,068
----------- -----------
Common stock 70,000,000 17,066,797 $ 218,765
----------- -----------
On December 14, 1995, the Company's board of directors
unanimously approved the increase of the number of authorized
shares of the Company's common stock to 70,000,000 shares and
preferred stock to 10,000,000 shares. The par value of the common
stock is $.01.
On November 15, 1996, the Company's board of directors
authorized the purchase of the Company's common stock. In January
1997, the Company purchased 723,000 shares.
F-18
NOTE 5 - EQUITY SECURITIES. (Continued)
(b) Series A Cumulative Convertible Preferred Stock:
On February 2, 1993, the Company's board of directors
adopted a resolution providing for the issuance of 29,233 shares
of Series A 10% cumulative convertible preferred stock, par value
$.10.
Outlined below is a summary of the more significant rights
associated with these shares:
o Dividend rights - The shares have a stated annual cumulative
dividend rate of 10% each, beginning one year after
issuance. The dividend for the first year is payable in
shares of Series A preferred stock on the basis of one share
for each ten shares held and thereafter in cash. These
dividends are prior to any declaration or payment of any
dividend on common shares or any stock ranking junior to
these shares. In July 1994, the Company issued a stock
dividend of 3,100 shares of Series A preferred stock in
satisfaction of the first year dividend requirement. At June
30, 1997, the dividends in arrears aggregated $876.
o Voting rights - Each share has the right to one vote.
o Dissolution rights - On liquidation of the Company, each
preferred stockholder would be entitled to $100 per share
plus any dividend arrearage.
o Conversion - Commencing February 11, 1994, each stockholder
may convert each share into one share of common stock.
o Redemption - Commencing February 11, 1994, the Company may,
but shall not be obligated to, redeem shares at a rate of
$100 per share provided among other criteria that the
trading price of the Company's common stock equals or
exceeds $120 per share.
During June 1997, the Company purchased 110 shares of its
Series A cumulative convertible preferred stock at a cost of
$112.
(c) Series B Convertible Preferred Stock:
On June 23, 1994, the Company's board of directors adopted a
resolution providing for the issuance of 30,900 shares of Series
B convertible preferred stock, par value $.10, in connection with
an acquisition. Outlined below is a summary of the more
significant rights associated with these shares:
o Dividend rights - The shareholders have a stated annual
non-cumulative dividend rate of $1 each, beginning on the
second year after issuance, declaration of which is prior to
any declaration or payment of any dividend on common shares
or any stock ranking junior to these shares.
F-19
NOTE 5 - EQUITY SECURITIES. (Continued)
(c) Series B Convertible Preferred Stock: (Continued)
o Voting rights - As of June 30, 1996, each share has the
right to one vote.
o Dissolution rights - As of June 30, 1996, each share
has a dissolution value of $10 per share.
o Conversion - As of June 30, 1996, the shares are
convertible on a one-to-one basis.
o These shares rank junior to the Company's Series A 10%
cumulative convertible preferred stock.
The Company's board of directors unanimously approved the
decrease in the number of authorized shares of the Company's
Series B convertible preferred stock from 30,900 to 12,704.
(d) Series C Convertible Preferred Stock:
On April 17, 1996, the Company's board of directors adopted
a resolution providing for the issuance of 350,000 shares of
Series C convertible preferred stock, par value $1. Outlined
below is a summary of the more significant rights associated with
these shares:
o Dividend rights - The shareholders shall not be
entitled to any dividends, except as authorized at the
sole discretion of the board of directors of the
Company.
o Voting rights - The holders of these shares have one
vote per share at all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution
of the Company, each preferred stockholder would be
entitled to $5 per share plus any accrued dividends.
o Conversions - The holders of these shares may convert
ten shares into one share of the common stock of the
Company.
F-20
NOTE 5 - EQUITY SECURITIES. (Continued)
(e) Series D Convertible Preferred Stock:
In fiscal 1995, the Company's board of directors adopted two
resolutions providing for the issuance of 400,000 shares of
Series D convertible preferred stock, par value $5 which were
issued and outstanding at June 30, 1995 and 1996.
On December 31, 1996, the Company purchased 117,648 shares
at a cost of $500,000. On June 2, 1997, 282,352 shares of Series
D convertible preferred stock were converted to 1,821,626 of the
Company's common stock. All such Series D shares were retired.
(f) Series E Convertible Preferred Stock:
In fiscal 1995, the Company's board of directors adopted a
resolution providing for the issuance of 200,000 shares of a
Series E convertible preferred stock, par value $5.
On June 10, 1997, 200,000 shares of Series E convertible
preferred stock were converted to 1,290,323 of the Company's
common stock. All such Series E shares were retired.
(g) Series F Convertible Preferred Stock:
In fiscal 1995, the Company's board of directors adopted a
resolution providing for the issuance of 66,800 shares of Series
F convertible preferred stock, par value $5. In August 1995, the
shares were converted into 273,351 shares of common stock. All
Series F shares have been retired.
(h) Series G Convertible Preferred Stock:
In fiscal 1995, the Company's board of directors adopted a
resolution providing for the issuance of 1 share of Series G
convertible preferred stock, par value $.01.
Conversion - Commencing July 1, 1995 through July 31, 1995,
this share was exchangeable into shares of common stock of the
Company. In August 1995, the share was converted to 70,768 shares
of common stock. The Series G share has been retired.
(i) Series H Convertible Preferred Stock:
On February 6, 1995, the Company's board of directors
adopted a resolution providing for the issuance of 85,000 shares
of Series H convertible preferred stock, par value $.01. The
Company's board of directors unanimously approved the decrease in
the number of authorized shares of the Company's Series H
convertible preferred stock from 85,000 to -0-.
F-21
NOTE 5 - EQUITY SECURITIES. (Continued)
(j) Series I Convertible Preferred Stock:
On April 28, 1995, the Company's board of directors adopted
a resolution providing for the issuance of 390,000 shares of a
Series I convertible preferred stock, par value $5.1282. During
July 1996, 390,000 shares of Series I convertible preferred stock
were converted to 1,666,665 shares of the Company's common stock.
All Series I shares have been retired.
(k) Series J Convertible Preferred Stock:
In August 1995, the Company's board of directors adopted a
resolution providing for the issuance of 800,000 shares of a
Series J convertible preferred stock, par value $5. In December
1996, the Company acquired 166,472 shares at a cost of $707,500.
In June 1997, 633,528 shares were converted into 4,087,277 shares
of common stock. All Series J shares have been retired.
(l) Series K Convertible Preferred Stock:
In August 1995, the Company's board of directors adopted a
resolution providing for the issuance of 400,000 shares of a
Series K convertible preferred stock, par value $5. In December
1996, the Company acquired 10,000 shares at a cost of $42,500. In
June 1997, 390,000 shares were converted into 2,516,129 shares of
common stock. All Series K shares have been retired.
(m) Warrants:
At June 30, 1997, the Company had outstanding 620,000
warrants entitling the holders to purchase one share of common
stock expiring in February 1998 at a price of $84. The warrants
are not valued in the financial statements because the amounts
are immaterial.
(n) Options:
As described in Note 7, the Company has issued options to
purchase up to 700,000 shares of it's common stock at $.75 per
share to officers/stockholders of the Company. These options
expire in January 2007.
F-22
NOTE 6 - OPERATING LEASES.
The Company conducts its operations under five
noncancellable operating leases expiring at various dates through
2003. Future minimum rent payments are as follows:
For the
Year
Ending
June 30, MCS CONY ACS Innovative Total
- -------- --- ---- --- ---------- -----
1998 $ 96,600 $ 54,526 $ 70,000 $ 24,053 $ 245,179
1999 108,192 41,026 36,000 -- 185,218
2000 108,192 41,026 36,000 -- 185,218
2001 108,192 41,026 36,000 -- 185,218
2002 108,192 34,188 36,000 -- 178,380
Thereafter 108,192 -- 3,000 -- 111,192
---------- ---------- ---------- ---------- ----------
Total minimum
annual rentals $ 637,560 $ 211,792 $ 217,000 $ 24,053 $1,090,405
========== ========== ========== ========== ==========
MCS leases its premises from a partnership which is
controlled by two officers and directors of the company under a
triple net lease arrangement.
Total rent expense for the years ended June 30, 1997, 1996
and 1995 amounted to $258,002, $264,000 and $199,000,
respectively.
NOTE 7 - EMPLOYMENT AGREEMENTS.
(a) MCS and SCSI:
Pursuant to the stock acquisition agreement of SCSI and MCS,
the Company entered into two similar employment agreements with
the former officers/stockholders of MCS and SCSI which expired on
June 30, 1997. Renewals are presently being negotiated. Under the
agreements, the individuals received the following compensation:
o A salary of $150,000 with annual increases based on
increases in the consumer price index.
o A stock bonus based on certain performance criteria. No
bonuses were earned under the agreements.
The agreements also provided for various fringe benefits
including discretionary bonuses, pension and profit sharing
participation.
F-23
NOTE 7 - EMPLOYMENT AGREEMENTS. (Continued)
(b) ACS:
Pursuant to the stock acquisition agreement of ACS, the
Company entered into an employment agreement with the former
stockholder who is now the president of the Company. Under the
terms of the agreement, the individual received:
o A salary of $135,000 with 10% annual increases.
o Annual stock bonuses based on certain performance
criteria, which resulted in the issuance of Series G
Preferred Stock with an aggregate market value of
$86,000 as recorded in fiscal 1995.
In January 1997, the employment and stock purchase
agreements were modified. All rights to additional stock bonuses
were waived. In addition, the Company issued its president an
option to purchase 500,000 shares of common stock at $.75 per
share.
(c) CONY:
Pursuant to the stock acquisition agreement of CONY, the
Company entered into three employment agreements with the former
stockholders, two of whom received annual salaries of $120,000
and the third $24,000 annually, with annual increases based upon
increases of the national consumer price index.
Additionally, the employees would be eligible to share in a
bonus pool of additional shares of the Company's common stock.
The percentages of such pool that the employee shall receive will
be determined by the board of directors of the Company. The stock
bonuses were based on certain performance criteria relating to
revenues and pretax income. The employees have previously agreed
to forego any of their rights to the aforementioned shares for
the year ended June 30, 1996.
In January 1997, the employment and stock purchase
agreements were modified. All rights to additional stock bonuses
were waived. In addition the Company issued options to purchase
200,000 shares of common stock at $.75 per share.
F-24
NOTE 8 - REVOLVING LINES OF CREDIT.
The Company and it's subsidiaries have agreements with
Deutsche Financial Services ("Deutsche"), whereby certain
inventory purchases are financed. Deutsche grants the Company
terms and charges interest at rates of prime plus 1-1/2% - 2-1/2%
per annum. Aggregate borrowings under these lines may be up to
$6,000,000. As of June 30, 1997 and 1996, borrowings under these
lines amounted to $1,830,359 and $2,085,054, respectively. The
lines are collateralized by all the assets of the Company.
NOTE 9 - LITIGATION.
During 1990, a competitor of the Company commenced an action
against it and one of its advertising agents. The complaint seeks
$1,000,000 in damages for alleged disclosure of certain trade
secrets, and $10,000,000 in punitive damages and $10,000,000
based upon allegations that the Company interfered with and
impaired the competitor's business relations. Management believes
that there is no merit to this action. The action has been
virtually inactive since commencement.
A third party lawsuit was commenced against the Company 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 alternative
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.
The Company is a defendant in various other lawsuits for
which certain provisions have been made in the financial
statements. Management is of the opinion that the ultimate
resolution of these actions will not have a significant effect on
the Company's financial statements.
F-25
NOTE 10 - INCOME TAXES.
The Company's income tax provision consists of the
following:
1997 1996 1995
---- ---- ----
Current tax provision:
Federal $ 894,365 $ 223,386 $ 112,013
State 399,190 218,714 48,461
---------- ---------- ----------
1,293,555 442,100 160,474
Deferred tax benefit relating
to temporary differences 5,524 (27,560) (8,928)
---------- ---------- ----------
Income tax provision $1,299,079 $ 414,540 $ 151,546
========== ========== ==========
A reconciliation of the above effective tax rate to the
federal statutory rate is as follows:
1997 1996 1995
-------------------- -------------------- --------------------
Tax at statutory 34.0% $ 1,008,772 34.0% $ 426,000 (34.0%) ($ 713,900)
State income tax, net of
federal tax benefit 8.9 264,345 (4.1) (51,284) (7.8) (164,500)
Effect of nondeducti-
biliity of:
Amortization and charge
off of goodwill 2.6 76,225 4.6 57,217 39.9 838,450
Media advertising
credits written off -- -- -- -- 8.7 183,685
Tax expense and loss
limitations (.4) (10,853) -- -- (.4) (8,521)
Other (1.3) (39,410) (1.4) (17,393) .8 16,332
---- ----------- ---- ----------- ---- ----------
43.8% $ 1,299,079 33.1 $ 414,540 7.2% $ 151,546
==== =========== ==== =========== ==== ==========
The Company's deferred tax assets at June 30, 1997 and 1996
amounted to approximately $37,249 and $42,773, respectively,
which resulted from the temporary differences relating to the
allowance for doubtful accounts.
F-26
NOTE 11 - RELATED PARTY TRANSACTIONS.
(a) Receivable from Officers:
During the normal course of business, SCSI made advances to
its former sole shareholder. These loans bore interest at 8%,
were unsecured and due on demand. At June 30, 1996, the balance
due the Company amounted to $6,124. During April 1997, the entire
balance was repaid to the Company.
Interest income on receivables from officers amounted to
$-0- for the years ended June 30, 1997 and 1996 and $12,022 for
1995.
(b) Notes Payable - Related Parties:
In May 1995, certain loans payable to officers of the
Company and other related parties were converted into shares of
common stock of the Company with an aggregate market value of
approximately $609,000.
ACS, prior to acquisition by ATEC, entered into an agreement
with its sole stockholder, now President of the Company, to
borrow up to $750,000 at 10% interest and due December 1997. The
Company has guaranteed payment of this loan. The balance due at
June 30, 1997 and 1996 amounted to $2,967 and $228,322,
respectively. Interest expense on this loan amounted to $4,030,
$38,258 and $11,992, for the years ended June 30, 1997, 1996 and
1995, respectively.
To assist in financing working capital requirements, CONY
borrowed $125,000 during fiscal 1997 from a stockholder of the
Company. The loan was evidenced by an unsecured promissory note
which bears interest at 10% per annum. At June 30, 1997, the
balance due on this loan amounted to $125,000. Interest expense
on this loan for the year ended June 30, 1997 amounted to $3,125.
(c) Purchases and Sales:
During the normal course of business, the Company buys and
sells from entities owned by officers of the Company. For the
years ended June 30, 1997, 1996 and 1995 the amounts were
immaterial.
F-27
NOTE 12 - OTHER FINANCIAL INFORMATION.
(a) Accounts Receivable - Net.
Accounts receivable, net at June 30, 1997 and 1996 consists
of the following:
1997 1996
---------- ----------
Accounts receivable $9,332,047 $5,257,805
Allowance for doubtful
accounts, returns and
discounts (85,800) (105,800)
---------- ----------
$9,246,247 $5,152,005
========== ==========
For the years ended June 30, 1997, 1996 and 1995, $88,402,
$164,487 and $65,000, respectively, was charged to bad debt
expense.
(b) Other Current Assets:
Other current assets consist of the following at June 30,
1997 and 1996:
1997 1996
-------- --------
Receivable from suppliers $400,991 $199,409
Marketable securities - 33
Prepaid expenses 30,678 154,232
Prepaid income taxes 4,800 -
Sundry loans 5,000 60,038
-------- --------
$441,469 $413,712
======== ========
(c) Goodwill - Net:
Goodwill, net at June 30, 1997 and 1996 consists of the
following:
1997 1996
---------- ----------
Goodwill relating to computer
businesses acquired $4,001,834 $2,835,385
Accumulated amortization 445,130 220,940
---------- ----------
$3,556,704 $2,614,445
========== ==========
Amortization charged to operations for the years ended June
30, 1997, 1996 and 1995 amounted to $224,190, $168,285 and
$52,655, respectively.
F-28
NOTE 12 - OTHER FINANCIAL INFORMATION. (Continued)
(d) Property and Equipment:
Property and equipment are carried at cost and consist of
the following at June 30, 1997 and 1996:
1997 1996
---------- ----------
Leasehold improvements $ 494,418 $ 483,884
Furniture and fixtures 277,669 202,534
Office equipment 296,445 322,142
Automobiles 123,385 113,144
---------- ----------
1,191,917 1,121,704
Less: Accumulated depreciation
and amortization 752,917 606,794
---------- ----------
$ 439,000 $ 514,910
========== ==========
Depreciation and amortization charged to operations for the
years ended June 30, 1997, 1996 and 1995 amounted to $146,123,
$104,030 and $81,837, respectively.
(e) Other Assets:
Other assets consist of the following at June 30, 1997 and
1996:
1997 1996
------- -------
Bid deposits $ - $39,100
Investment - 12,000
Deposits and other assets 31,253 46,096
------- -------
$31,253 $97,196
======= =======
(f) Other Current Liabilities:
Other current liabilities consist of the following at June
30, 1997 and 1996:
1997 1996
-------- --------
Deferred sales tax obligation $300,000 $553,052
Customers with credit balances 321,412 -
Sundry - 1,317
-------- --------
$621,412 $554,369
======== ========
F-29
NOTE 12 - OTHER FINANCIAL INFORMATION. (Continued)
(g) Notes Payable:
During 1994, the Company borrowed approximately $752,000
from six foreign stockholders. The obligations were convertible
into Series H Convertible Preferred and common shares of the
Company. During June 1994, certain stockholders advanced, through
funds held by an attorney in escrow, $135,000 to the Company to
pay specified expenses. Concurrent with the execution of the
stock acquisition agreement, these advances were deemed capital
contributions and, accordingly, have been classified as
additional paid-in capital in the accompanying consolidated
statements of stockholders' equity. During March and May 1995,
the Company issued a total of 1,355,200 common shares of the
Company with an aggregate market value, discounted for
restrictions placed on the shares, of approximately $752,000 to
settle to the aforementioned amounts borrowed and advanced.
(h) Settlement with Pre-Acquisition CEO:
Pursuant to agreements with the pre-acquisition CEO, in
fiscal 1994 he was given shares of a publicly traded stock valued
at $200,000 with downside protection against a reduction in value
below $150,000. During fiscal 1995, the Company made a payment to
the former CEO of $100,000 together with 88,968 shares of its
common stock valued at $180,700. Upon sale (in 1995) of the
publicly traded stock by the former CEO, the gross proceeds
amounted to $77,525, resulting in an additional cash payment to
him of $72,475. The total value of the settlement amounting to
$553,00 was charged to operations during the year ended June 30,
1995.
(i) Transactions with Major Customers and Suppliers:
During the years ended June 30, 1997 and 1996, no one
customer accounted for 10% or more of the Company's net sales.
During the year ended June 30, 1995, one customer accounted for
approximately 11% of the Company's net sales.
The Company buys a significant portion of its merchandise
from one supplier, Computerland Corporation ("Computerland"). All
of the Company's subsidiaries are franchisees of Computerland.
Purchases by the Company from Computerland amounted to
approximately $20,813,000, $31,200,000 and $18,995,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
F-30
NOTE 12 - OTHER FINANCIAL INFORMATION. (Continued)
(j) Management Agreement:
During 1994, the Company provided consulting services for
product purchasing, customer referrals and general management
advisory services to two companies. These agreements were
terminated upon the Company's acquisition of the Companies in
fiscal 1995. Total management fees earned by the Company amounted
to $375,000 for the year ended June 30, 1995.
(k) 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,
$7,000, $16,000 and $-0- for the years ended June 30, 1997, 1996
and 1995, respectively.
NOTE 13 - SUBSEQUENT EVENT.
In August 1997, the Company's Stock Option Committee awarded
an aggregate of 700,000 options to acquire common stock at $.63
per share to various employees and a consultant of the Company
under the Company's Incentive Stock Option Plan.
F-31