SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: (DATE OF EARLIEST EVENT REPORTED): JANUARY 31, 2003
COMMISSION FILE NO. 000-33231
HY-TECH TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4868120
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1840 BOY SCOUT DRIVE, FORT MYERS, FLORIDA 33907
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(239) 278-4111
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(ISSUER TELEPHONE NUMBER)
HEGIBACHSTRASSE 22
8032 ZURICH
SWITZERLAND
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FORMER ADDRESS
ITEM 1. CHANGES IN CONTROL OF THE REGISTRANT.
As a result of the acquisition of Hy-Tech Computer Systems, Inc., a
Florida corporation ("Hy-Tech"), the control of the Registrant shifted to the
former shareholders of Hy-Tech. The following individuals will exercise control
of the Registrant.
Name No. of shares Percentage
Gary F. McNear Revocable Trust(1) 3,959,612 16.5%
Susan M. McNear Revocable Trust(2) 3,959,612 16.5%
Craig W. Conklin Revocable Trust(3) 3,959,612 16.5%
Margaret L. Conklin Revocable Trust(4) 3,959,612 16.5%
(1) Gary F. McNear, the Registrant's new chief executive officer, serves as trustee of the
Gary F. McNear Revocable Trust.
(2) Susan M. McNear is the wife of Gary F. McNear, the Registrant's new chief executive
officer, and she serves as trustee of the Susan M. McNear Revocable Trust.
(3) Craig W. Conklin, the Registrant's new president, serves as trustee of the Craig W.
Conklin Revocable Trust.
(4) Margaret L. Conklin is the wife of Craig W. Conklin, the Registrant's new president, and
she serves as trustee of the Margaret L. Conklin Revocable Trust.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 31, 2003, the Registrant acquired 100% of the issued and
outstanding shares of Hy-Tech in exchange for 16,000,000 shares of the
Registrant's common stock. Following the exchange, there are 24,000,000 shares
of the Registrant's common stock outstanding.
BACKGROUND
Hy-Tech Computer Systems, Inc. began operations on November 3, 1992 in Fort
Myers, Florida. It is still headquartered in Fort Myers, Florida where it also
operates a local Hy-Tech distribution center and a National Distribution
operation. Hy-Tech also has sixteen other Hy-Tech computer distribution centers
throughout Florida, Alabama, Tennessee, Kentucky and in Madison, Wisconsin and
Colorado Springs, Colorado.
In the seventeen local Hy-Tech operations, and National Distribution, Hy-Tech's
mission is to supply quality computer systems, components and peripherals to
computer professionals in a timely manner with customer service that is
unparalleled in the computer industry. At each of these locations, Hy-Tech has
the ability to build custom Hy-Tech Brand Systems ranging in size from a simple
desktop computer to very complicated and sophisticated servers.
The two main markets in which the company operates are sales to computer
resellers and sales to Information Technology Departments, which are in the
commercial, government and education fields.
At all of its locations, Hy-Tech distributes quality components and peripherals
from such leading computer parts vendors as Intel, Microsoft, IBM, Iomega,
Kingston, Symantec, Seagate, AMD, and Logitech to name just a few.
During the ten years the company has been in existence, it has established
strong relationships with many of these superb companies. Hy-Tech enjoys Direct
OEM status with Microsoft, is an Intel Premier Provider, a Microsoft System
Builder Gold Member and Authorized Education Reseller, a Symantec Authorized
Education Reseller, and an Iomega Premier Partner to name just a few.
PRODUCTS & SERVICES
Currently, the products Hy-Tech sells can be categorized as follows;
1) Hy-Tech computer systems - desktops, notebooks and servers;
2) Computer components and peripherals;
3) Computer storage products;
4) Computer operating systems and office software;
5) Compaq computer systems - desktop and servers;
6) Computer service; and
7) Computer warranty work.
The Hy-Tech systems the company manufactures range in size from a simple desktop
to very complicated and sophisticated servers. The company estimates that 60%
of the revenue from Hy-Tech systems is from the sale of desktop/workstations,
30% is from the sale of servers, with 10% from the sale of notebook computers.
Overall, the sale of Hy-Tech systems represents approximately 50% of the
company's total revenue.
The company stocks and sells a full line of computer components and peripherals
for parts replacement, computer upgrades and to resellers who choose to build
there own systems. It also does a great deal of special order sales, product
that the company does not routinely stock but will purchase at the request of a
customer.
In addition to the standard storage products such as hard drives, ZIP drives,
and tape drives, the company is actively involved with the sale and promotion of
Iomega's Network Attached Storage (NAS) products. The Storage Area is growing
very rapidly and the Iomega product is priced very competitively. Sales of NAS
products are forecasted to grow tremendously. Hy-Tech also distributes a PCMCIA
Notebook Storage back-up product manufactured by CMS. As the sale of Notebooks
increases and the reality that the hard drives in these notebooks need to be
backed-up, sales of this product should increase dramatically.
Hy-Tech distributes Microsoft OEM operating systems and Office software products
utilizing its System Builder Gold Member status. It sells Microsoft operating
systems installed on its Hy-Tech systems utilizing its Direct OEM status. It
also sells Microsoft volume licenses on software to commercial and government IT
departments. Using its Microsoft Authorized Education Reseller status, the
company sells Microsoft software products into the education arena.
Sales of computer components, peripherals, storage products and Microsoft
licenses represent approximately 45% of the company's total revenue.
When its customers request a "Tier 1" product, Hy-Tech is also an authorized
reseller of workstations and certain Compaq servers. Hy-Tech does service work
for its customers both in-house and on-site. While this is a relatively new
emphasis by the company, many of the Hy-Tech stores are booking an increasing
number of service hours. The company also does warranty work for several of the
large third party computer service companies.
Currently, the total revenue generated by Compaq system sales, customer service,
and warranty work represents approximately 5% of the company's total revenue.
COMPETITVE SITUATION
The company has different competitors in the two basic markets in which it
currently operates - the reseller market and direct to the IT market.
The company's primary competitors for the reseller customers are the national or
large regional distribution companies. The main advantages of these competitors
are size and price. The advantages Hy-Tech has over these competitors is
convenience, immediate availability, product information, and hands-on technical
support.
In its direct sales to IT departments, be they in the commercial, government or
education fields, Hy-Tech competes primarily with the large computer
manufacturers. The large computer manufacturers have the advantage of size and
name recognition. They also have the disadvantage of size which are
historically weak customer relationships and little or no local presence. The
IT departments prefer to work with local sources, who they often view as
neighbors and friends, if the local entity can supply quality product at
reasonable prices. The company uses, in its systems, only quality components
and has the ability to custom build systems to the customer's specifications in
a fraction of the time it takes to get the custom built systems from the large
computer companies. Often, the technicians in the IT departments come to rely
on the expertise of Hy-Tech's technical staff, which is immediately available to
them as needed. In emergency situations, Hy-Tech has the ability to custom
build and deliver systems to these customers in three to four hours.
When the IT departments require parts rather than systems, Hy-Tech is in
competition for this business primarily with on-line computer components
suppliers. These companies treat this business as a commodity and compete
strictly on price. Again, the benefits of Hy-Tech's local service such as the
ability to immediately pick-up components, over-the-counter replacement of
defective parts as needed, and hands-on product support allow the company to
effectively compete for this business.
Competition in the company's two primary markets is very active, particularly in
the past two years when the total size of these markets has decreased. The
company believes it has been able to maintain its market share in these markets.
The reduction in the company's sales has been primarily the result of a
shrinking total market size.
DEPENDENCE ON ONE OR A FEW CUSTOMERS
The company estimates that it currently has approximately 2,000 active customers
with no one customer representing more than 5% of its total business. The
company's top ten customers represent less than 15% of total sales.
INTELLECTUAL PROPERTY
Hy-Tech holds no patents, or trademarks. Hy-Tech does hold the appropriate
business licenses to operate in each of its locations.
GOVERNMENT AUTHORIZATION
The only government approvals required for Hy-Tech's operations are local
business licenses.
RESEARCH AND DEVELOPMENT
Hy-Tech has developed two sophisticated web sites for providing technical
information to its customers, selling product to its existing customers, and the
second site has been developed for selling product to the end user customers
that Hy-Tech has not previously targeted. Development costs were $185,000 in
2001, and $335,000 in 2002.
EMPLOYEES
Hy-Tech currently employs sixty five full-time employees and three
part-time employees.
PROPERTY
Hy-Tech currently leases two buildings from related parties. The building
located at 1826 Boy Scout Drive, Fort Myers, FL consists of 4,600 square feet,
and Hy-Tech leases it for $3,400.00 monthly. The lease expires December 31,
2010, and Hy-Tech has the option of extending it for five more years with a rent
escalation equal to the consumer price index increase over the term of the first
lease period. The building located at 1840 Boy Scout Drive, Fort Myers, FL
consists of 11,320 square feet, and Hy-Tech leases it for $6,325 monthly. The
lease expires December 31, 2010, and Hy-Tech has an option to extend it for five
years with a rent escalation equal to the consumer price index increase over the
term of the first lease period. Both of these buildings are owned by Lee Coast
Enterprises, Inc. Margaret L. Conklin, (wife of Craig Conklin), as trustee,
owns 33% of the stock of Lee Coast Enterprises. Susan McNear, (wife of Gary
McNear), as trustee, owns 33% of the stock of Lee Coast Enterprises. Gary
McNear is President of Lee Coast Enterprises, Inc. Both of these buildings are
leased at market rates.
LEGAL PROCEEDINGS
SunTrust Bank filed a lawsuit in the circuit court of the twentieth
judicial circuit in and for Lee County, Florida, civil division. This lawsuit
is against Hy-Tech Computer Systems, Inc., a Florida Corporation, f/k/a Datasys
USA, Incorporated, Craig W. Conklin, an individual, Thomas Z. Frosceno, Sr., an
individual, and Gary F. McNear, an individual. The lawsuit arises from three
promissory notes held by SunTrust. SunTrust is asking for $3,677,603.74 plus
interest accrued since November 6, 2002. Hy-Tech is also in default of a
provision of the SunTrust loan covenants restricting mergers and acquisitions.
Hy-Tech has negotiated a settlement with SunTrust Bank whereby Hy-Tech has paid
SunTrust Bank $1,300,000 and SunTrust Bank has agreed to accept an aggregate of
$1,800,000, including the $1,300,000 already paid, as payment for all amounts
owed and outstanding to SunTrust Bank. Pursuant to the settlement agreement,
Hy-Tech must make three payments of $65,000 at the beginning of June, July, and
August, and an additional payment of $305,000 by August 29, 2003.
CERTAIN TRANSACTIONS
Bradley Conklin has loaned $52,054.79 to the company, this amount is due on or
before December 31, 2003, and is secured by a second mortgage on a building
owned by the company. This loan carries interest at six percent per annum.
Susan McNear, the wife of Gary McNear our chief executive officer, has loaned
the company $28,630.14. This amount is due on or before December 31, 2003, and
is secured by a third mortgage on a building owned by the company. This loan
bears interest at six percent per annum. Margaret Conklin, the wife of Craig
Conklin our president, has loaned the company $23,424.66. This amount is due on
or before December 31, 2003, and is secured by a fourth mortgage on a building
owned by the company. This loan carries interest at six percent per annum.
Gary McNear, our chief executive officer has loaned the company $124,369.86.
This loan is unsecured and carries interest at six percent per annum, and is due
May 31, 2003. Craig W. Conklin, our president, has loaned the company
$122,520.55. These loans are all from officers of the company, or relatives of
officers of the company, and the total amount of these loans is $353,000.
ITEM 5. OTHER EVENTS.
As a result of the acquisition of Hy-Tech and the change in focus of the
Registrant's business, the Registrant is changing its name from SRM Networks,
Inc. to Hy-Tech Technology Group, Inc. and expects to trade under a new stock
symbol shortly. In addition, the former directors and officers of SRM Networks,
Inc. resigned and the directors and officers of Hy-Tech have become the
directors and officers of the Registrant. The new directors and officers are as
follows: Gary F. McNear-Chief Executive Officer and Director; and Craig W.
Conklin-President and Director.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements of Hy-Tech Computer Systems, Inc.
(a) Financial Statements of Businesses Acquired
(b) Pro Forma Financial Information
(c) Exhibits:
2.1(1) Exchange Agreement
(1) Filed as an Exhibit to the Form 8-K filed on February 4, 2003.
Signatures
Pursuant to the requirement 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.
HY-TECH TECHNOLOGY GROUP, INC.
May 1, 2003
/s/ Gary F. McNear
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Gary F. McNear
Chief Executive Officer
Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hy-Tech Computer Systems, Inc.
Fort Myers, Florida
We have audited the accompanying balance sheet of Hy-Tech Computer Systems, Inc.
as of February 28, 2002, and the related statements of operations, stockholders'
deficit, and cash flows for each of the two years then ended. These financial
statements are the responsibility of Hy-Tech's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hy-Tech Computer Systems, Inc.
as of February 28, 2002, and the results of its operations and its cash flows
for each of the two years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Malone & Bailey, PLLC
Houston, Texas
www.malone-bailey.com
March 19, 2003, except as to Note 9, which is as of April 29, 2003
HY-TECH COMPUTER SYSTEMS, INC.
BALANCE SHEET
FEBRUARY 28, 2002
ASSETS
Current assets
Cash $ 65,962
Accounts receivable, net of allowance of $438,000 2,099,622
Inventories 2,682,090
Other receivables 283,034
Prepaid expenses 40,990
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Total current assets 5,171,698
Property and equipment, net 726,631
Other assets 67,416
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Total assets $ 5,965,745
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 1,663,325
Accrued expenses 870,008
Line of credit 3,070,000
Current portion of long term liabilities 272,068
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Total current liabilities 5,875,401
Long-term liabilities
Loans payable, net of current portion 474,430
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Total liabilities 6,349,831
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Commitments
STOCKHOLDERS' DEFICIT:
Common stock, $1 par value, 10,000 shares authorized, 3,500 shares issued
and outstanding 3,500
Additional paid-in capital 702,000
Accumulated deficit (1,089,586)
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Total Stockholders' Deficit (384,086)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,965,745
============
See accompanying summary of accounting policies and notes to financial
statements.
HY-TECH COMPUTER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Years Ended
February 28,
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2002 2001
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Net revenues $28,210,368 $31,057,993
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Cost of revenues 23,636,872 26,856,194
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Gross margin 4,573,496 4,201,799
General, administrative and selling 4,992,190 4,811,624
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Loss from operations (418,694) (609,825)
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Other income (expense)
Other income 5,813 8,339
Interest expense (322,186) (483,138)
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(316,373) (474,799)
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Net loss $ (735,067) $(1,084,624)
============ ============
Net loss per share:
Net loss - basic and diluted $ (280.77) $ (723.08)
============ ============
Weighted average shares outstanding:
Basic and diluted 2,618 1,500
============ ============
See accompanying summary of accounting policies and notes to financial
statements.
HY-TECH COMPUTER SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED FEBRUARY 28, 2002
Common stock Additional
---------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ -------- -------------------- ------------ ------------
Balance,
February 28, 2000 1,500 $ 1,500 $ 24,000 $ 730,105 $ 755,605
------------ -------- -------------------- ------------ ------------
Net loss - - - (1,084,624) (1,084,624)
------------ -------- -------------------- ------------ ------------
Balance,
February 28, 2001 1,500 1,500 24,000 (354,519) (329,019)
Issuance of common stock
for conversion of debt 2,000 2,000 398,000 - 400,000
Conversion of shareholder
loans into additional
paid-in capital - - 280,000 - 280,000
Net loss - - - (735,067) (735,067)
------------ -------- -------------------- ------------ ------------
Balance,
February 28, 2002 3,500 $ 3,500 $ 702,000 $(1,089,586) $ (384,086)
============ ======== ==================== ============ ============
See accompanying summary of accounting policies and notes to financial
statements.
HY-TECH COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years Ended
February 28,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(735,067) $(1,084,624)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 364,346 299,382
Bad debt expense 606,569 280,428
Gain on sale-leaseback of buildings - (78,159)
Changes in assets and liabilities:
Accounts receivable 41,509 (512,489)
Inventories (42,390) (61,700)
Other receivables (171,843) 50,323
Prepaid expenses 53,783 (55,257)
Other assets 22,581 (45,795)
Accounts payable 439,370 61,103
Accrued expenses (679,507) 1,144,724
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CASH FLOWS USED IN OPERATING ACTIVITIES (100,649) (2,064)
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (433,638) (394,611)
Proceeds from related party under sale-leaseback - 209,085
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CASH FLOWS USED IN INVESTING ACTIVITIES (433,638) (185,526)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds on line of credit 70,000 430,000
Proceeds from shareholders loans 400,000 280,000
Payments of loans payable (163,663) (266,426)
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CASH FLOWS FROM FINANCING ACTIVITIES 306,337 443,574
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NET INCREASE (DECREASE) IN CASH (227,950) 255,984
Cash, beg. of period 293,912 37,928
---------- ------------
Cash, end of period $ 65,962 $ 293,912
========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 322,186 $ 483,138
========== ============
Supplemental disclosure of non-cash transactions:
Assignment of mortgage loans to related parties $ - $ 676,545
Issuance of common stock for shareholder loans $ 400,000 $ -
Conversion of shareholder loans into additional paid in
Capital $ 280,000 $ -
See accompanying summary of accounting policies and notes to financial
statements.
HY-TECH COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Nature of business. Hy-Tech Computer Systems, Inc. ("Hy-Tech") was incorporated
in Florida on May 22, 1991. Hy-Tech is a distributor of computers and computer
parts to customers who specialize in computer maintenance. As of February 28,
2002, Hy-Tech had ten locations in Florida, three locations in Tennessee, two
locations in Alabama, two locations in Kentucky, one location in Wisconsin and
one location in Colorado.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash equivalents include highly liquid, temporary cash investments having
original maturity dates of three months or less. For reporting purposes, cash
equivalents are stated at cost plus accrued interest, which approximates fair
value.
Inventories
Inventories consist of components of computer hardware and prepackaged software
and are stated at the lower of cost, determined by average cost method, or
market.
Other Receivables
Other receivables consist primarily of credits generated upon Hy-Tech's return
of products to the vendor or original equipment manufacturer which are under
warranty.
Long-Lived Assets
Property, plant and equipment are stated at cost less accumulated depreciation.
Major renewals and improvements are capitalized; minor replacements, maintenance
and repairs are charged to current operations. Depreciation is computed by
applying the straight-line method over the estimated useful lives of machinery
and equipment (3 to 39 years). Leasehold improvements are amortized over the
shorter of the useful life of the improvement or the life of the related lease.
Revenue Recognition
Hy-Tech's revenue is generated primarily from the sale of computer equipment to
resellers and end users. Hy-Tech recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectibility is probable.
Hy-Tech recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, Hy-Tech provides for the estimated
cost of product warranties and reduces revenue for estimated product returns.
Sales incentives are generally classified as a reduction of revenue and are
recognized at the later of when revenue is recognized or when the incentive is
offered. When other significant obligations remain after products are
delivered, revenue is recognized only after such obligations are fulfilled.
Shipping and handling costs are included in cost of goods sold.
Hy-Tech's suppliers generally warrant the products distributed by Hy-Tech and
allow returns of defective products, including those that have been returned to
Hy-Tech by its customers. Hy-Tech does not independently warrant the products
that it distributes, but it does provide warranty services on behalf of the
supplier.
Advertising
Costs incurred in connection with advertising are charged to expense as
incurred. Advertising expense was approximately $104,167 and $167,454 for the
years ended February 28, 2002 and 2001, respectively.
Income Taxes
Hy-Tech elected to have its income taxed under Section 1362 of the Internal
Revenue Code and a similar section of the Florida income tax law (S Corporation
election). These laws provide that, in lieu of corporate income taxes,
Hy-Tech's taxable income will be passed through to the stockholders of the
corporation and taxed at the individual level. Therefore, no federal income
taxes are provided for in these financial statements.
Basic Loss per Share
Basic loss per share has been calculated based on the weighted average number of
shares of common stock outstanding during the period.
Fair Value of Financial Instruments
The recorded amounts of cash and cash equivalents, short-term borrowings,
accounts payable and accrued expenses approximate their respective fair values
because of the short maturity of those instruments and the variable nature of
any underlying interest rates. The rates of fixed obligations approximate the
rates of the variable obligations. Therefore, the fair value of these loans has
been estimated to be approximately equal to their carrying value.
Concentrations of Credit Risk
Financial instruments which potentially subject Hy-Tech to concentrations of
credit risk consist primarily of cash, cash equivalents, and trade accounts
receivable. Hy-Tech maintains its cash and cash equivalents with high quality
financial institutions as determined by Hy-Tech's management. To reduce risk of
trade accounts receivable, ongoing credit evaluations of customers' financial
condition are performed, guarantees or other collateral may be required and
Hy-Tech maintains a broad customer base.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Hy-Tech will be required to adopt this
statement effective January 1, 2003. The Company does not expect that the
adoption of SFAS No. 143 will have any effect on Hy-Tech's financial statement
presentation or disclosures.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This SFAS made revisions to the accounting for gains and losses from the
extinguishment of debt, rescinded SFAS No. 44 and required certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions.
Hy-Tech will be required to adopt SFAS No. 145 on January 1, 2003. The adoption
of SFAS No. 145 is not expected to have a material impact on Hy-Tech's financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Such costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146
replaces the previous accounting guidance provided by the Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Hy-Tech does not
anticipate that the adoption of SFAS No. 146 will have any effect on Hy-Tech's
financial statement presentation or disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN45"). FIN45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, Hy-Tech must recognize an initial liability for the fair market value
of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. Hy-Tech has implemented
the disclosure provisions of FIN45 in its December 31, 2002 financial
statements, without significant impact.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (and Interpretation of ARB No. 51)" ("FIN46"). FIN46
addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. Hy-Tech will be
required to implement the other provisions of FIN46 in 2003. Hy-Tech does not
anticipate that the adoption of FIN46 will have any effect on Hy-Tech's
financial statement presentation or disclosure.
NOTE 2 - ACCOUNTS RECEIVABLE
Hy-Tech's trade accounts receivable are shown net of allowance for doubtful
accounts of $438,000 February 28, 2002 as follows:
Accounts receivable $ 2,537,622
Less: Allowance for doubtful accounts (438,000)
---------
$ 2,099,622
============
Hy-Tech maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of Hy-Tech's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
NOTE 3 - PROPERTY, PLANT, AND EQUIPMENT:
Components of property, plant, and equipment, at February 28, 2002 are as
follows:
Vehicles $ 42,088
Equipment 379,510
Business software and web site 875,563
Buildings and improvements 172,691
Land 10,000
Leasehold improvements 54,238
-------
1,534,090
Less: accumulated depreciation and amortization (807,459)
---------
$726,631
========
Depreciation and amortization expense was $364,346 and $299,382 for the years
ended February 28, 2002 and 2001, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
During December 2000, Hy-Tech executed a sale and leaseback of two facilities
with a related party controlled by two of Hy-Tech's shareholders. The
facilities were sold for approximately $973,000, of which $250,000 was paid in
cash during December 2000, approximately $46,000 was paid in cash during January
2001, and approximately $677,000 resulted from the assumption of the mortgage on
the facilities by the related party. The assumption of the mortgages occurred
during January 2001. At the time of the sale, the facilities had a book value
of approximately $817,000, which resulted in a gain of approximately $156,000.
Hy-Tech now leases these two facilities under ten year operating leases.
NOTE 5 - LINE OF CREDIT
Hy-Tech has a $4,000,000 revolving line of credit with a financial institution.
The line of credit is collateralized by Hy-Tech's accounts receivable and
inventories. The interest rate is LIBOR plus 2.00% (3.9% at February 28, 2002).
The revolving line of credit matures in 2002, and the agreement allows for
borrowings of up to 80% of the eligible accounts receivable and 50% of eligible
inventory as defined by the lender less 50% of the principal amount outstanding
on a note payable to the same lender dated October 2, 1998. At February 28,
2002, the balance outstanding on the line of credit was $3,070,000.
The bank obtained a judgment against Hy-Tech for failing to meet its borrowing
base requirements in April 2003. The line of credit was settled with Sun Trust
Bank in February 2003; see Note 9 - Subsequent Events.
NOTE 6 - LONG-TERM DEBT
Hy-Tech's long-term debt is comprised of the following at February 28, 2002:
Amount
----------
Promissory note payable to a financial institution, guaranteed by the
shareholders, interest at a fixed rate of 7.5%, principal and interest of
$15,338 due monthly through October 2003 when the full unpaid balance
of principal and interest is due. $ 579,942
--------------------------------------------------------------------------- ----------
Installment note payment payable to a financial institution, collateralized
by accounting and office management software, interest at a fixed rate of
8.21%, principal and interest of approximately $4,191 due monthly
through September 2003 when the full unpaid balance is due. 75,118
--------------------------------------------------------------------------- ----------
Loan payable to a financial institution, interest at the bank's prime rate
plus 1% or 5.75% at February 28, 2002, principal of $483 plus interest
due monthly through May 2007 when the full unpaid balance of principal
and interest is due. 89,354
--------------------------------------------------------------------------- ----------
Other 2,084
--------------------------------------------------------------------------- ----------
746,498
----------
Less current portion (272,068)
--------------------------------------------------------------------------- ----------
$ 474,430
==========
The annual principal requirements on a long-term debt for the years subsequent
to 2002 are as follows:
Amount
--------
2003 $272,068
-------- --------
2004 474,430
-------- --------
746,498
========
The bank obtained a judgment against Hy-Tech for failing to meet its borrowing
base requirements in April 2003. The promissory notes payable for $579,942 and
$75,118 were settled with Sun Trust Bank in February 2003; see Note 9 -
Subsequent Events.
NOTE 7 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consisted of the following for the
year ended February 28, 2002 and 2001:
2002 2001
---------- ----------
Accounting and legal $ 67,953 $ 81,195
----------------------- ---------- ----------
Advertising 104,167 167,454
----------------------- ---------- ----------
Bad debt expense 606,569 280,428
----------------------- ---------- ----------
Depreciation 364,346 299,382
----------------------- ---------- ----------
Insurance 171,426 123,880
----------------------- ---------- ----------
Payroll taxes 202,233 213,937
----------------------- ---------- ----------
Office supplies 68,501 74,559
----------------------- ---------- ----------
Rent 431,580 434,725
----------------------- ---------- ----------
Repairs and maintenance 12,868 14,311
----------------------- ---------- ----------
Salaries 2,046,588 2,535,772
----------------------- ---------- ----------
Utilities 225,253 191,834
----------------------- ---------- ----------
Other 690,706 394,147
----------------------- ---------- ----------
$4,992,190 $4,811,624
========== ==========
NOTE 8 - COMMITMENTS
Hy-Tech has several non-cancelable operating leases, primarily for office space
and storage that expire over the next six years. These leases require Hy-Tech
to pay all executor costs such as maintenance and insurance. Two of the leases
are collateralized by equipment owned by Hy-Tech. Rental expense for the
operating leases for the year ended February 28, 2002 and 2001 was $431,580 and
$434,725, respectively.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) as of February 28, 2002
are approximately:
February 28, Amount
--------
2003 $419,283
--------
2004 257,241
2005 137,138
2006 80,454
--------
894,116
=============
NOTE 9 - SUBSEQUENT EVENTS
Reverse Merger
In January 2003, SRM Networks, Inc. ('SRM") entered into an agreement and
exchanged 100% of Hy-Tech Computer Systems, Inc. ("Hy-Tech") shares for
16,000,000 shares of SRM or 67% of SRM. In connection with the transaction, SRM
changed its name to Hy-Tech Computer Systems, Inc. For accounting purposes this
transaction was treated as an acquisition of SRM Networks, Inc. and a
recapitalization of Hy-Tech. Hy-Tech is the accounting acquirer and the results
of its operations carry over. Accordingly, the operations of SRM Networks, Inc.
are not carried over and will be adjusted to $0. In connection with the reverse
merger, SRM cancelled 27,450,000 shares of common stock.
Litigation
In February 2003, Hy-Tech agreed to pay Sun Trust Bank $1,500,000 by April 11,
2003 to settle the outstanding balances on a $4,000,000 revolving line of credit
and a $1,000,000 promissory note and a $171,000 promissory note. Hy-Tech failed
to pay the $1,500,000 by April 11, 2003 and Sun Trust Bank then obtained a
judgment on April 14, 2003 for failure to make required payments and failure to
meet its borrowing base requirements. The outstanding balance on the line of
credit was $3,070,000 and the outstanding balance was $579,942 and $75,118 on
the promissory notes as of February 28, 2002. Hy-Tech paid $300,000 by April
11, 2003 and extended the final payment to August 29, 2003 for an additional
$300,000 increasing the pay out to $1,800,000. As of April 30, 2003, Hy-Tech
owes $500,000.
In connection with the agreement with Sun Trust Bank, the chief executive
officer and the chief financial officer were paid 6% each for the discount
negotiated with Sun Trust Bank.
Financing
In April 2003, Hy-Tech issued a convertible debenture for $1,000,000 due in
April 2008. The convertible debenture is convertible into common stock at the
lesser of $0.35 per share or 125% of the average closing price for the previous
five trading days or 100% of the average of the three lowest closing bid prices
for the preceding forty days.
HY-TECH COMPUTER SYSTEMS, INC.
BALANCE SHEET
NOVEMBER 30, 2002
(UNAUDITED)
ASSETS
Current assets
Cash $ 44,289
Accounts receivable, net of allowance of $400,000 1,841,294
Inventories 2,027,334
Other receivables 136,085
Prepaid expenses 83,708
------------
Total current assets 4,132,710
Property and equipment, net 557,947
Other assets 72,750
------------
Total assets $ 4,763,407
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 1,990,645
Accrued expenses 249,383
Line of credit 3,136,000
Current portion of long term liabilities 550,011
------------
Total current liabilities 5,926,036
Long-term liabilities
Loans payable, net of current portion 79,204
------------
Total liabilities 6,005,243
------------
STOCKHOLDERS' DEFICIT:
Common stock, $1 par value, 10,000 shares authorized, 3,500 shares issued
and outstanding 3,500
Additional paid-in capital 702,000
Accumulated deficit (1,947,336)
------------
Total Stockholders' Deficit (1,241,836)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,763,407
============
HY-TECH COMPUTER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
November 30, November 30,
----------- -----------
2002 2001 2002 2001
------------ ------------
Net revenues $6,478,123 $5,725,005 $19,161,368 $21,153,727
----------- ----------- ------------ ------------
Cost of revenues 5,279,161 4,810,470 16,332,482 17,719,847
----------- ----------- ------------ ------------
Gross margin 1,198,962 914,535 2,828,886 3,433,880
General, administrative and 1,250,523 874,309 3,478,268 3,298,552
----------- ----------- ------------ ------------
selling
Income (loss) from operations (51,561) 40,226 (649,382) 135,328
Other income (expense)
Other income - - - 16,452
Interest expense (86,413) (89,632) (208,368) (269,601)
----------- ----------- ------------ ------------
(86,413) (69,632) (208,368) (253,149)
----------- ----------- ------------ ------------
Net loss $ (137,974) $ (49,406) $ (857,750) $ (117,821)
=========== =========== ============ ============
Basic and diluted loss per common share $ (39.42) $ (14.12) $ (245.07) $ (50.59)
Weighted average shares outstanding 3,500 3,500 3,500 2,329
HY-TECH COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(857,750) $(117,821)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 205,457 271,353
Bad debt expense 25,893 187,500
Gain on sale-leaseback of buildings - (58,619)
Changes in assets and liabilities:
Accounts receivable 232,435 254,111
Inventories 654,756 65,078
Other receivables 146,949 101,739
Prepaid expenses (42,718) (47,356)
Other assets (5,334) (333,793)
Accounts payable 327,320 (2,048)
Accrued expenses (620,625) (284,158)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES 66,383 35,986
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (36,773) (375,943)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds on line of credit 66,000 (295,000)
Proceeds from shareholders loans - 400,000
Payments of loans payable (117,283) (3,959)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES (51,283) 101,041
---------- ----------
NET DECREASE IN CASH (21,673) (238,916)
Cash, beg. of period 65,962 293,912
---------- ----------
Cash, end of period $ 44,289 $ 54,996
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 208,368 $ 269,601
========== ==========
Supplemental disclosure of non-cash transactions:
Issuance of common stock for shareholder loans $ - $ 400,000
Conversion of shareholder loans into additional paid in
Capital $ - $ 280,000
HY-TECH COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: PRESENTATION
The balance sheet of Hy-Tech as of November 30, 2002, the related statements of
operations for the three and nine months ended November 30, 2002 and 2001 and
the statements of cash flows for the nine months ended November 30, 2002 and
2001 included in the financial statements have been prepared by Hy-Tech without
audit. In the opinion of management, the accompanying financial statements
include all adjustments (consisting of normal, recurring adjustments) necessary
to summarize fairly Hy-Tech's financial position and results of operations. The
results of operations for the three and nine months ended November 30, 2002 are
not necessarily indicative of the results of operations for the full year or any
other interim period. Notes to the financial statements which would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ended February 28, 2002 as reported
in Form 8-K/A, have been omitted.
PRO FORMA CONSOLIDATED BALANCE SHEET
The following pro forma balance sheet has been derived from the balance sheet of
SRM Networks, Inc. ("SRM") at December 31, 2002 and adjusts such information to
give effect to the acquisition of Hy-Tech Computer Systems, Inc. ("Hy-Tech"), as
if the acquisition had occurred at December 31, 2001. The pro forma balance
sheet is presented for informational purposes only and does not purport to be
indicative of the financial condition that would have resulted if the
acquisition had been consummated at December 31, 2002. The pro forma balance
sheet should be read in conjunction with the notes thereto and Hy-Tech's
financial statements and related notes thereto contained elsewhere in this
filing.
A pro-forma consolidated balance sheet is essentially the same as Hy-Tech's
balance sheet and is presented below.
Pro Forma
SRM Hy-Tech Adjustments
----------- ------------ ------------
Cash $ - $ 65,962 - $ 65,962
Accounts receivable - 2,099,622 - 2,099,622
Inventories - 2,682,090 - 2,682,090
Other receivables - 283,034 - 283,034
Prepaid expenses - 40,990 - 40,990
----------- ------------ ------------
Total current assets - 5,171,698 - 5,171,698
Property and equipment - 726,631 - 726,631
Other assets - 67,416 - 67,416
----------- ------------ ------------
$ - $ 5,965,745 - $ 5,965,745
=========== ============ ============
Accounts payable $ 119,901 $ 1,663,325 - $ 1,783,226
Accrued expenses 40,754 870,008 - 910,762
Advances 83,000 - - 83,000
Line of credit - 3,070,000 - 3,070,000
Current portion - long-term
liabilities 700,000 272,068 - 972,068
----------- ------------ ------------
Total current liabilities 943,655 5,875,401 - 6,819,056
Long-term liabilities - 474,430 - 474,430
----------- ------------ ------------
Total liabilities 943,655 6,349,831 - 7,293,486
----------- ------------ ------------
Stockholders' Deficit:
Preferred stock - - - -
Common stock 35,475 3,500 (14,975) 24,000
Additional paid-in capital 19,412 702,000 (721,412) -
Accumulated deficit (998,542) (1,089,586) 736,387 (1,351,741)
----------- ------------ ------------
Total Stockholders'
Deficit (943,655) (384,086) - (1,327,741)
----------- ------------ ------------
$ - $ 5,965,745 - $ 5,965,745
=========== ============ ============
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
On January 31, 2003, the Registrant acquired 100% of the issued and
outstanding shares of Hy-Tech in exchange for 16,000,000 shares of the
Registrant's common stock. Following the exchange, there are 24,000,000 shares
of the Registrant's common stock outstanding.
After the reorganization and stock purchase there will be 24,000,000 shares of
common stock outstanding of the combined entity.