ITEM 1. BUSINESS
GENERAL
ATEC Group, Inc. ("the Company" or "ATEC"), is a leading system integrator and provider of a full line of computer and information technology products and services to business, professionals, government agencies and educational institutions. The Company has experienced rapid growth over the past few years on core competencies including system design, high speed data transmission, local and/or wide area network ("LAN/WAN)", video conferencing, telecommunications, and Internet/Intranet technology.
ATEC provides end to end solutions acting as the single source for procurement, custom configuration, delivery, and installation. Further, ATEC provides integration services that effect after sales support, LAN/WAN design and selective outsourcing as well as many other services providing solutions in mission critical environments. The Company's objective is to help its clients effectively manage their Information Technology ("IT") environments by providing solutions that reduce the total cost of ownership.
In an effort to create a unique identity and distinguish the Company from most other resellers in the industry, the Company has committed its resources to assisting its clients in the implementation of the latest changing technology as it occurs. This allows ATEC to achieve greater client satisfaction and continued growth, in spite of aggressive competition.
During October 1997, ATEC created the ATEC Digital Arts division to provide a wide range of solutions and services in high-end graphics for the entertainment, publishing, advertising, animation, multimedia and internet markets, as well as communications and graphics departments in Fortune 1000/2000 companies. Creation of the graphic arts division enhances the existing system integration capabilities by providing solutions to new applications such as pre-press and publishing, videos and non-linear editing, animation, special effects, internet and premier web designs.
On April 7, 1998, ATEC acquired LOGIX Solutions, Inc. ("LOGIX"), a Colorado based company involved with different facets of Year 2000 such as assessment, planning, conversion, testing, implementation, and contingency preparedness. LOGIX has a core team of business management and technical personal with in-depth experience to evaluate the best products and services available in the market place to ensure that the Company's clients receive the most effective solutions for their intellectual property needs. Further, management believes that Year 2000 involvement will establish ATEC in the software arena to develop new software and modify existing software or convert legacy software to workstations and server levels.
INDUSTRY
Complex computer information processing systems, the foundation on which business and organizations now function, are continuously being redesigned, modified and upgraded as new computer and telecommunications technologies are introduced. Until the mid-1980's, either mid- range or mainframe computer systems were used to manage an organization's mission-critical, transaction-oriented commerce and business functions, such as banking, credit transactions, retail point-of-sale transactions and airline reservations. Networks supported access to these functions, either within a single site or from numerous geographically dispersed sites.
In the late 1980's, a new architecture for information processing called "client/server" computing emerged, fueled by the growing intelligence in desktop computers, expanding capabilities of software applications and growing capabilities of networks. A client/server system typically consists of multiple intelligent desktop client computers linked with high performance server computers by a LAN/WAN and is characterized by the flexibility and mobility of both application and user. In order to take advantage of their established operational staff and physical plant, many corporations are seeking to reconfigure their existing mainframe/mid-range computers (sometimes referred to as "legacy systems) to operate in parallel with client/server networks.
The Company believes that these two information system models - legacy systems and client/server systems - will continue to coexist, each with advantages for certain applications. Thus, organizations are faced with complex decisions concerning the current and future configurations of their information systems, based upon factors such as the re-engineering of aspects of legacy systems to function more efficiently with related client/server systems. The markets for information technology products and services are expected to continue to experience significant growth over the next few years. The Company believes that the leading factors driving the growth in the markets are the continued transition to distributed computing technologies, such as client/server, increased networking of personal computers into LAN/WAN, increased use of the Internet and growing use of intranets in corporate environments.
BUSINESS STRATEGY
The Company's strategic focus is to pursue growth in its core business. To fuel expansion as well as earnings, additional products and services are developed internally or through the acquisition of companies. ATEC acquires a company when it finds an organization with complimentary synergy providing additional value added services to meet the growing requirements of our clients. As a result, the Company continually evaluates potential acquisition opportunities, some of which, may be material in size and scope. The Company focuses on expense control, including the improvement of the company's internal processes and procedures, effective asset management, and the addition and expansion of higher margin services and products.
The Company seeks to maintain a low over-head structure through the combination of many of its management and operating functions. Further, the Company pursues revenue growth in its core business of providing information technology products and services while continually training its staff to deliver the latest technology and services to its clients, thereby achieving higher margins.
Additionally, as part of its growth strategy, the Company pursues strategic alliances with companies that market products and services that either complement or expand its existing business.
MARKETING
The Company's marketing strategy is to educate business clients as to the Company's ability to provide a "single source, end to end solution" for all computer related products and services. The Company also benefits from the "word of mouth" promotion of satisfied customers.
The Company believes business technology buying has matured and corporate customers have become more knowledgeable about integrating new technologies and how to get the most for their business out of the new technologies. The Company's objective is to continue to be an industry leader by providing corporate America with a full range of technology products and services that effectively reduce information services management's total cost.
PRODUCTS
Computer Hardware and Software
The Company markets a broad selection of products with a focus on the microcomputer, client/servers and peripherals manufactured by major vendors. The Company's subsidiaries are authorized sales and service dealers for major manufacturers, including, but not limited to, Compaq, Gateway, Hewlett-Packard, Apple, Novell, Informix, 3 Com, Toshiba, Oracle, Sybase, GM Hughes, and numerous others. The sales of products of three major manufacturers (IBM, Compaq, and Hewlett-Packard) generated over 50% of the Company's revenues for the year ended June 30, 1998. The Company's agreement with these vendors generally are renewed periodically and permit termination by manufacturers without cause, generally upon 30 to 90 day's notice. The Company believes that these provisions are standard in the computer reseller industry and any such change in the future would not adversely affect the company.
The Company evaluates its product assortment based on technological advances, availability, and marketability of the products. The Company continually seeks to expand its product offering in response to its market conditions. Service and support offered by the Company are with emphasis on achieving higher profit margin, insuring good quality, and service to its clients. The Company has excellent vendor/dealer relationships with distributors such as, Synnex (formerly ComputerLand), Micro Age, Merisel, Techdata, Ingram, and many
more. These relationships enable the Company to source its products from multi-distribution channels. The Company purchased approximately 38% of its products from Synnex during the year ended June 1998. The company did not experience any material differential in obtaining products from its vendors during its prior year. The Company believes that other suppliers would be able to adequately service the Company's needs in the event that an existing vendor/dealer agreement were terminated. The industry has recently experienced product shortages as a result of manufacturers' decision to reduce inventory quantities.
SERVICES AND SOLUTIONS
Digital Arts Division
ATEC Digital Arts delivers complete solutions from sales, installation and custom integration into customer environments, to ongoing support and consultation including a full range of client training programs in graphics using Silicon Graphics/Unix, Macintosh, and Windows NT. In addition, ATEC Digital Arts provides high-end server and networking solutions, with full cross-platform networking and interoperability capabilities. Digital Arts has grown rapidly since its inception and has already won awards for sales in animation and computer graphics including the "TOP 3D SALES" award in July 1998 from Softimage for the Eastern USA.
Digital Arts is an authorized value-added reseller for a wide range of workstations, servers, networking equipment, animation, digital video, and electronic publishing solutions including Silicon Graphics, Compaq, Intergraph, Apple, Bay Networks, Cisco, Avid Softimage, Kinetix-Discreet Logic, Media 100, Accom, DPS, Adobe Premium VAR, Xinet, Canto and more. Creation of this graphic arts and high-end server division enhances the existing system integration capabilities of the Company by expanding its scope into new media, pre-press and electronic publishing, video non-linear editing, animation and special effects, internet, web design, as well into complete unix and NT server and complex 100 BaseT, GigaBit ethernet, and FDDI networking and cross-platform installations.
Year 2000 Solution
Many computer applications that have been developed by corporations during the past decades will experience failures or glitches associated with the Year 2000 issue. This problem will be unlike any that organizations have experienced since the dawn of the computer age. The problem is real and huge. Unless systems are fixed or replaced by December 31, 1999, this problem could cause the equivalent of a giant computer meltdown. Peter de Jagar, a Year 2000 industry analyst, describes it as "...the largest management challenge most systems people will face in their lifetime..." Estimates to cure the Year 2000 problem run as high as $600 billion. Every business which relies on information systems is potentially at risk. The basis of the Year 2000 problem is that most computer systems use a two-digit field in entering the date year. When "00" is entered for the year 2000, many of these systems will fail to recognize the data and stop working or recognize the year as 1900. The issue is critical to businesses. There is not enough
time and there are not enough resources for every business and government agency to achieve compliance by December 31, 1999. Companies that start their date change projects now have a better chance of minimizing exposure in the new millennium.
The Company acquired LOGIX, a Colorado based Year 2000 solution provider, to help client's address the complexity of the Year 2000 problem. The Company offers Year 2000 business solutions to its clients through an array of tools and procedures that are broad in scope but flexible enough to fit an organization's individual needs. The Company provides breadth and depth of services that support long-term success in the following project areas:
o Assessment o Planning o Conversion o Testing o Implementation
Year 2000 issues do not stop with computer systems; most of today's office equipment, building systems, elevators, heating, air conditioning, security systems, medical equipment, etc., rely on data chips. Any equipment with an embedded microchip using software logic sets in the read-only memory of a hardware device may fail to compare, calculate, or sequence date data. The Company recognizes that addressing the Year 2000 embedded chip issue requires PLC (Programmable Logic Chips) expertise, project management expertise, Year 2000 expertise, and strategic alliances. The Company is ready to address Year 2000 embedded chip issues such as assessment, inventory, analysis, and implementation.
The Company is equipped to deliver high quality Year 2000 business solutions, services, and resources including conversion, methodologies, remediation factory operations, review of previously remediated code, project management, training, testing, consultation, and process reviews. Among languages the Company supports are Cobol, PLI, RPG, Focus, and Natural. LOGIX will continue to evaluate solutions for additional languages.
Telecommunication Products and Services
ATEC signed a co-marketing agreement with Switch Now, a New York company ("Switch Now") to deliver a diversity of telecommunications services through innovative, low cost "CT2" switching platforms capable of managing voice, fax, Internet, messaging, and other forms of communications traffic. The Company will target small and medium size businesses, the departments of large corporations, and carriers who desire to extend their services to the premises of new customers. The Company's unique approach that combines systems integration with a carrier business will enable ATEC to reach a diverse base of clients desiring to achieve telecom and data communications.
The CT2 platform enables the user to readily reconfigure the platform's operation to a variety of applications, that facilitates the insertion of new calling features and services with a minimum of programming effort or additional hardware. CT2 platforms will be deployed at the site of ATEC clients and at Switch Now switching centers.
Support Services
ATEC's support services include a wide range of services designed for its clients, corporate planners and management needing a single source for consulting and technical support issues, such as local and wide area networks, gateways, bridges, system conversion planning, hardware and software specifications, database/database server development and implementation, video conferencing and high speed data transmission.
ATEC provides professional network company administrators who determine managerial requirements and then perform executive functions on a regularly scheduled basis. Since the Company's technicians provide expertise in a variety of network administration technologies, ATEC serves as a single, neutral source of support services, significantly reducing network administration costs while ensuring that systems remain updated with the latest available application software.
Outsourcing Services
Outsourcing is defined as the use of an outside service provider to extend or replace an in-house department. The outsourcing of computer services is a rapidly growing trend which has allowed the Company to provide those types of services to our client base. The Company believes that it is generally more cost-effective and more efficient for its client's to purchase outsourcing services from the Company than for them to provide equivalent services by hiring their own service and support personnel.
Product Maintenance
The Company offers its clients complete on-site and off-site product maintenance and repair services. These services generally provide for the Company to maintain microcomputer equipment at the client's location during regular business hours. Most maintenance contracts are renewable annually. In addition, our service department fulfills warranty requirements and offers extended maintenance and repair agreements after the expiration of manufacturer warranties.
COMPETITION
The microcomputer market is very competitive. The Company competes directly with a variety of local and national distributors, super stores, retailers, mail order houses and other entities that offer computer products and services. The Company seeks to compete with its competitors based upon the Company's commitment to provide a single source "end-to-end" solution to its clients' data processing needs in a cost effective manner. While the Company attempts to competitively price hardware and software items, the Company does not focus on pricing as its primary competitive strength. Before price, management believes that the Company's principal strength is its ability to offer clients complete and cost efficient solutions to their individualized computer needs.
The systems integration and computer installation industries are both highly competitive and include participants from a variety of market segments. The competition in systems integration services includes mid-level and regional systems integrators. The Company believes it competes favorably with these systems integrators in the areas of responsiveness, regional and national vendor contacts and dedication to achieving certification standards to provide its clients with a higher quality of customer service.
The Company believes that its ability to compete depends in part on a number of factors outside of its control, including the ability of its competitors to hire, retain and motivate a large number of personnel and the development by others of services that are competitive with ATEC's applications and services, and the price at which others offer comparable service. Many participants in the computer reseller, software development and systems integration businesses have significantly greater financial, technical and marketing resources than does the Company.
BACKLOG
The Company does not have a significant backlog as it normally delivers and installs the computer products purchased by its clients within a short time of the date of order.
GOVERNMENTAL REGULATION AND CONTRACTS
The Company believes that it is in material compliance with federal and state laws and regulations which are applicable to its operations. The Company is not a party to any government contract which represents a material portion of the Company's revenues or which, if terminated or renegotiated, would have a material adverse effect on the Company's business.
PATENTS AND TRADEMARKS
The Company does not currently rely upon the use of any patents and/or trademarks in connection with its operations except for references in advertising materials as an authorized dealer or vendor of specific products of manufacturers with whom they have agreements. The Company believes however that the ability to identify itself as the authorized dealer of such manufacturers is an important aspect of their marketing strategy.
EMPLOYEES
As of the date of this Annual Report, the Company had an aggregate of approximately 110 employees, including its 7 administrators, 25 staff persons, 6 managers, 42 full-time sales persons, 23 technical and 7 warehouse personnel. The Company has no collective bargaining agreements and believes the relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters and executive offices are located at 90 Adams Ave., Hauppauge, New York. This location occupies approximately 6,000 square feet leased pursuant to a lease expiring in 2000 providing for annual rental payments of approximately $44,000 plus certain expenses. ATEC maintains a retail location and warehouse facility in Albany, New York, consisting of approximately 8,050 square feet. The Albany facility lease expires on June 30, 2003 and requires annual rental payments of 108,192, plus all expenses and taxes attributable to the operation of the premises. The Albany facility is leased from a company controlled by Surinder and Ashok Rametra, officers and directors of the Company. The Company's New York City operations are located at 143 West 29th Street, New York, New York. This location occupies 4,000 square feet, is leased on a month to month basis and requires annual rental payments of $39,000, plus certain expenses. Due to limited space, additional space was leased at 143 West 29th Street, New York, New York. This location occupies 4,000 square feet and required annual payments of $36,000 per year plus other expenses under a lease expiring in 2002. Another facility is located in Pinebrook, New Jersey. This location occupies 5,328 square feet and requires annual payments of approximately $41,026 per year plus other expenses under a lease expiring in 2002. The Company's LOGIX subsidiary has leased a facility which occupies 8,000 square feet at an annual rental of approximately $92,000 expiring in 1999.
The Company believes that its current facilities are suitable for its present and projected needs. The Company does not own any real property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
A third party action was commenced against the Company's predecessor ("Hillside Bedding") in the Supreme Court, Bronx County in 1993. The action results from a claim by a former worker who was allegedly injured while operating a forklift during the course of his employment. The worker commenced an action against the Company which maintained the forklift, Mid Hudson Clarklift ("MH"), seeking damages of $7,000,000 for the alleged failure of such company to properly maintain and service the lift. MH instituted a third party action seeking judgment for all or part of any verdict or judgment which may be obtained against MH. The case is presently in the discovery stages.
In 1990, a competitor of the Company commenced an action against it and one of its advertising agents. This action was dismissed during the year ended June 30, 1998.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1998, the Company did not submit any matter to the vote of its shareholders.
ITEM 5.
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 ---- --- Quarter ended 9/30..................................3 3/4 3 19/32 Quarter ended 12/31.................................4 11/16 4 3/8
Quarter ended 3/31..................................3 9/32 3 1/8 Quarter ended 6/30..................................3 9/32 2 31/32 Quarter ended 9/30................................8 19/32 7 11/32 Quarter ended 12/31.................................3 1/2 3 1/4
Quarter ended 3/31..................................6 1/2 5 5/8 Quarter ended 6/30..................................7 5/8 6 15/16
WARRANTS
High Low ---- --- Quarter ended 9/30..................................15/32 5/16 Quarter ended 12/31.................................1 9/16 1 1/4
Quarter ended 3/31..................................15/16 5/16 Quarter ended 6/30..................................15/16 5/16 Quarter ended 9/30................................1 9/16 1 9/16 Quarter ended 12/31.................................1/8 3/32
Quarter ended 3/31..................................7/16 11/32 Quarter ended 6/30..................................1 19/32
On September 23, 1998, the closing prices of the Company's common stock and warrants was $4.25 and $.25 respectively.
On September 23, 1998, there were approximately 264 holders of record of the Company's Common Stock; 16 holders of record of the Series A Preferred Shares; 3 holders of record of the Units and 34 holders of record of the Warrants. The number of record holders do not include holders whose securities are held in street name.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is management's intention not to declare or pay dividends on the Common Stock, but to retain earnings for the operation and expansion of the Company's business.
The holders of its Series A Preferred Shares are entitled to certain dividend payments upon declaration by the Company's Board. (See "Item 8 - Financial Statements").
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in the period ended June 30, 1998 have been derived from the audited financial statements of the Company. This information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and "Management's Discussion and Analysis."
* Results have been restated to include the June 1996 acquisition of Innovative Business Micros, Inc. Shares outstanding and earning per share for 1996 have been restated to reflect the increase in shares issued upon the conversion of preferred stock due to market price changes. All earnings per share reflect the Company's five for one reverse stock split in November 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
ATEC is a leading system integrator and provider of a full line of IT service products. As a single source "end-to-end" solution provider for the computer needs of businesses, professionals, government agencies and educational institutions, ATEC enters the new millennium with a technological arsenal that includes Year 2000 remediation, multimedia products, video conferencing, system integration, networking, high speed data transmission, Internet, and Intranet ready solutions. In addition, the Company has positioned itself for growth in telecommunications, outsourcing of IT professionals, and offshore software development to provide its clients' technological needs in a cost effective manner.
RESULTS OF OPERATIONS
Fiscal 1998 compared to Fiscal 1997
The Company's revenues for the 1998 fiscal year ("Fiscal 1998) increased to $187.2 million from $100.8 million for the prior year, an increase of approximately 86%. This increase is primarily attributable to internal growth. Revenues are generated by the Company's sales of computer hardware and software, and related support services. Gross profit for the Fiscal 1998 increased to $13.7 million from $9.8 million for 1997, a 40% increase due to the increased revenues. Gross margin for the Fiscal 1998 was 7.3% as compared to 9.7% for the prior year. These margins are expected to increase as the Company attempts to increase its market share n more profitable sectors of the business such as integration, hardware service/maintenance, telecommunications Year 2000 consulting and services, networking and training.
Fiscal 1998 operating expenses exclusive of amortization of intangible assets increased to $8.6 million as compared to $6.9 million for the prior year. The 25% increase in operating expenses are related primarily to additional selling expenses and research and development expenses.
Amortization of intangible assets increased to $308,000 for the year from $224,000 in the comparable 1997 period. Other income decreased to $148,000 from $282,000 primarily as a result of $153,000 reduction in the sales tax obligation of the Company's predecessor in 1997. The Company also earned an additional $78,000 of interest income and incurred $32,000 less interest expense in 1998 due to management's continued judicious use of working capital.
The provision for income taxes for 1998 was $2,145,000 as compared to $1,299,0000 for 1997.
As a result of the above, the Company's net income increased to $2,740,000 for 1998 from $1,668,000 in 1997. For 1998, net income per share was $.43 compared to $.28 in the prior
year, an increase of 54%. Basic and diluted average shares outstanding were 6,079,045 and 6,338,151 respectively, for 1998.
Fiscal 1997 compared to Fiscal 1996
The Company's revenues for the 1997 fiscal year increased to $100.8 million from $81.8 million for the prior year, an increase of approximately 23%. This increase is primarily attributable to internal growth. Revenues were generated by the Company's sales of computer hardware and software, and related support services. Gross profit for the year increased to $9.8 million for 1997 from $7.5 million for 1996, a 31% increase due to the increased revenues. Gross margin for the year was 9.7% as compared to 9.1% for the prior year.
1997 operating expenses exclusive of amortization of intangible assets increased to $6.9 million as compared to $6 million for the prior year. The 15% increase in operating expenses are related primarily to additional selling expenses and research and development expenses in 1997.
Amortization of intangible assets increased to $224,000 for the year from $168,000 in the comparable 1995 period. Other income increased $345,000 to $282,000 primarily as a result of $153,000 reduction in the sales tax obligation of the Company's predecessor. The Company also earned an additional $41,000 of interest income and incurred $39,000 less interest expenses in 1997 due to management's judicious use of working capital.
The provision for income taxes for 1997 was $1,299,000 as compared to $415,000 for 1996.
As a result of the above, the Company's net income increased to $1,668,000 for 1997 from $838,000 in 1996. For 1997, net income per share was $.28 compared to $.16 in the prior year. Basic and diluted average shares outstanding were 5,947,109 and 5,960,247, respectively for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $1,785,000 at June 30, 1998, a decrease of $229,000 as compared to June 30, 1997. The Company's working capital at June 30, 1998 was $8,314,000 as compared to a working capital of $3,753,000 at June 30, 1997. The changes in cash and working capital resulted primarily from operations and the sale of common stock for $1,682,000.
Cash used for investing activities totaled $293,000 primarily for the purchase property and equipment.
To accommodate the Company's financial needs for inventory financing, Deutsche Financial Service has granted a credit line in the amount of $15,000,000. At June 30, 1998, indebtedness of the Company to Deutsche Financial was $6,999,000, or an increase of $5,168,000 compared at June 30, 1997. Substantially, all of subsidiary company tangible and intangible assets are pledged as collateral for this facility.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operation will not be adversely affected by Year 2000 software failure. The Company is communicating with suppliers, customers and others with which it does business to coordinate Year 2000 conversion. The cost of achieving compliance is estimated to be a minor increase over the cost of normal software upgrades and replacements.
ITEM 8.
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.
PART II
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current directors and officers of the Company and the position in the Company held by them:
Name Age Position ---- --- --------
Surinder Rametra 58 Chairman of the Board and Chief Executive Officer
Ashok Rametra 44 Treasurer, Chief Financial Officer and Director
Balwinder Singh Bathla 42 Director
George Eagan 41 Director
David Reback 56 Director
Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
Surinder Rametra was appointed the Chief Executive Officer and Chairman of the Board of the Company in June 1994. Prior to June 1994 Mr. Rametra was president of a subsidiary of the Company. Mr. Rametra received a Bachelor of Science Degree from the Punjab Engineering College, India and a Masters of Science Degree in Engineering from the University of I.I.T., India in 1965 and 1969 respectively. In 1976 Mr. Rametra received a Masters of Business Administration Degree in Finance from New York University.
Ashok Rametra was appointed Treasurer, Chief Financial Officer and Director of the Company in June 1994. From June 1994 to March 1995 Mr. Rametra also served as the Company's president. Prior to 1994 Mr. Rametra was the president of a subsidiary of the Company. Mr. Rametra received a Bachelor of Science Degree from St. Johns University in accounting in 1980.
Balwinder Singh Bathla was appointed as the President and a Director of the Company in March, 1995. Prior to 1995, Mr. Bathla was the principal operating officer of a subsidiary of the Company. Mr. Bathla received a Masters Degree in Statistics from Punjab University, Chandigar, India in 1979. On August 24, 1998, Mr. Bathla resigned as an officer and director of the Company.
George Eagan was appointed as a Director in November 1997. Mr. Eagan serves as president of Waterford Capital. Mr. Eagan has been in the financial industry for the past twenty years working with both private and public companies in the capacity of a financial advisor. Mr. Eagan graduated with a Bachelor of Science in Business Administration/Management from Alfred University, and an MBA in Finance from McGill University.
David C. Reback was appointed as a Director in November 1997. Since 1969, Mr. Reback is a partner with Reback & Potash, LLP, a law firm specializing in litigation, appellate matters and real estate. Mr. Reback received a B.A. from Syracuse University, and in 1965 he received a law degree from Syracuse University College of Law.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Registrant during its most recent fiscal year, the Company believes that there were no Section 16(a) reports filed untimely during the Company's year ended June 30, 1998 or June 30, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Summary Compensation Table for the years ended June 30, 1998, 1997 and 1996 is provided herein. This table provides compensation information on behalf of the Company's existing officers and directors. There are no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal Year-End Option/SAR Value Table for the Years ended June 30, 1998, 1997 and/or 1996. There are no long-term incentive plan ("LTIP") awards, or stock option or stock appreciation rights except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1998, 1997 and 1996 Annual Compensation Awards Payouts
(1) Major Medical $6,372, Leased Auto $8,058 (2) Major Medical $4,380, Leased Auto $9,697 (3) Major Medical $5,196, Leased Auto $6,025 (4) Major Medical $6,737 (5) Major Medical $4,727, Leased Auto $4,645, Interest Income 10,000 (6) Major Medical $4,776, Life Insurance $6,600, Rent Income $5,400, Interest Income $4,030 (7) Major medical $5,680 (8) Major medical $3,799, Leased Auto $2,710 (9) Major medical $4,465, Leased Auto $9,000, Interest income $38,258 (10) In December 1996, the Company issued to Mr. Bathla options to purchase an aggregate of 100,000 shares of common stock exercisable at $3.75 per share through December 2006.
Year End Option Table. The following table sets forth certain information regarding the stock options held as of June 30, 1998 by the individuals named in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
(1) Represents options to acquire: (i) 100,000 shares at $3.75 per share exercisable through December 19, 2006; and (ii) 24,000 shares at $3.44 per share exercisable through August 8, 2007. (2) Represents options to acquire: (i) 500,000 shares at $5.00 per share exercisable through March 2008; and (ii) 7,000 shares at $3.44 per share exercisable through August 8, 2007. (3) Represents options to acquire 10,000 shares at $3.44 per share exercisable through August 8, 2007. (4) Computation based on $4.1875 which was the June 30, 1998 closing price for the Common Stock.
Option Grant Table. The following table sets forth certain information regarding the stock options granted during the fiscal year ended June 30, 1998 by the Company to the individuals named in the above Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
% of Total Options Granted to Employees in Exercise Price Expiration Name Granted (#) Fiscal Year $ / Share Date - ---- ----------- ----------- --------- ----
Balwinder Singh Bathla 24,000 Less than 1% $3.44 2007 Surinder Rametra 500,000 7.7% $5.00 2008 Surinder Rametra 7,000 Less than 1% $3.44 2007 Ashok Rametra 10,000 Less than 1% $3.44 2007
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 23, 1998 certain information with respect to the beneficial ownership of the Company's voting securities by (i) any person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") known by the Company to be the beneficial owner of more than 5% of the Company's voting securities, (ii) each director of the Company, (iii) each executive officer named in the Summary Compensation table appearing herein, and (iv) all executive officers and directors of the Company as a group. The table also sets forth the respective general voting power of such persons taking into account the voting power of the Common Stock and the Preferred Stock combined.
Name and Address Amount and Nature of Beneficial of Beneficial Percentage of Owner Ownership of Voting Stock Outstanding Common Stock Outstanding(1) - ----------- ------------ --------------
Ashok Rametra(2) 677,045 9.5% 1762 Central Avenue Albany, NY 12205
Surinder Rametra(3) 1,212,801 15.9% 90 Adams Avenue Hauppauge, NY 11788
George Eagan (4) 5,000 ** C/O 90 Adams Avenue Hauppauge, NY 11788
David Reback (5) 5,000 ** C/O 90 Adams Avenue Hauppauge, NY 11788
Balwinder Singh Bathla(6) 497,454 6.9% 143 West 29th Street New York, NY 10001
Rajnish Rametra (7) 413,070 5.8% 90 Adams Avenue Hauppauge, NY 11788
All directors and (2)(3)(4)(5) 1,899,846 24.9% executive/officers as a group (4 persons)
- ---------------- ** Less than 1%
(1) Computed based upon a total of 6,764,460 shares of Common Stock, 12,213 shares of Series A Preferred Stock, 1,458 shares of Series B Preferred Stock and 330,731 shares of Series C Preferred Stock. Each share is Common Stock and Preferred Stock possess one vote per share. Accordingly, the foregoing represents an aggregate of 7,109,380 votes. (2) The foregoing figure reflects the ownership of 279,949 shares of common stock by Mr. Rametra and 387,096 common shares owned by Mr. Rametra's spouse and children. The foregoing amount also assumes the exercise by Mr. Rametra of options to acquire 10,000 shares of the common stock. Mr. Rametra disclaims beneficial ownership of shares of the Company's securities owned by other members of the Rametra family. (3) The foregoing figure reflects the ownership of 440,140 shares of common stock by Mr. Rametra and 265,661 shares by Mr. Rametra's spouse. In addition, the foregoing assumes the exercise by Mr. Rametra to acquire 507,000 shares of the Company's common stock. Mr. Rametra disclaims beneficial ownership of shares of the Company's securities owned by other members of the Rametra family including independent children. (4) The foregoing figure reflects options for the purchase of 5,000 shares of common stock. (5) The foregoing figure reflects options for the purchase of 5,000 shares of common stock. (6) The foregoing figures reflect the ownership of 272,744 shares of common stock by Mr. Bathla, 60,000 shares held by American Century Mortgage of which Mr. Bathla is the sole shareholder and 40,710 shares held by Charanjit Sidhu, a relative. The foregoing figure also assumes the exercise by Mr. Bathla of options to acquire 124,000 shares of the Company's common stock. Mr. Bathla disclaims beneficial ownership of shares of the Company owned by other members of his family. Mr. Bathla resigned as an officer and director of the Company in August 1998. (7) The foregoing figures reflect the ownership by Mr. Rametra of 203,620 shares and an aggregate of 185,450 shares by his spouse and children. The figure also assumes the exercise by Mr. Rametra of 24,000 stock options. Mr. Rametra disclaims beneficial ownership of shares of the Company owned by other members of the Rametra family.
ITEM 13.
ITEM 13. CERTAIN TRANSACTIONS
In June. 1996, the Company acquired 100% of the outstanding capital stock of Innovative Business Micros. Inc. a computer integrator located in Long Island. Innovative was formerly owned by Surinder Rametra and Ashok Rametra, the Company's Chief Executive Officer and Chief Financial Officer, respectively. and Rajnish Rametra their brother. The consideration for the acquisition was the issuance by the Company of an aggregate of 4,900,000 shares of the Company's Common Stock to the former shareholders of Innovative. The terms of the acquisition were not negotiated in an arms-length manner and there can be no assurance that an unaffiliated company would have paid less consideration for Innovative then paid by the Company. The acquisition was accounted for as a pooling of interest.
In January 1997, the Company issued options to purchase 700,000 shares of common stock to the former shareholders of Cony and ACS for the amendment to the purchase and employment agreements, eliminating any future performance payments.
All inter company transaction have been eliminated in consolidation.
LOANS
During the year ended June 30, 1998, Balwinder Singh Bathla advanced the Company $2,967. The advance bears interest at the rate of 10% per annum.
MCS's office located in Albany, New York is leased pursuant to a lease expiring in June 2003. The lease requires annual rental payments of approximately $108,192 plus all expenses and taxes attributable to the operation of the premises. This facility is leased from 1762 Central Avenue Realty Associates (a partnership) controlled Surinder Rametra and Ashok Rametra, Officers and Directors of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: s\ Surinder Rametra ----------------------------------------- Surinder Rametra, Chief Executive Officer
Dated: September 28, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
s\ Surinder Rametra September 28, 1998 - ----------------------------------------------------- Surinder Rametra, Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
s\ Ashok Rametra September 28, 1998 - ----------------------------------------------------- Ashok Rametra, Chief Financial Officer, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer)
s\ George Eagan September 28, 1998 - ----------------------------------------------------- George Eagan, Director
s\ David Reback September 28, 1998 - ----------------------------------------------------- David Reback, Director
ATEC GROUP, INC. AND SUBSIDIARIES
I N D E X
Page No. --------
INDEPENDENT AUDITORS' REPORT ........................................
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 1998 and 1997 .......
Consolidated Statements of Operations For the Years Ended June 30, 1998, 1997 and 1996 .............
Consolidated Statements of Cash Flows For the Years Ended June 30, 1998, 1997 and 1996 ............. -
Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 1996, 1997 and 1998 ............. -
NOTES TO FINANCIAL STATEMENTS ....................................... -
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.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors ATEC Group, Inc.
We have audited the accompanying consolidated balance sheets of ATEC Group, Inc. and Subsidiaries as at June 30, 1998 and 1997, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ATEC Group, Inc. and Subsidiaries as at June 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years ended June 30, 1998, in conformity with generally accepted accounting principles.
New York, New York August 21, 1998
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to financial statements.
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
See accompanying notes to financial statements.
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
See accompanying notes to financial statements.
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(1) Adjusted to reflect a one for five reverse stock split on November 18, 1997.
See accompanying notes to consolidated financial statements.
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(1) Adjusted to reflect a one for five reverse stock split on November 18, 1997
See accompanying notes to consolidated financial statements.
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE 1 - GENERAL AND ACCOUNTING POLICIES.
(a) Organization and Presentation of Financial Statements:
ATEC Group, Inc. (the "Company" or "ATEC") was incorporated under the laws of the State of Delaware on July 17, 1992. The accompanying consolidated financial statements include the accounts of ATEC Group, Inc. and all of its wholly owned subsidiaries and a 90% owned subsidiary. All significant intercompany transactions and balances have been eliminated.
(b) Principal Business Activity:
The Company is a system integrator and provider of a full line of computer and information technology products and services to business, professionals, government agencies and educational institutions. The Company focuses on core competencies including system design, high speed data transmission, LAN/WAN, video conferencing and internet/intranet technology. The Company has recently expanded its business to include digital arts solutions and Year 2000 ("Y2K") solutions for its customers. Revenues derived from services are not significant.
(c) Summary of Significant Accounting Policies:
(1) Inventories:
Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventories consist of microcomputer hardware, software and related peripherals, accessories and finished products.
(2) Property and Equipment:
Property and equipment are carried at cost less accumulated depreciation. When assets are sold or retired, the cost and related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and replacements which substantially extend the lives of the assets are capitalized.
Depreciation is computed on either straight-line or accelerated methods over useful lives ranging from 5 to 10 years. Leasehold improvements are amortized over the shorter of the useful life of the improvement or the life of the related lease.
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies: (Continued)
(3) Goodwill:
The Company amortizes goodwill over its estimated period of benefit, not exceeding fifteen years. The goodwill is periodically reviewed to evaluate the future economic benefits and/or potential impairments which may affect recorded values.
(4) Revenue Recognition:
The Company recognizes revenue at the time products are shipped to its customers, or when sales are made on a "cash and carry" basis.
(5) Research and Development Costs:
Research and development costs are charged to expense as incurred.
(6) Income Taxes:
The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" which utilizes a balance sheet approach for financial accounting and reporting of income taxes, and requires that deferred tax assets and liabilities be established at income tax rates expected to apply to taxable income in periods in which the deferred tax asset or liability is expected to be settled or realized.
(7) Earnings Per Share:
The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," in the year ended June 30, 1998. Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding. All historical earnings per share data have been restated to conform to this presentation. Below is the calculation of basic and diluted earnings per share for each of the past three fiscal years:
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (Continued)
(c) Summary of Significant Accounting Policies: (Continued)
(7) Earnings Per Share: (Continued)
For the Years Ended June 30, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net income available to common stockholders $2,740,066 $1,667,898 $ 838,346 ========== ========== ==========
Weighted average shares outstanding - basic 6,079,045 5,947,109 5,138,329 Employee stock options 95,706 -- -- Acquisition options 93,776 -- -- Warrants 56,486 -- -- Convertible preferred stock 13,138 13,138 7,577 ---------- ---------- ----------
Weighted average shares outstanding - diluted 6,338,151 5,960,247 5,145,906 ========== ========== ==========
Earnings per common share: Basic $ .45 $ .28 $ .16 ========== ========== ==========
Diluted $ .43 $ .28 $ .16 ========== ========== ==========
(8) Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions which at times, may be in excess of the FDIC insurance limit.
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the large number of customers comprising the Company's customer base. A substantial portion of the Company's revenue is derived from customers located in the northeastern region of the United States. An economic downturn in the geographic region could have an adverse effect on the Company's operations. Management continually reviews its trade receivables credit risk and has adequately allowed for potential losses.
(9) Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
NOTE 2 - ACQUISITIONS.
(a) Innovative Business Micros, Inc.:
On June 14, 1996, the Company, pursuant to the terms of a stock purchase agreement, issued 980,000 shares of its common stock in exchange for all of the outstanding capital stock of Innovative Business Micros, Inc. ("Innovative"). The acquisition was accounted for under the pooling of interests method and, accordingly, the Company's consolidated financial statements were restated to include the operations of Innovative for the nine months ended June 30, 1996.
(b) Global Trading & Leasing Corporation:
On November 19, 1997, the Company acquired 100% of the issued and outstanding capital stock of Global Trading & Leasing Corporation ("Global"), a New York corporation, for $29,751 in cash. The purchase of Global resulted in additional goodwill of $12,186.
(c) Logix Solutions, Inc.:
On April 7, 1998, the Company, pursuant to the terms of a stock purchase agreement, acquired 90% of the issued and outstanding capital stock of Logix Solutions, Inc. ("Logix"), a Colorado corporation, which provides solutions to the Y2K problem. In consideration for the shares acquired, the Company agreed to issue the following securities:
1. 252,000 shares of restricted common stock;
2. Options to purchase up to 756,000 shares of common stock exercisable at a price of $4.71 per share, expiring on October 10, 1998;
3. Options to purchase up to 2,520,000 shares of common stock exercisable at a price of $7.50 per share, expiring on October 10, 1998;
4. Options to purchase up to 2,520,000 shares of common stock exercisable at a price of $10 per share, expiring on December 31, 2000.
The acquisition was accounted for as a purchase. The Company's investment in Logix resulted in additional goodwill of $907,748 which is being amortized over a seven year period.
NOTE 3 - EQUITY SECURITIES.
(a) Reverse Stock Split:
On November 18, 1997, the Company's shareholders approved a reverse split of the Company's $.01 par value common stock, resulting in the exchange of one share of common stock for each five shares then outstanding. All share and per share information included in these consolidated financial statements have been adjusted to reflect this reverse split retroactively to the beginning of all periods presented.
(b) Capital Stock:
The Company's authorized and issued capital stock at June 30, 1998 and 1997 consists of the following:
Shares Shares Authorized Issued Amount ---------- --------- -------- June 30, 1998:
Preferred Stocks: Series A cumulative convertible 29,233 29,121 $ 2,912 Series B convertible 12,704 1,458 145 Series C convertible 350,000 343,450 343,450 --------- --------
Total preferred 374,029 $346,507 ========= ========
Common stock 70,000,000 6,700,664 (i) $ 67,006 ========= ========
June 30, 1997:
Preferred Stocks: Series A cumulative convertible 29,233 29,121 $ 2,912 Series B convertible 12,704 1,458 145 Series C convertible 350,000 350,000 350,000 --------- --------
Total preferred 380,579 $353,057 ========= ========
Common stock 70,000,000 5,965,652 (ii) $ 59,657 ========= ========
(i) Included in the total are 94,930 shares which were issued subsequent to June 30, 1998.
(ii) Included in the total are 2,206,960 shares which were issued subsequent to June 30, 1997.
In November 1996, the Company's Board of Directors authorized a common stock buy-back program, which resulted in the purchase of 144,600 shares of the Company's common stock in the market at a cost of $654,851. In January 1998, the Company's Board of Directors authorized the retirement of these treasury shares to authorized but unissued stock.
NOTE 3 - EQUITY SECURITIES. (Continued)
(c) Preferred Stock:
At June 30, 1998 and 1997, the Company had three authorized series of preferred stock; Series A Cumulative Convertible (par value $.10), Series B Convertible (par value $.10) and Series C Convertible (par value $1) (hereinafter referred to as the "A", "B" and "C" Shares, respectively). The authorized and issued shares for each of the Series at June 30, 1998 and 1997 are described in detail in Note 3(b) above.
Each of the A, B and C shares has the right to one vote on all matters in which shareholders are entitled to vote. The A, B and C shares may be converted into shares of common stock at an exchange rate of five, five and fifty shares, respectively, for each share of common stock or approximately 15,400 shares. Each of the A, B and C shares carry dissolution rights amounting to $100, $10 and $5 per share, respectively. The A shares grant the Company the right to redeem such shares at a price of $100 per share.
The A shares have a annual dividend rate of 10% of the par value, which is cumulative. They are senior to all other series or classes of common stock. At June 30, 1998, the A shareholders were due $1,168 in dividends in arrears. The B shares have a non-cumulative stated annual dividend rate of $1 each and are senior to all but the rights of the A shareholders. The C shares have no dividend rights, except as may be authorized at the sole discretion of the Company's Board of Directors.
(d) Warrants:
At June 30, 1998, the Company had outstanding warrants entitling the holders to purchase common stock as follows:
Number of Exercise Shares Price Expiration Date --------- ------------ ----------------- 5 Warrants and 620,000 $5 per share December 31, 1998 75,000 $4.25 August 20, 2000 50,000 5.25 August 20, 2000 60,000 3.75 July 22, 2002 60,000 3.75 July 22, 2002 60,000 3.75 July 22, 2002
The warrants are not valued in the financial statements as the amounts are immaterial. 60,000 of the above warrants are not vested at June 30, 1998.
NOTE 3 - EQUITY SECURITIES. (Continued)
(e) Options:
At June 30, 1998, the Company has outstanding options to acquire 6,786,630 shares of the Company's common stock, comprised of both qualified and non-qualified stock options as those terms are defined by Internal Revenue Codes.
The following table summarizes the activity relating to the option grants:
The following table summarizes information concerning currently outstanding and exercisable stock options:
NOTE 4 - ACCOUNTING FOR STOCK - BASED COMPENSATION.
In accordance with Statement of Financial Accounting Standard No. 123, the following information is provided. The weighted average fair value of all stock options at date of grant was $1.99, $.71 and $-0- per option for options granted during the years June 30, 1998, 1997 and 1996, respectively. Additionally, the weighted average fair value of employee stock options granted in the years ended June 30, 1998, 1997 and 1996 was $.40, $-0- and $-0-, per option, respectively. The weighted average fair value of options was determined based on the Black-Scholes model, utilizing the following weighted average assumptions:
For the Years Ended June 30, --------------------------------------- 1998 1997 1996 ----------------- -------- ---- Expected term: All stock options 6 months-10 years 10 years -- Employee stock options 10 years 10 years -- Interest rate 5.00% 5.00% -- Volatility 78.40% 78.40% -- Dividends None None --
Had the Company accounted for its stock option by recording compensation expense based on the fair value at the grant date on a straight-line basis over the vesting period, stock-based compensation costs would have reduced pretax income by $2,425,491 ($1,360,700 net of taxes), $5,992 ($3,368 net of taxes), and $-0- for the years ended June 30, 1998, 1997 and 1996, respectively. The pro forma effect on diluted earnings per common share would have been a reduction of $.21 for the year ended June 30, 1998 and no effect for the years ended June 30, 1997 and 1996. The pro forma effect on basic earnings per common share would have been a reduction of $.22 for the year ended June 30, 1998 and no effect for the years ended June 30, 1997 and 1996.
NOTE 5 - OPERATING LEASES.
The Company conducts its operations under five noncancellable operating leases expiring at various dates through 2003. Future minimum rent payments are as follows:
NOTE 5 - OPERATING LEASES. (Continued)
MCS leases its premises from a partnership which is controlled by two officers and directors of the company under a triple net lease arrangement.
Total rent expense for the years ended June 30, 1998, 1997 and 1996 amounted to $305,554, $258,000 and $264,000, respectively.
NOTE 6 - REVOLVING LINE OF CREDIT.
At June 30, 1998, the Company and it's subsidiaries have an agreement with Deutsche Financial Services ("Deutsche"), whereby certain inventory purchases are financed. Deutsche grants the Company terms and charges no interest for 30 days and thereafter at rates of prime plus 1/4% - 6-1/2% per annum. Borrowings under the line may be up to $15,000,000. As of June 30, 1998 and 1997, borrowings under the line amounted to $6,998,712 and $1,830,359, respectively. The lines are collateralized by all the assets of the Company.
NOTE 7 - LITIGATION.
During 1990, a competitor of the Company commenced an action against it and one of its advertising agents. The action was dismissed during the year ended June 30, 1998.
A third party lawsuit was commenced against the Company's predecessor ("Hillside Bedding") by Mid Hudson Clarklift ("MH") as a result of a claim against them by a former employee of the Company who sustained an injury while operating a forklift maintained by MH. The lawsuit consists of four alternative causes of action each for $5,000,000 and one cause of action by the former employee's wife for $2,000,000. MH is seeking judgement for all or part of any verdict or judgement which may be obtained against them. The lawsuit is in the discovery stages. Management and its counsel have no opinion as to its ultimate disposition.
NOTE 8 - INCOME TAXES.
The Company's income tax provision consists of the following:
1998 1997 1996 ---------- ---------- ---------
Current tax provision: Federal $1,651,331 $ 894,365 $ 223,386 State 493,703 399,190 218,714 ---------- ---------- --------- 2,145,034 1,293,555 442,100 Deferred tax provision (benefit) relating to temporary differences -- 5,524 (27,560) ---------- ---------- ---------
Income tax provision $2,145,034 $1,299,079 $ 414,540 ========== ========== =========
NOTE 8 - INCOME TAXES. (Continued)
A reconciliation of the above effective tax rate to the federal statutory rate is as follows:
The Company's deferred tax assets amounted to $37,249 at June 30, 1998 and 1997 which resulted from the temporary differences relating to the allowance for doubtful accounts.
NOTE 9 - RELATED PARTY TRANSACTIONS.
In the normal course of business the Company periodically borrows funds from stockholder/officers and pays interest on those loans at rates which are comparable to rates which could be obtained from third parties. At June 30, 1998 and 1997, Company owed one stockholder $2,967 and at June 30, 1997, $125,000 to another stockholder.
Interest charged to operations on such loans for the years ended June 30, 1998, 1997 and 1996 amounted to $13,542, $7,155 and $38,258, respectively.
The Company also periodically enters into transactions with entities which are owned or controlled by officers of the Company. Such transactions are in the normal course of business and are on terms at least as favorable as those which could be obtained from third parties. All such transactions were immaterial in the aggregate, when compared to the results of operations taken as a whole, for all periods presented.
NOTE 10 - OTHER FINANCIAL INFORMATION.
(a) Accounts Receivable - Net.
Accounts receivable, net at June 30, 1998 and 1997 consists of the following:
1998 1997 ------------ ----------- Accounts receivable $ 17,720,432 $ 9,332,047 Allowance for doubtful accounts, returns and discounts (85,800) (85,800) ------------ ----------- $ 17,634,632 $ 9,246,247 ============ ===========
For the years ended June 30, 1998, 1997 and 1996, $21,000, $88,402 and $164,487, respectively, was charged to bad debt expense.
(b) Other Current Assets:
Other current assets consist of the following at June 30, 1998 and 1997:
1998 1997 ---------- ---------- Receivable from suppliers $ 537,313 $ 400,991 Prepaid expenses -- 30,678 Prepaid income taxes 39,364 4,800 Sundry loans -- 5,000 ---------- ---------- $ 576,677 $ 441,469 ========== ==========
(c) Goodwill - Net:
Goodwill, net at June 30, 1998 and 1997 consists of the following:
1998 1997 ------------ ------------ Goodwill $ 4,921,768 $ 4,001,834 Accumulated amortization 753,145 445,130 ------------ ------------ $ 4,168,623 $ 3,556,704 ============ ============
Amortization charged to operations for the years ended June 30, 1998, 1997 and 1996 amounted to $308,015, $224,190 and $168,285, respectively.
NOTE 10 - OTHER FINANCIAL INFORMATION. (Continued)
(d) Property and Equipment:
Property and equipment are carried at cost and consist of the following at June 30, 1998 and 1997:
1998 1997 ------------ ------------ Leasehold improvements $ 466,982 $ 494,418 Furniture and fixtures 292,708 277,669 Office equipment 510,674 296,445 Automobiles 100,902 123,385 ------------ ------------ 1,371,266 1,191,917 Less: Accumulated depreciation and amortization 803,240 752,917 ------------ ------------ $ 568,026 $ 439,000 ============ ============
Depreciation and amortization charged to operations for the years ended June 30, 1998, 1997 and 1996 amounted to $173,950, $146,123 and $104,030, respectively.
(e) Other Current Liabilities:
Other current liabilities consist of the following at June 30, 1998 and 1997:
1998 1997 ---------- ---------- Deferred sales tax obligation $ -- $ 300,000 Customers with credit balances 57,057 321,412 ---------- ---------- $ 57,057 $ 621,412 ========== ==========
(f) Transactions with Major Customers and Suppliers:
During the year ended June 30, 1998, two customers accounted for 25% of the Company's sales and during the years ended June 30, 1997 and 1996, no one customer accounted for 10% or more of the Company's net sales.
During the year ended June 30, 1998, two suppliers accounted for 50% of the Company's purchases and during the years ended June 30, 1997 and 1996, one supplier accounted for 22% and 42% of the Company's purchases, respectively.
(g) Deferred Compensation Plan:
The Company has 401(k) deferred compensation plans to which the Company may make discretionary contributions. The Company made contributions to these plans amounting to approximately, $30,000, and $7,000 and $16,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information", No. 132 (SFAS 132), Employer's Disclosures about Pension and other Postretirement Benefits and No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. Management does not believe that the effect of implementing these new standards will be material to the Company's financial position, results of operations and cash flows.
NOTE 12 - YEAR 2000.
The Company recognizes the need to ensure its operation will not be adversely affected by Year 2000 software failures. The Company is communicating with suppliers, customers and others with which it does business to coordinate Year 2000 conversion. The cost of achieving compliance is estimated to be a minor increase over the cost of normal software upgrades and replacements.