SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K/A-1
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number 0-22710
ATEC GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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(State or other jurisdiction of (IRS. Employer
corporation or organization) Identification Number)
69 Mall Drive, Commack, New York 11725
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 543-2800
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Securities registered pursuant to Section 12(b) of the Act: Common Stock $.01
par value
Securities registered pursuant to Section 12(g) of the Act: Series A Preferred
Stock $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES [X] NO [ ]
On September 20, 2002, the aggregate market value of the voting common
equity of ATEC Group, Inc., held by non-affiliates of the Registrant was
$2,284,974* based on the closing price of $.35 for such common stock on said
date as reported by the American Stock Exchange. On such date, there were
8,347,689 shares of common stock of the Registrant outstanding.
* Excludes 1,819,192 shares of common stock beneficially owned by Surinder
Rametra, Ashok Rametra, Praveen Bhutani, Balwinder Singh Bathla, Stewart
Benjamin, James Charles and David Reback, the officers and directors of the
Company.
EXPLANATORY NOTE
The undersigned registrant hereby amends Item 6, Item 7 and Item 8 of
Part II of its Annual Report on Form 10-K for the fiscal year ended June 30,
2002 previously filed with the Commission.
ii
ITEM 6. SELECTED FINANCIAL DATA
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The following selected financial data as and for each of the five years in the
period ended June 30, 2002, have been derived from audited financial statements.
This information should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report and "Management's Discussion
and Analysis."
Operating Data 2002 2001 2000 1999 1998
-------------- ---- ---- ---- ---- ----
Net Sales $ 39,032,043 $ 53,051,120 $ 71,937,680 $107,435,617 $187,150,164
Income (Loss) from
Continuing operations $ (1,676,408) $ (4,525,134) $ 296,953 $ (4,299,228) $ 2,740,066
Income (Loss) per
common share:
Basic $ (.24) $ (.64) $ .04 $ (.62) $ .45
Diluted $ (.24) $ (.64) $ .04 $ (.62) $ .43
Balance Sheet Data
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Total Assets $ 7,801,950 $ 11,109,198 $ 16,490,517 $ 16,004,995 $ 26,634,164
Long-term obligations Nil Nil Nil Nil Nil
Cash dividend per
common share Nil Nil Nil Nil Nil
Results for 2002 include a charge of $220,000 for the impairment of goodwill for
our Nexar patents and trademark.
Results for fiscal 2001 include expenses of $325,000 that the previous
management would not have incurred. The expenses were for investor relations,
business plans, legal and other items incurred during the temporary control of
the Company by Applied Digital Solutions ("ADS") and the settlement of
litigation of $160,900. For more information about the ADS transaction see Item
7. "Management's Discussion And Analysis Of Financial Condition And Results Of
Operations; Results of Operations; Fiscal 2002 compared to Fiscal 2001."
Results for fiscal 2000 reflected one-time charges totaling $284,000, including
approximately $186,200 in expenses related to a class-action lawsuit, $58,800 in
moving expenses for the relocation of the Company's headquarters and warehouse,
and $39,400 of costs related to a terminated merger with Applied Digital
Solutions.
1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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RESULTS OF OPERATIONS
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers. We offer our customers
single-source solutions, customized to their information systems needs, by
integrating analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of our revenues have been derived from product sales. We generally do not
develop software products. However, certain computer hardware products sold by
us are loaded with prepackaged software products.
Fiscal 2002 compared to Fiscal 2001
Revenues for the fiscal year ended June 30, 2002 ("fiscal 2002")
decreased to $39.0 million from $53.1 million for the prior year, a decrease of
approximately 27%. This decrease is primarily attributable to a decline in
orders that we believe is due to a drop of $12.7 million in sales in our B to B
division. We believe that this drop in sales resulted from continued weakness in
the PC industry due to reduced capital expenditures. Gross profit for fiscal
2002 decreased to $5.4 million from $6.3 million for 2001, a 14% decrease due to
the decreased revenues. Gross margin for fiscal 2002 was 14% as compared to 12%
for the prior year.
Fiscal 2002 operating expenses decreased to $6.9 million as compared to
$10.6 million (exclusive of amortization of intangible assets) for the prior
year. The 35% decrease in operating expenses is related primarily to
non-recurring charges of $485,900 in 2001 for the settlement of litigation of
$160,900 and $325,000 of expenses incurred during the temporary control of the
Company by Applied Digital Solutions. These expenses were for items that the
previous management would not have incurred. The expenses were for investor
relations, business plans, legal and other. The period during which ADS
temporarily controlled Atec commenced on October 31, 2000, when Surinder
Rametra, our then Chairman and Chief Executive Officer retired and he and his
spouse entered into a stock purchase agreement to sell their Atec stock to ADS.
Pursuant to the stock purchase agreement, Mr. Rametra and his spouse delivered
to ADS an irrevocable proxy for all of their shares in Atec which, at the time,
represented approximately 16.1% of our issued and outstanding shares of common
stock. The term of the proxy continued until such time as the stock purchase
agreement was consummated or terminated in accordance with its terms. At that
time, Mr Rametra and two outside directors resigned and the remaining directors
elected four ADS designated members to the board. On March 7, 2001, ADS
terminated its agreement with the Rametras and the ADS designees resigned.
2
Operating expenses also decreased in 2002 because we reduced our
headcount by 49 people and salary expense by $1,755,000.
In 2002 we incurred a one-time charge of $220,000 for impaired
Goodwill. We also earned $41,000 of interest income and incurred no interest
expense in 2002.
The provision for income taxes for 2002 was $63,678 as compared to an
expense of $38,000 for 2001. The current year benefit from income taxes was
reduced by a reserve against our deferred tax asset of $473,000.
As a result of the above, the Company incurred a loss of $1,676,408 for
2002 compared to a loss of $4,525,134 in 2001. For 2002, basic and diluted net
loss per share was $.24 compared to basic and diluted loss of $.64 per share in
the prior year. Basic and diluted average shares outstanding were 6,988,054 for
2002.
Fiscal 2001 compared to Fiscal 2000
Revenues for the fiscal year ended June 30, 2001 ("fiscal 2001")
decreased to $53.1 million from $71.9 million for the prior year, a decrease of
approximately 26%. This decrease is primarily attributable to a $15.1 million
drop in sales in our TIS division and a $2.3 million decline in our former Y2K
consulting group. The TIS sales decline was due to a significant decrease,
approximately 46%, in orders received and our phase out of the Y2K division.
Gross profit for fiscal 2001 decreased to $6.3 million from $11.6 million for
2000, a 46% decrease due to the decreased revenues. Gross margin for fiscal 2001
was 12% as compared to 16% for the prior year.
Fiscal 2001 operating expenses, exclusive of amortization of intangible
assets, decreased to $10.6 million as compared to $11.1 million for the prior
year. The 4% decrease in operating expenses is related primarily to decreased
costs of $1.7 million in our former Y2K consulting group, partially offset by
increased costs of $600,000 in our manufacturing division. Also in 2001, we
incurred $645,535 of bad debts due to three customers going bankrupt with
outstanding receivables totaling $604,859.
Amortization of intangible assets was essentially unchanged in 2001. We
incurred a one-time charge of $23,000 for impaired Goodwill. We also earned
$52,000 of interest income and incurred $1,500 of interest expense in 2001.
The provision for income taxes for 2001 was $38,000 as compared to an
expense of $102,000 for 2000. The current year benefit from income taxes was
reduced by a reserve against our deferred tax asset of $1,438,000.
As a result of the above, the Company incurred a loss of $4,525,134 for
2001 compared to net income of $296,953 in 2000. For 2001, basic and diluted net
loss per share was $.64 compared to basic and diluted net income of $.04 per
share in the prior year. Basic and diluted average shares outstanding were
7,088,603 for 2001.
3
LIQUIDITY AND CAPITAL RESOURCES
The cash position was $1,382,722 at June 30, 2002, a decrease of
$172,298 as compared to June 30, 2001. Working capital at June 30, 2002, was
$3,662,451 as compared to working capital of $5,253,000 at June 30, 2001. Cash
used for investing activities totaled $29,753. We believe that our resources are
adequate to meet our capital requirements over the next twelve months.
To accommodate our financial needs for inventory financing, we have
arranged a line of credit with one financial institution in the aggregate amount
of $775,000. At June 30, 2002, our indebtedness was $368,292, or a decrease of
$655,865 compared to June 30, 2001.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Note 1 to this consolidated financial statements in the
Annual Report on Form 10-K for the fiscal year ended June 30, 2002 describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements. Estimates are used for, but not limited to,
the accounting for the allowance for doubtful accounts, inventory allowances,
and goodwill impairments. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden and significant decrease in demand for our
products or there is a higher risk of inventory obsolescence because of rapidly
changing technology and customer requirements, we may be required to increase
our inventory allowances and our gross margin could be adversely affected.
We will perform goodwill impairment tests on an annual basis and
between annual tests in certain circumstances. In assessing the recoverability
of the Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
4
Issues And Uncertainties
The following issues and uncertainties, among others, should be
considered in evaluating the Companys financial outlook.
The computer industry is characterized by a number of potentially
adverse business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a decline in the rate of growth in sales of
personal computers. Heightened price competition among various hardware
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
An integral part of our strategy is to increase our value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires us, among
other things, to attract and retain highly skilled technical employees in a
competitive labor market, provide additional training to our sales
representatives and enhance our existing service management system. We cannot
predict whether we will be successful in increasing our focus on providing
value-added services, and the failure to do so may have a material adverse
effect on our business, results of operations and financial condition.
To date, our revenues have been based primarily upon sales in the New
York Metropolitan area and Albany, New York. Our strategy, encompassing the
expansion of service offerings and the expansion of existing offices, has
challenged and will continue to challenge our senior management and
infrastructure. We cannot predict our ability to respond to these challenges. If
we fail to effectively manage our planned growth, there may be a material
adverse effect on our business, results of operations and financial condition.
The success of our strategy depends in large part upon our ability to
attract and retain highly skilled technical personnel and sales representatives,
including independent sales representatives, in a very competitive labor market.
Our ability to grow our service offerings has been somewhat limited by a
shortage of qualified personnel, and we cannot assure you that we will be able
to attract and retain such skilled personnel and representatives. The loss of a
significant number of our existing technical personnel or sales representatives,
difficulty in hiring or retaining additional technical personnel or sales
representatives, or reclassification of our sales representatives as employees
may have a material adverse effect on our business, results of operations and
financial condition.
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
5
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants and possible alliances between existing
competitors. Moreover, additional suppliers and manufacturers may choose to
market products directly to end users through a direct sales force and/or the
Internet rather than or in addition to channel distribution, and may also choose
to market services, such as repair and configuration services, directly to
end-users. Some of our competitors have or may have, greater financial,
marketing and other resources, and may offer a broader range of products and
services, than us. As a result, they may be able to respond more quickly to new
or emerging technologies or changes in customer requirements, benefit from
greater purchasing economies, offer more aggressive hardware and service pricing
or devote greater resources to the promotion of their products and services. We
may not be able to compete successfully in the future with these or other
current or potential competitors.
Our business is dependent upon our relationships with major
manufacturers and distributors in the computer industry. Many aspects of our
business are affected by our relationships with major manufacturers, including
product availability, pricing and related terms, and reseller authorizations.
The increasing demand for personal computers and ancillary equipment has
resulted in significant product shortages from time to time, because
manufacturers have been unable to produce sufficient quantities of certain
products to meet demand. In addition, many manufacturers have adopted "just in
time" manufacturing principles that can reduce the immediate availability of a
wide range of products at any one time. We cannot predict that manufacturers
will maintain an adequate supply of these products to satisfy all the orders of
our customers or that, during periods of increased demand, manufacturers will
provide products to us, even if available, or at discounts previously offered to
us. In addition, we cannot assure you that the pricing and related terms offered
by major manufacturers will not adversely change in the future. Our failure to
obtain an adequate supply of products, the loss of a major manufacturer, the
deterioration of our relationship with a major manufacturer or our inability in
the future to develop new relationships with other manufacturers may have a
material adverse effect on our business, financial condition and results of
operations. On May 3, 2002, the Hewlett-Packard Company and Compaq Computer
Corporation merged. ATEC sells the products of both companies and we believe
that we have strong relationships with both companies. While we do not believe
that there will be a material adverse effect on our business, financial
condition and results of operations as a result of this merger, there can be no
assurance that such a material adverse effect will not occur.
The markets for our products and services are characterized by rapidly
changing technology and frequent introduction of new hardware and software
products and services. This may render many existing products and services
noncompetitive, less profitable or obsolete. Our continued success will depend
on our ability to keep pace with the technological developments of new products
and services and to address increasingly sophisticated customer requirements.
Our success will also depend upon our abilities to address the technical
requirements of our customers arising from new generations of computer
technologies, to obtain these new products from present or future suppliers and
vendors at reasonable costs, to educate and train our employees as well as our
customers with respect to these new products or services and to integrate
effectively and efficiently these new products into both our internal systems
6
and systems developed for our customers. We may not be successful in
identifying, developing and marketing product and service developments or
enhancements in response to these technological changes. Our failure to respond
effectively to these technological changes may have a material adverse effect on
our business, financial condition and results of operations.
Rapid product improvement and technological change characterize the
computer industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory devaluation due to price reductions on current
products. Certain of our suppliers also provide stock balancing to us pursuant
to which we are able to return unsold inventory to a supplier as a partial
credit against payment for new products. There are often restrictions on the
dollar amount of inventory that we can return at any one time. Price protection
and stock balancing may not be available to us in the future, and, even if
available, these measures may not provide complete protection against the risk
of excess or obsolete inventories. Certain manufacturers have reduced the period
for which they provide price protection and stock balancing rights. Although we
maintain a sophisticated proprietary inventory management system, we cannot
assure you that we will continue to successfully manage our existing and future
inventory. Our failure to successfully manage our current or future inventory
may have a material adverse effect on our business, financial conditions and
results of operations.
As a result of the rapid changes that are taking place in computer and
networking technologies, product life cycles are short. Accordingly, our product
offerings change constantly. Prices of products change, with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The computer industry has experienced rapid declines
in average selling prices of personal computers. In some instances, we have been
able to offset these price declines with increases in units shipped. There can
be no assurance that average selling prices will not continue to decline or that
we will be able to offset declines in average selling prices with increases in
units shipped.
Most of the personal computers we sell utilize operating systems
developed by Microsoft Corporation. The United States Department of Justice has
brought a successful antitrust action against Microsoft, which could delay the
introduction and distribution of Microsoft products. The potential
unavailability of Microsoft products could have a material adverse effect on our
business, results of operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Our consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
7
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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(a) (1) FINANCIAL STATEMENTS
The following financial statements of ATEC Group, Inc., are included:
Independent Auditor's Report
Consolidated Balance Sheet as at June 30, 2002 and 2001
Consolidated Statements of Operations for the years ended June 30,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended June 30,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) OTHER SCHEDULES
All other schedules are omitted since the required information is not
present or is not present in an amount sufficient to require submission of
schedules, or because the information required is included in the financial
statements and notes thereto.
(3) EXHIBITS
See c below.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
Number Description
*3.1 Certificate of Incorporation of the Company
*3.2 Certificate of Amendment of Certificate of Incorporation,
filed October 21, 1992
*3.3 By-laws of the Company
*3.4 Certificate of Amendment of Certificate of Incorporation,
filed December 22, 1992
*3.5 Form of Certificate of Powers, Designations, Preferences and
Rights of the Series A 10% Cumulative Convertible Preferred
Stock
8
*4.7 Form of Common Stock Certificate
*4.9 Form of Preferred Stock Certificate
21.1 List of Subsidiaries
23.1 Consent of Weinick Sanders Leventhal & Co LLP
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference from Registration Statement on Form SB-2
(registration no. 33-54356) filed by the Company with the Securities
and Exchange Commission on November 9, 1992.
** Previously filed with the original Annual Report on Form 10-K for the
year ended June 30, 2002.
(d) Not Applicable.
9
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: /s/ JAMES J. CHARLES
-------------------------------------
James J. Charles, Chief Financial
Officer (Principal Financial and
Accounting Officer) and a Director
Dated: February 10, 2003
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 February 10, 2003
-----------------------------------------------------
Surinder Rametra, Chairman of the Board
/s/ BALWINDER SINGH BATHLA February 10, 2003
-----------------------------------------------------
Chief Executive Officer (Principal Executive Officer)
/s/ ASHOK RAMETRA February 10, 2003
-----------------------------------------------------
Ashok Rametra, President, Secretary, Treasurer and
Director
/s/ STEWART BENJAMIN February 10, 2003
-----------------------------------------------------
Stewart Benjamin, Director
/s/ DAVID REBACK February 10, 2003
-----------------------------------------------------
David Reback, Director
10
CERTIFICATIONS
Certifications pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as
adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002:
I, Balwinder Singh Bathla, Chief Executive Officer of Atec Group, Inc.
(the "Company") certify that:
(1) I have reviewed this annual report on Form 10-K/A-1 of the Company;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
/s/ BALWINDER SINGH BATHLA
-----------------------------------------
Balwinder Singh Bathla
Chief Executive Officer
February 10, 2003
I, James J. Charles, Chief Financial Officer of Atec Group, Inc. (the
"Company") certify that:
(1) I have reviewed this annual report on Form 10-K/A-1 of the Company;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
/s/ JAMES J. CHARLES
-----------------------------------------
James J. Charles
Chief Financial Officer
February 10, 2003
11
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
ATEC GROUP, INC. AND SUBSIDIARIES
JUNE 30, 2002
I N D E X
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Page No.
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INDEPENDENT AUDITORS' REPORT ....................................... F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 2002 and 2001 ...... F-2
Consolidated Statements of Operations
For the Years Ended June 30, 2002, 2001 and 2000 ........... F-3
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2002, 2001 and 2000 ........... F-4
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2002, 2001 and 2000 ........... F-5
NOTES TO FINANCIAL STATEMENTS ...................................... F-6 - F-19
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.
[GRAPHIC OMITTED] WEINICK
SANDERS 1375 BROADWAY
LEVENTHAL & CO. LLP NEW YORK, N.Y. 10018-7010
------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 212-869-3333
FAX: 212-764-3060
WWW.WSLCO.COM
INDEPENDENT AUDITORS' REPORT
----------------------------
Stockholders and Board of Directors
ATEC Group, Inc.
We have audited the accompanying consolidated balance sheets of ATEC Group, Inc.
and Subsidiaries as at June 30, 2002 and 2001, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years ended June 30, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above pre-sent
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
s/s: WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
August 14, 2002
F-1
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
----------------------------
2002 2001
------------ ------------
Current assets:
Cash $ 1,382,722 $ 1,555,020
Accounts receivable - net 3,166,078 5,114,302
Inventories 602,792 1,666,633
Deferred taxes 401,493 581,510
Other current assets 858,682 585,634
------------ ------------
Total current assets 6,411,767 9,503,099
Property and equipment - net 290,040 420,255
Goodwill - net 864,961 1,134,177
Other assets 235,182 51,667
------------ ------------
$ 7,801,950 $ 11,109,198
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Revolving lines of credit $ 368,292 $ 1,024,157
Accounts payable 1,114,071 2,177,391
Accrued expenses 585,795 555,785
Deferred income 26,976 139,357
Other current liabilities 654,182 353,589
------------ ------------
Total current liabilities 2,749,316 4,250,279
------------ ------------
Stockholders' equity:
Preferred stocks 835,582 835,582
Common stock 73,435 73,477
Additional paid-in capital 11,815,397 11,864,674
Discount on preferred stocks (742,740) (742,740)
Deficit (6,219,452) (4,543,043)
------------ ------------
5,762,222 7,487,950
Less: Treasury stock - at cost 709,588 629,031
------------ ------------
Total stockholders' equity 5,052,634 6,858,919
------------ ------------
$ 7,801,950 $ 11,109,198
============ ============
See accompanying notes to financial statements.
F-2
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales $ 39,032,043 $ 53,051,120 $ 71,937,680
Cost of sales 33,600,688 46,767,529 60,353,009
------------ ------------ ------------
Gross profit 5,431,355 6,283,591 11,584,671
------------ ------------ ------------
Operating expenses:
Selling and administrative 6,886,953 10,489,929 10,824,623
Research and development -- 157,595 234,557
Amortization of goodwill -- 189,327 186,626
Impairment of long-lived assets 219,896 22,645 --
------------ ------------ ------------
Total operating expenses 7,106,849 10,859,496 11,245,806
------------ ------------ ------------
Income (loss) from operations (1,675,494) (4,575,905) 338,865
------------ ------------ ------------
Other income (expense):
Interest income 40,755 52,101 62,789
Interest expense -- (1,512) (11,467)
Other income 22,009 38,450 8,291
------------ ------------ ------------
Total other income (expense) 62,764 89,039 59,613
------------ ------------ ------------
Income (loss) before income taxes (1,612,730) (4,486,866) 398,478
Provision for income taxes 63,678 38,268 101,525
------------ ------------ ------------
Net income (loss) ($ 1,676,408) ($ 4,525,134) $ 296,953
============ ============ ============
Earnings (loss) per common share:
Basic ($ .24) ($ .64) $ .04
============ ============ ============
Diluted ($ .24) ($ .64) $ .04
============ ============ ============
Weighted average shares outstanding:
Basic 6,988,054 7,088,603 7,177,432
============ ============ ============
Diluted 6,988,054 7,088,603 7,221,927
============ ============ ============
See accompanying notes to financial statements.
F-3
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) ($1,676,408) ($4,525,134) $ 296,953
----------- ----------- -----------
Adjustments to reconcile net income (loss) in net
cash provided by (used in) operating activities:
Depreciation and amortization 159,969 228,665 274,877
Amortization of goodwill -- 189,327 186,626
Loss on abandonment of leasehold improvements -- -- 1,438
Compensatory element of issuances of capital stock -- 60,900 5,250
Loss on impairment of long-lived assets 219,896 22,645 --
Provision for doubtful accounts 75,308 645,535 42,216
Deferred income (112,381) 139,357 --
Deferred taxes -- (122,054) (208,166)
Changes in assets and liabilities:
Accounts receivable 1,872,916 4,277,625 (1,413,178)
Inventories 1,063,841 690,192 (1,246,552)
Deferred taxes 180,017 -- --
Other current assets (273,048) 1,008,393 (188,694)
Other assets (183,515) -- --
Revolving lines of credit (655,865) (1,149,619) 239,242
Accounts payable (1,063,320) (341,330) 808,958
Accrued expenses 30,010 272,425 (386,378)
Other current liabilities 300,592 123,100 (2,279)
----------- ----------- -----------
Total adjustments 1,614,420 6,045,161 (1,886,640)
----------- ----------- -----------
Net cash provided by (used in) operating activities (61,988) 1,520,027 (1,589,687)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (29,753) (116,682) (58,274)
Security deposits -- 12,086 (9,159)
Addition to goodwill -- -- (13,000)
----------- ----------- -----------
Net cash used in investing activities (29,753) (104,596) (80,433)
----------- ----------- -----------
Cash flows from financing activities:
Capital contribution -- 41,588 --
Issuance of capital stock -- -- 58,750
Purchase of treasury stock (80,557) (2,606) (534,974)
----------- ----------- -----------
Net cash provided by (used in) financing activities (80,557) 38,982 (476,224)
----------- ----------- -----------
Net increase (decrease) in cash (172,298) 1,454,413 (2,146,344)
Cash at beginning of year 1,555,020 100,607 2,246,951
----------- ----------- -----------
Cash at end of year $ 1,382,722 $ 1,555,020 $ 100,607
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes $ 7,721 $ 88,510 $ 50,170
=========== =========== ===========
Interest $ -- $ 1,512 $ 11,467
=========== =========== ===========
Supplemental Schedules of Noncash Operating
Operating and Financial Transactions:
Issuance of common stock for services $ -- $ -- $ 5,250
=========== =========== ===========
Issuance of Preferred Stock Series J convertible
in connection with settlement of a lawsuit $ -- $ 60,900 $ --
=========== =========== ===========
Retirement of common stock $ 49,319 $ -- $ --
=========== =========== ===========
See accompanying notes to financial statements.
F-4
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Preferred Stock Common Stock Additional Discount on
---------------------------- ---------------------------- Paid-In Preferred
Shares Amount Shares Amount Capital Stocks
------------ ------------ ------------ ------------ ------------ ------------
Balance at July 1, 1999 330,009 $ 321,090 7,326,963 $ 73,270 $ 11,758,235 ($ 288,090)
Purchase of treasury stock -- -- -- -- -- --
Shares issued for services -- -- 2,500 25 5,225 --
Shares issued for options
exercised -- -- 18,000 180 58,570 --
Shares issued for conversion
of Preferred Series A and C (10,580) (10,508) 226 2 1,056 9,450
Net income for the year -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 319,429 310,582 7,347,689 73,477 11,823,086 (278,640)
Purchase of treasury stock -- -- -- -- -- --
Capital contribution -- -- -- -- 41,588 --
Issuance of convertible
Preferred Stock Series J 105,000 525,000 -- -- -- (464,100)
Net loss for the year -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2001 424,429 835,582 7,347,689 73,477 11,864,674 (742,740)
Purchase of treasury stock -- -- -- -- -- --
Capital contribution -- -- -- -- 30,082 --
Cost related to capital
contribution -- -- -- -- (30,082) --
Net loss for the year -- -- -- -- -- --
Retirement of common stock -- -- (42,718) (42) (49,277) --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2002 424,429 $ 835,582 7,304,971 $ 73,435 $ 11,815,397 ($ 742,740)
============ ============ ============ ============ ============ ============
Treasury Stock Total
---------------------------- Stockholders'
Deficit Shares Amount Equity
------------ ------------ ------------ ------------
Balance at July 1, 1999 ($ 314,862) (18,000) ($ 91,451) $ 11,458,192
Purchase of treasury stock -- (239,945) (534,974) (534,974)
Shares issued for services -- -- -- 5,250
Shares issued for options
exercised -- -- -- 58,750
Shares issued for conversion
of Preferred Series A and C -- -- -- --
Net income for the year 296,953 -- -- 296,953
------------ ------------ ------------ ------------
Balance at June 30, 2000 (17,909) (257,945) (626,425) 11,284,171
Purchase of treasury stock -- (1,300) (2,606) (2,606)
Capital contribution -- -- -- 41,588
Issuance of convertible
Preferred Stock Series J -- -- -- 60,900
Net loss for the year (4,525,134) -- -- (4,525,134)
------------ ------------ ------------ ------------
Balance at June 30, 2001 (4,543,043) (259,245) (629,031) 6,858,919
Purchase of treasury stock -- (119,100) (80,557) (80,557)
Capital contribution -- -- -- 30,082
Cost related to capital
contribution -- -- -- (30,082)
Net loss for the year (1,676,408) -- -- (1,676,408)
Retirement of common stock -- -- -- (49,319)
------------ ------------ ------------ ------------
Balance at June 30, 2002 ($ 6,219,451) (378,345) ($ 709,588) $ 5,052,635
============ ============ ============ ============
See accompanying notes to financial statements.
F-5
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002, 2001, AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(a) Organization and Presentation of Financial Statements:
ATEC Group, Inc. (the "Company" or "ATEC") was incorporated
under the laws of the State of Delaware on July 17, 1992. The
accompanying consolidated financial statements include the accounts
of ATEC Group, Inc. and all of its wholly owned subsidiaries and a
90% owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
(b) Principal Business Activity:
The Company is an "end to end" provider of a full line of
computer and information technology products and services to
business, professionals, government agencies and educational
institutions. The Company focuses on system design, high-speed data
transmission, LAN/WAN, video conferencing, internet/intranet
technology, digital arts solutions and E-commerce services for its
customers.
(c) Basis of Presentation:
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted
in the United States of America.
(d) 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.
F-6
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(Continued)
(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 is 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.
(3) Goodwill:
In June 2001, the Financial Accounting Standards Board issued
Statement NO. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and
Statement NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
Statements modify accounting for business combinations after June 30,
2001. SFAS No. 141 prohibits pooling-of-interests accounting for
acquisitions. SFAS No. 142 requires that goodwill existing at the
date of adoption be reviewed for possible impairment and the
impairment tests be periodically repeated, with impaired assets
written-down to fair value. Additionally, existing goodwill must be
assessed and classified consistent with the Statements' criteria. The
Company has adopted FASB No. 142 beginning July 1, 2001, upon which
the amortization of goodwill ceased. For the years ended June 30,
2001 and 2000, the Company recognized $189,327 and $186,626 of
goodwill amortization, respectively. The recoverability of goodwill
is evaluated on a separate basis for each acquisition. Based on an
evaluation of its goodwill at June 30, 2002 and 2001, the Company
determined that $219,896 and $22,645, respectively, of goodwill, net
of accumulated amortization, associated with the Company's prior
acquisitions was impaired.
(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. For service income, revenue is recognized upon
completion of the contract and acceptance by the customer.
(5) Research and Development Costs:
Research and development costs are charged to expense as
incurred.
F-7
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(Continued)
(d) Summary of Significant Accounting Policies: (Continued)
(6) Income Taxes:
The Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" which utilizes a
balance sheet approach for financial accounting and reporting of
income taxes, and requires that deferred tax assets and liabilities
be established at income tax rates expected to apply to taxable
income in periods in which the deferred tax asset or liability is
expected to be settled or realized.
(7) Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and trade accounts receivable. The Company places its cash with high
credit quality financial institutions, which at times, may be in
excess of the FDIC insurance limit.
Concentrations of credit risk with respect to trade accounts
receivable are generally limited due to the large number of customers
comprising the Company's customer base. A substantial portion of the
Company's revenue is derived from customers located in the
northeastern region of the United States. An economic downturn in the
geographic region could have an adverse effect on the Company's
operations. Management continually reviews its trade receivables
credit risk and has adequately allowed for potential losses.
(8) Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
(9) Asset Impairment:
The Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". This statement
requires that the Company recognize an impairment loss in the event
that facts and circumstances indicate that the carrying amount of an
asset may not be recoverable, and an estimate of future undiscounted
cash flows is less than the carrying amount of the asset. Property
and equipment is evaluated separately within each subsidiary.
F-8
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(Continued)
(d) Summary of Significant Accounting Policies: (Continued)
(10) Earnings Per Share:
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". Basic earnings per share is
based on the weighted average 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. Below is the calculation of basic and diluted earnings
per share for each of the past three fiscal years:
For the Years Ended June 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Net income (loss) available
to common stockholders ($1,676,408) ($4,525,134) $ 296,953
=========== =========== ===========
Weighted average shares
outstanding - basic 6,988,054 7,088,603 7,177,432
Employee stock options -- -- 18,392
Acquisition options -- -- 17,945
Convertible preferred stock -- -- 8,158
----------- ----------- -----------
Weighted average shares
outstanding - diluted 6,988,054 7,088,603 7,221,927
=========== =========== ===========
Earnings (loss) per common share:
Basic ($ .24) ($ .64) $ .04
=========== =========== ===========
Diluted ($ .24) ($ .64) $ .04
=========== =========== ===========
NOTE 2 - ACQUISITIONS.
Nexar Technologies, Inc.:
On January 15, 1999 the Company purchased the trademarks and
patents of Nexar Technologies, Inc. resulting in goodwill of
$405,805. In May 1999, the Company registered the trademark for the
"Nexar" brand name. The goodwill associated with this acquisition has
been fully amortized or reserved as of June 30, 2002.
F-9
NOTE 3 - EQUITY SECURITIES.
The Company's authorized and issued capital stock at June 30,
2002 and 2001 consists of the following:
Shares Issued
Shares or
Authorized Outstanding Amount
---------- ----------- ----------
June 30, 2002:
--------------
Preferred Stocks:
Series A cumulative
convertible 29,233 8,371 $ 837
Series B convertible 12,704 1,458 145
Series C convertible 350,000 309,600 309,600
Series J convertible 105,000 105,000 525,000
---------- ----------
Total preferred 424,429 $ 835,582
========== ==========
Common stock 70,000,000 7,304,971 $ 73,435
========== ==========
June 30, 2001:
--------------
Preferred Stocks:
Series A cumulative
convertible 29,233 8,371 $ 837
Series B convertible 12,704 1,458 145
Series C convertible 350,000 309,600 309,600
Series J convertible 105,000 105,000 525,000
---------- ----------
Total preferred 424,429 $ 835,582
========== ==========
Common stock 70,000,000 7,347,689 $ 73,477
========== ==========
(a) Treasury Stock:
From time to time, the Board of Directors authorizes a common
stock buy-back program. During the years ended June 30, 2002 and
2001, the Company purchased 119,100 and 1,300 shares of the Company's
common stock at a cost of $80,577 and $2,606, respectively.
(b) Preferred Stock:
At June 30, 2002 and 2001, ATEC had four authorized series of
preferred stock; Series A Cumulative Convertible (par value $.10),
Series B Convertible (par value $.10), Series C Convertible (par
value $1) and Series J Convertible (par value $.01) (hereinafter
referred to as the "A", "B", "C" and "J" shares, respectively). The
authorized and issued shares for each of the Series at June 30, 2002
and 2001 are described in detail in Note 3 above.
F-10
NOTE 3 - EQUITY SECURITIES. (Continued)
(b) Preferred Stock: (Continued)
The A shares have an annual dividend rate of 10% of the par
value, which is cumulative. They are senior to all other series or
classes of capital stock. At June 30, 2002, the A shareholders were
due $1,502 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 and J shares have
no dividend rights, except as may be authorized at the sole
discretion of the Company's Board of Directors.
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 holders of
Series J shares shall not be entitled to any voting rights. 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, B, C
and J shares may be converted into shares of common stock at an
exchange rate of five, five, fifty and one shares, respectively, for
each share of common stock or approximately 134,200 shares.
The J shares have a maturity date of three years from the
applicable issuance date. The shares have a mandatory conversion, if
any time on or after the applicable issuance date the closing price
of the common stock of the Company for three consecutive trading days
is equal to or greater than five dollars. At the end of the third
year, should the stock price by $2.50 or less, the stock would
automatically be converted into 210,000 shares of the Company's
common stock.
(c) Options:
At June 30, 2002, there were 8,598,299 options to acquire
shares of ATEC's common stock outstanding, comprised of both
qualified and non-qualified options as those terms are defined by
Internal Revenue Codes.
The following table summarizes the activity relating to the
option grants:
2002 2001 2000
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
beginning of year 7,602,087 $1.81 2,527,614 $4.39 2,602,072 $5.26
Granted 2,686,300 .48 6,218,500 1.05 789,500 2.26
Exercised -- -- -- -- (18,000) 3.26
Expired (79,100) 3.17 (314,027) 8.52 (765,700) 5.30
Cancelled (1,610,988) 1.91 (830,000) .57 (80,258) 3.46
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
end of year 8,598,299 $1.36 7,602,087 $1.81 2,527,614 $4.39
========== ========== ========== ========== ========== ==========
Exercisable at
end of year 4,344,032 $2.19 5,058,787 $2.45 1,604,114 $5.44
========== ========== ========== ========== ========== ==========
F-11
NOTE 3 - EQUITY SECURITIES. (Continued)
(c) Options: (Continued)
The following table summarizes information concerning
currently outstanding and exercisable stock options:
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices June 30, 2002 Life Price June 30, 2002 Price
--------------- ------------- ----------- -------- ------------- --------
$.40 - $6.80 8,598,299 $5.19 $1.36 4,344,032 $2.19
NOTE 4 - ACCOUNTING FOR STOCK - BASED COMPENSATION.
In accordance with Statement of Financial Accounting Standard
No. 123, the following information is provided. The weighted average
fair value of all stock options at date of grant was $3.19, $3.22 and
$1.99 per option for options granted during the years ended June 30,
2002, 2001 and 2000, respectively. Additionally, the weighted average
fair value of employee stock options granted in the years ended June
30, 2002, 2001 and 2000 was $2.10, $1.93 and $2.01, 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,
--------------------------------
2002 2001 2000
-------- -------- --------
Expected term:
All stock options 10 years 10 years 10 years
Interest rate 4.00% 5.00% 5.00%
Volatility 85.00% 93.27% 78.40%
Dividends None None None
Had ATEC accounted for its stock options 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 pre-tax income by $1,214,835 ($905,052, net
of taxes), $1,155,001 ($860,477 net of taxes) and $986,845 ($735,200
net of taxes) for the years ended June 30, 2002, 2001 and 2000,
respectively. The pro forma effect on diluted earnings per common
share would have been a reduction of $.17, $.12 and $.10 for the
years ended June 30, 2002, 2001 and 2000, respectively. The pro forma
effect on basic earnings per common share would have been a reduction
of $.17, $.12 and $.10 for the years ended June 30, 2002, 2001 and
2000, respectively.
F-12
NOTE 5 - OPERATING LEASES.
ATEC conducts its operations under several noncancellable
operating leases expiring at various dates through 2007. Future
minimum rent payments, net of annual sublease rental income of
$80,548 are as follows:
For the Years
Ending June 30,
---------------
2003 $ 276,374
2004 213,168
2005 209,939
2006 57,094
2007 50,012
---------
Total minimum
annual rentals $ 806,587
=========
Total rent expense for the years ended June 30, 2002, 2001 and
2000 amounted to $382,044, $456,060 and $460,084, respectively.
NOTE 6 - REVOLVING LINES OF CREDIT.
At June 30, 2002, ATEC and its subsidiaries have had
agreements with two financial institutions, whereby certain inventory
purchases are financed. The first facility granted the Company terms
and charged no interest for 40 days and thereafter at rates ranging
from prime plus 1/4% to 6-1/2% per annum. The facility was
collateralized by all the assets of the Company. At June 30, 2002 the
facility expired and has not been renewed. At June 30, 2001, the
borrowings under this facility amounted to $709,586. The second
facility grants the Company terms and charges interest at the prime
rate. Borrowings under this line may be up to $775,000. The facility
is collateralized by the inventory, subject to a prior lien. At June
30, 2002 and 2001, the borrowings under this facility amounted to
$368,292 and $314,571.
NOTE 7 - LITIGATION.
On August 23, 1999, a class action lawsuit was filed on behalf
of all persons who purchased the Company's common stock from October
12, 1998 through May 19, 1999, inclusive. The complaint charges ATEC
and certain of its officers and directors with violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as well as
SEC Rule 10b-5 promulgated thereunder. Plaintiff seeks to recover
damages on behalf of all class members. The Company has reached a
settlement with the plaintiffs subject to court approval. This
settlement has been agreed to and will be paid by the Company's
insurance carrier.
F-13
NOTE 8 - INCOME TAXES.
The Company's income tax provision (benefit) consists of the
following:
2002 2001 2000
--------- --------- ---------
Current tax provision (benefit):
Federal $ -- $ 112,036 $ 188,675
State 63,678 48,286 121,016
--------- --------- ---------
63,678 160,322 309,691
--------- --------- ---------
Deferred tax provision (benefit):
Federal -- (100,085) (170,696)
State -- (21,969) (37,470)
--------- --------- ---------
-- (122,054) (208,166)
--------- --------- ---------
Income tax provision (benefit) $ 63,678 $ 38,268 $ 101,525
========= ========= =========
A reconciliation of the above effective tax rate to the
federal statutory rate is as follows:
2002 2001 2000
------------------- ------------------- -------------------
% % %
---- ---- ----
Tax at statutory ($ 548,000) (34.0) ($1,526,000) (34.0) $ 135,483 34.0
State income tax, net of
federal tax benefit 63,678 3.9 (114,000) (2.5) (56,023) (14.0)
Effect of nondeduct-
ability of:
Amortization and
impairment
of goodwill 74,460 4.6 72,000 1.6 54,089 13.6
Tax expense and loss
limitations -- -- 16,000 0.4 55,472 13.9
Effect of NOL carryforward -- -- -- -- (72,519) (18.2)
Valuation allowance for
deferred tax assets 473,540 29.4 1,438,000 32.0 -- --
Other -- -- 152,268 3.4 (14,977) (3.8)
----------- ---- ----------- ---- ----------- ----
$ 63,678 3.9 $ 38,268 0.9 $ 101,525 25.5
=========== ==== =========== ==== =========== ====
F-14
NOTE 8 - INCOME TAXES. (Continued)
The deferred tax benefit results from differences in
recognition of expense for tax and financial statement purposes and
for minimum tax provision for the various state and local taxing
authorities where the Company and its subsidiaries are subject to
tax. The Company has deferred tax assets consisting of the following
temporary differences.
June 30,
-----------------------
2002 2001
---------- ----------
Net operating loss carryforward $1,879,341 $1,524,000
Allowance for bad debts 134,836 485,510
---------- ----------
Total deferred tax assets 2,014,177 2,009,510
Less: Valuation allowance for
deferred tax assets 1,612,684 1,438,000
---------- ----------
Total $ 401,493 $ 571,510
========== ==========
NOTE 9 - RELATED PARTY TRANSACTIONS.
The Company has an operating lease for space at its Albany,
N.Y. location with a partnership, which is controlled by the
Company's Chairman and its President. The lease runs through June 30,
2003 at a minimum annual rent of $108,192, plus applicable expenses
and taxes.
The Company also periodically enters into transactions with
entities, which are owned or controlled by officers of the Company.
All such transactions were immaterial in the aggregate, when compared
to the results of operations taken as a whole, for all periods
presented.
In March of 2002, the Company paid approximately $224,000 to a
company owned and controlled by the present Chief Executive Officer
(CEO). The payment was for inventory, property and equipment and
certain receivables which have been guaranteed by a company owned and
controlled by the CEO.
NOTE 10 - OTHER FINANCIAL INFORMATION.
(a) Accounts receivable - Net:
Accounts receivable, net at June 30, 2002 and 2001 consists of
the following:
2002 2001
---------- ----------
Accounts receivable $3,484,892 $6,357,064
Allowance for doubtful accounts,
returns and discounts (318,814) (1,242,762)
---------- ----------
$3,166,078 $5,114,302
========== ==========
For the years ended June 30, 2002, 2001 and 2000, $75,308,
$645,535 and $42,216, respectively, was charged to bad debt expense.
F-15
NOTE 10 - OTHER FINANCIAL INFORMATION. (Continued)
(b) Other Current Assets:
Other current assets consist of the following at June 30, 2002
and 2001:
2002 2001
---------- ----------
Receivables from suppliers $ 122,155 $ 140,546
Prepaid expenses 226,119 242,811
Prepaid and refundable income taxes 259,732 167,930
Sundry loans 101,000 34,347
Current portion of deferred compensation 149,676 --
---------- ----------
$ 858,682 $ 585,634
========== ==========
(c) Goodwill - Net:
Goodwill, net at June 30, 2002 and 2001 consists of the
following:
2002 2001
---------- ----------
Cost $5,678,253 $5,727,573
Less: Impairment 3,241,616 3,021,720
---------- ----------
2,436,637 2,705,853
Less: Accumulated amortization 1,571,676 1,571,676
---------- ----------
$ 864,961 $1,134,177
========== ==========
Amortization charged to operations for the years ended June
30, 2002, 2001 and 2000 amounted to $-0-, $189,327 and $186,626,
respectively. Net income (loss) exclusive of amortization and
impairment of goodwill was ($1,456,512), ($4,313,162) and $483,579,
for the years ended June 30, 2002, 2001 and 2000, respectively.
At June 30, 2002 the goodwill recognized on the acquisition of
Nexar, our manufacturing division, in the amount of $219,896 was
written off. This goodwill became impaired when we ceased
manufacturing and closed the division. The June 30, 2001 goodwill
write off of $22,645 was attributable to the acquisition of Global
Leasing and Trading Corporation. All outstanding contracts between
Global and its customers expired in 2001 and no new contracts were
entered into.
(d) Property and Equipment:
Property and equipment are carried at cost and consist of the
following at June 30, 2002 and 2001:
2002 2001
---------- ----------
Leasehold improvements $ 516,265 $ 563,573
Furniture and fixtures 244,293 244,293
Office equipment 904,133 887,852
Automobiles 110,598 110,598
---------- ----------
1,775,289 1,806,316
Less: Accumulated depreciation
and amortization 1,485,249 1,386,061
---------- ----------
$ 290,040 $ 420,255
========== ==========
Depreciation and amortization charged to operations for the
years ended June 30, 2002, 2001 and 2000 amounted to $159,969,
$228,665 and $274,877, respectively.
F-16
NOTE 10 - OTHER FINANCIAL INFORMATION. (Continued)
(e) Other Current Liabilities:
Other current liabilities consist of the following at June 30,
2002 and 2001:
2002 2001
---------- ----------
Accrued compensation $ 370,000 $ --
Payroll taxes payable 31,221 38,592
Sales tax payable 35,752 33,295
Customers with credit balances 217,209 281,702
---------- ----------
$ 654,182 $ 353,589
========== ==========
(f) Transactions with Major Customers and Suppliers:
In each of the three years ended June 30, 2002, the Company
did not have sales to any one customer, which represented 10% or more
of the Company's net sales during a fiscal year.
During the years ended June 30, 2002, 2001 and 2000, two
suppliers accounted for 35%, 45% and 55% of the Company's purchases,
respectively. At June 30, 2002 and 2001, these two suppliers
accounted for 35% and 59% of accounts payable, respectively.
(g) Deferred Compensation Plan:
The Company has 401(k) deferred compensation plans to which
the Company may make discretionary contributions. The Company expense
for these plans amounted to approximately, $20,000, $45,000 and $-0-
for the years ended June 30, 2002, 2001 and 2000, respectively.
NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically issues
new accounting standards in a continuing effort to improve the
quality of financial information and to promote uniformity in its
presentation. Management has reviewed all such pronouncements made in
the last fiscal year and concluded that none have a material impact
on the Company's presentation of its financial position, results of
operations and cash flows.
F-17
NOTE 12 - SEGMENT INFORMATION.
The Company is comprised of four business segments. These
segments consist of the technology integration services (TIS),
Business to Business (B to B), software and manufacturing divisions.
Set forth below are net sales, net income (loss), capital
expenditures, depreciation and identifiable assets of these segments.
For the Years Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales:
TIS $ 17,433,683 $ 17,437,079 $ 32,579,527
B to B 20,845,797 33,525,488 35,311,719
Software 1,537 -- 2,330,065
Manufacturing 751,026 2,088,552 2,005,201
Elimination of
intersegment revenues -- -- (288,832)
------------ ------------ ------------
$ 39,032,043 $ 53,051,119 $ 71,937,680
============ ============ ============
Net income (loss):
TIS ($ 650,241) ($ 2,403,235) ($ 1,011,907)
B to B 1,122,309 (332,780) 1,316,876
Software (54,868) (13,985) 337,216
Manufacturing (725,685) (1,385,735) (207,959)
Corporate (1,367,923) (389,399) (137,273)
------------ ------------ ------------
($ 1,676,408) ($ 4,525,134) $ 296,953
============ ============ ============
Depreciation:
TIS $ 128,938 $ 165,649 $ 166,388
B to B 11,829 29,887 32,506
Software -- -- 21,350
Manufacturing 2,890 3,933 5,545
Corporate 16,312 29,196 49,088
------------ ------------ ------------
$ 159,969 $ 228,665 $ 274,877
============ ============ ============
Capital additions:
TIS $ 29,753 $ 107,793 $ 52,150
B to B -- 8,889 6,124
Software -- -- --
Manufacturing -- -- 13,000
Corporate -- -- --
------------ ------------ ------------
$ 29,753 $ 116,682 $ 71,274
============ ============ ============
Identifiable assets:
TIS $ 3,993,979 $ 825,454 $ 7,091,035
B to B 2,201,472 3,765,364 6,566,091
Software 3,853 943,240 112,461
Manufacturing 5,535 911,199 1,947,502
Corporate 1,597,111 4,663,941 773,428
------------ ------------ ------------
$ 7,801,950 $ 11,109,198 $ 16,490,517
============ ============ ============
During the years ended June 30, 2002, 2001, and 2000, one
customer accounted for -0-%, -0-% and 81.6%, respectively of the
software segment.
F-18
NOTE 13 - SUPPLEMENTAL FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED
(UNAUDITED):
June 30, March 31, December 31, September 30,
2002 2002 2001 2001
----------- ----------- ----------- -----------
Net sales $ 8,488,273 $10,876,246 $ 7,619,339 $12,048,185
=========== =========== =========== ===========
Gross profit $ 818,123 $ 1,221,057 $ 1,057,684 $ 2,334,491
=========== =========== =========== ===========
Net income (loss) ($1,129,809) ($ 462,774) ($ 181,115) $ 97,290
=========== =========== =========== ===========
Income (loss) per share:
Basic ($ 0.15) ($ 0.07) ($ 0.03) $ 0.01
=========== =========== =========== ===========
Diluted ($ 0.15) ($ 0.07) ($ 0.03) $ 0.01
=========== =========== =========== ===========
June 30, March 31, December 31, September 30,
2001 2001 2000 2000
----------- ----------- ----------- -----------
Net sales $10,570,525 $14,096,629 $13,435,293 $14,948,683
=========== =========== =========== ===========
Gross profit $ 982,680 $ 1,306,619 $ 1,803,946 $ 2,190,346
=========== =========== =========== ===========
Net income (loss) ($2,712,642) ($1,136,289) ($ 421,365) ($ 254,838)
=========== =========== =========== ===========
Loss per share:
Basic ($ 0.38) ($ 0.16) ($ 0.06) ($ 0.04)
=========== =========== =========== ===========
Diluted ($ 0.38) ($ 0.16) ($ 0.06) ($ 0.04)
=========== =========== =========== ===========
F-19
EXHIBITS
--------
Number Description
------ -----------
23.1 Consent of Weinick Sanders Leventhal & Co LLP
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.