SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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CURRENT REPORT
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2001
[ ] 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, 2001, the aggregate market value of the voting common
equity of ATEC Group, Inc., held by non-affiliates of the Registrant $2,647,304*
was based on the closing price of $.45 for such common stock on said date as
reported by the American Stock Exchange. On such date, there were 7,347,689
shares of common stock of the Registrant outstanding.
* Excludes 1,464,792 shares of common stock beneficially owned by
Surinder Rametra, Ashok Rametra, Praveen Bhutani, Stewart Benjamin, James
Charles and David Reback, the officers and directors of the Company.
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FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
o risks associated with the uncertainty of future financial results;
o additional financing requirements;
o development of new products or mergers;
o the continued ability to sustain integration of future acquisitions;
o the ability to hire and retain key personnel;
o the continued development of our technical, manufacturing, sales,
marketing and management capabilities;
o relationships with and dependence on third-party suppliers;
o anticipated competition;
o uncertainties relating to economic conditions;
o uncertainties relating to government and regulatory policies;
uncertainties relating to customer plans and commitments;
o rapid technological developments and obsolescence in the industries in
which the Company competes;
o potential performance issues with suppliers and customers;
o governmental export and import policies;
o global trade policies;
o worldwide political stability and economic growth; potential entry of
new, well-capitalized competitors into the markets;
o changes in the Corporate capital structure and cost of capital;
o and uncertainties inherent in international operations and foreign
currency fluctuations.
The words "believe, expect, anticipate, intend and plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
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PART I
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ITEM 1. BUSINESS
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GENERAL
ATEC Group, Inc. ("the Company" or "ATEC") is a one-stop provider for a
full line of information technology products and services to businesses,
professionals, government and educational institutions. We offer multiple
solutions to our clients that we believe generate loyalty and improve our
ability to seek higher margins. We have developed several core competencies,
including system design, software development, networking, server-based
computing, help desk, wireless telecommunications, voice over IP, e-commerce,
web hosting, , ASP and Internet/Intranet solutions. Recently we entered the IT
enabled services with an emphasis on call centers.
In furtherance of our efforts to provide end-to-end solutions to
clients, we continue to commit resources to establish our PC manufacturing
division, Nexar(R), which offers a line of branded computer products built with
state-of-the-art technology, minimizing upgrade cost. Nexar provides unique 24 x
7 toll-free hardware and software support, including off-the-shelf software.
Our e-commerce website, www.atecgroup.com, is designed to ensure our
clients seamless access, security, speed and ease of use. It employs a unique
and powerful search engine and database that was developed in-house and is
continually being reengineered. We plan to market this search engine and
e-commerce development capability as a new offering to our clients while
continuing our own expansion into the e-commerce marketplace. www.atecgroup.com
offers over 60,000 information technology (IT) products from major PC and
peripheral manufacturers along with access to comprehensive technical
specifications and availability on most of these products that allows buyers to
shop, compare and procure all their IT product needs through one place, easily
and quickly, making us a one-stop solution provider. The site also offers our
Nexar PC line of products directly to end-users and corporate clients.
Most industry experts agree that e-business will dramatically impact
traditional supply chains and distribution channels. E-marketers estimate
e-business revenues to exceed $3.5 trillion by the year 2002 and reach in excess
of $7.0 trillion by 2004, representing over 7% of all sales transactions
worldwide. With that in mind, we continually aim to be a part of the e-business
segment growth. However, we believe that existing relationships will not vanish
overnight. Our goal is to continue to strengthen our presence in both the
business-to-business (B2B) and business-to-consumer (B2C) segments of
e-commerce, each of which is critical to strengthening our core business
objective of providing a one-stop, value-added service and product solution.
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As the decision-making process that confronts organizations while
planning, selecting and implementing information technology solutions has grown
more complex, it became necessary for us to create an enterprise-focused team,
our Technology Integration Services (TIS) division, to streamline and strengthen
our core business. Our TIS trained support staff has opened new avenues for us
such as turn-key server-based computing, storage networks and complete
end-to-end solutions, including implementation, project management and program
custom applications on platforms such as Citrix, Microsoft NT, Netware, Linux,
Unix, Java and others.
INDUSTRY
Complex computer information processing systems, the foundation on
which business and organizations now function, are continuously being
redesigned, modified and upgraded as new computer and telecommunications
technologies are introduced. Until the mid-1980s, either mid-range or mainframe
computer systems were used to manage an organization's mission-critical,
transaction-oriented functions, such as banking, credit transactions,
point-of-sale and airline reservations.
In the late 1980s, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in desktop
computers, expanding capabilities of software applications and growing
capabilities of networks. A client/server system typically consists of multiple
intelligent desktop client computers linked with high- performance server
computers by a LAN/WAN providing flexibility and mobility to a wide range of
applications. Most corporations today are seeking to reconfigure their existing
mainframe/mid-range computers (sometimes referred to as "legacy systems") to
operate in parallel with client/server networks. We believe that these two
information system models, legacy systems and client/server systems, will
continue to coexist, providing advantages for certain applications. Over the
past several years, the increase in performance of personal computers and the
development of a variety of effective business connectivity software programs
have led to an industry shift away from mainframe computer systems to
client/server systems.
The markets for information technology products and services are
expected to continue to experience significant growth over the next few years.
According to Data Quest Inc., a leading industry market research firm, the U.S.
market for personal computers is expected to increase from $80 billion in 1998
to $103 billion in 2001, a compound growth rate of 9%. We believe that the
leading factors driving the growth in the markets are the continued transition
to distributed computing technologies, such as client/server.
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BUSINESS STRATEGY
We as a value-added reseller, distribute products to major clients and
other resellers, and provide services such as consulting, procurement,
built-to-order, networking and hardware sales to our clients. We focus on
servicing small and medium-size enterprises (SME), which often do not have the
adequate IT personnel to procure, design, install or maintain complex systems to
incorporate continuously evolving technologies.
Since 1998, the PC market underwent major changes as leading
manufacturers such as IBM, Compaq, Toshiba, Apple and Hewlett-Packard shifted
their focus away from the reseller channel towards direct marketing. Such
actions by the major manufacturers significantly affected the distribution
business due to the availability of products and competition on direct volume
sales. In response, we changed our focus to exit low margin distribution sales
and enter into complementary lines of business by:
o Enhancing our existing value added/system integration services into a
Technical Integration Services (TIS) division as the strategic
marketing arm to serve clients effectively;
o Expanding into Internet and e-solutions with atecone.net and
atecgroup.com, respectively;
o Acquiring the intellectual properties of Nexar and establishing a PC
manufacturing division;
o Enhancing our software development capabilities through offshore
alliances; and
o Creating a consolidated new corporate structure to streamline
administrative functions and stimulate future growth.
MARKETING STRATEGY
Our marketing strategy is to educate business clients about our ability
to provide a single source, end-to-end solution that reduces total cost of
ownership. In an effort to create a unique identity and distinguish ourselves
from the competition, we have committed our resources to assisting our clients
in the implementation of the latest changes in the IT industry.
We are an authorized dealer for leading manufacturers such as Compaq,
Gateway, Hewlett-Packard, Apple, Novell, Informix, Quest Communications, AMD,
Citrix, Microsoft, 3 COM, Toshiba, Oracle, Sybase, Intel, Computer Associates
and numerous others. We provide our clients with a variety of products from
microcomputers to client/servers to peripherals. To market our products, we
enjoy partnering relationships with major computer distributors, including
Ingram Micro, Tech Data and others, which have multiple distribution sites and
collectively carry more than $1 billion in inventory at any given point. Through
these two relationships, manufacturers on the one hand and distributors on the
other, we offer our clients the best in information technology products while
reducing our inventory cost.
To succeed in this competitive environment and to achieve greater
client satisfaction, we offer our clients several distinct advantages:
o A commitment to providing a single source, "end-to-end" solution to
their individual data processing needs;
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o Low cost overhead structures, including limited inventory, extensive
use of warehousing of our allied distributors and automated management
and operating functions, thereby enabling us to hold costs down;
o Continual pursuit of new products and service offerings in response to
market conditions, and
o Responsive, expert service and support.
PRODUCTS, SERVICES AND SOLUTIONS
We market a broad selection of products with a focus on microcomputers,
client/servers and peripherals manufactured by major vendors. Our subsidiaries
are authorized sales and service dealers for major IT manufacturers. The sales
of products by major manufacturers such as Apple, Compaq, Toshiba, Gateway,
Epson and Hewlett-Packard generated over 50% of our revenue for the year ended
June 30, 2001. The agreements with these vendors are generally renewed
periodically and permit termination by manufacturers without cause, generally
upon 30 to 90 days notice. These provisions are standard in the computer
reseller industry.
We evaluate product assortment based on technological advances,
availability and marketability of the products. We continually seek to expand
our product offerings in response to market conditions. Service and support is
performed with an emphasis on achieving higher profit margins while ensuring
quality service to our clients. We have excellent vendor/dealer relationships
with major national distributors, enabling us to source our products from
multi-distribution channels.
PC Manufacturing
Nexar(R), a division of ATEC with patented technologies, is an
innovative manufacturer of personal computers with a fundamentally different
approach to personal computing. Nexar manufactures PCs that allow for
customization of the system and enable end-users to affordably upgrade all major
system components, including future processors and technology advances.
Nexar has developed three lines of personal computers with
high-resolution, high-performance monitors, and is committed to continually
developing and introducing new product lines to keep ahead of technology. The
current product lines of Nexar are:
Enable Series: This series captures the true essence of the PC, powered by
the latest class of processors, and is built to the rigorous standards of
ISO 9002 specifications. Superior quality and performance are combined to
create top value in the world of desktop computers. Enable is aimed at the
cost-conscious consumer.
Empower Series: These systems are built to the client's specifications
using widely accepted quality components and peripherals to ensure 100%
compatibility. This line is the ideal solution for clients who demand to
stay on the cutting edge of technology. The
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Empower line is aimed at corporate users who require value and the
flexibility of standard options and components.
Infinity Series: This series incorporates Nexar's patented XPA technology,
which uses standard components but allows for processor and memory upgrades
across processor generations from within the same PC footprint.
Nexar offers its products through our extended sales and marketing
group, national retail channels and directly through our web sites:
www.nexarusa.com and www.atecgroup.com.
Global Distribution
Global Distribution "GD" has been operating in this marketplace for
over 15 years. It enjoys direct relationships with a number of manufacturers
that seek out in advance when they have product that fit the Global Distribution
model. These manufactures include Cisco, IBM, Compaq, HP, NEC, Toshiba, View
Sonic and many others.
Several studies highlight the fact that the majority of technology
users never fully utilize the capabilities of their installed systems. For those
times that IT professionals are seeking a less expensive way to implement a
project, Global Distribution acquires Brand Name, New, Fully Warranted Late Life
Cycle products that can be serviced by any authorized provider. These products
are acquired in volume and at costs typically 30-50% below market.
Global Distribution is a B2B division of ATEC that offers a unique
combination of price and delivery to other resellers, retailers and enterprise
customers. Our low cost overhead structure - selective inventory, extensive use
of warehousing facilities of allied vendors and distributors - ensures cost
effective solutions.
Technology Integration Service
The microcomputer industry is characterized by numerous hardware
systems that utilize different and often incompatible standards for hardware and
software applications. Further, as new technologies in PCs, telecommunication
and wireless are introduced, organizations need to continually redesign, upgrade
and modify their existing systems. In response to these growing IT requirements,
we recognize the need to go beyond the traditional system integration approach
(trouble shooting, networking, custom configuration of technology) and to create
an enterprise focused team: its Technology Integration Services (TIS) division.
The TIS group is focused on providing value-added solutions to allow customers
to take advantage of the technology they need without many of the obstacles
required to implement them. The services offered by TIS include:
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1. Technology fulfillment and management
2. Staff augmentation and outsourcing
3. Professional and network services-ATEC branded solutions
4. Server-based computing (Microsoft Terminal Server and Citrix
Metaframe)
5. Software solutions
6. E-commerce, Internet access, ISP and Internet integration
7. End-user support
8. Special technology and markets
Software Solutions
We offer both project management capabilities and technical expertise
to deliver high-quality custom software to our clients. We provide a wide range
of services, including analysis, design, coding, testing, deployment,
implementation, training and maintenance.
IT Enabled Services
In the global, digital economy, the biggest challenge faced by a
business enterprise is to reach, retain, acquire and service customers in a
shrinking world - thanks to the universal penetration of the Internet. Today's
empowered customer, regardless of the industry, company, or product has 3
expectations:
o Easy and immediate access to information,
o Personalized service,
o Prompt and efficient response and resolution of problems.
Businesses are tapping into global availability of skilled resources
and technology to address these customer needs and achieving significant
improvements in cost, quality and time to deliver these services.
IT-enabled services are parts of the value chain (business process and
services), which are sourced from a geographic area different from the location
of the end users. They are usually delivered over private or efficient public
networks and are frequently offered cross-border rather than from within the
same national borders of the end user.
McKinsey predicts that the global IT-enabled services opportunity is
likely to grow to $142 billion by 2008. Customer interaction services, financial
processing, accounting services and data management services will account for
almost 90 percent of the market. According to IDC, worldwide spending on
customer relationship management services is expected to be about $90 billion
annually by 2003.
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ATEC's IT- enabled services include:
o Customer Interaction Center
Customer Relationship Management
Call Center / Contact Center
Help Desk
Telemarketing
Market research
o Software Development & Maintenance
A call center traditionally is defined as a physical location with
telecom links for incoming and outgoing calls and trained agents to carry out
sales and support activities.
In today's market environment, a call center is really much more than
that. It leverages convergence technologies of the WWW, internet, computer,
telephony and CRM software to provide an integrated customer contact center with
the focus on meeting a customer's needs for easy access, personalized services
and fast response and resolution of problems. It collects valuable data about
the customers, which is used to further strengthen the customer relationship. It
acts as the central point for all forms of interaction between the company and
its customers - phone call, telemarketing, web site, email, fax, chat, on-line
support etc.
ATEC's off-shore customer contact center combines data and voice
communication along with trained consultants to provide a variety of customer
interaction related functions such as marketing, selling, information
dispensing, technical support, help desk etc. A dedicated line circuit connects
the offshore contact center to ATEC's Commack headquarters.
We entered this market in April 2001.
COMPETITION
The microcomputer market is very competitive, and as such we compete
directly with major PC manufacturers, a variety of local and national
distributors, super stores, retailers, mail order houses and other entities that
offer computer products and services. We compete with these entities based on
our commitment to provide a cost-effective, single source, "end-to-end" solution
to our clients' IT needs. We attempt to competitively price hardware and
software items with our wide range of customer support and services; however, we
do not focus on pricing as our primary competitive strength. Rather, we believe
that our principal strength is our ability to offer clients complete and
cost-efficient solutions to their individual IT needs.
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BACKLOG
We do not have a significant backlog, as we normally deliver and
install the computer products purchased by our clients within a short time of
the date of order.
GOVERNMENTAL REGULATION AND CONTRACTS
We believe that we are in compliance with federal and state laws and
regulations that are applicable to our operations. We are not a party to any
government contract that represents a material portion of our revenue or that,
if terminated or renegotiated, would have a material adverse effect on our
business.
PATENTS AND TRADEMARKS
Patented Technology
The U.S. Patent & Trademark Office awarded Nexar a patent for its
advanced PC motherboard and chassis design. The patent addresses the Nexar PC's
Inverted Socket Process Architecture and design that place the processor, system
memory and cache sockets on the undercarriage of the motherboard and a "future
ready" XPA design that incorporates a highly innovative split motherboard
design. XPA is a substantial enhancement to our ISPA patent because it supports
multiple processor architectures. The XPA design separates the most stable
components of a PC from those components that are most susceptible to technology
obsolescence, easily enabling resellers and users to adapt to rapidly changing
technologies.
Trademark
On May 11, 1999, the U.S. Patent and Trademark Office granted us a
trademark for Nexar. We currently use the Nexar mark on our line of computers.
The registration is enforceable for ten (10) years.
EMPLOYEES
As of September 14, 2001, there was an aggregate of approximately 106
employees, including 5 administrators, 20 staff persons, 13 managers, 35
full-time sales persons, 30 technical and 3 warehouse personnel. We have no
collective bargaining agreements and believe that relations with our employees
are good.
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ITEM 2. PROPERTIES
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Our headquarters and executive offices are located at 69 Mall Drive,
Commack, New York. This location occupies approximately 23,175 square feet
pursuant to a lease expiring in 2005, and provides for annual rental payments of
approximately $134,000, plus certain expenses. We also maintain a retail
location and warehouse facility in Albany, New York, consisting of approximately
8,050 square feet. The Albany facility lease expires on June 30, 2003 and
requires annual rental payments of $108,192, plus all expenses and taxes
attributable to the operation of the premises. The Albany facility is leased
from a company controlled by Surinder and Ashok Rametra, officers and directors
of ATEC. The New York City operations are located at 143 West 29th Street, New
York, New York. This location occupies 7,000 square feet; 4,000 square feet is
leased on a month-to-month basis and requires annual rental payments of $48,000,
plus certain expenses and 3,000 square feet with required annual payments of
$36,000 per year, plus other expenses under a lease expiring in 2002. Our
Pinebrook, New Jersey facility occupies 5,328 square feet and requires annual
payments of approximately $41,026 per year, plus other expenses under a lease
expiring in 2002. Our Syracuse facility occupies 1,300 square feet and requires
annual rental payments of approximately $16,000 per year, plus other expenses
under a lease expiring in 2002.
We believe that our current facilities are suitable for our present and
projected needs. We do not own any real property.
ITEM 3. LEGAL PROCEEDINGS
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On August 23, 1999, a class-action lawsuit was filed in the United
States District Court for the Eastern District of New York on behalf of all
persons who purchased 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. Plaintiffs seek to
recover damages on behalf of all class members.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the last quarter of fiscal year 2001, we did not submit any
matter to the vote of our shareholders.
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PART II
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ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the American Stock Exchange
under the symbol "TEC." The following table sets forth the high and low bid
prices for our common stock for the periods indicated as reported by the NASDAQ
and AMEX. Such prices reflect inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
COMMON STOCK
High Low
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1999
Quarter ended 9/30................................................ $4.000 $2.000
Quarter ended 12/31............................................... 3.250 1.750
2000
Quarter ended 3/31............................................... 7.000 2.380
Quarter ended 6/30............................................... 4.940 2.125
Quarter ended 9/30............................................... 2.313 1.625
Quarter ended 12/31.............................................. 2.000 .438
2001
Quarter ended 3/31............................................... 1.000 .370
Quarter ended 6/30............................................... .810 .380
On September 20, 2001, there were approximately 247 holders of record
of our common stock, 17 holders of record of Series A preferred shares and 3
holders of record of the Units. The number of record holders does not include
holders whose securities are held in street name.
We do not currently pay dividends on our common stock. It is
management's intention not to declare or pay dividends on our common stock, but
to retain earnings for the operation and expansion of our business.
The holders of our Series A preferred shares are entitled to certain
dividend payments upon declaration by the Board of Directors. (See "Item
8-Financial Statements").
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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, 2001, 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 2001 2000 1999 1998 1997
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Net Sales $ 53,051,120 $ 71,937,680 $ 107,435,617 $ 187,150,614 $ 100,841,362
Income or (Loss) from
continuing operations $ (4,525,134) $ 296,953 $ (4,299,228) $ 2,740,066 $ 1,667,898
Income (Loss) per
common share:
Basic $ (.64) $ .04 $ (.62) $ .45 $ .28
Diluted $ (.64) $ .04 $ (.62) $ .43 $ .43
Balance Sheet Data
Total Assets $ 11,109,198 $ 16,490,517 $ 16,004,995 $ 26,634,164 $ 17,147,707
Long-term obligations Nil Nil Nil Nil Nil
Cash dividends per
common share Nil Nil Nil Nil Nil
Results for fiscal 2001 includes charges of $325,000 related to the temporary
control of the Company by Applied Digital Solutions and the settlement of
litigation of $625,000.
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.
All earnings per share reflect our one-for-five reverse stock split in November
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Background
We are a leading system integrator and provider of a full line of IT
service products, as well as a single source, "end-to-end" solution provider for
the computer needs of businesses, professionals, government agencies and
educational institutions.
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RESULTS OF OPERATIONS
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 significant drop
in sales in our TIS division and a $2.3 million decline in our former Y2K
consulting group. 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 in our former Y2K consulting group.
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.
Fiscal 2000 compared to Fiscal 1999
Revenues for the fiscal year ended June 30, 2000 ("fiscal 2000")
decreased to $71.9 million from $107.4 million for the prior year, a decrease of
approximately 33%. This decrease is primarily attributable to our exit from the
low margin wholesale business. Our revenues are generated by sales of computer
hardware and software, and related support services. Gross profit for fiscal
2000 increased to $11.6 million from $11.1 million for 1999, a 5% increase due
to the higher margin revenues. Gross margin for fiscal 2000 improved to 16.1% as
compared to 10.3% for the prior year.
Fiscal 2000 operating expenses, exclusive of amortization of intangible
assets, decreased to $11.1 million as compared to $12.7 million for the prior
year.
Amortization of intangible assets decreased to $187,000 for the year
from $443,000 in the comparable 1999 period. In 1999 we incurred one-time
charges of $3,000,000 of goodwill for prior acquisitions. We also earned $63,000
of interest income and incurred $11,000 of interest expense in fiscal 2000 due
to our continued strong working capital position.
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The provision for income taxes for 2000 was $102,000 as compared to a
benefit of $641,000 for 1999.
As a result of the above, we had net income of $297,000 for fiscal 2000
compared to net loss of $4,300,000 in fiscal 1999. For 2000, net income per
share was $.04 compared to a net loss of $.62 per share in the prior year. Basic
and diluted average shares outstanding were each approximately 7,200,000 for
fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The cash position was $1,555,020 at June 30, 2001, an increase of
$1,454,413 as compared to June 30, 2000. Working capital at June 30, 2001, was
$5,253,000 as compared to working capital of $9,342,000 at June 30, 2000. The
major sources of cash were derived primarily from reductions of inventory on
hand and accounts receivable ($4,968,000). Cash used for investing activities
totaled $105,000. 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 lines of credit with two financial institutions in the aggregate amount
of $15,775,000. At June 30, 2001, our indebtedness to these institutions was
$1,024,000, or a decrease of $1,149,600 compared to June 30, 2000. Substantially
all tangible and intangible assets are pledged as collateral for these
facilities. In September 2001 we eliminated the $15,000,000 line and our assets
are no longer pledged as collateral.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
---------------------------------------------------------
We presently do not use any derivative financial instruments to hedge
our exposure to adverse fluctuations in interest rates, fluctuations in
commodity prices or other market risks, nor do we invest in speculative
financial instruments. Borrowings under our line of credit are at Prime plus a
quarter percent, which is adjusted monthly. Our interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments.
Due to the nature of ATEC's borrowings and short-term investments, we
have concluded that there is no material risk exposure and, therefore, no
quantitative tabular disclosures are required.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
--------------------
NONE
17
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current
directors and officers and the position held by them:
Name Age Position
---- --- --------
Surinder Rametra 61 Chairman of the Board and
Chief Executive Officer
Ashok Rametra 49 President, Secretary,
Treasurer and Director
James J. Charles 58 Chief Financial Officer
and Director
Praveen Bhutani 54 Director
David C. Reback 59 Director
Stewart Benjamin 37 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
Surinder Rametra was appointed the Chief Executive Officer and Chairman
of the Board in June 1994. Prior to June 1994 Mr. Rametra was president of one
of our subsidiaries. Mr. Rametra received a Bachelor of Science Degree from the
Punjab Engineering College, India, and a Masters of Science Degree in
Engineering from the University of I.I.T., India in 1965 and 1969, respectively.
In 1976, Mr. Rametra received a Masters of Business Administration Degree in
Finance from New York University.
Ashok Rametra was appointed President in January 1999. Prior thereto he
was the Secretary, Treasurer, Chief Financial Officer and a Director since June
1994. From June 1994 to March 1995 Mr. Rametra also served as our president.
Prior to 1994, Mr. Rametra was the president of one of the Company's
subsidiaries. Mr. Rametra received a Bachelor of Science
18
Degree from St. Johns University in Accounting in 1980. Mr. Rametra is the
brother of Surinder Rametra.
James J. Charles was appointed Chief Financial Officer in January 1999.
Prior to his appointment, he was a financial consultant to several public
companies (1994-1998), Chief Financial Officer of a printing company (1990-1994)
and a partner in the firm of Ernst & Young (1966-1990). He was appointed a
Director in September 2000.
Praveen Bhutani was appointed a Director in May 2001. Mr. Bhutani was
the founder of Ultra Spec Cables, Inc. and The Options Group, Inc. He serves
both companies as the Chief Executive Officer since 1992. Prior to 1992 he held
various executive positions. Mr. Bhutani has Bachelor and Master degrees in
finance from the Delhi College, Delhi, India.
Stewart Benjamin was appointed a Director in May 2001. Mr. Benjamin is
a certified public accountant in the State of New York. From January 1996 to the
present, Mr. Benjamin has been self-employed as a sole practitioner under the
name of Stewart H. Benjamin, CPA, P.C. From 1985 through December 1995, Mr.
Benjamin was employed as a staff accountant in both private industry and local
public accounting firms. Mr. Benjamin received a Bachelor of Business
Administration degree from Pace University in 1985.
David C. Reback was appointed a Director in November 1997. Since 1969,
Mr. Reback has been a partner with Reback & Potash, LLP, a law firm specializing
in litigation, appellate matters and real estate. Mr. Reback received a BA from
Syracuse University, and in 1965 he received a Juris Doctor's degree from
Syracuse University College of Law.
Based solely upon a review of Forms 3, 4 and 5 furnished during the
most recent fiscal year, it is believed, except as discussed below, that there
were no Section 16(a) reports filed untimely during the years ended June 30,
2000 and 1999.
19
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Summary Compensation Table for the years ended June 30, 2001, 2000
and 1999 is provided herein. This table provides compensation information on
behalf of the existing officers and directors who earned in excess of $100,000.
There are no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal
Year-End Option/SAR Value Table for the years ended June 30, 2001, 2000 and/or
1999. There are no long-term incentive plan ("LTIP") awards, or stock option or
stock appreciation rights except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 2001, 2000 and 1999
Annual Compensation Awards Payouts
Year Compen- Options/ LTIP
Name Position Ended Salary($) Bonus($) sation($) SARs Payouts
---- ------------ ------- --------- -------- --------- ------ -------
Surinder Rametra CEO 6/30/01 $108,915 8,464(1) NONE NONE
6/30/00 $200,000 12,731(3) NONE NONE
6/30/99 $202,733 15,262(5) NONE NONE
Ashok Rametra President 6/30/01 $215,077 $50,000 10,766(2) none NONE
6/30/00 $200,000 $25,000 12,779(4) NONE NONE
6/30/99 $174,980 11,652(6) NONE NONE
(1) Major Medical $3,531, Leased Auto $4,933
(2) Major Medical $3,058, Leased Auto $7,708
(3) Major Medical $3,941, Leased Auto $8,790
(4) Major Medical $5,611, Leased Auto $7,168
(5) Major Medical $6,472, Leased auto $8,790
(6) Major Medical $4,484, Leased auto $7,168
20
Year End Option Table. The following table sets forth certain
information regarding the stock options held as of June 30, 2001, by the
individuals named in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End (#) at Fiscal Year End (3)
Shares Acquired Value ---------------------------- -----------------------------
Name on exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------- ------------ -------------- ----------- -------------
Surinder Rametra(1) 0 0 1,047,000 1,250,000 0 $ 312,500
Ashok Rametra(2) 0 0 345,000 1,000,000 0 250.000
(1) Represents options to acquire: (i) 7,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 500,000 shares at $5.50 per share
exercisable through March 28, 2008; (iii) 250,000 shares at $4.67 per share
exercisable through September 27, 2008; (iv) 140,000 shares at $4.26 per
share exercisable through June 29, 2009; (v) 150,000 shares at $1.993 per
share exercisable through November 7, 2009 and (vi) 1,250,000 shares at
$.56 per share exercisable through April 23, 2011.
(2) Represents options to acquire: (i) 10,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 35,000 shares at 3.7125 per share
exercisable through October 8, 2008; (iii) 100,000 shares at $6.80 per
share exercisable through December 14, 2008; (iv) 200,000 shares at $1.993
per share exercisable through November 7, 2009 and (v) 1,000,000 shares at
$.563 per share excisable through November 14, 2010.
(3) Computation based on $.81, which was the June 30, 2001, closing price for
our common stock.
Option Grant Table. The following table sets forth certain information
regarding the stock options granted during the fiscal year ended June 30, 2000,
by us to the individuals named in the above Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Options
Granted to
Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year $ / Share Date
---- ----------- ----------- --------- ----
Surinder Rametra 1,250,000 44% $.56 2011
Ashok Rametra 1,000,000 35% $.563 2010
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth as of September 20, 2000, certain
information with respect to the beneficial ownership of the voting securities by
(i) any person (including any "group" as that term is used in Section 13(d)(3)
of the Securities Exchange Act known by ATEC to be the beneficial owner of more
than 5% of our voting securities, (ii) each director, (iii) each executive
officer named in the Summary Compensation table appearing herein, and (iv) all
executive officers and directors as a group. The table also sets forth the
respective general voting power of such persons taking into account the voting
power of our common stock and preferred stock combined.
Name and Address Amount and Nature
of Beneficial of Beneficial Percentage of
Owner Ownership of Voting Stock
Outstanding Common Stock Outstanding(1)
----------- ------------ --------------
Ashok Rametra (2) 1,261,242 12.4%
1762 Central Avenue
Albany, NY 12205
Surinder Rametra (3) 2,140,640 21%
69 Mall Drive
Commack, NY 11725
James Charles (4) 305,000 3%
69 Mall Drive
Commack, NY 11725
Praveen Bhutani 244,910 **
69 Mall Drive
Commack, NY 11725
David Reback (5) 25,000 **
69 Mall Drive
Commack, NY 11725
Stewart Benjamin _ **
69 Mall Drive
Commack, NY 11725
All directors and 3,752,882 37%
(2)(3)(4)(5)(6)
executive/officers as a group
(5 persons)
---------------
** Less than 1%
22
(1) Computed based upon a total of 7,347,689 shares of common stock, 8,371
shares of Series A preferred stock, 1,458 shares of Series B preferred
stock, 309,600 shares of Series C preferred stock and options to
acquire 2,533,000 shares of common stock. Each share of common stock
and preferred stock possesses one vote per share. Accordingly, the
foregoing represents an aggregate of 10,200,118 votes.
(2) The foregoing figure reflects the ownership of 229,146 shares of common
stock by Mr. Rametra and 387,096 common shares owned by Mr. Rametra's
spouse and children. The foregoing amount also assumes the exercise by
Mr. Rametra of options to acquire 645,000 shares of the common stock.
Mr. Rametra disclaims beneficial ownership of shares of ATEC securities
owned by other members of the Rametra family. Excludes non-vested
options to purchase 1,000,000 shares of common stock.
(3) The foregoing figure reflects the ownership of 382,640 shares of common
stock by Mr. Rametra and 200,000 shares by Mr. Rametra's spouse and
11,000 shares jointly. In addition, the foregoing assumes the exercise
by Mr. Rametra of options to acquire 1,547,000 shares of ATEC common
stock. Mr. Rametra disclaims beneficial ownership of the shares of ATEC
securities owned by other members of the Rametra family, including
independent children. Excludes non-vested options to purchase 1,250,000
shares of common stock
(4) The foregoing figure reflects ownership of 10,000 shares of common
stock by Mr. Charles. The foregoing amount also assumes the exercise by
Mr. Charles of options to acquire 295,000 shares of common stock.
Excludes non-vested options to purchase 300,000 shares of common stock.
(5) The foregoing figure reflects options for the purchase of 25,000 shares
of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Our Albany facility is leased from a company controlled by Surinder and
Ashok Rametra, officers and directors of ATEC. Our lease with this company
requires annual rental payments of approximately $108,000 per year plus all
expenses and taxes attributable to the operation of the premises. The Company
has not been a party to any significant transactions in the last fiscal year.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(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, 2001 and 2000
Consolidated Statements of Operations for the years
ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years
ended June 30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 2001, 2000 and 1999
Notes to 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
None.
(b) REPORTS ON FORM 8-K
November 2000
May 2001
(c) EXHIBITS
See Exhibit Index.
(d) Not Applicable.
24
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: /s/ JAMES J. CHARLES
-------------------------------
James J. Charles, Chief
Financial Officer and Director
Dated: September 28, 2001
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ SURINDER RAMETRA September 28, 2001
-----------------------------------------------------
Surinder Rametra, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/ ASHOK RAMETRA September 28, 2001
-----------------------------------------------------
Ashok Rametra, President, Secretary, Treasurer and
Director
/s/ STEWART BENJAMIN September 28, 2001
-----------------------------------------------------
Stewart Benjamin, Director
/s/ DAVID REBACK September 28, 2001
-----------------------------------------------------
David Reback, Director
/s/ PRAVEEN BHUTANI September 28, 2001
-----------------------------------------------------
Praveen Bhutani, Director
25
Exhibits
Number Description
21.1 List of Subsidiaries
26
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
ATEC GROUP, INC. AND SUBSIDIARIES
JUNE 30, 2001
I N D E X
---------
Page No.
--------
INDEPENDENT AUDITORS' REPORT ..................................... F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 2001 and 2000 .... F-2
Consolidated Statements of Operations
For the Years Ended June 30, 2001, 2000 and 1999 ......... F-3
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2001, 2000 and 1999 ......... F-4 - F-5
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2001, 2000 and 1999 .......... F-6
NOTES TO FINANCIAL STATEMENTS ..................................... F-7 - F-22
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 1515 Broadway
LEVENTHAL & CO., LLP NEW YORK, N.Y. 10036-5788
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 212-869-3333
FAX 212-764-3080
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, 2001 and 2000, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years ended June 30, 2001. 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, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years
ended June 30, 2001, 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 17, 2001
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
June 30,
------------------------------
2001 2000
-------------- --------------
Current assets:
Cash $ 1,555,020 $ 100,607
Accounts receivable - net 5,114,302 10,037,462
Inventories 1,666,633 2,356,825
Deferred taxes 581,510 459,456
Other current assets 585,634 1,594,027
-------------- --------------
Total current assets 9,503,099 14,548,377
Property and equipment - net 420,255 532,238
Goodwill - net 1,134,177 1,346,149
Other assets 51,667 63,753
-------------- --------------
$ 11,109,198 $ 16,490,517
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Revolving lines of credit $ 1,024,157 $ 2,173,776
Accounts payable 2,177,391 2,518,721
Accrued expenses 555,785 283,360
Deferred income 139,357 -
Other current liabilities 353,589 230,489
-------------- --------------
Total current liabilities 4,250,279 5,206,346
-------------- --------------
Stockholders' equity:
Preferred stocks 835,582 310,582
Common stock 73,477 73,477
Additional paid-in capital 11,864,674 11,823,086
Discount on preferred stocks (742,740) (278,640)
Deficit (4,543,043) (17,909)
-------------- --------------
7,487,950 11,910,596
Less: Treasury stock - at cost 629,031 626,425
-------------- --------------
Total stockholders' equity 6,858,919 11,284,171
-------------- --------------
$ 11,109,198 $ 16,490,517
============== ==============
See accompanying notes to financial statements.
F-2
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net sales $ 53,051,120 $ 71,937,680 $ 107,435,617
Cost of sales 46,767,529 60,353,009 96,317,894
------------- ------------- -------------
Gross profit 6,283,591 11,584,671 11,117,723
------------- ------------- -------------
Operating expenses:
Selling and administrative 10,489,929 10,824,623 12,679,751
Research and development 157,595 234,557 10,525
Amortization of goodwill 189,327 186,626 442,577
------------- ------------- -------------
Total operating expenses 10,836,851 11,245,806 13,132,853
------------- ------------- -------------
Income (loss) from operations (4,553,260) 338,865 (2,015,130)
------------- ------------- -------------
Other income (expense):
Impairment of long-lived assets (22,645) - (2,999,075)
Interest income 52,101 62,789 124,171
Interest expense (1,512) (11,467) (37,630)
Other income (expense) 38,450 8,291 (12,895)
------------- ------------- -------------
Total other income (expense) 66,394 59,613 (2,925,429)
------------- ------------- -------------
Income (loss) before income taxes (4,486,866) 398,478 (4,940,559)
Provision for (benefit from) income taxes 38,268 101,525 (641,331)
------------- ------------- -------------
Net income (loss) ($ 4,525,134) $ 296,953 ($ 4,299,228)
============= ============= =============
Earnings (loss) per common share:
Basic ($.64) $ .04 ($.62)
==== ===== ====
Diluted ($.64) $ .04 ($.62)
==== ===== ====
Weighted average shares outstanding:
Basic 7,088,603 7,177,432 6,885,069
============= ============= =============
Diluted 7,088,603 7,221,927 6,885,069
============= ============= =============
See accompanying notes to financial statements.
F-3
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) ($ 4,525,134) $ 296,953 ($ 4,299,228)
------------- ------------- -------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 228,665 274,877 254,982
Amortization of goodwill 189,327 186,626 442,577
Loss on abandonment of leasehold improvements - 1,438 -
Compensatory element of issuances of capital stock - 5,250 24,000
Loss on impairment of long-lived assets 22,645 - 2,999,075
Provision for doubtful accounts 645,535 42,216 469,211
Deferred income 139,357 - -
Deferred taxes (122,054) (208,166) (214,041)
Changes in assets and liabilities:
Accounts receivable 4,277,625 (1,413,178) 8,498,921
Inventories 690,192 (1,246,552) 680,422
Other current assets 1,008,393 (188,694) (828,656)
Revolving lines of credit (1,149,619) 239,242 (5,064,178)
Accounts payable (341,330) 808,958 (2,444,380)
Accrued expenses 333,325 (386,378) (496,332)
Income taxes payable - - (790,882)
Other current liabilities 123,100 (2,279) 175,711
------------- ------------- -------------
Total adjustments 6,045,161 (1,886,640) 3,706,430
------------- ------------- -------------
Net cash provided by (used in) operating activities 1,520,027 (1,589,687) (592,798)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (116,682) (58,274) (437,235)
Security deposits 12,086 (9,159) 18,818
Addition to goodwill - (13,000) (792,804)
------------- ------------- -------------
Net cash used in investing activities (104,596) (80,433) (1,211,221)
------------- ------------- -------------
Cash flows from financing activities:
Capital contribution 41,588 - -
Issuance of capital stock - 58,750 2,700,482
Purchase of treasury stock (2,606) (534,974) (91,451)
Repayments to related parties - - (2,967)
Bank overdraft - - (339,944)
------------- ------------- -------------
Net cash provided by (used in) financing activities 38,982 (476,224) 2,266,120
------------- ------------- -------------
Net increase (decrease) in cash 1,454,413 (2,146,344) 462,101
Cash at beginning of year 100,607 2,246,951 1,784,850
------------- ------------- -------------
Cash at end of year $ 1,555,020 $ 100,607 $ 2,246,951
============= ============= =============
See accompanying notes to financial statements.
F-4
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended June 30,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Income taxes $ 88,510 $ 50,170 $ 1,466,801
============ ============ ============
Interest $ 1,512 $ 11,467 $ 37,630
============ ============ ============
Supplemental Schedules of Noncash
Operating and Financing Transactions:
Issuance of common stock for services $ - $ 5,250 $ 24,000
============ ============ ============
Issuance of Preferred Stock Series J
convertible in connection with
settlement of a lawsuit $ 60,900 $ - $ -
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Preferred Stock Common Stock Additional
---------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
------- ------------ --------- ------------ ------------
Balance at July 1, 1998 374,029 $ 346,507 6,700,664 $ 67,006 $ 9,035,615
Purchase of treasury stock - - - - -
Shares issued for warrants
exercised - - 206,943 2,070 679,227
Shares issued for options
exercised - - 405,058 4,051 2,015,134
Shares issued in accordance
with employment agreement - - 9,697 97 23,903
Shares issued for conversion
of Preferred Series A and C (44,020) (25,417) 4,601 46 4,356
Net loss for the year - - - - -
------- ------------ --------- ------------ ------------
Balance at June 30, 1999 330,009 321,090 7,326,963 73,270 11,758,235
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
Net income for the year - - - - -
------- ------------ --------- ------------ ------------
Balance at June 30, 2000 319,429 310,582 7,347,689 73,477 11,823,086
Purchase of treasury stock - - - - -
Capital contribution - - - - 41,588
Issuance of convertible
Preferred Stock Series J 105,000 525,000 - - -
Net loss for the year - - - - -
------- ------------ --------- ------------ ------------
Balance at June 30, 2001 424,429 $ 835,582 7,347,689 $ 73,477 $ 11,864,674
======= ============ ========= ============ ============
Discount on Retained Treasury Stock Total
Preferred Earnings ------------------------ Stockholders'
Stocks (Deficit) Shares Amount Equity
------------ ------------ --------- ------------ ------------
Balance at July 1, 1998 ($ 309,105) $ 3,984,366 - $ - $ 13,124,389
Purchase of treasury stock - - (18,000) (91,451) (91,451)
Shares issued for warrants
exercised - - - - 681,297
Shares issued for options
exercised - - - - 2,019,185
Shares issued in accordance
with employment agreement - - - - 24,000
Shares issued for conversion
of Preferred Series A and C 21,015 - - - -
Net loss for the year - (4,299,228) - - (4,299,228)
------------ ------------ --------- ------------ ------------
Balance at June 30, 1999 (288,090) (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 9,450 - - - -
Net income for the year - 296,953 - - 296,953
------------ ------------ --------- ------------ ------------
Balance at June 30, 2000 (278,640) (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 (464,100) - - - 60,900
Net loss for the year - (4,525,134) - - (4,525,134)
------------ ------------ --------- ------------ ------------
Balance at June 30, 2001 ($ 742,740) ($ 4,543,043) (259,245) ($ 629,031) $ 6,858,919
============ ============ ======== ============ ============
See accompanying notes to financial statements.
F-6
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001, 2000, AND 1999
NOTE 1- GENERAL AND ACCOUNTING POLICIES:
(a) Organization and Presentation of Financial Statements:
ATEC Group, Inc. (the "Company" or "ATEC") was incorporated
under the laws of the State of Delaware on July 17, 1992. The
accompanying consolidated financial statements include the accounts of
ATEC Group, Inc. and all of its wholly owned subsidiaries and a 90%
owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
(b) Principal Business Activity:
The Company is 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, PC manufacturing, E-commerce and internet access 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-7
NOTE 1- GENERAL AND ACCOUNTING POLICIES: (Continued)
(d) Summary of Significant Accounting Policies:
(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:
The Company amortizes goodwill over its estimated period of
benefit, ranging from five to fifteen years. The goodwill is
periodically reviewed to evaluate the future economic benefits and/or
potential impairments which may effect recorded values.
(4) Revenue Recognition:
The Company recognizes revenue at the time products are
shipped to its customers, or when sales are made on a "cash and carry"
basis.
(5) Research and Development Costs:
Research and development costs are charged to expense as
incurred.
(6) Income Taxes:
The Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" which utilizes a
balance sheet approach for financial accounting and reporting of income
taxes, and requires that deferred tax assets and liabilities be
established at income tax rates expected to apply to taxable income in
periods in which the deferred tax asset or liability is expected to be
settled or realized.
F-8
NOTE 1- GENERAL AND ACCOUNTING POLICIES: (Continued)
(d) Summary of Significant Accounting Policies: (Continued)
(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. The recoverability of
goodwill is evaluated on a separate basis for each acquisition. Based
on an evaluation of its goodwill at June 30, 2001 and 1999, the Company
determined that $22,645 and $2,999,075, respectively, of goodwill, net
of accumulated amortization, associated with the Company's prior
acquisitions was impaired.
F-9
NOTE 1- GENERAL AND 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. For the years ended
June 30, 2001 and 1999, diluted earnings per share are not presented as
it is anti-dilutive. 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,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (loss) available to
common stockholders $(4,525,134) $ 296,953 $(4,299,228)
=========== =========== ===========
Weighted average shares
outstanding - basic 7,088,603 7,177,432 6,885,069
Employee stock options - 18,392 -
Acquisition options - 17,945 -
Convertible preferred stock - 8,158 -
----------- ----------- -----------
Weighted average shares
outstanding - diluted 7,088,603 7,221,927 6,885,069
=========== =========== ===========
Earnings (loss) per common share:
Basic ($.64) $ .04 ($.62)
==== ===== ====
Diluted ($.64) $ .04 ($.62)
==== ===== ====
(11) New Accounting Pronouncements:
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 and will
affect the Company's treatment of goodwill at the start of fiscal year
2002. 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 will
adopt FASB No. 142 beginning July 1, 2001, at which time amortization
of goodwill will cease. At this time, the Company has not determined
the complete impact of these Statements. However, for the year ended
June 30, 2001, the Company has recognized $189,327 of goodwill
amortization.
F-10
NOTE 2 - ACQUISITIONS.
(a) Logix Solutions, Inc.:
On April 7, 1998, the Company, pursuant to the terms of a
stock purchase agreement, acquired 90% of the issued and outstanding
capital stock of Logix Solutions, Inc. ("Logix"), a Colorado
corporation, which provides solutions to the Y2K problem. In
consideration for the shares acquired, the Company issued the following
securities:
1. 252,000 shares of common stock;
2. Options to purchase up to 548,700 shares of common stock
exerciseable at a price of $4.74 per share, expiring on
October 10, 1999;
3. Options to purchase up to 176,000 shares of common stock
exerciseable at a price of $7.50 per share, expiring on
October 10, 1999;
4. Options to purchase up to 252,000 shares of common stock
exercisable at a price of $10 per share, expiring on December
31, 2000;
5. $400,000 in cash.
The acquisition was accounted for as a purchase and resulted
in goodwill of $1,307,748. The remaining unamortized goodwill of
approximately $1,140,000 was reserved due to impairment in fiscal 1999.
(b) 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.
F-11
NOTE 3- EQUITY SECURITIES.
The Company's authorized and issued capital stock at June 30,
2001 and 2000 consists of the following:
Shares Issued
Shares or
Authorized Outstanding Amount
----------- --------- ------------
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 100,000,000 7,347,689 $ 73,477
========= ============
June 30, 2000:
--------------
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
--------- ------------
Total preferred 319,429 $ 310,582
========= ============
Common stock 70,000,000 7,347,689 $ 73,477
========= ============
(a) Common Stock:
The Company's Board of Directors approved the increase of the
number of authorized shares of the Company's common stock to
100,000,000 shares. The par value of the common stock is $.01.
(b) Treasury Stock:
From time to time, the Board of Directors authorizes
a common stock buy-back program. During the years ended June
30, 2001 and 2000, the Company purchased 1,300 and 239,945
shares of the Company's common stock at a cost of $2,606 and
$534,974, respectively.
F-12
NOTE 3- EQUITY SECURITIES. (Continued)
(c) Preferred Stock:
At June 30, 2001 and 2000, ATEC had four and three authorized
series of preferred stock, respectively; 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, 2001 and 2000 are described in detail in Note 3 above.
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, 2001, the A shareholders were due
$1,334 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 five shares, respectively, for each share of
common stock or approximately 29,200 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. All of the outstanding shares
shall then be automatically converted to common stock.
(d) Warrants:
At June 30, 2001, ATEC had outstanding warrants entitling the
holders to purchase common stock as follows:
Number of Exercise Expiration
Shares Price Date
--------- -------- -------------
18,000 3.75 July 22, 2002
60,000 3.75 July 22, 2002
The warrants are not valued in the financial statements as the
amounts are immaterial.
F-13
NOTE 3- EQUITY SECURITIES. (Continued)
(e) Options:
At June 30, 2001, there were 7,602,087 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:
For the Years Ended June 30,
----------------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- ---------- --------- ----------
Outstanding at
beginning of year 2,527,614 $ 4.39 2,602,072 $ 5.26 6,786,630 $ 7.68
Granted 6,218,500 1.05 789,500 2.26 826,500 4.40
Exercised - - (18,000) 3.26 (405,058) 4.99
Expired (314,027) 8.52 (765,700) 5.30 (70,000) 4.71
Cancelled (830,000) .57 (80,258) 3.46 (4,536,000) 8.75
--------- --------- ---------
Outstanding at
end of year 7,602,087 $ 1.81 2,527,614 $ 4.39 2,602,072 $ 5.26
========= ========== ========= ========== ========= ==========
Exercisable at
end of year 5,058,787 $ 2.45 1,604,114 $ 5.44 1,875,572 $ 5.73
========= ========== ========= ========== ========= ==========
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, 2001 Life Price June 30, 2001 Price
--------------- ------------- ----------- -------- --------------- -------
$.40 - $6.80 7,602,087 4.66 $1.81 5,058,787 $2.45
F-14
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,
2001, 2000 and 1999, respectively. Additionally, the weighted average
fair value of employee stock options granted in the years ended June
30, 2001, 2000 and 1999 was $1.93, $2.01 and $.40, 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,
--------------------------------
2001 2000 1999
-------- --------- --------
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 $1,155,001 ($860,477 net of
taxes), $986,845 ($735,200 net of taxes), and $2,044,716 ($1,318,533
net of taxes) for the years ended June 30, 2001, 2000 and 1999,
respectively. The pro forma effect on diluted earnings per common share
would have been a reduction of $.12, $.10 and $.19 for the years ended
June 30, 2001, 2000 and 1999, respectively. The pro forma effect on
basic earnings per common share would have been a reduction of $.12,
$.10 and $.19 for the years ended June 30, 2001, 2000 and 1999,
respectively.
NOTE 5- OPERATING LEASES.
ATEC conducts its operations under various noncancellable
operating leases expiring at various dates through 2005. Future minimum
rent payments, net of annual sublease rental income of $80,548 are as
follows:
For the Year
Ending June 30,
---------------
2002 $299,514
2003 219,769
2004 151,120
2005 143,395
--------
Total minimum
annual rental $813,798
========
Total rent expense for the years ended June 30, 2001, 2000 and
1999 amounted to $456,060, $460,084 and $404,350, respectively.
F-15
NOTE 6- REVOLVING LINES OF CREDIT.
At June 30, 2001, ATEC and its subsidiaries have agreements
with two financial institutions, whereby certain inventory purchases
are financed. The first line grants the Company terms and charges no
interest for 40 days and thereafter at rates ranging from prime plus
1/4% to 6-1/2% per annum. Borrowings under this line may be up to
$15,000,000. The line is collateralized by all the assets of the
Company. At June 30, 2001 and 2000, the borrowings under this line
amounted to $709,586 and $2,087,375. The second line grants the Company
terms and charges interest at the prime rate. Borrowings under this
line may be up to $775,000. This line is collateralized by the
inventory, subject to a prior lien. At June 30, 2001 and 2000, the
borrowings under this line amounted to $314,571 and $86,401.
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.
NOTE 8 - INCOME TAXES.
The Company's income tax provision consists of the following:
2001 2000 1999
---------- ---------- ----------
Current tax provision (benefit):
Federal $ 112,036 $ 188,675 ($ 362,696)
State 48,286 121,016 (64,594)
---------- ---------- ----------
160,322 309,691 (427,290)
---------- ---------- ----------
Deferred tax provision (benefit):
Federal (100,085) (170,696) (175,514)
State (21,969) (37,470) (38,527)
---------- ---------- ----------
(122,054) (208,166) (214,041)
---------- ---------- ----------
Income tax provision (benefit) $ 38,268 $ 101,525 ($ 641,331)
========== ========== ==========
F-16
NOTE 8 - INCOME TAXES. (Continued)
A reconciliation of the above effective tax rate to the
federal statutory rate is as follows:
2001 2000 1999
---------------------- ----------------------- -----------------------
% % %
----- ----- -----
Tax at statutory ($ 1,526,000) (34.0) $ 135,483 34.0 ($ 1,679,790) (34.0)
State income tax, net of
federal tax benefit (114,000) (2.5) (56,023) (14.0) (78,608) (1.6)
Effect of nondeduct-
ability of:
Amortization and
impairment
of goodwill 72,000 1.6 54,089 13.6 1,170,163 23.7
Tax expense and loss
limitations 16,000 0.4 55,472 13.9 (8,257) (0.2)
Effect of net operating
loss carryforward - - (72,519) (18.2) - -
Valuation allowance for
deferred tax assets 1,438,000 32.0 - - - -
Other 152,268 3.4 (14,977) (3.8) (44,839) (0.8)
------------ ----- ----------- ---- ------------ -----
$ 38,268 0.9 $ 101,525 25.5 ($ 641,331) (12.9)
============ ===== =========== ==== ============ =====
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,
---------------------------
2001 2000
------------ ------------
Net operating loss carryforward $ 1,524,000 $ 177,743
Allowance for bad debts 485,510 281,713
------------ ------------
Total deferred tax assets 2,009,510 459,456
Less: Valuation allowance for
deferred tax assets 1,438,000 -
------------ ------------
Total $ 571,510 $ 459,456
============ ============
F-17
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
CEO 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.
NOTE 10- OTHER FINANCIAL INFORMATION.
(a) Accounts receivable - Net:
Accounts receivable, net at June 30, 2001 and 2000 consists of
the following:
2001 2000
------------ ------------
Accounts receivable $ 6,357,064 $ 10,634,689
Allowance for doubtful accounts,
returns and discounts (1,242,762) (597,227)
------------ ------------
$ 5,114,302 $ 10,037,462
============ ============
For the years ended June 30, 2001, 2000 and 1999, $71,949,
($14,783) and $897,356, respectively, was recovered or charged to bad
debt expense.
(b) Other Current Assets:
Other current assets consist of the following at June 30, 2001
and 2000:
2001 2000
------------ ------------
Receivables from suppliers $ 140,546 $ 505,594
Prepaid expenses 242,811 134,167
Prepaid and refundable
income taxes 167,930 639,077
Sundry loans 34,347 315,189
------------ ------------
$ 585,634 $ 1,594,027
============ ============
F-18
NOTE 10- OTHER FINANCIAL INFORMATION. (Continued)
(c) Goodwill - Net:
Goodwill, net at June 30, 2001 and 2000 consists of the
following:
2001 2000
------------ ------------
Cost $ 5,727,573 $ 5,727,573
Less: Impairment 3,021,720 2,999,075
------------ ------------
2,705,853 2,728,498
Less: Accumulated amortization 1,571,676 1,382,349
------------ ------------
$ 1,134,177 $ 1,346,149
============ ============
Amortization charged to operations for the years ended June
30, 2001, 2000 and 1999 amounted to $189,327, $186,626 and $442,577,
respectively.
(d) Property and Equipment:
Property and equipment are carried at cost and consist of the
following at June 30, 2001 and 2000:
2001 2000
------------ ------------
Leasehold improvements $ 563,573 $ 470,905
Furniture and fixtures 244,293 234,855
Office equipment 887,852 873,276
Automobiles 110,598 110,598
------------ ------------
1,806,316 1,689,634
Less: Accumulated depreciation
and amortization 1,386,061 1,157,396
------------ ------------
$ 420,255 $ 532,238
============ ============
Depreciation and amortization charged to operations for the
years ended June 30, 2001, 2000 and 1999 amounted to $228,665, $274,877
and $254,982, respectively.
F-19
NOTE 10- OTHER FINANCIAL INFORMATION. (Continued)
(e) Other Current Liabilities:
Other current liabilities consist of the following at June 30,
2001 and 2000:
2001 2000
------------ ------------
Payroll taxes payable $ 38,592 $ 53,192
Sales tax payable 33,295 84,428
Customers with credit balances 281,702 92,869
------------ ------------
$ 353,589 $ 230,489
============ ============
(f) Transactions with Major Customers and Suppliers:
In each of the three years ended June 30, 2001, 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, 2001, 2000 and 1999, two
suppliers accounted for 45%, 55% and 65% of the Company's purchases,
respectively. At June 30, 2001, these two suppliers accounted for 59%
of accounts payable.
(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 amounting to approximately, $45,000, $-0- and $47,000
for the years ended June 30, 2001, 2000 and 1999, 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-20
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,
------------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Net sales:
TIS $ 17,437,079 $ 32,579,527 $ 42,218,303
B to B 33,525,488 35,311,719 65,134,311
Software - 2,330,065 2,539,703
Manufacturing 2,088,552 2,005,201 869,958
Elimination of
intersegment revenues - (288,832) (3,326,658)
-------------- -------------- --------------
$ 53,051,119 $ 71,937,680 $ 107,435,617
============== ============== ==============
Net income (loss):
TIS $ (2,403,235) $ (1,011,907) $ (1,202,830)
B to B (332,780) 1,316,876 (1,537,103)
Software (13,985) 337,216 (388,202)
Manufacturing (1,385,735) (207,959) (192,275)
Corporate (389,399) (137,273) (978,818)
-------------- -------------- --------------
$ (4,525,134) $ 296,953 $ (4,299,228)
============== ============== ==============
Depreciation:
TIS $ 165,649 $ 166,388 $ 128,624
B to B 29,887 32,506 53,233
Software - 21,350 35,106
Manufacturing 3,933 5,545 3,368
Corporate 29,196 49,088 34,651
-------------- -------------- --------------
$ 228,665 $ 274,877 $ 254,982
============== ============== ==============
Capital additions:
TIS $ 107,793 $ 52,150 $ 253,807
B to B 8,889 6,124 41,832
Software - - 400,000
Manufacturing - 13,000 392,804
Corporate - - 141,596
-------------- -------------- --------------
$ 116,682 $ 71,274 $ 1,230,039
============== ============== ==============
Identifiable assets:
TIS $ 825,454 $ 7,091,035 $ 7,205,285
B to B 3,765,364 6,566,091 4,202,432
Software 943,240 112,461 1,153,567
Manufacturing 911,199 1,947,502 563,082
Corporate 4,663,941 773,428 2,880,629
-------------- -------------- --------------
$ 11,109,198 $ 16,490,517 $ 16,004,995
============== ============== ==============
During the years ended June 30, 2001, 2000, and 1999, one
customer accounted for -0-%, 81.6% and $27.6%, respectively of the
software segment.
During the years ended June 30, 2001, 2000, and 1999, one
customer accounted for 68.3%, 30.5% and 13.5%, respectively of the
manufacturing segment.
F-21
NOTE 13- SUPPLEMENTAL FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED (UNAUDITED):
September 30, December 31, March 31, June 30,
2000 2000 2001 2001
--------------- --------------- --------------- ---------------
Net sales $ 14,948,683 $ 13,435,283 $ 14,096,629 $ 10,570,525
=============== =============== =============== ===============
Gross profit $ 2,190,346 $ 1,803,946 $ 1,306,619 $ 982,680
=============== =============== =============== ===============
Net loss $ (254,838) $ (421,365) $ (1,136,289) $ (2,712,642)
=============== =============== =============== ===============
Loss per share:
Basic ($0.04) ($0.06) ($0.16) ($0.38)
====== ====== ====== ======
Diluted ($0.04) ($0.06) ($0.16) ($0.38)
====== ====== ====== ======
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
--------------- --------------- --------------- ---------------
Net sales $ 20,188,643 $ 17,531,550 $ 15,592,963 $ 18,624,524
=============== =============== =============== ===============
Gross profit $ 3,817,707 $ 3,088,381 $ 2,483,512 $ 2,195,071
=============== =============== =============== ===============
Net income (loss) $ 270,129 $ 136,251 $ 138,184 $ (247,611)
=============== =============== =============== ===============
Earnings (loss) per share:
Basic $0.04 $0.02 $0.02 ($0.03)
===== ===== ===== ======
Diluted $0.04 $0.02 $0.02 ($0.03)
====== ===== ===== ======
F-22