SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_____ to _____
Commission File Number 0-22710
ATEC GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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(State or other jurisdiction of (IRS. Employer
corporation or organization) Identification Number)
69 Mall Drive, Commack, New York 11725
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 543-2800
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Securities registered pursuant to Section 12(b) of the Act: Common Stock $.01
par value
Securities registered pursuant to Section 12(g) of the Act: Series A Preferred
Stock $.01 par
value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES [X] NO [ ]
On September 20, 2002, the aggregate market value of the voting common
equity of ATEC Group, Inc., held by non-affiliates of the Registrant was
$2,284,974* based on the closing price of $.35 for such common stock on said
date as reported by the American Stock Exchange. On such date, there were
8,347,689 shares of common stock of the Registrant outstanding.
* Excludes 1,819,192 shares of common stock beneficially owned by
Surinder Rametra, Ashok Rametra, Praveen Bhutani, Balwinder Singh Bathla,
Stewart Benjamin, James Charles and David Reback, the officers and directors of
the Company.
ii
ATEC GROUP, INC.
Form 10-K
Year Ended June 30, 2002
Table of Contents
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PART I Page
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Item 1. Business.......................................................2-6
Item 2. Properties.......................................................6
Item 3. Legal Proceedings................................................7
Item 4. Submission of Matters to a Vote of
Security Holders...............................................7
Part II
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Item 5. Market for Common Stock
and Related Stockholder Matters................................8
Item 6. Selected Financial Data..........................................9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............10-15
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk.............................................15
Item 8. Financial Statements and Supplementary Data.....................15
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.........................................15
Part III
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Item 10. Directors and Executive Officers
of the Registrant..........................................16-17
Item 11. Executive Compensation.......................................18-23
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters........................................24-26
Item 13. Certain Relationships and Related
Transactions...............................................26-27
Part IV
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Item 14. Controls and Procedures.........................................28
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.....................................28-29
Signatures...................................................................30
Certifications............................................................31-36
Financial Statements F-1
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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;
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, e-commerce, and
Internet/Intranet solutions.
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. 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.
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.
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.
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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, Dell, 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; and
o Creating a consolidated new corporate structure to streamline administrative
functions.
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;
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;
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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, Toshiba, Gateway, Epson, and
Hewlett-Packard/Compaq generated over 50% of our revenue for the year ended June
30, 2002. 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.
Global Distribution
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.
Global Distribution 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.
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.
Technology Integration Services
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
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(trouble shooting, networking, custom configuration of technology) and to create
an enterprise focused team: our 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:
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 and Internet integration
7. End-user support
8. Special technology and markets
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.
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.
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PATENTS AND TRADEMARKS
Patented Technology
The U.S. Patent & Trademark Office awarded us a patent for our advanced
PC motherboard and chassis design. The patent addresses our Nexar Division PC's
Inverted Socket Process Architecture and design that place the processor, system
memory and cache sockets on the undercarriage of the motherboard.
Trademark
On May 11, 1999, the U.S. Patent and Trademark Office granted us a
trademark for Nexar. The registration is enforceable for ten (10) years.
EMPLOYEES
As of September 16, 2002, there was an aggregate of approximately 57
employees, including 4 administrators, 19 staff persons, 6 managers, 12
full-time sales persons, 14 technical and 2 warehouse personnel. We have no
collective bargaining agreements and believe that relations with our employees
are good.
See Note 12 to the Consolidated financial statements contained
elsewhere herein for our segment information.
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 $180,130, plus certain expenses. We are currently subletting
approximately 18,500 square feet for $85,600 per annum. 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 3,000 square feet and
requires annual rental payments of $48,000, plus other expenses under a lease
expiring in 2007. Our Pinebrook, New Jersey facility occupies 5,328 square feet
and requires annual payments of approximately $48,500 per year, plus other
expenses under a lease expiring in May 2007.
We believe that our current facilities are suitable for our present and
projected needs. We do not own any real property.
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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. We have reached a
settlement with the plaintiffs subject to court approval. This settlement will
be paid by our insurance carrier.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the last quarter of fiscal year 2002, we did not submit any
matter to the vote of our stockholders.
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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
---- ---
2000
Quarter ended 9/30........................... $ 2.313 $ 1.625
Quarter ended 12/31.......................... 2.000 0.438
2001
Quarter ended 3/31.......................... 1.000 0.370
Quarter ended 6/30.......................... 0.810 0.380
Quarter ended 9/30.......................... 0.840 0.370
Quarter ended 12/31......................... 0.840 0.430
2002
Quarter ended 3/31.......................... 0.790 0.430
Quarter ended 6/30.......................... 0.500 0.400
On September 16, 2002, there were approximately 260 holders of record
of our common stock, 17 holders of record of Series A preferred shares, 294
holders of record of Series C 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, 2002, have been derived from audited financial
statements. This information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report and
"Management's Discussion and Analysis."
Operating Data 2002 2001 2000 1999 1998
-------------- ---- ---- ---- ---- ----
Net Sales $ 39,032,043 $ 53,051,120 $ 71,937,680 $107,435,617 $187,150,614
Income or (Loss) from
continuing operations $ (1,676,408) $ (4,525,134) $ 296,953 $ (4,299,228) $ 2,740,066
Income (Loss) per
common share:
Basic $ (.24) $ (.64) $ .04 $ (.62) $ .45
Diluted $ (.24) $ (.64) $ .04 $ (.62) $ .43
Balance Sheet Data
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Total Assets $ 7,801,950 $ 11,109,198 $ 16,490,517 $ 16,004,995 $ 26,634,164
Long-term obligations Nil Nil Nil Nil Nil
Cash dividends per
common share Nil Nil Nil Nil Nil
Results for 2002 include a charge of $220,000 for the impairment of goodwill for
our Nexar patents and trademark.
Results for fiscal 2001 include 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
General
We are an integrator and reseller of computer hardware, software and
networking products, primarily for commercial customers. We offer our customers
single-source solutions, customized to their information systems needs, by
integrating analysis, design and implementation services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of our revenues have been derived from product sales. We generally do not
develop software products. However, certain computer hardware products sold by
us are loaded with prepackaged software products.
Fiscal 2002 compared to Fiscal 2001
Revenues for the fiscal year ended June 30, 2002 ("fiscal 2002")
decreased to $39.0 million from $53.1 million for the prior year, a decrease of
approximately 27%. This decrease is primarily attributable to a significant drop
in sales in our TIS division due to continued weakness in the PC industry. Gross
profit for fiscal 2002 decreased to $5.4 million from $6.3 million for 2001, a
14% decrease due to the decreased revenues. Gross margin for fiscal 2002 was 14%
as compared to 12% for the prior year.
Fiscal 2002 operating expenses decreased to $6.9 million as compared to
$10.6 million (exclusive of amortization of intangible assets) for the prior
year. The 3.5% decrease in operating expenses is related primarily to
non-recurring charges of $950,000 in 2001 for the settlement of litigation of
$625,000 and $325,000 related to the temporary control of the Company by Applied
Digital Solutions. We also reduced our headcount and salary expense in 2002 by
$1,755,000.
In 2002 we incurred a one-time charge of $220,000 for impaired
Goodwill. We also earned $41,000 of interest income and incurred no interest
expense in 2002.
The provision for income taxes for 2002 was $63,678 as compared to an
expense of $38,000 for 2001. The current year benefit from income taxes was
reduced by a reserve against our deferred tax asset of $473,000.
As a result of the above, the Company incurred a loss of $1,676,408 for
2002 compared to a loss of $4,525,134 in 2001. For 2002, basic and diluted net
loss per share was $.24 compared to basic and diluted loss of $.64 per share in
the prior year. Basic and diluted average shares outstanding were 6,988,054 for
2002.
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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.
LIQUIDITY AND CAPITAL RESOURCES
The cash position was $1,382,722 at June 30, 2002, a decrease of
$172,298 as compared to June 30, 2001. Working capital at June 30, 2002, was
$3,662,451 as compared to working capital of $5,253,000 at June 30, 2001. Cash
used for investing activities totaled $29,753. We believe that our resources are
adequate to meet our capital requirements over the next twelve months.
To accommodate our financial needs for inventory financing, we have
arranged a line of credit with one financial institution in the aggregate amount
of $775,000. At June 30, 2002, our indebtedness was $368,292, or a decrease of
$655,865 compared to June 30, 2001.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Note 1 to this consolidated financial statements in the
Annual Report on Form 10-K for the fiscal year ended June 30, 2002 describes the
significant accounting policies and methods used in the preparation of the
consolidated
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financial statements. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, inventory allowances, and goodwill
impairments. Actual results could differ from these estimates. The following
critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
Inventory purchases and commitments are based upon future demand
forecasts. If there is a sudden and significant decrease in demand for our
products or there is a higher risk of inventory obsolescence because of rapidly
changing technology and customer requirements, we may be required to increase
our inventory allowances and our gross margin could be adversely affected.
We will perform goodwill impairment tests on an annual basis and
between annual tests in certain circumstances. In assessing the recoverability
of the Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
Issues And Uncertainties
The following issues and uncertainties, among others, should be considered in
evaluating the Companys financial outlook.
The computer industry is characterized by a number of potentially
adverse business conditions, including pricing pressures, evolving distribution
channels, market consolidation and a decline in the rate of growth in sales of
personal computers. Heightened price competition among various hardware
manufacturers may result in reduced per unit revenue and declining gross profit
margins. As a result of the intense price competition within our industry, we
have experienced increasing pressure on our gross profit and operating margins
with respect to our sale of products. Our inability to compete successfully on
the pricing of products sold, or a continuing decline in gross margins on
products sold due to adverse industry conditions or competition, may have a
material adverse effect on our business, financial condition and results of
operations.
An integral part of our strategy is to increase our value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires us, among
other things, to attract and retain highly skilled technical employees in a
competitive labor market, provide additional training to our sales
representatives and enhance our existing service management system. We cannot
predict whether
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we will be successful in increasing our focus on providing value-added services,
and the failure to do so may have a material adverse effect on our business,
results of operations and financial condition.
To date, our revenues have been based primarily upon sales in the New
York Metropolitan area and Albany, New York. Our strategy, encompassing the
expansion of service offerings and the expansion of existing offices, has
challenged and will continue to challenge our senior management and
infrastructure. We cannot predict our ability to respond to these challenges. If
we fail to effectively manage our planned growth, there may be a material
adverse effect on our business, results of operations and financial condition.
The success of our strategy depends in large part upon our ability to
attract and retain highly skilled technical personnel and sales representatives,
including independent sales representatives, in a very competitive labor market.
Our ability to grow our service offerings has been somewhat limited by a
shortage of qualified personnel, and we cannot assure you that we will be able
to attract and retain such skilled personnel and representatives. The loss of a
significant number of our existing technical personnel or sales representatives,
difficulty in hiring or retaining additional technical personnel or sales
representatives, or reclassification of our sales representatives as employees
may have a material adverse effect on our business, results of operations and
financial condition.
The computer industry is characterized by intense competition. We
directly compete with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces and/or the Internet. The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions, and manufacturers of personal computers may
increase competition by offering a range of services in addition to their
current product and service offerings. In the future, we may face further
competition from new market entrants and possible alliances between existing
competitors. Moreover, additional suppliers and manufacturers may choose to
market products directly to end users through a direct sales force and/or the
Internet rather than or in addition to channel distribution, and may also choose
to market services, such as repair and configuration services, directly to
end-users. Some of our competitors have or may have, greater financial,
marketing and other resources, and may offer a broader range of products and
services, than us. As a result, they may be able to respond more quickly to new
or emerging technologies or changes in customer requirements, benefit from
greater purchasing economies, offer more aggressive hardware and service pricing
or devote greater resources to the promotion of their products and services. We
may not be able to compete successfully in the future with these or other
current or potential competitors.
Our business is dependent upon our relationships with major
manufacturers and distributors in the computer industry. Many aspects of our
business are affected by our relationships with major manufacturers, including
product availability, pricing and related terms, and reseller authorizations.
The increasing demand for personal computers and ancillary equipment has
resulted in significant product shortages from time to time, because
manufacturers have been unable to produce sufficient quantities of certain
products to meet demand. In addition, many manufacturers have adopted "just in
time" manufacturing principles that can
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reduce the immediate availability of a wide range of products at any one time.
We cannot predict that manufacturers will maintain an adequate supply of these
products to satisfy all the orders of our customers or that, during periods of
increased demand, manufacturers will provide products to us, even if available,
or at discounts previously offered to us. In addition, we cannot assure you that
the pricing and related terms offered by major manufacturers will not adversely
change in the future. Our failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of our relationship with a major
manufacturer or our inability in the future to develop new relationships with
other manufacturers may have a material adverse effect on our business,
financial condition and results of operations. On May 3, 2002, the
Hewlett-Packard Company and Compaq Computer Corporation merged. ATEC sells the
products of both companies and we believe that we have strong relationships with
both companies. While we do not believe that there will be a material adverse
effect on our business, financial condition and results of operations as a
result of this merger, there can be no assurance that such a material adverse
effect will not occur.
The markets for our products and services are characterized by rapidly
changing technology and frequent introduction of new hardware and software
products and services. This may render many existing products and services
noncompetitive, less profitable or obsolete. Our continued success will depend
on our ability to keep pace with the technological developments of new products
and services and to address increasingly sophisticated customer requirements.
Our success will also depend upon our abilities to address the technical
requirements of our customers arising from new generations of computer
technologies, to obtain these new products from present or future suppliers and
vendors at reasonable costs, to educate and train our employees as well as our
customers with respect to these new products or services and to integrate
effectively and efficiently these new products into both our internal systems
and systems developed for our customers. We may not be successful in
identifying, developing and marketing product and service developments or
enhancements in response to these technological changes. Our failure to respond
effectively to these technological changes may have a material adverse effect on
our business, financial condition and results of operations.
Rapid product improvement and technological change characterize the
computer industry. This results in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory devaluation due to price reductions on current
products. Certain of our suppliers also provide stock balancing to us pursuant
to which we are able to return unsold inventory to a supplier as a partial
credit against payment for new products. There are often restrictions on the
dollar amount of inventory that we can return at any one time. Price protection
and stock balancing may not be available to us in the future, and, even if
available, these measures may not provide complete protection against the risk
of excess or obsolete inventories. Certain manufacturers have reduced the period
for which they provide price protection and stock balancing rights. Although we
maintain a sophisticated proprietary inventory management system, we cannot
assure you that we will continue to successfully manage our existing and future
inventory. Our failure to successfully manage our current or future inventory
may have a material adverse effect on our business, financial conditions and
results of operations.
14
As a result of the rapid changes that are taking place in computer and
networking technologies, product life cycles are short. Accordingly, our product
offerings change constantly. Prices of products change, with generally higher
prices early in the life cycle of the product and lower prices near the end of
the product's life cycle. The computer industry has experienced rapid declines
in average selling prices of personal computers. In some instances, we have been
able to offset these price declines with increases in units shipped. There can
be no assurance that average selling prices will not continue to decline or that
we will be able to offset declines in average selling prices with increases in
units shipped.
Most of the personal computers we sell utilize operating systems
developed by Microsoft Corporation. The United States Department of Justice has
brought a successful antitrust action against Microsoft, which could delay the
introduction and distribution of Microsoft products. The potential
unavailability of Microsoft products could have a material adverse effect on our
business, results of operations and financial condition.
ITEM 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.
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
15
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 62 Chairman of the Board
Balwinder Singh Bathla 46 Chief Executive Officer and
Director
Ashok Rametra 50 President, Secretary,
Treasurer and Director
James J. Charles 59 Chief Financial Officer and
Director
Praveen Bhutani 55 Director
David C. Reback 60 Director
Stewart Benjamin 38 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. He resigned as Chief Executive Officer in January
2002. Prior to June 1994 Mr. Rametra was president of one of our subsidiaries.
Mr. Rametra received a Bachelor's degree in Mechanical Engineering from the
Punjab Engineering College, India and a Master's degree in Industrial
Engineering from the Indian Institute of Technology in 1965 and 1969
respectively. In 1976, Mr. Rametra received a Masters of Business Administration
Degree in Finance from New York University.
Balwinder Singh Bathla was appointed as the Chief Executive Officer and
Director of the Company in January 2002. Prior to 2002 he was the Chief
Executive Officer of Advance Computer Management Group, Inc., a computer sales
company. Prior to 1998, he was the
16
President and a Director of the Company.
Ashok Rametra was appointed President in January 1999. He has been the
Company's Secretary, Treasurer 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 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 Caribbean Printing Industries,
Inc., 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., a cable manufacturing company and The
Options Group, Inc., a placement company. 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.
To our knowledge, based solely on a review of such materials as are
required by the Securities and Exchange Commission, none of our officers,
directors or beneficial holders of more than ten percent of our issued and
outstanding shares of Common Stock has failed to timely file with the Securities
and Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended June 30, 2002.
17
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Summary Compensation Table for the years ended June 30, 2002, 2001
and 2000 is provided herein. This table provides compensation information on
behalf of the Chief Executive Officer and other officers who earned in excess of
$100,000. There are no Option/SAR Grants, Aggregated Option/SAR Exercises or
Fiscal Year-End Option/SAR Value Table for the years ended June 30, 2002, 2001
and/or 2000. There are no long-term incentive plan ("LTIP") awards, or stock
option or stock appreciation rights except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 2002, 2001 and 2000
Annual Compensation Awards Payouts
Year Compen- Options/ LTIP
Name Position Ended Salary($) Bonus($) sation($) SARs Payouts
---- -------- ----- --------- -------- --------- ------ -------
Surinder Rametra Chairman* 6/30/02 $159,615 14,367(1)
6/30/01 $108,915 8,464(2) NONE NONE
6/30/00 $200,000 12,731(4) NONE NONE
Ashok Rametra President 6/30/02 $181,731 10,772(5)
6/30/01 $215,077 $50,000 10,766(3) NONE NONE
6/30/00 $200,000 $25,000 12,779(6) NONE NONE
Balwinder Singh CEO* 6/30/02 $ 64,038 3,900(7)
Bathla
* Surinder Rametra was the Company's Chief Executive Officer during the fiscal
years ended June 30, 2000 and 2001 and part of 2002. Mr. Bathla became Chief
Executive Officer in January 2002.
(1) Major Medical $6,567, Leased Auto $7,800
(2) Major Medical $3,531, Leased Auto $4,933
(3) Major Medical $3,058, Leased Auto $7,708
(4) Major Medical $3,941, Leased Auto $8,790
(5) Major Medical $3,064, Leased Auto $7,708
(6) Major Medical $5,611, Leased Auto $7,168
(7) Leased auto $3,900
Year End Option Table. The following table sets forth certain
information regarding the stock options held as of June 30, 2002, by the
individuals named in the above Summary Compensation Table.
18
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End (#) at Fiscal Year End (4)
Shares Acquired Value ---------------------------- ----------------------------
Name on exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------- ----------- ------------- ----------- -------------
Surinder Rametra(1) 0 0 2,297,000 750,000 0 $ 0
Ashok Rametra(2) 0 0 1,345,000 750,000 0 0
Balwinder Singh Bathla(3) 0 0 100,000 -- 0 0
(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 and 750,000 shares at
$.50 per share exercisable through November 16, 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 and 750,000 shares at
$.50 per share exercisable through November 16, 2011.
(3) Represents options to acquire 100,000 shares at $3.75 per share exercisable
through December 19, 2006.
(4) Computation based on $.40, which was the June 28, 2002, 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, 2002,
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 750,000 28% $.50 2011
Ashok Rametra 750,000 28% $.50 2011
Balwinder Singh Bathla
19
EMPLOYMENT AGREEMENTS
Surinder Rametra, Balwinder Singh Bathla, and Ashok Rametra our
executive officers, all have employment agreements that expire December 31,
2002, except for Mr. Balwinder Singh Bathla, whose agreement expires December
31, 2004. The agreements contain provisions for base compensation, termination
of employment and change-in-control arrangements. The agreements provide annual
compensation of $250,000 for Ashok Rametra and Balwinder Singh Bathla and
$200,000 for Surinder Rametra. Changes to the annual compensation are determined
each year by the compensation committee. In the event the Company is sold or a
change in control occurs the Company may terminate these agreements at any time
within 12 months following the transaction date provided that the employee
receives compensation up to 18 months (in the case of Mr. Bathla 12 months
compensation or the balance of the term of his agreement).
BOARD OF DIRECTORS COMPENSATION
All directors are entitled to reimbursement of reasonable travel and
lodging expenses related to attending meetings of the board of directors and any
committee on which they serve. On January 9, 2001, our stockholders approved
that our non-employee directors receive up to $5,000 for attendance at each
quarterly meeting of the board of directors plus up to $1,000 for attendance at
each committee meeting. Non-employee directors are also eligible to participate
in and receive stock options under the 2000 Plan. Directors who are employees
receive no fees for attending meetings of the board of directors or any
committee on which they serve.
During the fiscal year ended June 30, 2002 no director received any fees
for attending meetings.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
In August 1994, the board of directors established a compensation
committee, which is responsible for decisions regarding salaries, stock option
grants and other matters regarding executive officers and key employees of ATEC.
During fiscal 2002,Ashok Rametra, David C. Reback and Praveen Bhutani were
members of the compensation committee. . In the opinion of the board of
directors, Mr. Reback and Mr. Bhutani are independent of management and free of
any relationship which would interfere with their exercise of independent
judgment as a member of our compensation committee. Mr. Rametra is not
independent based on his status as both an employee and executive officer of
ATEC. See Item 13. "Certain Relationships and Related Transactions" for more
information about Mr. Rametra's relationship with the Company.
20
REPORT OF THE COMPENSATION COMMITTEE
This report outlines the framework used for making compensation decisions.
Management's compensation philosophy and the criteria used for making
compensation decisions in fiscal 2002 regarding the Chief Executive Officer and
the other named executive officers is set below.
Framework for Compensation Decisions.
The board of directors has overall responsibility for compensation and
benefit programs. The board of directors created the compensation committee in
August 1994 to facilitate its fulfillment of this responsibility. The committee
administers ATEC's salary program and recommends to the board of directors
grants of stock options under our stock option plans. The committee specifically
reviews and recommends for board approval all decisions relating to the
compensation of the Chief Executive Officer and other named executive officers.
Philosophy of Management Compensation.
ATEC has an aggressive goal to significantly improve stockholder value
by being an industry growth leader. The committee recognizes that the
compensation program must enable ATEC to attract, retain, and motivate key
employees who are committed to creating stockholder value.
Criteria Used for Making Compensation Decisions in Fiscal 2002.
This section describes the criteria used by the board of directors and
the compensation committee regarding compensation decisions in fiscal 2002
affecting the Chief Executive Officer and other executive officers named in the
summary compensation table above. Before the establishment of the compensation
committee, salaries were based on individual employment agreements and any
bonuses were reflective of an individual's performance during the year and that
individual's current compensation compared to competitive market practices.
Base Salary.
In fiscal 2002, the committee reviewed and compared various executive
compensation programs established by competitors in ATEC's industry to determine
whether compensation levels for ATEC's executive officers were consistent with
competitive practice for companies in the same line of business. The committee
reviewed base salaries, bonuses and whether executive officers were granted
stock options at these comparable companies. The committee believed that these
levels should serve as a barometer of the compensation levels to which executive
compensation should be compared. Based on these comparisons, the committee
recommended and the board of directors approved the base salary for each of the
executive officers named in the summary compensation table effective July 1,
2001 and for Mr. B. Singh Bathla effective January 1, 2002.
Bonuses.
21
In fiscal 2002, no bonuses were awarded.
Stock Options.
In fiscal 2002, the committee recommended, and the board of directors
approved, grants of incentive stock options to each of the executive officers
named in the summary compensation table above.
The committee believes that our compensation practices and plans bring
ATEC's executives into line with current market conditions for pay and benefits
in its industry and supports ATEC's mission and strategies going forward.
Ashok Rametra
David Reback
Praveen Bhutani
22
PERFORMANCE GRAPH
Total Return To Shareholder's
(Dividends reinvested monthly)
ANNUAL RETURN PERCENTAGE
Years Ending
Company / Index Jun98 Jun99 Jun00 Jun01 Jun02
-----------------------------------------------------------------------------------------
ATEC GROUP INC 142.20 -47.46 -45.16 -61.88 -50.62
S&P SMALLCAP 600 19.46 -2.31 14.39 11.12 0.27
S&P 600 COMPUTER HARDWARE -43.51 22.12 -52.56 -31.04 3.55
INDEXED RETURNS
Base Years Ending
Period
Company / Index Jun97 Jun98 Jun99 Jun00 Jun01 Jun02
-----------------------------------------------------------------------------------------
ATEC GROUP INC 100 242.20 127.26 69.79 26.60 13.14
S&P SMALLCAP 600 100 119.46 116.70 133.49 148.32 148.73
S&P 600 COMPUTER HARDWARE 100 56.49 68.99 32.73 22.57 23.37
TOTAL SHAREHOLDER RETURNS
[GRAPHIC OMITTED]
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The following table sets forth as of September 20, 2002, 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)
----------- ------------ --------------
Balwinder Singh Bathla(2) 425,000 3.0%
69 Mall Drive
Commack, NY 11725
Ashok Rametra(3) 2,272,242 16.5%
1762 Central Avenue
Albany, NY 12205
Surinder Rametra(4) 3,408,040 25%
69 Mall Drive
Commack, NY 11725
James Charles(5) 605,000 3%
69 Mall Drive
Commack, NY 11725
Praveen Bhutani(7) 254,910 2%
69 Mall Drive
Commack, NY 11725
David Reback(6) 36,000 **
69 Mall Drive
Commack, NY 11725
Stewart Benjamin(8) 10,000 **
69 Mall Drive
Commack, NY 11725
24
All directors and (2)(3)(4)(5)(6)(7)(8) 7,011,192 49%
executive/officers as a group (7 persons)
----------------
** Less than 1%
(1) Computed based upon a total of 8,347,689 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 5,192,000 shares of common stock. Each share of common stock
and preferred stock possesses one vote per share. Accordingly, the
foregoing represents an aggregate of 13,859,118 votes.
(2) The foregoing figure reflects the ownership of 325,000 shares of common
stock by Mr. Bathla and options to acquire 100,000 shares of common
stock.
(3) The foregoing figure reflects the ownership of 240,146 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 1,645,000 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 750,000 shares of common stock.
(4) The foregoing figure reflects the ownership of 400,040 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 2,797,000 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 750,000
shares of common stock
(5) 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 595,000 shares of common stock.
Excludes non-vested options to purchase 200,000 shares of common stock.
(6) The foregoing figure reflects ownership of 1,000 shares of common stock
and options for the purchase of 35,000 shares of common stock.
(7) The foregoing figure reflects ownership of 244,910 shares of common
stock by Mr. Bhutani. The foregoing also assumes the exercise of
options to acquire 10,000 shares of common stock.
(8) The foregoing figures reflect options for the purchase of 10,000 shares
of common stock.
25
The following table gives information about the Company's common stock
that may be issued upon the exercise of options, warrants and rights under all
of the Company's equity compensation plans as of June 30, 2002. The table
includes the following plans: 1997 Stock Option Plan; and 2001 Flexible Stock
Plan.
Number of Number of securities
Securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column (a))
=================================================== ======================= ================= ============================
(a) (b) (c)
======================= ================= ============================
Equity compensation plans approved by security
holders:
1997 Stock Option Plan 2,332,203 $ 3.687 -0-
2001 Flexible Stock Plan 6,311,200 $ 0.545 2,834,597
=========== ========= ============
Total 8,643,403 $ 4.232 2,834,597
=========== ========= ============
====================================================================================================================================
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.
In April 2001, the Company entered the IT enabled services market. The
Company had no revenue from this division. In April 2002 we sold the division to
ITES, LLC, a company controlled by our Chairman, Surinder Rametra for 10% of its
pre-tax profits for a period of three years ending December 31, 2004 not to
exceed $100,000. At June 30, 2002 the company had revenues of $2,652 and a loss
of $37,000.
In March 2002, we paid $223,606 to Advance Computer Management Group
(ACM), a company owned and controlled by our Chief Executive Officer Balwinder
Singh Bathla. The payments were for the purchase of fixed assets and inventory
of $30,558, expenses paid by ACM for Mr. Bathla, $25,807 and $167,241 to
purchase notes and over advances on commissions for former ACM employees who
entered into sales consulting agreements with us. The notes of
26
$119,444 are guaranteed by ACM.
Our Chief Executive Officer, Balwinder Singh Bathla, President, Ashok
Rametra and two non-executive officers , Arvin Gulati and Rajnish Rametra,
invested $25,000 each in a company controlled by Mr. Sonu Sodhi who is a
stockholder of ATEC and has a sales consulting agreement with us. Rajnish
Rametra is the brother of Ashok Rametra and Surinder Rametra, our Chairman.
27
PART IV
-------
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
Not Applicable.
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Operations for the years ended June 30,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended June 30, 2002,
2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) OTHER SCHEDULES
All other schedules are omitted since the required information is not
present or is not present in an amount sufficient to require submission of
schedules, or because the information required is included in the financial
statements and notes thereto.
(3) EXHIBITS
See c below.
(b) REPORTS ON FORM 8-K
None
28
(c) EXHIBITS
Number Description
*3.1 Certificate of Incorporation of the Company
*3.2 Certificate of Amendment of Certificate of Incorporation,
filed October21, 1992
*3.3 By-laws of the Company
*3.4 Certificate of Amendment of Certificate of Incorporation,
filed December 22, 1992
*3.5 Form of Certificate of Powers, Designations, Preferences and
Rights of the Series A 10% Cumulative Convertible Preferred
Stock
*4.7 Form of Common Stock Certificate
*4.9 Form of Preferred Stock Certificate
21.1 List of Subsidiaries
23.1 Consent of Weinick Sanders Leventhal & Co LLP
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference from Registration Statement on Form SB-2
(registration no. 33-54356) filed by the Company with the Securities and
Exchange Commission on November 9, 1992.
(d) Not Applicable.
29
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
(Principal Financial and Accounting Officer)
and a Director
Dated: September 26, 2002
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 26, 2002
-----------------------------------------------------
Surinder Rametra, Chairman of the Board
/s/ BALWINDER SINGH BATHLA September 26, 2002
-----------------------------------------------------
Chief Executive Officer (Principal Executive Officer)
/s/ ASHOK RAMETRA September 26, 2002
-----------------------------------------------------
Ashok Rametra, President, Secretary, Treasurer and
Director
/s/ STEWART BENJAMIN September 26, 2002
-----------------------------------------------------
Stewart Benjamin, Director
/s/ DAVID REBACK September 26, 2002
-----------------------------------------------------
David Reback, Director
30
CERTIFICATIONS
Certifications pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as
adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002:
I, Balwinder Singh Bathla, Chief Executive Officer of Atec Group, Inc.
(the "Company") certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
/s/ BALWINDER SINGH BATHLA
----------------------------------
Balwinder Singh Bathla
Chief Executive Officer
September 26, 2002
I, James J. Charles, Chief Financial Officer of Atec Group, Inc. (the
"Company") certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report.
/s/ JAMES J. CHARLES
----------------------------------
James J. Charles
Chief Financial Officer
September 26, 2002
31
Exhibits
Number Description
21.1 List of Subsidiaries
23.1 Consent of Weinick Sanders Leventhal & Co LLP
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
ATEC GROUP, INC. AND SUBSIDIARIES
JUNE 30, 2002
I N D E X
---------
Page No.
--------
INDEPENDENT AUDITORS' REPORT ..................................... F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 2002 and 2001 .... F-2
Consolidated Statements of Operations
For the Years Ended June 30, 2002, 2001 and 2000 ......... F-3
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2002, 2001 and 2000 ......... F-4
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2002, 2001 and 2000 ......... F-5
NOTES TO FINANCIAL STATEMENTS .................................... F-6 - F-19
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and have therefore been omitted or
the required information is shown in the Financial Statements or the Notes
thereto.
WEINICK
WSL SANDERS 1375 BROADWAY
LEVENTHAL & CO. LLP NEW YORK, N.Y. 10018-7010
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 212-869-3333
FAX: 212-764-3060
WWW.WSLCO.COM
INDEPENDENT AUDITORS' REPORT
----------------------------
Stockholders and Board of Directors
ATEC Group, Inc.
We have audited the accompanying consolidated balance sheets of ATEC Group, Inc.
and Subsidiaries as at June 30, 2002 and 2001, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years ended June 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above pre-sent
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
August 14, 2002
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
June 30,
----------------------------
2002 2001
------------ ------------
Current assets:
Cash $ 1,382,722 $ 1,555,020
Accounts receivable - net 3,166,078 5,114,302
Inventories 602,792 1,666,633
Deferred taxes 401,493 581,510
Other current assets 858,682 585,634
------------ ------------
Total current assets 6,411,767 9,503,099
Property and equipment - net 290,040 420,255
Goodwill - net 864,961 1,134,177
Other assets 235,182 51,667
------------ ------------
$ 7,801,950 $ 11,109,198
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Revolving lines of credit $ 368,292 $ 1,024,157
Accounts payable 1,114,071 2,177,391
Accrued expenses 585,795 555,785
Deferred income 26,976 139,357
Other current liabilities 654,182 353,589
------------ ------------
Total current liabilities 2,749,316 4,250,279
------------ ------------
Stockholders' equity:
Preferred stocks 835,582 835,582
Common stock 73,435 73,477
Additional paid-in capital 11,815,397 11,864,674
Discount on preferred stocks (742,740) (742,740)
Deficit (6,219,452) (4,543,043)
------------ ------------
5,762,222 7,487,950
Less: Treasury stock - at cost 709,588 629,031
------------ ------------
Total stockholders' equity 5,052,634 6,858,919
------------ ------------
$ 7,801,950 $ 11,109,198
============ ============
See accompanying notes to financial statements.
F-2
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales $ 39,032,043 $ 53,051,120 $ 71,937,680
Cost of sales 33,600,688 46,767,529 60,353,009
------------ ------------ ------------
Gross profit 5,431,355 6,283,591 11,584,671
------------ ------------ ------------
Operating expenses:
Selling and administrative 6,886,953 10,489,929 10,824,623
Research and development -- 157,595 234,557
Amortization of goodwill -- 189,327 186,626
------------ ------------ ------------
Total operating expenses 6,886,953 10,836,851 11,245,806
------------ ------------ ------------
Income (loss) from operations (1,455,598) (4,553,260) 338,865
------------ ------------ ------------
Other income (expense):
Impairment of long-lived assets (219,896) (22,645) --
Interest income 40,755 52,101 62,789
Interest expense -- (1,512) (11,467)
Other income 22,009 38,450 8,291
------------ ------------ ------------
Total other income (expense) (157,132) 66,394 59,613
------------ ------------ ------------
Income (loss) before income taxes (1,612,730) (4,486,866) 398,478
Provision for income taxes 63,678 38,268 101,525
------------ ------------ ------------
Net income (loss) ($ 1,676,408) ($ 4,525,134) $ 296,953
============ ============ ============
Earnings (loss) per common share:
Basic ($ .24) ($ .64) $ .04
============ ============ ============
Diluted ($ .24) ($ .64) $ .04
============ ============ ============
Weighted average shares outstanding:
Basic 6,988,054 7,088,603 7,177,432
============ ============ ============
Diluted 6,988,054 7,088,603 7,221,927
============ ============ ============
See accompanying notes to financial statements.
F-3
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) ($1,676,408) ($4,525,134) $ 296,953
----------- ----------- -----------
Adjustments to reconcile net income (loss) in net
cash provided by (used in) operating activities:
Depreciation and amortization 159,969 228,665 274,877
Amortization of goodwill -- 189,327 186,626
Loss on abandonment of leasehold improvements -- -- 1,438
Compensatory element of issuances of capital stock -- -- 5,250
Loss on impairment of long-lived assets 219,896 22,645 --
Provision for doubtful accounts 75,308 645,535 42,216
Deferred income (112,381) 139,357 --
Deferred taxes -- (122,054) (208,166)
Changes in assets and liabilities:
Accounts receivable 1,872,916 4,277,625 (1,413,178)
Inventories 1,063,841 690,192 (1,246,552)
Deferred taxes 180,017 -- --
Other current assets (273,048) 1,008,393 (188,694)
Other assets (183,515) -- --
Revolving lines of credit (655,865) (1,149,619) 239,242
Accounts payable (1,063,320) (341,330) 808,958
Accrued expenses 30,010 333,325 (386,378)
Other current liabilities 300,592 123,100 (2,279)
----------- ----------- -----------
Total adjustments 1,614,420 6,045,161 (1,886,640)
----------- ----------- -----------
Net cash provided by (used in) operating activities (61,988) 1,520,027 (1,589,687)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (29,753) (116,682) (58,274)
Security deposits -- 12,086 (9,159)
Addition to goodwill -- -- (13,000)
----------- ----------- -----------
Net cash used in investing activities (29,753) (104,596) (80,433)
----------- ----------- -----------
Cash flows from financing activities:
Capital contribution -- 41,588 --
Issuance of capital stock -- -- 58,750
Purchase of treasury stock (80,557) (2,606) (534,974)
----------- ----------- -----------
Net cash provided by (used in) financing activities (80,557) 38,982 (476,224)
----------- ----------- -----------
Net increase (decrease) in cash (172,298) 1,454,413 (2,146,344)
Cash at beginning of year 1,555,020 100,607 2,246,951
----------- ----------- -----------
Cash at end of year $ 1,382,722 $ 1,555,020 $ 100,607
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes $ 7,721 $ 88,510 $ 50,170
=========== =========== ===========
Interest $ -- $ 1,512 $ 11,467
=========== =========== ===========
Supplemental Schedules of Noncash Operating
Operating and Financial Transactions:
Issuance of common stock for services $ -- $ -- $ 5,250
=========== =========== ===========
Issuance of Preferred Stock Series J convertible
in connection with settlement of a lawsuit $ -- $ 60,900 $ --
=========== =========== ===========
Retirement of common stock $ 49,319 $ -- $ --
=========== =========== ===========
See accompanying notes to financial statements.
F-4
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Preferred Stock Common Stock Additional Discount on Treasury Stock Total
------------------ ------------------- Paid-In Preferred -------------------- Stockholders'
Shares Amount Shares Amount Capital Stocks Deficit Shares Amount Equity
------- ---------- --------- --------- ------------ ---------- ------------ -------- ---------- ------------
Balance at
July 1,
1999 330,009 $ 321,090 7,326,963 $ 73,270 $ 11,758,235 ($ 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 -- -- 2,500 25 5,225 -- -- -- -- 5,250
Shares
issued
for
options
exercised -- -- 18,000 180 58,570 -- -- -- -- 58,750
Shares
issued
for
conversion
of
Preferred
Series A
and C (10,580) (10,508) 226 2 1,056 9,450 -- -- -- --
Net income
for the
year -- -- -- -- -- -- 296,953 -- -- 296,953
------- ---------- --------- --------- ------------ ---------- ------------ -------- ---------- ------------
Balance at
June 30,
2000 319,429 310,582 7,347,689 73,477 11,823,086 (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 -- -- -- -- 41,588
Issuance of
convertible
Preferred
Stock
Series J 105,000 525,000 -- -- -- (464,100) -- -- -- 60,900
Net loss for
the year -- -- -- -- -- -- (4,525,134) -- -- (4,525,134)
------- ---------- --------- --------- ------------ ---------- ------------ -------- ---------- ------------
Balance at
June 30,
2001 424,429 835,582 7,347,689 73,477 11,864,674 (742,740) (4,543,043) (259,245) (629,031) 6,858,919
Purchase of
treasury
stock -- -- -- -- -- -- -- (119,100) (80,557) (80,557)
Capital
contribution -- -- -- -- 30,082 -- -- -- -- 30,082
Cost
related
to capital
contribution -- -- -- -- (30,082) -- -- -- -- (30,082)
Net loss
for the
year -- -- -- -- -- -- (1,676,408) -- -- (1,676,408)
Retirement
of common
stock -- -- (42,718) (42) (49,277) -- -- -- -- (49,319)
------- ---------- --------- --------- ------------ ---------- ------------ -------- ---------- ------------
Balance at
June 30,
2002 424,429 $ 835,582 7,304,971 $ 73,435 $ 11,815,397 ($ 742,740) ($ 6,219,451) (378,345) ($ 709,588) $ 5,052,635
======= ========== ========= ========= ============ ========== ============ ======== ========== ============
See accompanying notes to financial statements.
F-5
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002, 2001, AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(a) Organization and Presentation of Financial Statements:
ATEC Group, Inc. (the "Company" or "ATEC") was incorporated
under the laws of the State of Delaware on July 17, 1992. The
accompanying consolidated financial statements include the accounts of
ATEC Group, Inc. and all of its wholly owned subsidiaries and a 90%
owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
(b) Principal Business Activity:
The Company is an "end to end" provider of a full line of
computer and information technology products and services to business,
professionals, government agencies and educational institutions. The
Company focuses on system design, high-speed data transmission,
LAN/WAN, video conferencing, internet/intranet technology, digital arts
solutions and E-commerce services for its customers.
(c) Basis of Presentation:
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America.
(d) Summary of Significant Accounting Policies:
(1) Inventories:
Inventories are stated at the lower of cost or market using
the first-in, first-out method. Inventories consist of microcomputer
hardware, software and related peripherals, accessories and finished
products.
F-6
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(Continued)
(2) Property and Equipment:
Property and equipment are carried at cost less accumulated
depreciation. When assets are sold or retired, the cost and related
accumulated depreciation is eliminated from the accounts, and any
resulting gain or loss is reflected in income for the period. The cost
of maintenance and repairs is charged to expense as incurred.
Significant renewals and replacements which substantially extend the
lives of the assets are capitalized.
Depreciation is computed on either straight-line or
accelerated methods over useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the shorter of the useful
life of the improvement or the life of the related lease.
(3) Goodwill:
In June 2001, the Financial Accounting Standards Board issued
Statement NO. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement
NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These Statements modify
accounting for business combinations after June 30, 2001. SFAS No. 141
prohibits pooling-of-interests accounting for acquisitions. SFAS No.
142 requires that goodwill existing at the date of adoption be reviewed
for possible impairment and the impairment tests be periodically
repeated, with impaired assets written-down to fair value.
Additionally, existing goodwill must be assessed and classified
consistent with the Statements' criteria. The Company has adopted FASB
No. 142 beginning July 1, 2001, upon which the amortization of goodwill
ceased. For the years ended June 30, 2001 and 2000, the Company
recognized $189,327 and $186,626 of goodwill amortization,
respectively.
(4) Revenue Recognition:
The Company recognizes revenue at the time products are
shipped to its customers, or when sales are made on a "cash and carry"
basis. For service income, revenue is recognized upon completion of the
contract and acceptance by the customer.
(5) Research and Development Costs:
Research and development costs are charged to expense as
incurred.
(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-7
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL 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, 2002 and 2001, the Company
determined that $219,896 and $22,645, respectively, of goodwill, net of
accumulated amortization, associated with the Company's prior
acquisitions was impaired.
F-8
NOTE 1 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(Continued)
(d) Summary of Significant Accounting Policies: (Continued)
(10) Earnings Per Share:
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". Basic earnings per share is
based on the weighted average of all common shares issued and
outstanding, and is calculated by dividing net income available to
common stockholders by the weighted average shares outstanding during
the period. Diluted earnings per share is calculated by dividing net
income available to common stockholders by the weighted average number
of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming conversion of
all potentially dilutive securities outstanding. Below is the
calculation of basic and diluted earnings per share for each of the
past three fiscal years:
For the Years Ended June 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Net income (loss) available
to common stockholders ($1,676,408) ($4,525,134) $ 296,953
=========== =========== ===========
Weighted average shares
outstanding - basic 6,988,054 7,088,603 7,177,432
Employee stock options -- -- 18,392
Acquisition options -- -- 17,945
Convertible preferred stock -- -- 8,158
----------- ----------- -----------
Weighted average shares
outstanding - diluted 6,988,054 7,088,603 7,221,927
=========== =========== ===========
Earnings (loss) per common share:
Basic ($ .24) ($ .64) $ .04
=========== =========== ===========
Diluted ($ .24) ($ .64) $ .04
=========== =========== ===========
NOTE 2 - ACQUISITIONS.
Nexar Technologies, Inc.:
On January 15, 1999 the Company purchased the trademarks and
patents of Nexar Technologies, Inc. resulting in goodwill of $405,805.
In May 1999, the Company registered the trademark for the "Nexar" brand
name. The goodwill associated with this acquisition has been fully
amortized or reserved as of June 30, 2002.
F-9
NOTE 3 - EQUITY SECURITIES.
The Company's authorized and issued capital stock at June 30,
2002 and 2001 consists of the following:
Shares Issued
Shares or
Authorized Outstanding Amount
---------- ----------- ----------
June 30, 2002:
--------------
Preferred Stocks:
Series A cumulative
convertible 29,233 8,371 $ 837
Series B convertible 12,704 1,458 145
Series C convertible 350,000 309,600 309,600
Series J convertible 105,000 105,000 525,000
--------- ----------
Total preferred 424,429 $ 835,582
========= ==========
Common stock 70,000,000 7,304,971 $ 73,435
========= ==========
June 30, 2001:
--------------
Preferred Stocks:
Series A cumulative
convertible 29,233 8,371 $ 837
Series B convertible 12,704 1,458 145
Series C convertible 350,000 309,600 309,600
Series J convertible 105,000 105,000 525,000
--------- ----------
Total preferred 424,429 $ 835,582
========= ==========
Common stock 70,000,000 7,347,689 $ 73,477
========= ==========
(a) Treasury Stock:
From time to time, the Board of Directors authorizes a common
stock buy-back program. During the years ended June 30, 2002 and 2001,
the Company purchased 119,100 and 1,300 shares of the Company's common
stock at a cost of $80,577 and $2,606, respectively.
(b) Preferred Stock:
At June 30, 2002 and 2001, ATEC had four authorized series of
preferred stock; Series A Cumulative Convertible (par value $.10),
Series B Convertible (par value $.10), Series C Convertible (par value
$1) and Series J Convertible (par value $.01) (hereinafter referred to
as the "A", "B", "C" and "J" shares, respectively). The authorized and
issued shares for each of the Series at June 30, 2002 and 2001 are
described in detail in Note 3 above.
F-10
NOTE 3 - EQUITY SECURITIES. (Continued)
(b) Preferred Stock: (Continued)
The A shares have an annual dividend rate of 10% of the par
value, which is cumulative. They are senior to all other series or
classes of capital stock. At June 30, 2002, the A shareholders were due
$1,502 in dividends in arrears. The B shares have a non-cumulative
stated annual dividend rate of $1 each and are senior to all but the
rights of the A shareholders. The C and J shares have no dividend
rights, except as may be authorized at the sole discretion of the
Company's Board of Directors.
Each of the A, B and C shares has the right to one vote on all
matters in which shareholders are entitled to vote. The holders of
Series J shares shall not be entitled to any voting rights. Each of the
A, B and C shares carry dissolution rights amounting to $100, $10 and
$5 per share, respectively. The A shares grant the Company the right to
redeem such shares at a price of $100 per share. The A, B, C and J
shares may be converted into shares of common stock at an exchange rate
of five, five, fifty and one shares, respectively, for each share of
common stock or approximately 134,200 shares.
The J shares have a maturity date of three years from the
applicable issuance date. The shares have a mandatory conversion, if
any time on or after the applicable issuance date the closing price of
the common stock of the Company for three consecutive trading days is
equal to or greater than five dollars. At the end of the third year,
should the stock price by $2.50 or less, the stock would automatically
be converted into 210,000 shares of the Company's common stock.
(c) Options:
At June 30, 2002, there were 8,598,299 options to acquire
shares of ATEC's common stock outstanding, comprised of both qualified
and non-qualified options as those terms are defined by Internal
Revenue Codes.
The following table summarizes the activity relating to the
option grants:
2002 2001 2000
------------------------ ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- --------- ---------- --------- -----------
Outstanding at
beginning of year 7,602,087 $ 1.81 2,527,614 $ 4.39 2,602,072 $ 5.26
Granted 2,686,300 .48 6,218,500 1.05 789,500 2.26
Exercised -- -- -- -- (18,000) 3.26
Expired (79,100) 3.17 (314,027) 8.52 (765,700) 5.30
Cancelled (1,610,988) 1.91 (830,000) .57 (80,258) 3.46
---------- --------- ---------
Outstanding at
end of year 8,598,299 $ 1.36 7,602,087 $ 1.81 2,527,614 $ 4.39
========== ========== ========= ========== ========= ==========
Exercisable at
end of year 4,344,032 $ 2.19 5,058,787 $ 2.45 1,604,114 $ 5.44
========== ========== ========= ========== ========= ==========
F-11
NOTE 3 - EQUITY SECURITIES. (Continued)
(c) Options: (Continued)
The following table summarizes information concerning
currently outstanding and exercisable stock options:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices June 30, 2002 Life Price June 30, 2002 Price
--------------- ------------- ----------- -------- ------------- --------
$.40 - $6.80 8,598,299 $5.19 $1.36 4,344,032 $2.19
NOTE 4 - ACCOUNTING FOR STOCK - BASED COMPENSATION.
In accordance with Statement of Financial Accounting Standard
No. 123, the following information is provided. The weighted average
fair value of all stock options at date of grant was $3.19, $3.22 and
$1.99 per option for options granted during the years ended June 30,
2002, 2001 and 2000, respectively. Additionally, the weighted average
fair value of employee stock options granted in the years ended June
30, 2002, 2001 and 2000 was $2.10, $1.93 and $2.01, per option,
respectively. The weighted average fair value of options was determined
based on the Black-Scholes model, utilizing the following weighted
average assumptions:
For the Years Ended June 30,
-------------------------------------
2002 2001 2000
-------- -------- --------
Expected term:
All stock options 10 years 10 years 10 years
Interest rate 4.00% 5.00% 5.00%
Volatility 85.00% 93.27% 78.40%
Dividends None None None
Had ATEC accounted for its stock options by recording
compensation expense based on the fair value at the grant date on a
straight-line basis over the vesting period, stock-based compensation
costs would have reduced pre-tax income by $1,214,835 ($905,052, net of
taxes), $1,155,001 ($860,477 net of taxes) and $986,845 ($735,200 net
of taxes) for the years ended June 30, 2002, 2001 and 2000,
respectively. The pro forma effect on diluted earnings per common share
would have been a reduction of $.17, $.12 and $.10 for the years ended
June 30, 2002, 2001 and 2000, respectively. The pro forma effect on
basic earnings per common share would have been a reduction of $.17,
$.12 and $.10 for the years ended June 30, 2002, 2001 and 2000,
respectively.
F-12
NOTE 5 - OPERATING LEASES.
ATEC conducts its operations under several noncancellable
operating leases expiring at various dates through 2007. Future minimum
rent payments, net of annual sublease rental income of $80,548 are as
follows:
For the Years
Ending June 30,
---------------
2003 $276,374
2004 213,168
2005 209,939
2006 57,094
2007 50,012
--------
Total minimum
annual rentals $806,587
========
Total rent expense for the years ended June 30, 2002, 2001 and
2000 amounted to $382,044, $456,060 and $460,084, respectively.
NOTE 6 - REVOLVING LINES OF CREDIT.
At June 30, 2002, ATEC and its subsidiaries have had
agreements with two financial institutions, whereby certain inventory
purchases are financed. The first facility granted the Company terms
and charged no interest for 40 days and thereafter at rates ranging
from prime plus 1/4% to 6-1/2% per annum. The facility was
collateralized by all the assets of the Company. At June 30, 2002 the
facility expired and has not been renewed. At June 30, 2001, the
borrowings under this facility amounted to $709,586. The second
facility grants the Company terms and charges interest at the prime
rate. Borrowings under this line may be up to $775,000. The facility is
collateralized by the inventory, subject to a prior lien. At June 30,
2002 and 2001, the borrowings under this facility amounted to $368,292
and $314,571.
NOTE 7 - LITIGATION.
On August 23, 1999, a class action lawsuit was filed on behalf
of all persons who purchased the Company's common stock from October
12, 1998 through May 19, 1999, inclusive. The complaint charges ATEC
and certain of its officers and directors with violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as well as SEC
Rule 10b-5 promulgated thereunder. Plaintiff seeks to recover damages
on behalf of all class members. The Company has reached a settlement
with the plaintiffs subject to court approval. This settlement will be
paid by the Company's insurance carrier.
F-13
NOTE 8 - INCOME TAXES.
The Company's income tax provision (benefit) consists of the
following:
2002 2001 2000
---------- ---------- ----------
Current tax provision (benefit):
Federal $ -- $ 112,036 $ 188,675
State 63,678 48,286 121,016
---------- ---------- ----------
63,678 160,322 309,691
---------- ---------- ----------
Deferred tax provision (benefit):
Federal -- (100,085) (170,696)
State -- (21,969) (37,470)
---------- ---------- ----------
-- (122,054) (208,166)
---------- ---------- ----------
Income tax provision (benefit) $ 63,678 $ 38,268 $ 101,525
========== ========== ==========
A reconciliation of the above effective tax rate to the
federal statutory rate is as follows:
2002 2001 2000
----------------------- ----------------------- -----------------------
% % %
--------- --------- ---------
Tax at statutory ($ 548,000) (34.0) ($1,526,000) (34.0) $ 135,483 34.0
State income tax, net of
federal tax benefit 63,678 3.9 (114,000) (2.5) (56,023) (14.0)
Effect of nondeduct-
ability of:
Amortization and
impairment
of goodwill 74,460 4.6 72,000 1.6 54,089 13.6
Tax expense and loss
limitations -- -- 16,000 0.4 55,472 13.9
Effect of NOL carryforward -- -- -- -- (72,519) (18.2)
Valuation allowance for
deferred tax assets 473,540 29.4 1,438,000 32.0 -- --
Other -- -- 152,268 3.4 (14,977) (3.8)
----------- --------- ----------- --------- ----------- ---------
$ 63,678 3.9 $ 38,268 0.9 $ 101,525 25.5
=========== ========= =========== ========= =========== =========
F-14
NOTE 8 - INCOME TAXES. (Continued)
The deferred tax benefit results from differences in
recognition of expense for tax and financial statement purposes and for
minimum tax provision for the various state and local taxing
authorities where the Company and its subsidiaries are subject to tax.
The Company has deferred tax assets consisting of the following
temporary differences.
June 30,
-------------------------
2002 2001
---------- ----------
Net operating loss carryforward $1,879,341 $1,524,000
Allowance for bad debts 134,836 485,510
---------- ----------
Total deferred tax assets 2,014,177 2,009,510
Less: Valuation allowance for
deferred tax assets 1,612,684 1,438,000
---------- ----------
Total $ 401,493 $ 571,510
========== ==========
NOTE 9 - RELATED PARTY TRANSACTIONS.
The Company has an operating lease for space at its Albany,
N.Y. location with a partnership, which is controlled by the Company's
Chairman and its President. The lease runs through June 30, 2003 at a
minimum annual rent of $108,192, plus applicable expenses and taxes.
The Company also periodically enters into transactions with
entities, which are owned or controlled by officers of the Company. All
such transactions were immaterial in the aggregate, when compared to
the results of operations taken as a whole, for all periods presented.
In March of 2002, the Company paid approximately $224,000 to a
company owned and controlled by the present Chief Executive Officer
(CEO). The payment was for inventory, property and equipment and
certain receivables which have been guaranteed by a company owned and
controlled by the CEO.
NOTE 10 - OTHER FINANCIAL INFORMATION.
(a) Accounts receivable - Net:
Accounts receivable, net at June 30, 2002 and 2001 consists of
the following:
2002 2001
----------- -----------
Accounts receivable $ 3,484,892 $ 6,357,064
Allowance for doubtful accounts,
returns and discounts (318,814) (1,242,762)
----------- -----------
$ 3,166,078 $ 5,114,302
=========== ===========
For the years ended June 30, 2002, 2001 and 2000, $75,308,
$645,535 and $42,216, respectively, was charged to bad debt expense.
F-15
NOTE 10 - OTHER FINANCIAL INFORMATION. (Continued)
(b) Other Current Assets:
Other current assets consist of the following at June 30, 2002
and 2001:
2002 2001
---------- ----------
Receivables from suppliers $ 122,155 $ 140,546
Prepaid expenses 226,119 242,811
Prepaid and refundable income taxes 259,732 167,930
Sundry loans 101,000 34,347
Current portion of deferred compensation 149,676 --
---------- ----------
$ 858,682 $ 585,634
========== ==========
(c) Goodwill - Net:
Goodwill, net at June 30, 2002 and 2001 consists of the
following:
2002 2001
---------- ----------
Cost $5,678,253 $5,727,573
Less: Impairment 3,241,616 3,021,720
---------- ----------
2,436,637 2,705,853
Less: Accumulated amortization 1,571,676 1,571,676
---------- ----------
$ 864,961 $1,134,177
========== ==========
Amortization charged to operations for the years ended June
30, 2002, 2001 and 2000 amounted to $-0-, $189,327 and $186,626,
respectively.
(d) Property and Equipment:
Property and equipment are carried at cost and consist of the
following at June 30, 2002 and 2001:
2002 2001
---------- ----------
Leasehold improvements $ 516,265 $ 563,573
Furniture and fixtures 244,293 244,293
Office equipment 904,133 887,852
Automobiles 110,598 110,598
---------- ----------
1,775,289 1,806,316
Less: Accumulated depreciation
and amortization 1,485,249 1,386,061
---------- ----------
$ 290,040 $ 420,255
========== ==========
Depreciation and amortization charged to operations for the
years ended June 30, 2002, 2001 and 2000 amounted to $159,969, $228,665
and $274,877, respectively.
F-16
NOTE 10 - OTHER FINANCIAL INFORMATION. (Continued)
(e) Other Current Liabilities:
Other current liabilities consist of the following at June 30,
2002 and 2001:
2002 2001
---------- ----------
Accrued compensation $ 370,000 $ --
Payroll taxes payable 31,221 38,592
Sales tax payable 35,752 33,295
Customers with credit balances 217,209 281,702
---------- ----------
$ 654,182 $ 353,589
========== ==========
(f) Transactions with Major Customers and Suppliers:
In each of the three years ended June 30, 2002, the Company
did not have sales to any one customer, which represented 10% or more
of the Company's net sales during a fiscal year.
During the years ended June 30, 2002, 2001 and 2000, two
suppliers accounted for 35%, 45% and 55% of the Company's purchases,
respectively. At June 30, 2002 and 2001, these two suppliers accounted
for 35% and 59% of accounts payable, respectively.
(g) Deferred Compensation Plan:
The Company has 401(k) deferred compensation plans to which
the Company may make discretionary contributions. The Company expense
for these plans amounted to approximately, $20,000, $45,000 and $-0-
for the years ended June 30, 2002, 2001 and 2000, respectively.
NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically issues
new accounting standards in a continuing effort to improve the quality
of financial information and to promote uniformity in its presentation.
Management has reviewed all such pronouncements made in the last fiscal
year and concluded that none have a material impact on the Company's
presentation of its financial position, results of operations and cash
flows.
F-17
NOTE 12 - SEGMENT INFORMATION.
The Company is comprised of four business segments. These
segments consist of the technology integration services (TIS), Business
to Business (B to B), software and manufacturing divisions. Set forth
below are net sales, net income (loss), capital expenditures,
depreciation and identifiable assets of these segments.
For the Years Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales:
TIS $ 17,433,683 $ 17,437,079 $ 32,579,527
B to B 20,845,797 33,525,488 35,311,719
Software 1,537 -- 2,330,065
Manufacturing 751,026 2,088,552 2,005,201
Elimination of
intersegment revenues -- -- (288,832)
------------ ------------ ------------
$ 39,032,043 $ 53,051,119 $ 71,937,680
============ ============ ============
Net income (loss):
TIS ($ 650,241) ($ 2,403,235) ($ 1,011,907)
B to B 1,122,309 (332,780) 1,316,876
Software (54,868) (13,985) 337,216
Manufacturing (725,685) (1,385,735) (207,959)
Corporate (1,367,923) (389,399) (137,273)
------------ ------------ ------------
($ 1,676,408) ($ 4,525,134) $ 296,953
============ ============ ============
Depreciation:
TIS $ 128,938 $ 165,649 $ 166,388
B to B 11,829 29,887 32,506
Software -- -- 21,350
Manufacturing 2,890 3,933 5,545
Corporate 16,312 29,196 49,088
------------ ------------ ------------
$ 159,969 $ 228,665 $ 274,877
============ ============ ============
Capital additions:
TIS $ 29,753 $ 107,793 $ 52,150
B to B -- 8,889 6,124
Software -- -- --
Manufacturing -- -- 13,000
Corporate -- -- --
------------ ------------ ------------
$ 29,753 $ 116,682 $ 71,274
============ ============ ============
Identifiable assets:
TIS $ 3,993,979 $ 825,454 $ 7,091,035
B to B 2,201,472 3,765,364 6,566,091
Software 3,853 943,240 112,461
Manufacturing 5,535 911,199 1,947,502
Corporate 1,597,111 4,663,941 773,428
------------ ------------ ------------
$ 7,801,950 $ 11,109,198 $ 16,490,517
============ ============ ============
During the years ended June 30, 2002, 2001, and 2000, one
customer accounted for -0-%, 81.6% and 27.6%, respectively of the
software segment.
F-18
NOTE 13 - SUPPLEMENTAL FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED (UNAUDITED):
June 30, March 31, December 31, September 30,
2002 2002 2001 2001
------------ ------------ ------------ ------------
Net sales $ 8,488,273 $ 10,876,246 $ 7,619,339 $ 12,048,185
============ ============ ============ ============
Gross profit $ 818,123 $ 1,221,057 $ 1,057,684 $ 2,334,491
============ ============ ============ ============
Net income (loss) ($ 1,129,809) ($ 462,774) ($ 181,115) $ 97,290
============ ============ ============ ============
Income (loss) per share:
Basic ($ 0.15) ($ 0.07) ($ 0.03) $ 0.01
============ ============ ============ ============
Diluted ($ 0.15) ($ 0.07) ($ 0.03) $ 0.01
============ ============ ============ ============
June 30, March 31, December 31, September 30,
2001 2001 2000 2000
------------ ------------ ------------ ------------
Net sales $ 10,570,525 $ 14,096,629 $ 13,435,293 $ 14,948,683
============ ============ ============ ============
Gross profit $ 982,680 $ 1,306,619 $ 1,803,946 $ 2,190,346
============ ============ ============ ============
Net income (loss) ($ 2,712,642) ($ 1,136,289) ($ 421,365) ($ 254,838)
============ ============ ============ ============
Loss per share:
Basic ($ 0.38) ($ 0.16) ($ 0.06) ($ 0.04)
============ ============ ============ ============
Diluted ($ 0.38) ($ 0.16) ($ 0.06) ($ 0.04)
============ ============ ============ ============
F-19