-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OuBf17zlRoIEEzyiVCq7JuWHDflmT/qZSIz3nMavCxTaPYlMyBLTS9sqN/j8fj5U LJzIeznrOdrbZxTvKHnrrg== 0001021408-03-000890.txt : 20030131 0001021408-03-000890.hdr.sgml : 20030131 20030131120113 ACCESSION NUMBER: 0001021408-03-000890 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021120 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Changes in registrant's certifying accountant ITEM INFORMATION: Financial statements and exhibits ITEM INFORMATION: Change in fiscal year FILED AS OF DATE: 20030131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVATECH SOLUTIONS INC CENTRAL INDEX KEY: 0000852437 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 841035353 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31265 FILM NUMBER: 03533816 BUSINESS ADDRESS: STREET 1: 11403 CRONHILL DRIVE STREET 2: SUITE A CITY: OWING MILLS STATE: MD ZIP: 21117 BUSINESS PHONE: 4109026900 MAIL ADDRESS: STREET 1: 11403 CRONHILL DRIVE STREET 2: SUITE A CITY: OWING MILLS STATE: MD ZIP: 21117 FORMER COMPANY: FORMER CONFORMED NAME: SPATIAL TECHNOLOGY INC DATE OF NAME CHANGE: 19960708 FORMER COMPANY: FORMER CONFORMED NAME: PLANETCAD INC DATE OF NAME CHANGE: 20001117 8-K 1 d8k.txt AVATECH SOLUTIONS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): November 20, 2002 Avatech Solutions, Inc. (Exact Name of Registrant as Specified in Charter) Delaware 000-7372 84-1035353 (State or Other Jurisdiction of (Commission (IRS Employer Incorporation) File Number) Identification No.) 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117 (Address of Principal Executive Offices) (ZIP Code) Registrant's telephone number, including area code: (410) 902-6900 Item 2. Acquisition or Disposition of Assets. As of May 1, 2002, PlanetCAD Inc., a Delaware Corporation, and Avatech Solutions, Inc., a Delaware Corporation, entered into a plan of merger whereby, subject to shareholder approval, the shareholders of Avatech would receive approximately 75% of the outstanding common stock of the combined companies and the shareholders of PlanetCAD would receive 25% of the outstanding common stock of the combined companies. On September 27, 2002, PlanetCAD Inc. filed a Registration Statement on Form S-4, which included a proxy statement soliciting the affirmative vote of a majority of the PlanetCAD common stock (including common stock underlying PlanetCAD convertible preferred stock) and two-thirds of the Avatech common stock. On November 19, 2002, the merger was approved by the respective shareholder groups and Avatech Solutions, Inc. merged with and into PlanetCAD, Inc. The merger was effected by the exchange of Avatech common stock for PlanetCAD common stock, after which Avatech became a subsidiary of PlanetCAD Inc. Since the shareholders of Avatech became the holders of a majority of the common stock of the combined company, the merger was deemed to be a "reverse acquisition" with Avatech as the acquiror of PlanetCAD. Accordingly, on November 19, 2002, PlanetCAD changed its name to Avatech Solutions, Inc. and assumed the fiscal year of June 30 to conform to the fiscal year of Avatech. Effective October 31, 2002, Avatech allocated the acquisition cost of approximately $2.2 million for PlanetCAD to the estimated fair value of the acquired net assets. The merger was treated as a purchase business combination for financial reporting purposes and Avatech's financial statements are now considered to be the financial statements of the post-merger combined company. Item 4. Changes in Registrant's Certifying Accountant. In May 2002, the management of Avatech Solutions, Inc. engaged Ernst & Young LLP as their independent auditors for the year ended June 30, 2002 in anticipation of Avatech becoming a public registrant. Avatech's board of directors ratified this engagement of Ernst & Young LLP effective May 28, 2002. During the 2002 fiscal year and through the date of this report, there were no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedures which, if not resolved, would have caused them to make reference to the subject matter in connection with their report on Avatech's consolidated financial statements for such year. Ernst & Young LLP's report on Avatech's financial statements for the past year did not contain an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. Additionally, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Walpert & Wolpoff, LLP had been engaged to audit Avatech's consolidated financial statements for the fiscal years ended June 30, 2001 and 2000. During these two fiscal years and through the date of this report, there were no disagreements with Walpert & Wolpoff on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedures which, if not resolved, would have caused them to make reference to the subject matter in connection with their report on Avatech's consolidated financial statements for such years. Neither of Walpert & Wolpoff, LLP's reports on Avatech's financial statements for either of the past two years contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. Additionally, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. 2 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Pro Forma Financial Information. Unaudited condensed combined pro forma balance sheet as of September 30, 2002 and unaudited condensed combined pro forma statements of income for the year ended June 30, 2002 and the three-month period ended September 30, 2002, including notes thereto, are attached as Exhibit 99.1 hereto. (b) Management's Discussion and Analysis of Financial Condition and Results of Operations. Avatech's Management's Discussion and Analysis of Financial Conditions and Results of Operations is attach as Exhibit 99.2 hereto. (c) Financial Statements of Acquired Business. Financial statements of Avatech Solutions, Inc. as of June 30, 2001 and 2002, and for each of the three years in the period ended June 30, 2002, including notes thereto, are attached as Exhibit 99.3 hereto and incorporated herein by reference. (d) Exhibits. 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Walpert & Wolpoff LLP, Independent Auditors 99.1 Unaudited condensed combined pro forma balance sheet as of September 30, 2002 and unaudited condensed combined pro forma statements of income for the year ended June 30, 2002 and the three-month period ended September 30, 2002, including notes thereto. 99.2 Avatech's Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.3 Audited financial statements of Avatech Solutions, Inc. June 30, 2001 and 2002, and for each of the three years in the period ended June 30, 2002, including notes thereto. 99.4 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). 99.5 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). 99.6 Schedule II - Valuation and Qualifying Accounts Item 8. Change in Fiscal Year. In connection with the merger on November 19, 2002, PlanetCAD Inc. changed its fiscal year end from December 31 to June 30 to conform with the fiscal year of Avatech Solutions Inc., the accounting acquiror. This change takes effect as of December 31, 2002 upon Avatech's filing of a Form 10-Q for the combined company for the six-month period ended December 31, 2002. No transition report has been filed; however, all periodic reports for periods ended prior to the merger have been filed by PlanetCAD as they became due in the ordinary course of business. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Avatech Solutions, Inc. By: /s/ Gary Rever ---------------------------------- Gary Rever, Chief Financial Officer Date: January 31, 2003 4 CERTIFICATIONS I, Donald R. Walsh, certify that: 1. I have reviewed this report on Form 8-K of Avatech Solutions, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and (c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 31, 2003 /s/ Donald R. Walsh ------------------------------ Donald R. Walsh Chief Executive Officer (principal executive officer) I, Gary Rever, certify that: 1. I have reviewed this report on Form 8-K of Avatech Solutions, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and (c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 31, 2003 /s/ Gary Rever ------------------------------------------------- Gary Rever Chief Financial Officer (principal financial accounting officer) EX-23.1 3 dex231.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-96949) pertaining to the PlanetCAD, Inc. 2000 Stock Incentive Plan, of our report dated September 3, 2002 (except Note 13, as to which the date is January 25, 2003) with respect to the consolidated financial statements and schedule of Avatech Solutions, Inc. and subsidiaries as of and for the year ended June 30, 2002, included in the Current Report (Form 8-K) filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Baltimore, Maryland January 27, 2003 EX-23.2 4 dex232.txt CONSENT OF WALPERT & WOLPOFF LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-96949) pertaining to the PlanetCAD, Inc. 2000 Stock Incentive Plan, of our report dated October 3, 2001 (except for Note 3 for which the date is September 3, 2002), with respect to the consolidated financial statements and schedule of Avatech Solutions, Inc. and Subsidiaries as of and for the years ended June 30, 2001 and 2000, included in the Current Report (Form 8-K) filed with the Securities and Exchange Commission. /s/ Walpert & Wolpoff, LLP Baltimore, Maryland January 27, 2003 EX-99.1 CHARTER 5 dex991.txt UNAUDITED BALANCE SHEET AND PRO FORMA STATEMENTS Exhibit 99.1 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION INTRODUCTION The merger agreement required PlanetCAD to issue to the Avatech stockholders three shares of PlanetCAD common stock for each share of PlanetCAD common stock outstanding at the closing date of November 19, 2002. The following tables set forth certain historical financial information of PlanetCAD and Avatech on an unaudited pro forma basis after giving effect to the merger as a "reverse acquisition" (i.e., with Avatech as the acquiror of PlanetCAD for accounting purposes). The accompanying unaudited pro forma combined condensed balance sheet assumes the merger took place on September 30, 2002. The unaudited pro forma combined condensed balance sheet combines the unaudited consolidated balance sheets of Avatech and PlanetCAD as of September 30, 2002. PlanetCAD's fiscal year ended on December 31. For purposes of the pro forma information, Avatech's consolidated statement of operations for the year ended June 30, 2002 and three months ended September 30, 2002 have been combined with PlanetCAD's unaudited consolidated statement of operations for the twelve months ended June 30, 2002 and three months ended September 30, 2002. The unaudited pro forma combined condensed statement of operations gives effect to the PlanetCAD merger as if it had occurred on July 1, 2001. The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and is not necessarily indicative of the future financial position or future results of operations of Avatech after the merger or of the financial position or results of operations of Avatech that would have actually occurred had the merger been effected as of the date described above. The allocation of the purchase price reflected in the unaudited pro forma combined condensed financial information is preliminary as it assumes the merger took place on September 30, 2002. Avatech obtained a formal independent valuation of PlanetCAD and the allocation of the purchase price to the intangible assets as of October 31, 2002 or the effective closing date of the merger. For purposes of recording the acquisition in the pro forma financial statements, Avatech established an estimated value of $1.2 million for PlanetCAD's common stock based on the fair value of PlanetCAD established by the independent appraiser. The assumed purchase price allocation has been adjusted to reflect the fair values of assets acquired and liabilities assumed as of September 30, 2002. Accordingly, certain adjustments included here have changed based upon the final purchase price allocation at October 31, 2002. The actual allocation does not differ significantly from the preliminary allocation included in these pro forma financial statements. In contemplation of the proposed merger, in August 2002, Avatech borrowed $500,000 from each of PlanetCAD and James Hindman, an Avatech director. Collectively, this $1.0 million in bridge loans was used to satisfy Avatech's $3.0 million obligation owed to its junior lender. This arrangement has been reflected in the pro forma consolidated statements as the extinguishment of approximately $3.0 million of subordinated debt for a $1.0 million cash payment and compliance with certain non-financial covenants. As a result, Avatech recorded a one-time pre-tax gain in an amount of approximately $2.0 million in August 2002. 1 PlanetCAD, as a condition precedent to the merger, is required to make appropriate arrangements for investors in the February 2000 private placement of PlanetCAD common stock (PIPE Investors) to accept PlanetCAD common stock or convertible preferred stock in exchange for their outstanding claims of $432,888 relating to the registration rights of PlanetCAD common stock they acquired in such a placement. In connection with the merger, these outstanding claims were converted into common stock; therefore, no additional liabilities have been recorded in the consolidated financial statements as of September 30, 2002. The pro forma statements of operations do not reflect any effect of the contemplated operating efficiencies, cost savings and other benefits, anticipated by Avatech's management as a result of the merger. The unaudited pro forma combined condensed financial information should be read in conjunction with the audited consolidated financial statements and related notes of PlanetCAD and the audited consolidated financial statements of Avatech included within this document. 2 AVATECH SOLUTIONS, INC. UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET As of September 30, 2002
Historical Historical Pro Forma Combined Avatech PlanetCAD Adjustments Note Pro Forma ----------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 325,858 $ 1,314,000 $ (706,443) d $ 933,415 Accounts receivable, net 3,472,362 207,000 - 3,679,362 Inventory 545,597 - - 545,597 Prepaid expenses and other current assets 149,014 632,000 - 781,014 ---------------------------------------- ------------- Total current assets 4,492,831 2,153,000 (706,443) 5,939,388 Property and equipment, net 684,772 433,000 - 1,117,772 Goodwill, and other intangible assets, net 752,920 473,000 (234,000) a,g,i 991,920 Other assets 554,208 99,000 (240,557) c 412,651 ---------------------------------------- ------------- Total assets $ 6,484,731 $ 3,158,000 $ (1,181,000) $ 8,461,731 ======================================== ============= Liabilities and stockholders' equity (deficiency) Current liabilities: Accounts payable and accrued expenses $ 4,137,598 $ 545,000 $ - $ 4,682,598 Borrowings under lines-of-credit 1,284,880 - - 1,284,880 Note payable to related party 500,000 - - 500,000 Current portion of long-term debt 750,000 - (500,000) g 250,000 Deferred revenue 848,482 490,000 (245,000) i 1,093,482 Other current liabilities 307,131 - - 307,131 ---------------------------------------- ------------- Total current liabilities 7,828,091 1,035,000 (745,000) 8,118,091 Short-term debt subject to refinancing 1,422,426 - (1,422,426) f - Stockholders' equity (deficiency): Common stock 59,954 124,000 410,757 b 594,711 Preferred stock - 420,000 14,250 f 434,250 Additional paid-in capital 1,661,229 36,067,000 (33,798,581) b,f 3,929,648 Accumulated deficit (4,486,969) (34,488,000) 34,360,000 b,h (4,614,969) ---------------------------------------- -------------- Total stockholders' equity (deficiency) (2,765,786) 2,123,000 986,426 343,640 ---------------------------------------- ------------- Total liabilities and stockholders' equity (deficiency) $ 6,484,731 $ 3,158,000 $ (1,181,000) $ 8,461,731 ======================================== =============
3 AVATECH SOLUTIONS, INC. UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS For the year ended of June 30, 2002
Historical Historical Pro Forma Combined Avatech PlanetCAD Adjustments Note Pro Forma ------------------------------------------------------------------- Revenue: Product sales $ 18,486,676 $ 456,262 $ - $ 18,942,938 Service revenue 6,482,160 1,311,442 - 7,793,602 Commission revenue 4,843,751 - - 4,843,751 ---------------------------------------- ------------- Total revenue 29,812,587 1,767,704 - 31,580,291 Cost of revenue: Cost of product sales 12,464,965 289,129 - 12,754,094 Cost of service revenue 3,773,041 652,360 - 4,425,401 ---------------------------------------- ------------- Total cost of revenue 16,238,006 941,489 - 17,179,495 ---------------------------------------- ------------- Gross margin 13,574,581 826,215 - 14,400,796 Other expenses: Selling, general and administrative 12,806,324 5,801,719 - 18,608,043 Research and development - 2,584,716 - 2,584,716 Depreciation and amortization 589,306 - 79,667 a 668,973 Goodwill impairment 285,374 - - 285,374 ---------------------------------------- ------------- Total other expenses 13,681,004 8,386,435 79,667 22,147,106 Income/(loss) from operations (106,423) (7,560,220) (79,667) (7,746,310) Other income/(expense): Interest and other income/(expense) 61,510 - - 61,510 Interest expense (487,582) (265,688) 334,942 e,f (418,328) ---------------------------------------- ------------- (426,072) (265,688) 334,942 (356,818) Income (loss) before income taxes (532,495) (7,825,908) 255,275 (8,103,128) Income tax expense (benefit) (285,000) - - (285,000) ---------------------------------------- ------------- Net income (loss) $ (247,495) $ (7,825,908) $ 255,275 $ (7,818,128) ======================================== ============= Earnings (loss) per common share--basic and diluted $ (0.04) $ (12.56) $ (2.63) ======================================== ============= Weighted average number of common shares outstanding--basic and diluted 6,007,074 623,143 2,968,237 ======================================== =============
4 AVATECH SOLUTIONS, INC. UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS For the three months ended of September 30, 2002
Historical Historical Pro Forma Combined Avatech PlanetCAD Adjustments Note Pro Forma ----------------------------------------------------------------- Revenue: Product sales $ 3,366,703 $ 50,000 $ - $ 3,416,703 Service revenue 1,506,269 262,000 - 1,768,269 Commission revenue 985,765 - - 985,765 --------------------------------------- ------------ Total revenue 5,858,737 312,000 - 6,170,737 Cost of revenue: Cost of product sales 2,244,466 26,000 - 2,270,466 Cost of service revenue 932,636 84,000 - 1,016,636 --------------------------------------- ------------ Total cost of revenue 3,177,102 110,000 - 3,287,102 --------------------------------------- ------------ Gross margin 2,681,635 202,000 2,883,635 Other expenses: Selling, general and administrative 3,081,340 1,054,000 - 4,135,340 Research and development - 410,000 - 410,000 Depreciation and amortization 118,645 - 19,917 a 138,562 --------------------------------------- ------------ Total other expenses 3,199,985 1,464,000 19,917 4,683,902 Income/(loss) from operations (518,350) (1,262,000) (19,917) (1,800,267) Other income/(expense): Gain on the extinguishment of debt 1,960,646 - - 1,960,646 Interest and other income/(expense) 5,183 12,000 - 17,183 Interest expense (82,403) - 59,351 e,f (23,052) --------------------------------------- ------------ 1,883,426 12,000 59,351 1,954,777 Income (loss) before income taxes 1,365,076 (1,250,000) 39,434 154,510 Income tax expense (benefit) 393,000 - - 393,000 --------------------------------------- ------------ Net income (loss) $ 972,076 $ (1,250,000) $ 39,434 $ (238,490) ======================================= ============ Earnings (loss) per common share--basic and diluted $ 0.16 $ (2.01) $ (0.08) ========================== ============ Weighted average number of common shares outstanding--basic and diluted 5,995,402 623,143 2,968,237 ========================== ============
5 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION 1. The Merger The merger is a reverse acquisition purchase in which Avatech is treated as the acquiror of PlanetCAD for financial accounting purposes. Under that method, the purchase price for accounting purposes is established using the fair market value of the outstanding PlanetCAD common stock, determined by an independent appraiser, plus the value of PlanetCAD's stock options and estimated acquisition related costs, as follows: Estimated fair value of PlanetCAD's common stock $1,170,000 Estimated fair value of PlanetCAD's stock options 115,000 Estimated acquisition related costs 947,000 -------------- $2,232,000 ============== The estimated fair value of PlanetCAD's common stock was determined based on the fair value of PlanetCAD as estimated by an independent appraiser in connection with their valuation report on the acquired intangible assets, which was issued to Avatech in January 2003. At that time, the value assigned to PlanetCAD approximated $1.2 million, which represented the equity value of the business. The stock options to be issued in conjunction with the merger with PlanetCAD were valued using the Black-Scholes Option Pricing model, a generally accepted warrant valuation methodology, with the following assumptions: Stock price on date of grant $ 1.57 Expected price volatility 1.73 Risk free interest rate 4.55% Weighted-average exercise price $ 33.80 Expected dividend yield 0% Expected life 4 Years Additionally, the stock price on the date of grant was calculated based on the $1.2 million estimated fair value of PlanetCAD. An equity value of $4.7 million was assigned to the combined company as PlanetCAD represented 25% of the equity value of the combined businesses. This equity value was divided by 2,973,557 shares or the expected number of shares to be outstanding upon consummation of the merger, to derive the stock price on date of grant of approximately $1.57 per share. Avatech assumed that the most conservative and best estimate of the expected price volatility would be the historical price volatility of PlanetCAD. Therefore, the price volatility of 1.73 was obtained from the most recent Form 10-KSB of PlanetCAD. Additionally, the weighted-average exercise price and expected life of the options were obtained from the most recent Form 10-KSB of PlanetCAD. The Black-Scholes option pricing model with these assumption determined a value of $1.13 per share. This value was assigned to the 101,427 stock options outstanding as of September 30, 2002 to determine a fair value of approximately $115,000. The unaudited pro forma combined condensed balance sheet and statements of operations are not necessarily indicative of the financial position and operating results that would have been 6 achieved had the merger been completed as of the beginning of the earliest periods presented. They should not be construed as being a representation of financial position or future operating results of the combined companies. Management does not expect significant changes to the preliminary valuation of the transaction. However, the final purchase price allocation could be significantly different from the amounts reflected in the unaudited pro forma combined condensed information. In addition, the unaudited pro forma combined condensed financial information gives effect only to the adjustments set forth in the accompanying notes and does not reflect any restructuring or merger related costs, or any potential cost savings or other synergies that management expects to realize as a result of the merger. 2. Adjustments to Unaudited Pro Forma Combined Condensed Financial Statements The adjustments to the unaudited pro forma combined condensed balance sheet as of September 30, 2002 and the pro forma combined condensed statement of operations for the year ended June 30, 2002 and the three months ended September 30, 2002 in connection with the proposed merger are presented below: (a) The fair values of PlanetCAD's net assets have been estimated for the purpose of allocating the purchase price of the acquisition of PlanetCAD and determining the pro forma effect of the acquisition on the combined financial statements. The estimated purchase price of $2,232,000 has been assigned to the tangible and intangible assets acquired and liabilities assumed as follows: Current and other assets at September 30, 2002 $ 2,685,000 Fair value adjustments: Developed technology--3 year life 143,000 In-process research and development--expensed at closing 98,000 Customer relationships--3 year life 96,000 ------------ 3,022,000 Less liabilities assumed at September 30, 2002 (790,000) ------------ $ 2,232,000 ============ (see Note 1 for the fair value of PlanetCAD common stock and options.) (b) This adjustment is to eliminate the common stock, additional paid in capital, accumulated other comprehensive loss and accumulated deficit of PlanetCAD. (c) This adjustment is to allocate $240,557 of acquisition related costs paid and deferred at September 30, 2002 to acquired assets. (d) This adjustment is to reduce cash by the estimated unpaid merger expenses of $706,443. (e) This adjustment is to reduce interest from the $2.96 million extinguishment of debt at an interest rate of 6.50%. (f) This adjustment is for the dollar-for-dollar exchange of a total of $1.4 million of subordinated debt for preferred stock with a total par value of $14,250 and the associated reduction in interest expense at an interest rate of 10.0%. (g) This adjustment is to eliminate the $500,000 subordinated note to PlanetCAD, as Avatech became a subsidiary of PlanetCAD upon consummation of the merger. 7 (h) This adjustment is to expense in-process research and development costs of $98,000. (i) This adjustment is to adjust deferred revenue to its estimated fair value. 3. Items Not Adjusted The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by Avatech's management as a result of the merger. 4. Pro Forma Net Loss Per Share The pro forma basic and diluted net loss per share is computed by dividing the pro forma net loss by the pro forma basic and diluted weighted average number of shares outstanding, assuming PlanetCAD and Avatech had merged at the beginning of the earliest period presented. The pro forma basic and diluted weighted average number of shares outstanding includes the assumed conversion of PlanetCAD's convertible preferred stock to common stock upon the completion of the merger. Prior to the merger with Avatech, PlanetCAD effected a 20 for 1 reverse stock split, which has been reflected in the pro forma net loss per share calculations below. The pro forma weighted average basic and diluted number of shares outstanding, and pro forma adjustment to the weighted shares outstanding, are calculated as follows for the year ended June 30, 2002 and the three months ended September 30, 2002: The adjustment to common shares outstanding at June 30, 2002 and September 30, 2002, is calculated as follows: Basic and Diluted ---------------- PlanetCAD's weighted average common shares 621,813 Estimated common shares issued to PIPE Investors 120,246 ---------------- PlanetCAD adjusted shares 742,059 Multiplied by 3.00 Equivalent PlanetCAD shares issued to Avatech stockholders 2,226,177 Add PlanetCAD weighted average shares 742,060 ---------------- Pro forma combined weighted average shares outstanding 2,968,237 ================ 8 The adjustment to common shares outstanding is calculated as follows: As of June 30, 2002: PlanetCAD's common shares outstanding 623,143 Estimated common shares issued to PIPE Investors 120,246 ---------------- PlanetCAD adjusted shares 743,389 Multiplied by 3.00 Equivalent PlanetCAD shares outstanding 2,230,167 Add PlanetCAD shares outstanding 743,389 ---------------- Pro forma combined average shares outstanding 2,973,556 Less combined shares outstanding before common stock issued to PIPE Investors and exchange ratio effect (922,913) ---------------- Pro forma adjustment to shares outstanding 2,050,643 ================ 9 EX-99.2 BYLAWS 6 dex992.txt MANAGEMENT DISCUSSION AND ANALYSIS Exhibit 99.2 Avatech Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements set forth below constitute "forward-looking statements". Such forward-looking statements involve known and unknown risk, uncertainties and other factors including, but not limited to, those discussed in this quarterly report, that may cause Avatech's actual results, performance or achievements to be materially different from any future results, performance or achievements implied by such forward-looking statements. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Avatech disclaims any obligation to update information contained in any forward-looking statement. Overview Avatech is a leading design automation solutions provider. Avatech resells design automation software and supports its customers in the integration of this software by offering training, technical support and professional services. Avatech sales are to corporations, government agencies and educational institutions throughout the United States having industry specific focuses such as Architecture, Engineering, and Construction (AEC); Manufacturing; Location Services, Geographic Information Systems (GIS), and Electronic Document Management (EDM) Avatech has embarked on a revised business strategy to increase revenue and profitability in the future. This three-pronged strategy will place increased emphasis on: (a) the sale of product lifecycle management ("PLM") software, which Avatech believes will expand its higher margin services business, increase the average size of sales transactions, and position the Company as a leading integrator in the PLM market as it grows; (b) expanded high-value service offerings that target enterprise-wide implementation of PLM products from Autodesk and other manufacturers; and (c) acquisitions of small consulting businesses that create sales opportunities for the Autodesk product line in new geographic areas, or that would allow Avatech to diversity by offering new products and services. Product Sales Avatech product sales are primarily the resale of packaged design software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, modeling, drafting, mapping, rendering, and facilities management tasks. Avatech is one of the largest domestic resellers of design software developed by Autodesk, one of the world's leading design software and digital content companies for building design and land development, manufacturing, utilities, telecommunications, wireless data services and digital media. Approximately 90% of Avatech's total product revenues are related to Autodesk products. Product sales also include hardware that Avatech may purchase for the convenience of its customers. During fiscal 1999, Avatech made a strategic decision to de-emphasize the resale of hardware products as the future profit margins for these offerings were deteriorating. Product 1 hardware sales do not represent a significant percentage of total revenues for Avatech in any of the periods presented. Service Revenue Avatech provides services in the form of training, technical support, and professional services. Product and process education classes are offered at Avatech's training facilities or directly at a customer site. Avatech's class instructors are application engineers who have formal training or industry experience in the course content. Technical support services are provided primarily through Avatech's telephone support center located in Omaha, Nebraska. Through its staff of full time consultants, Avatech provides assistance to customers making inquiries concerning software products that it sells. Professional services are project-focused offerings that are fulfilled primarily with Avatech's own application engineers and programmers and can include software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance for complex software products. Commission Revenue Avatech generates sales from the resale of Autodesk software to various customers of which a portion are considered major accounts. Autodesk considers certain customers to be major accounts based on specified criteria primarily sales volume. These customers typically receive certain volume discounts. Avatech is responsible for managing and reselling product to certain of these accounts; however, the software product is shipped directly from Autodesk to the customer. Avatech has received commissions in accordance with the Autodesk reseller agreement on the product sales price depending upon the product type and volume. Commission revenues are recognized upon shipment of the product from Autodesk to the customer. Cost of Product Sales Cost of product sales consists of Avatech's cost of purchasing the products from the software suppliers or hardware manufacturers. Additionally, the associated shipping and handling costs are included in cost of product sales. Cost of Service Revenue Cost of service revenue includes the direct costs associated with the implementation of software and hardware solutions as well as training, support services, and professional services. These costs consist primarily of compensation, benefits, travel and the costs of third-party contractors engaged by Avatech. Cost of service revenue does not include an allocation of overhead costs. Selling, General and Administrative Expense Selling, general and administrative expense consists primarily of compensation and other expenses associated with management, finance, human resources and information systems. Additionally, advertising and public relations expense as well as expenses for facilities such as rent and utilities are included in selling, general and administrative expense. During fiscal 2000, Avatech instituted an expense reduction program which attributed to a $1.4 million reduction in average annualized selling, general and administrative expense. More specifically, nearly $900,000 of the reduction was achieved in salaries and employee benefits by reducing staff during the course of the year. Additional expense reduction were achieved for professional fees, 2 telephone, supplies, marketing and travel. Expense reduction measures were deemed necessary during the later part of fiscal 2000 to help reduce operating losses arising from a slowdown in sales following a very successful product release by Autodesk. Additionally, Avatech was in the midst of a consolidation effort following a period of rapid merger and acquisition activity in the previous two years. When practicable, targeted expense savings were accelerated in a effort to bring Avatech to a break even operating level. Depreciation and Amortization Expense Depreciation and amortization expense represents the period costs associated with Avatech's investment in property and equipment consisting principally of computer equipment, software, furniture and fixtures, and leasehold improvements. Depreciation and amortization expense is computed using the straight-line method. Additionally, Avatech leases all of its facilities and depreciates leasehold improvements over the lesser of the lease term or the useful life of the asset. Goodwill is the excess of the purchase price paid over the value of the identifiable net assets acquired in purchase business combinations and was being amortized over the expected period of benefit primarily 15 years. As of July 1, 2002, Avatech no longer amortizes this goodwill, but rather makes annual assessments of impairment. Interest Expense Interest expense consists primarily of interest on Avatech's revolving line-of-credit and subordinated debt, which it incurred to fund operations over the past three years. Critical Accounting Policies General. Avatech's consolidated financial statements are impacted by the accounting policies used, and the estimates and assumptions made, by management during their preparation. Critical accounting policies and estimates that impact the consolidated financial statements are those that relate to software revenue recognition, estimates of bad debts and estimates of the recoverability of goodwill. A summary of the significant accounting policies can be found in the Notes to the Consolidated Financial Statements. Presented below is a description of the accounting policies that Avatech believes are most critical to understanding the consolidated financial statements. Software Revenue Recognition. Avatech derives most of its revenue from the resale of packaged software programs. Product sales also include hardware that may be purchased for the convenience of customers. Historically, Avatech has not experienced significant customer returns. Avatech also earns service revenue from training and other professional services for the products that are sold. These services are not essential to the functionality of the software. Additionally, Avatech offers annual support contracts to its customers for the software products that it sells. Maintenance and support services are also sold under hourly billing arrangements. Revenue from software arrangements is recognized in accordance with the provisions of Statement of Position No. 97-2, Software Revenue Recognition, as amended by SOP No 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Prior to recognizing any revenue under these arrangements, (1) persuasive evidence of an arrangement must exist, (2) delivery of the software or service must have occurred, (3) all fees must be assessed as fixed or determinable and (4) all fees must be probable of collection. 3 Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Avatech's customer arrangements can involve the sale of two or more elements. When this occurs, revenue is allocated to each element based on the relative fair value of each element. Avatech limits the assessment of fair value to the price that is charged when the element is sold separately. All of the elements included in the multiple element arrangements have been analyzed, which may include products that are resold, training and other professional services, and support services. Avatech has determined that sufficient evidence of the fair value based on these separate sales exists to allocate revenue to the specified elements. Training and other professional services revenue is recognized as services are delivered and support revenue is recognized ratably over the respective contract term. All unrecognized fees that have been billed are included in deferred revenue. Bad Debts. Avatech maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to pay for products and services that are sold or for disputes that affect its ability to fully collect its accounts receivable. Avatech estimates this allowance by reviewing the status of past-due accounts and recording general reserves based on historical bad debt expense. Avatech's actual experience has not varied significantly from its estimates. However, if the financial condition of Avatech's customers were to deteriorate, resulting in their inability to pay for products or services, Avatech may need to record additional allowances in future periods. To mitigate this risk, Avatech performs ongoing credit evaluations of its customers. Recoverability of Goodwill. Avatech has remaining goodwill of $0.75 million at September 30, 2002 that was recorded in connection with two business combinations that were completed in 1998. As of July 1, 2002, Avatech adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Under the new rules, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statement. Accordingly, the Company no longer amortizes this goodwill, but rather makes annual assessments of impairments. During the second quarter of fiscal 2003, the Company completed phase one of the transitional impairment tests required by Statement 142. The Company will complete phase two of the transitional impairment tests before the end of fiscal year 2003 at which time any impairment charge for the goodwill will be recorded as of July 1, 2002. In the future, the Company will be making impairment tests during the fourth quarter of each year. In making these assessments, Avatech must make subjective judgments regarding estimated future cash flows and other factors to determine the fair value of the reporting units of its business that are associated with its remaining goodwill. It is possible that these judgments may change over time as market conditions or strategies change, and these changes may cause Avatech to record additional impairment charges to adjust goodwill to its estimated fair value. Effect of Recent Accounting Pronouncements As of July 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 supersedes and serves to clarify and further define the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets 4 and for Long-Lived Assets to Be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. Statement 144 does not apply to goodwill and other intangible assets that are not amortized, and retains the Company's current policy to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted future cash flows and to measure the impairment loss as the difference between the carrying amount and the fair value of the asset. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement 145). Among other changes, Statement 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, net of the related tax effect. Statement 145 provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they are unusual or infrequent, or they otherwise meet the criteria for classification as an extraordinary item, and observes that debt extinguishment transactions would seldom, if ever, result in extraordinary item classification of the resulting gains and losses. Avatech adopted Statement 145 effective July 1, 2002, and upon adoption, the Company expects to report as other income (expense), any extraordinary losses or gains that it incurs upon the extinguishment of debt. In August 2002, the Company reported a $2.0 million gain from the early extinguishment of certain debt. In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Statement 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and early adoption is encouraged. Avatech does not expect that the adoption of Statement 146 will have a material effect on its reported results of operations and financial position. Results of Operations Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001 Revenues Total revenues for the three months ended September 30, 2002 decreased $1,670,000, or 22.2%, to $5.9 million, compared to $7.5 million for the same period in 2001. Overall, the gross margin percentage increased to 45.8% in the three months ended September 30, 2002, compared to 42.9% in the same period in 2001. For the three months ended September 30, 2002, revenues from product sales decreased, while revenues from service and commission increased. The decrease in revenues from product sales was due to weak economic conditions as well as timing of product upgrade cycles. The increase in revenues from service and commission was a result of a realigned sales organization and a renewed focus by Avatech as a full solution, service provider for its customers. Although price changes occurred throughout the period, they did not have a material effect on fluctuations in revenues. Improved management over the sales organization 5 has enhanced sales forecasting to better exploit product sales and service opportunities to larger customers, which attributed to an increase in commission and service revenues. Product sales for the three months ended September 30, 2002 decreased $1,840,000, or 35.3%, to $3.4 million, compared to $5.2 million in the same period in 2001. The fluctuation in product sales is primarily attributed to weak economic conditions causing customers to defer purchasing software products as well as timing of product upgrade cycles. Sales of hardware products also declined in this period albeit this only represented $115,000 or 2.2% of the total decrease in product sales. The remaining decrease in product sales is attributable to a decline in sales volume on software product sales. Software products sold represented 97.5% and 96.2% of total product sales for the three months ending September 30, 2002 and 2001, respectively. Also, the sale of software developed by Autodesk, Inc. represented 90.2% and 89.8% of total software sales for the three months ending September 30, 2002 and 2001, respectively. Service revenue for the three months ended September 30, 2002 increased $41,000, or 2.8%, to $1.5 million, compared to $1.46 million in the same period in 2001. The increase in service revenue is a result of an increase in professional and technical support service contracts of $88,000 or 14.7%, partially offset by a decline in training attributable to the decline in software sales. All of Avatech's professional, technical support and training services have received additional sales focus as Avatech transitions to a full solution, service provider of software and services for its customers. Commission revenue for the three months ended September 30, 2002 increased $128,000, or 15.0%, to $.99 million, compared to $.86 million in the same period in 2001. The increase in commission revenues resulted from Avatech's continued focus on sales to major accounts that provide for commission revenue. The increase is primarily attributable to Avatech's aggressive sales efforts and its national network of 21 offices with the capacity to effectively service the geographic needs of many of these large customers. Cost of Revenues and Expenses Costs of Revenue Cost of product sales for the three months ended September 30, 2002 decreased $1,158,000, or 34.0%, to $2.2 million, compared to $3.4 million for the same period in 2001. Cost of product sales as a percentage of related revenue for the three months ended September 30, 2002 increased to 66.7% from 65.3% in the same period in 2001. The increase in cost of product sales as a percentage of related revenues is attributed to less favorable product mix as sales of high margin software products declined slightly during the period. Cost of service revenue for the three months ended September 30, 2002 increased $39,000, or 4.4%, to $.93 million compared to $.89 million for the same period in 2001. Cost of service revenue as a percentage of related revenue for the three months ended September 30, 2002 increased slightly to 61.9% from 61.3% in the same period in 2001. The modest increase in cost of service revenue as a percentage of revenue is primarily attributable to an increase in salary expenses for application engineers. Selling, General and Administrative Expense Selling, general and administrative expense for the three months ended September 30, 2002 decreased $.26 million, or 7.7%, to $3.1 million, compared to $3.3 million for the same 6 period in 2001. Selling, general and administrative expense as a percent of total revenues was 52.6% during the three months ended September 30, 2002, and 44.3% during the same period in 2001. The increase in selling, general and administrative expense as a percent of total revenues is attributable to the fixed cost required to support a nationwide network of 21 offices. Depreciation and Amortization Depreciation and amortization expense for the three months ended September 30, 2002 decreased $47,000 or 28.2%, to $119,000, compared to $165,000 for the same period in 2001. Depreciation and amortization expense of property and equipment decreased as a result of reduced capital expenditures for computer equipment and software, and an increase in the number of fully depreciated assets compared to the prior period. Additionally, amortization expense of $24,000 on unamortized goodwill was recorded for the three months ended September 30, 2001. On July 1, 2002, the Company adopted Statement 142 and no longer amortizes goodwill and other intangible assets deemed to have indefinite useful lives. Other Income (Expense) Other income for the three months ended September 30, 2002 increased $2.0 million to $1.9 million, compared to $(68,000) for the same period in 2001. The significant increase in other income is attributable to a gain recorded for the extinguishment of debt. In January 1999, Avatech borrowed $3.0 million from a junior lender. In August 2002, Avatech executed an agreement to extinguish the debt for a cash payment of $1.0 million resulting in a $2.0 million gain on the extinguishment of debt. Income Taxes Income tax expense for the three months ended September 30, 2002 was $393,000. In August 2002, the Company realized a $1.96 million taxable gain from the extinguishment of certain debt, which resulted in a net deferred tax asset of $373,000 being recorded at June 30, 2002. During the three months ended September 30, 2002, the Company recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax assets in 2003. This increase in deferred income tax expense coupled with certain state tax expense resulted in the additional income tax expense for the three months ended September 30, 2002. Years Ended June 30, 2002, 2001 and 2000 The following table sets forth the percentages of total revenues represented by selected items reflected in Avatech's Consolidated Statements of Operations. The year-to-year comparisons of financial results are not necessarily indicative of future results.
YEAR ENDED JUNE 30, -------------------------------------------------------------- 2002 2001 2000 ------------------ ---------------------- -------------------- Revenue Product sales ................................ 62.0% 66.4% 67.7% Service revenue .............................. 21.7% 19.6% 22.7% Commission revenue ........................... 16.3% 14.0% 9.6% ------------------ ---------------------- -------------------- Total revenue ................................ 100.0% 100.0% 100.0% ------------------ ---------------------- -------------------- Cost of Revenue
7 Cost of product sales ......................... 41.8% 46.2% 48.9% Cost of service revenue ....................... 12.7% 12.3% 14.1% -------------------- -------------------- ---------------------- Total cost of revenue ......................... 54.5% 58.5% 63.0% -------------------- -------------------- ---------------------- Gross margin .................................. 45.5% 41.5% 37.0% -------------------- -------------------- ---------------------- Other Expenses Selling, general and administrative ........... 43.0% 37.3% 39.0% Depreciation and amortization ................. 2.1% 2.3% 2.1% Impairment loss ............................... 0.8% - - -------------------- -------------------- ---------------------- Total other expenses .......................... 45.9% 39.6% 41.1% -------------------- -------------------- ---------------------- Income/(loss) from operations ................. (0.4)% 1.9% (4.1)% -------------------- -------------------- ---------------------- Other Income/(Expense) Interest and other income/(expense) ........... 0.2% 0.2% (0.2)% Interest expense .............................. (1.6)% (1.8)% (1.9)% -------------------- -------------------- ---------------------- (1.4)% (1.6)% (2.1)% -------------------- -------------------- ---------------------- Income (loss) before income taxes ............. (1.8)% 0.3% (6.2)% Income tax expense ............................ (1.0)% 0.0% 0.0% -------------------- -------------------- ---------------------- Net income (loss) ............................. (0.8)% 0.3% (6.2)% ==================== ==================== ======================
Year ended June 30, 2002 Compared to Year Ended June 30, 2001 Revenues Total revenues for the year ended June 30, 2002 decreased $1.1 million, or 3.4%, to $29.8 million, compared to $30.9 million for the same period in 2001. Overall, the gross margin percentage increased to 45.5% in the year ended June 30, 2002, compared to 41.5% in the same period in 2001. For the year ended June 30, 2002, revenues in two of three categories--service revenue and commission revenue--increased as a result of a realigned sales organization and a renewed focus by Avatech as a full solution, service provider for its customers. Although price changes occurred throughout the period, they did not have a material effect on fluctuations in revenues. Avatech realigned its sales organization in September 2000 and has improved sales forecasting to better exploit sales opportunities on high margin software products as well as sales to major accounts, which attributed to an increase in commission revenues. Product sales for the year ended June 30, 2002 decreased $2.0 million, or 9.8%, to $18.5 million, compared to $20.5 million in the same period in 2001. The fluctuation in product sales is attributed to a decrease in sales volume of software sold through the Company's customer base. In June 2001, Autodesk announced the release of an upgrade to it most popular version of Computer Aided Design ("CAD") software. Maintenance support on the former version of CAD software was phased out in January 2002, which resulted in most major customers purchasing the software upgrades in 2002. The software sales growth was completely offset by enhanced efforts to sell more Autodesk major accounts thereby increasing commission revenue, but reducing 8 product sales as well as a significant decline in the resale of hardware products. As Autodesk major account sales increased, the level of focus on other end product sales then diminished and resulted in a $1.6 million or 7.8% decrease in related revenues. Additionally, hardware sales decreased by $436,000, or 46.3% in the period of 2002. The Company has de-emphasized the resale of hardware products to its customers. Service revenue for the year ended June 30, 2002 increased $443,000, or 7.2%, to $6.5 million, compared to $6.0 million in the same period in 2001. The increase in service revenue is a direct result of an increase in the number of training and professional services sold through the Company's expanded customer base during 2002, which resulted in approximately $250,000 in additional revenue. Avatech's training and technical support services have received additional sales focus as Avatech transitions to a full solution, service provider of software and services for its customers. Commission revenue for the year ended June 30, 2002 increased $511,000, or 11.8%, to $4.8 million, compared to $4.3 million in the same period in 2001. The increase in commission revenues resulted from Avatech's realigned sales organization, which has improved sales to major accounts that provide for commission revenue. Cost of Revenues and Expenses Cost of Revenue Cost of product sales for the year ended June 30, 2002 decreased $1.8 million, or 12.5%, to $12.5 million, compared to $14.2 million for the same period in 2001. Cost of product sales as a percentage of related revenue for the year ended June 30, 2002 decreased to 67.4% from 69.5% in the same period in 2001. The decrease in cost of product sales as a percentage of related revenues is attributed to an increase in sales of high margin software products. Cost of service revenue for the year ended June 30, 2002 decreased $41,000, or 1.1%, to $3.8 million compared to $3.8 million for the same period in 2001. Cost of service revenue as a percentage of related revenue for the year ended June 30, 2002 decreased to 58.2% from 63.0% in the same period in 2001. The decrease in cost of service revenue as a percentage of revenues is attributed to enhanced efforts to sell higher margin training and professional services rather than lower margin installations of hardware products. Selling, General and Administrative Expense Selling, general and administrative expense for the year ended June 30, 2002 increased $1.3 million, or 11.2%, to $12.8 million, compared to $11.5 million for the same period in 2001. Selling, general and administrative expense as a percent of total revenues was 43.0% during the year ended June 30, 2002, and 37.3% during the same period in 2001. The increase in selling, general and administrative expense is attributable to the expansion of Avatech's sales force and technical support staff in its existing locations, as well as the costs associated with opening three new offices in Chicago, IL, St. Paul, MN, and Tampa, FL, during the third and fourth quarters of 2001. Avatech's sales force and support staff increased by approximately 15 employees in 2002 resulting in an approximate $1.0 million increase in selling, general and administrative expense. New facilities costs attributed to a $50,000 increase in selling, general and administrative expense during the same period. 9 Depreciation and Amortization Depreciation and amortization expense for the year ended June 30, 2002 decreased $105,000 or 15.1%, to $589,000, compared to $695,000 for the same period in 2001. Depreciation and amortization expense of property and equipment decreased as a result of capital expenditures for computer equipment and software made in 1999 becoming fully depreciated in 2001. Goodwill Impairment For the year ended June 30, 2002, Avatech recorded an impairment charge for the write down of unamortized goodwill to its net realizable value. The impairment charge was recorded in the third quarter of 2002 upon the recognition of an impairment indicator. During the period, Avatech evaluated goodwill for its past business combinations by comparing its best estimate of undiscounted future cash flows with the carrying value of goodwill. As the carrying value of goodwill exceeded the estimate of undiscounted future cash flows for one of these acquired companies, a discounted cash flow analysis was performed which attributed to the goodwill impairment charge of $283,000 or the amount by which the carrying value exceeded the fair value of the unamortized goodwill balance at that time. Other Income (Expense) Other expense for the year ended June 30, 2002 decreased $66,000, or 13.5%, to $426,000, compared to $492,0000 for the same period in 2001. The reduction in other expense in 2002 is primarily attributable to a reduction in interest expense resulting from a decrease in the variable interest rate associated with the revolving line-of-credit. Income Tax Benefit In 2002, Avatech recorded an income tax benefit of $285,000. This benefit includes current income tax expense of $88,000 for state income taxes and a deferred tax benefit of $373,000. The deferred tax benefit of $373,000 is the result of a change in the estimate of the amount of net operating loss carryforwards that will likely be used to reduce 2003 income taxes. This estimate was revised principally because Avatech recorded a $1.96 million gain from the extinguishment of certain debt in August 2002, which will increase 2003 taxable income. Year Ended June 30, 2001 Compared to Year Ended June 30, 2000 Revenues Total revenues for the year ended June 30, 2001 decreased $2.3 million, or 6.9%, to $30.9 million compared to $33.2 million in the same period in 2000. For the year ended June 30, 2001, revenues in two of the three categories - product sales and service revenue - decreased as a result of the general economic slowdown experienced in the forth quarter of fiscal 2000 as well as the culmination of the Y2K technology spending. Additionally, the sales cycle for Autodesk's most popular CAD software product concluded in February 2000, which contributed to the overall decline in product sales for fiscal 2001. While revenues declined for the year ended June 2001, the gross margin percentage increased to 41.5% in 2001 from 37.0% in 2000 principally due to Avatech's strategic decision to discontinue reselling the low margin hardware products and focus on selling higher margin software products on both a direct and agency basis. Product sales for the year ended June 30, 2001 decreased $1.9 million, or 8.7%, to $20.5 million, compared to $23.4 million in the same period in 2000. The decrease in product sales is 10 attributed to the culmination of the Y2K technology spending and the conclusion of the sales cycle for AutoDesk's most popular CAD software product in February 2000. Additionally, Avatech made a strategic decision to discontinue reselling the low margin hardware products and focus on selling higher margin software products. As a result, Avatech experienced a $1.9 million, or 66.8%, decline in hardware sales. Service revenue for the year ended June 30, 2001 decreased $1.5 million, or 19.5%, to $6.0 million, compared to $7.5 million in the same period in 2000. The decrease in service revenue is primarily attributed to a $829,000, or 17.5%, reduction in training service revenue in 2001. The decline in service revenue is a result of limited resources available to focus on selling training services. During fiscal 2000, Avatech experienced exceptional results from training services due to intense promotional efforts and sales force focus. These efforts were not sustained in 2001 due to the implementation of certain cost containment measures. Additionally, support services revenue for the year ended June 30, 2001 decreased $348,000, or 18.9%, due to changes associated with the strategic decision to discontinue selling hardware. Commission revenues for the year ended June 30, 2001 increased $1.1 million, or 35.4%, to $4.3 million compared to $3.2 million in the same period in 2000. The entire increase in commission revenue during 2001 resulted from the integration of past business combinations, which provided Avatech with the national network to service and sell to major accounts. Cost of Revenue and Expenses Cost of Revenue Cost of product sales for the year ended June 30, 2001 decreased $2.0 million, or 12.2%, to $14.2 million compared to $16.2 million for the same period in 2000. Cost of product sales as a percentage of related revenue decreased to 69.5% in 2001 from 72.3% in 2000. The decrease in cost of product sales as a percentage of revenues is attributable to the application of earn-backs and other rebates received from Autodesk as a result of Avatech achieving its sales quotas in fiscal 2001. These earn-backs and rebates are offset against cost of product sales in the period in which they are earned. Cost of service revenue for the year ended June 30, 2001 decreased $851,000, or 18.2%, to $3.8 million compared to $4.7 million for the same period in 2000. Cost of service revenue as a percentage of related revenue remained relatively constant at 63.0% in 2001 in comparison to 62.0% in 2000. Selling, General and Administrative Expense Selling, general and administrative expense for the year ended June 30, 2001 decreased $1.4 million, or 10.8%, to $11.5 million, compared to $12.9 million for the same period in 2000. Selling, general and administrative expense as a percent of total revenues was 37.3% in 2001 compared 39.0% in 2000. The reduction in selling, general and administrative expense in 2001 is attributable to an expense reduction program that was implemented in the fourth quarter of 2000. The expense reduction program coupled with a 6.9% decrease in total revenues attributed to the favorable decline in the ratio of selling, general and administrative expenses to revenues for the year ended June 30, 2001 in comparison to the year ended June 30, 2000. 11 Depreciation and Amortization Depreciation and amortization expense for the year ended June 30, 2001 increased $3,000, or 0.3%, to $695,000 compared to $692,000 for the same period in 2000. Depreciation and amortization expense for 2001 remained consistent with 2000 as few additions to property and equipment were needed. Other Income (Expense) Other expense for the year ended June 30, 2001 decreased $211,000, or 30.0%, to $492,000 compared to $703,000 for the same period in 2000. The reduction in other expense is primarily attributable to a decrease in interest expense of 13.6% or $87,000 in 2001. The reduction in interest expense is a result of refinancing of Avatech's revolving line-of-credit to provide for a lower interest rate. Liquidity and Capital Resources Historically, Avatech has financed its operations and met its capital expenditure requirements primarily through cash flows provided by operations and borrowings under short-term and long-term debt arrangements. Avatech had a deficiency of working capital of $3.3 million at September 30, 2002. Current liabilities include $1.3 million of borrowings under a line-of-credit from a senior lender as well as $750,000 of subordinated notes and a $500,000 note payable to a related party. In October 2000, Avatech entered into a $4.0 million revolving line-of-credit agreement with a senior lender that expires in October 2003, but is payable within 60 days of demand. Borrowings under the line-of-credit bear interest at the senior lender's prime rate plus 1.5%. The amount of outstanding borrowings is limited to 75% of eligible accounts receivable. In January 1999, Avatech borrowed $3.0 million from a junior lender. In August 2002, Avatech executed an agreement to extinguish the debt for a cash payment of $1.0 million and compliance with certain non-financial covenants. Avatech borrowed $500,000 from each of PlanetCAD and James Hindman, an Avatech director, to make the cash payment. On November 19, 2002 the merger with PlanetCAD was completed and the loan from PlanetCAD eliminated, as Avatech became a subsidiary of PlanetCAD. Mr. Hindman's loan matures on July 1, 2003. The loan bears simple interest at a rate of 15.0% on outstanding principal balance of the loan and is subordinate to Avatech's senior lender. Avatech also has outstanding $1.7 million of 10% subordinated notes. The notes were to mature on July 1, 2003 and interest is payable quarterly until maturity or prepayment. On November 19, 2002 with the completion of the merger with PlanetCAD, subordinated noteholders owning an aggregate of $1.4 million of subordinated notes outstanding at September 30, 2002 exchanged their notes for preferred stock. As a result of these exchanges, Avatech's liabilities at September 30, 2002 have been reduced by $1,425,000 while the Company's working capital position improved, and Avatech expects to reduce its interest expense by $152,500 per year due to this exchange. For the three months ended September 30, 2002 Avatech generated $0.34 million of cash from operations. For the comparable three-month period in 2001, Avatech used $0.44 million of cash in its operations. Net cash provided by (used in) operating activities was $1.1 million in 2002, $(0.4) million in 2001, and $0.2 million in 2000. Cash flow from operations before working capital changes improved from a deficit of $1.3 million in 2002 to surpluses of $0.9 12 million in 2001 and $0.4 million in 2002, followed by a $0.5 million deficit for the three months ended September 30, 2002. Avatech's operating assets and liabilities consist primarily of accounts receivable, accounts payable, and inventory. Changes in these balances are affected by the timing of sales and investments in inventory based on expected customer demand. Inventory levels are minimized through arrangements with suppliers to ship products with an average delivery period of two days and centralized inventory management. For the three-month period ended September 30, 2002, cash provided by operations was positively affected by decreases in accounts receivable of $0.65 million. Accounts receivable, net of allowance for doubtful accounts, decreased approximately 15.4% for the period ended September 30, 2002. Day sales outstanding (DSO's) in receivables increased to 54 days as of September 30, 2002 from 52 days as of September 30, 2001. The decrease in the accounts receivable balance is primarily attributable to lower sales in September 2002 due economic weakness and the timing of product upgrade cycles. The Company's customary collection terms range from 30 to 60 days for all of its customers. Avatech's investment activities consist principally of investments in computer and office equipment. Avatech acquired $0.04 million of fixed assets during the three months ended September 30, 2002, and acquired fixed assets of $0.3 million in 2002, $0.4 million in 2001 and $0.5 million in 2000. Avatech has no outstanding purchase commitments at September 30, 2002, and expects total fixed asset purchases in 2002 to be less than $0.4 million. As described more fully above, Avatech's financing activities in all periods have consisted principally of borrowings and repayments under its lines of credit. Net borrowings (repayments) under lines of credit were $(0.1) million for the three months ended September 30, 2002, $(0.5) million in 2002, $0.7 million in 2001, and $(0.7) million in 2000. At September 30, 2002, Avatech had additional borrowing availability under its line of credit of $0.37 million. As of the date of this report, Avatech and PlanetCAD have unpaid expenses due to professional firms totaling approximately $.8 million that were incurred in connection with the merger completed on November 19, 2002. Management believes that these fees are excessive and plans to vigorously negotiate the amounts due and related payment terms with all of the service providers. It is believed that the Company will be successful in negotiating reduced fees and extended payment terms. Because of the demand provisions of the line-of-credit and the lending agreement, and uncertainties surrounding the ability of Avatech to obtain the needed cash, there is substantial doubt about the ability of Avatech to continue as a going concern if the lenders exercise their demand rights under the agreement. Although management cannot control the actions of these lenders, it believes that they will not demand repayment of outstanding borrowings in the next 12 months. One of the Company's directors or officers has expressed their intention of lending the Company, up to $500,000, to fund any needed working capital deficiencies. Based on an evaluation of the likely cash generated from operations in the near term, available capital resources and the timing of cash payments to vendors, management believes that it has sufficient sources of working capital to fund its operations in the normal course of business through at least June 30, 2003. The Company has engaged an investment banking firm to assist in obtaining long-term financing. Additionally, the Company plans to raise between $1.0 million to $2.0 million of short term financing on acceptable terms by June 30, 2003. Below is a summary of the Company's contractual obligations and commitments at September 30, 2002: 13
Payments due by Period Contractual Obligations Total 2003 2004 2005 2006 - ------------------------------------------------------------------------------------------------------------ Long-term debt $1,422,426 $1,422,426 $ - $ - $ - Operating leases 1,220,911 609,841 469,621 115,934 25,515 -------------------------------------------------------------------- Total obligations $2,643,337 $2,032,267 $ 469,621 $ 115,934 $ 25,515 ====================================================================
Quantitative and Qualitative Disclosures about Market Risk Avatech is exposed to market risk from changes in interest rates associated with its variable rate line-of-credit facility. At September 30, 2002, approximately 32.5% of the Company's outstanding debt bears interest at variable rates. Accordingly, the Company's earnings and cash flow are affected by changes in interest rates. Assuming the current level of borrowings at variable rates and assuming a 100 basis point change in the 2002 average interest rate under these borrowings, it is estimated that the Company's 2002 interest expense and net income would have changed by less than $20,000. In the event of an adverse change in interest rates, management would likely take actions to further mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the analysis assumes no such actions. Further the analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. 14 EX-99.3 OTHER FIN ST 7 dex993.txt AUDITED FINANCIAL STATEMENTS Exhibit 99.3 Avatech Solutions, Inc. Financial Statements Page Independent Auditors' Reports ....................................... 2 Consolidated Balance Sheets ......................................... 4 Consolidated Statements of Operations ............................... 6 Consolidated Statements of Stockholders' Deficiency ................. 7 Consolidated Statements of Cash Flows ............................... 8 Notes to Consolidated Financial Statements .......................... 10 Report of Independent Auditors The Board of Directors and Stockholders Avatech Solutions, Inc. We have audited the accompanying consolidated balance sheet of Avatech Solutions, Inc. and subsidiaries as of June 30, 2002, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. Since the date of completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated September 3, 2002, the Company, as discussed in Note 13, has experienced a decline in working capital resulting principally from costs incurred to complete the acquisition of PlanetCAD, Inc. Note 13 describes management's plans to address this liquidity issue. In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatech Solutions, Inc. and subsidiaries at June 30, 2002 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Baltimore, Maryland September 3, 2002 (except Note 13, as to which the date is January 25, 2002) 2 Independent Auditors' Report To the Board of Directors and Stockholders Avatech Solutions, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 present fairly, in all material respects, the consolidated financial position of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. WALPERT & WOLPOFF, LLP Baltimore, Maryland October 3, 2001 (except for Note 3 for which the date is September 3, 2002) 3 Avatech Solutions, Inc. and Subsidiaries Consolidated Balance Sheets
June 30 September 30, 2001 2002 2002 ------------------------------------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 309,621 $ 222,562 $ 325,858 Accounts receivable, less allowance of $212,000 in 2001 and $111,897 in 2002 and $95,477 at September 30, 2002 5,123,773 4,108,372 3,472,362 Inventory 462,660 356,013 545,597 Deferred income taxes - 373,000 - Prepaid expenses and other current assets 382,411 113,469 149,014 ------------------------------------------ Total current assets 6,278,465 5,173,416 4,492,831 Property and equipment: Computer software and equipment 2,381,422 2,664,168 2,704,902 Office furniture and equipment 799,526 778,037 743,292 Leasehold improvements 191,908 198,002 198,002 ------------------------------------------ 3,372,856 3,640,207 3,646,196 Less accumulated depreciation and amortization 2,461,630 2,889,000 2,961,424 ------------------------------------------ 911,226 751,207 684,772 Goodwill 1,108,920 752,920 752,920 Other assets 78,404 430,870 554,208 ------------------------------------------ Total assets $ 8,377,015 $ 7,108,413 $ 6,484,731 ==========================================
4
June 30 September 30, 2001 2002 2002 ------------------------------------------- (Unaudited) Liabilities and stockholders' deficiency Current liabilities: Accounts payable and accrued expenses $ 4,021,062 $ 3,655,902 $ 3,952,627 Accrued compensation and related benefits 293,780 223,919 184,971 Borrowings under line-of-credit 1,916,912 1,422,901 1,284,880 Note payable to related party - - 500,000 Current portion of long-term debt 2,968,030 500,000 750,000 Deferred revenue 794,916 650,511 848,482 Other current liabilities 211,215 335,930 307,131 ------------------------------------------- Total current liabilities 10,205,915 6,789,163 7,828,091 Long-term debt (including $775,000 payable to related parties) 1,595,938 4,057,112 - Short-term debt subject to refinancing - - 697,426 Short-term debt subject to refinancing-related parties - - 725,000 Commitments and contingencies - - - Stockholders' deficiency: Common stock, $0.01 par value; 10,000,000 shares authorized; issued and outstanding shares of 5,995,402 at June 30, 2002 and September 30, 2002 and 6,013,549 at June 30, 2001 60,136 59,954 59,954 Additional paid-in capital 1,726,576 1,661,229 1,661,229 Accumulated deficit (5,211,550) (5,459,045) (4,486,969) ------------------------------------------- Total stockholders' deficiency (3,424,838) (3,737,862) (2,765,786) ------------------------------------------- Total liabilities and stockholders' deficiency $ 8,377,015 $ 7,108,413 $ 6,484,731 ===========================================
See accompanying notes. 5 Avatech Solutions, Inc. and Subsidiaries Consolidated Statements of Operations
Three months ended Year ended June 30 September 30 --------------------------------------------- -------------------------- 2000 2001 2002 2001 2002 --------------------------------------------- -------------------------- (restated) (restated) (Unaudited) Revenue: Product sales $ 22,436,739 $ 20,490,029 $ 18,486,676 $ 5,206,351 $ 3,366,703 Service revenue 7,519,169 6,049,275 6,482,160 1,465,247 1,506,269 Commission revenue 3,199,443 4,332,174 4,843,751 857,411 985,765 --------------------------------------------- -------------------------- 33,155,351 30,871,478 29,812,587 7,529,009 5,858,737 Cost of revenue: Cost of product sales 16,228,849 14,249,470 12,464,965 3,402,560 2,244,466 Cost of service revenue 4,664,518 3,813,635 3,773,041 893,218 932,636 --------------------------------------------- -------------------------- 20,893,367 18,063,105 16,238,006 4,295,778 3,177,102 --------------------------------------------- -------------------------- Gross margin 12,261,984 12,808,373 13,574,581 3,233,231 2,681,635 Other expenses: Selling, general and administrative 12,919,902 11,519,199 12,806,324 3,339,214 3,081,340 Depreciation and amortization 692,180 694,503 589,306 165,283 118,645 Impairment loss - - 285,374 - - --------------------------------------------- -------------------------- 13,612,082 12,213,702 13,681,004 3,504,497 3,199,985 --------------------------------------------- -------------------------- Income (loss) from operations (1,350,098) 594,671 (106,423) (271,266) (518,350) Other income (expense): Gain on the extinguishment of debt - - - - 1,960,646 Interest and other income (expense) (61,819) 61,488 61,510 64,818 5,183 Interest expense (641,320) (553,823) (487,582) (133,053) (82,403) --------------------------------------------- -------------------------- (703,139) (492,335) (426,072) (68,235) 1,883,426 --------------------------------------------- -------------------------- Income (loss) before income taxes (2,053,237) 102,336 (532,495) (339,501) 1,365,076 Income tax expense (benefit) - 13,000 (285,000) 21,759 393,000 --------------------------------------------- -------------------------- Net income (loss) $ (2,053,237) $ 89,336 $ (247,495) $ (361,260) $ 972,076 ============================================= ========================== Earning (loss) per common share - basic and diluted $ (0.34) $ 0.01 $ (0.04) $ (0.06) $ 0.16 ============================================= ========================== Shares used in computation 6,078,374 5,995,904 6,007,074 6,012,536 5,995,402 ============================================= ==========================
See accompanying notes. 6 Avatech Solutions, Inc. and Subsidiaries Consolidated Statements of Stockholders' Deficiency Years ended June 30, 2002, 2001, 2000 and the three months ended September 30, 2002
Common Stock Additional ---------------------------- Number of Paid-In Accumulated Shares Par Value Capital Deficit Total --------------------------------------------------------------------------- Balance at July 1, 1999 5,985,509 $ 59,856 $ 1,578,153 $ (3,247,649) $ (1,609,640) Issuance of common stock for cash 102,500 1,025 409,600 - 410,625 Issuance of common stock in connection with the 1998 Employee Stock Purchase Plan 18,810 188 67,721 - 67,909 Purchase of common stock from former employees (67,882) (679) (242,019) - (242,698) Net loss for fiscal year 2000 - - - (2,053,237) (2,053,237) --------------------------------------------------------------------------- Balance at June 30, 2000 6,038,937 60,390 1,813,455 (5,300,886) (3,427,041) Issuance of common stock for cash 6,176 62 26,186 - 26,248 Purchase of common stock from former employees (31,564) (316) (113,065) - (113,381) Net income for fiscal year 2001 - - - 89,336 89,336 --------------------------------------------------------------------------- Balance at June 30, 2001 6,013,549 60,136 1,726,576 (5,211,550) (3,424,838) Purchase of common stock from current and former employees (18,147) (182) (65,347) - (65,529) Net loss for fiscal year 2002 - - - (247,495) (247,495) --------------------------------------------------------------------------- Balance at June 30, 2002 5,995,402 $ 59,954 $ 1,661,229 $ (5,459,045) $ (3,737,862) Net income for three months ended September 30, 2002 - - - 972,076 972,076 --------------------------------------------------------------------------- Balance at September 30, 2002 5,995,402 $ 59,954 $ 1,661,229 $ (4,486,969) $ (2,765,786) ===========================================================================
See accompanying notes. 7 Avatech Solutions, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Three months ended Year ended June 30 September 30 ----------------------------------------- -------------------------- 2000 2001 2002 2001 2002 ----------------------------------------- -------------------------- (Unaudited) Cash flows from operating activities Net income (loss) $(2,053,237) $ 89,336 $ (247,495) $ (361,260) $ 972,076 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for bad debts 55,367 73,893 75,542 (158,908) (16,420) Gain on extinguishment of debt - - - - (1,960,646) Depreciation and amortization 692,180 694,503 612,918 165,283 118,645 Deferred income taxes 23,802 - (373,000) - 373,000 Impairment loss - - 285,374 - - Gain on available-for-sale securities (2,205) - - - - Loss on disposal of property and equipment 17,420 1,420 7,575 - - Amortization of debt discount charged to interest expense 3,838 2,694 3,844 - - Changes in operating assets and liabilities: Accounts receivable (1,869) (1,027,531) 893,017 733,951 652,430 Inventory 385,182 (7,065) 106,647 45,521 (189,584) Prepaid expenses and other current assets 437,728 96,987 190,804 157,485 (35,545) Accounts payable and accrued expenses 272,247 (295,547) (240,179) (737,836) 296,725 Accrued compensation and related benefits 23,451 (23,439) (69,862) (89,945) (38,948) Deferred revenue 213,915 14,144 (144,405) (186,538) 197,971 Other current liabilities 141,401 29,410 (4,058) (10,394) (28,799) ----------------------------------------- -------------------------- Net cash provided by (used in) operating activities 209,220 (351,195) 1,096,722 (442,641) 340,905 Cash flows from investing activities Purchase of property and equipment (535,161) (394,060) (258,944) (26,150) (47,527) Proceeds from sale of property and equipment 4,436 6,343 10,584 - - Proceeds from sale of available-for-sale securities 16,807 - - - - Acquisition costs related to PlanetCAD merger - - (302,228) - (128,023) ----------------------------------------- -------------------------- Net cash used in investing activities (513,918) (387,717) (550,588) (26,150) (175,550)
8 Avatech Solutions, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
Three months ended Year ended June 30 September 30 -------------------------------------------- ---------------------------- 2000 2001 2002 2001 2002 -------------------------------------------- ---------------------------- (Unaudited) Cash flows from financing activities Proceeds from borrowings under line-of-credit $ 31,870,180 $ 30,977,721 $ 31,166,171 $ 8,325,625 $ 6,924,526 Repayments of borrowings under line-of-credit (32,571,042) (30,244,758) (31,660,182) (7,992,156) (7,062,546) Proceeds from issuance of long-term debt 137,269 - - - 1,075,000 Repayments of long-term debt (188,894) (6,810) - - (999,039) Proceeds from issuance of common stock 478,534 26,248 - - - Repurchase of common stock (242,698) (113,381) (65,529) - - Change in other assets related to financing costs 45,891 (13,794) (73,653) (2,308) - -------------------------------------------- ---------------------------- Net cash provided by (used in) financing activities (470,760) 625,226 (633,193) 331,161 (62,059) -------------------------------------------- ---------------------------- Net decrease in cash and cash equivalents (775,458) (113,686) (87,059) (137,630) 103,296 Cash and cash equivalents--beginning of period 1,198,765 423,307 309,621 309,621 222,562 -------------------------------------------- ---------------------------- Cash and cash equivalents--end of period $ 423,307 $ 309,621 $ 222,562 $ 171,991 $ 325,858 ============================================ ============================
See accompanying notes. 9 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Nature of Business and Basis of Presentation Avatech Solutions, Inc. provides design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States. The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its wholly-owed subsidiaries (collectively, the "Company"). All intercompany accounts and transactions have been eliminated in consolidation. Unaudited Interim Financial Information The unaudited interim financial information as of September 30, 2002 and for the three months ended September 30, 2001 and 2002 has been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Article 10 of Regulation S-X. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation of such period. The operating results for any interim period are not necessarily indicative of results for any future period. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventory Inventory, consisting of computer software and hardware, is stated at the lower of first-in, first-out cost, or market. 10 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Property and Equipment Property and equipment is stated at cost. Depreciation for computer software and equipment and office furniture and equipment is provided for by the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset using the straight-line method. Impairment of Long-Lived Assets Excluding Goodwill Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. Goodwill Goodwill is the excess of the purchase price paid over the fair value of the identifiable net assets acquired in purchase business combinations. Prior to July 1, 2002, goodwill was amortization on a straight-line basis over 15 years. Commencing July 1, 2002, goodwill is not amortized but it tested annually for impairment at the reporting unit level. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess. (See also Note 1, Recent Accounting Pronouncements). 11 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Stock Options Granted to Employees The Company uses the intrinsic value method to account for its employee and director stock option plans. Under the intrinsic value method, compensation expense is calculated as the difference between the fair value of the underlying common stock and the exercise price of the option at the date of grant for fixed stock option awards. Any resulting compensation expense is recognized pro rata over the vesting period. The Company discloses in Note 7 the pro forma effects on net income if the Company had elected the fair value method of accounting for stock options. 12 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Revenue Recognition and Accounts Receivable The Company generates revenue from three sources, the resale of prepackaged software products, professional services and commissions. Software products are frequently sold in an arrangement that includes implementation services or maintenance services. Maintenance services are limited to help desk support and training. The Company allocates the total arrangement fee among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. The Company limits its assessment of fair value of each element to the price charged when the same element is sold separately. Revenues for software product sales are recognized as revenue when four criteria are met. These four criteria are (i) a signed purchase order has been obtained (ii) delivery of the software has occurred (iii) the fee is fixed or determinable and (iv) the fee is probable of collection. Software product sales billed and not recognized as revenue are included in deferred revenue. The Company generally does not require collateral The Company provides a 30-day return policy to its customers. The Company has historically not experienced significant returns, and accordingly, allowances for returned products are not recorded. Revenues from maintenance services are recognized ratably over the contractual service period. Revenues from implementation and training services are recognized as the services are provided. Advance payments for these services are deferred and recognized in the periods when the services are performed. The Company also receives commissions from vendors for transactions in which the Company does not take title to the product or have responsibility for the delivery of the services, has no risk of loss for collection, and has acted as an agent or broker. These commissions are recorded as revenue when earned. Cost of Product Sales Cost of product sales includes the costs of purchasing software and hardware from suppliers and the associated shipping and handling costs. 13 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Cost of Service Revenue Cost of service revenue consists primarily of direct employee compensation and related benefits, the cost of subcontracted services and direct expenses billable to customers. Cost of service revenue does not include an allocation of overhead costs. Warranty Costs The Company does not provide for warranty costs for its products as such costs are incurred by the manufacturer of the products. Advertising Costs Costs incurred for producing and communicating advertisements are expensed as incurred and included in selling, general and administrative expenses in the accompanying statements of operations. Advertising expenses approximated $549,000, $412,000 and $399,000 for years ended June 30, 2002, 2001 and 2000, respectively. Business Segment Reporting The Company's operating segments are established based on geographical areas managed by location managers and for which discrete financial information is prepared and reviewed by the Company's chief operating decision maker. These segments are aggregated for segment reporting purposes into one reporting segment because the operating segments have similar economic characteristics and generate revenues from sales of similar products and services to similar types of customers. Income Taxes The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Concentration of Credit Risk The Company maintains cash in bank accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses on these accounts. 14 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Earnings (Loss) Per Share of Common Stock Basic earnings (loss) per common share is computed as net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include the potential dilution that would occur from common shares issuable upon the exercise of outstanding stock options and warrants. Basic and diluted earnings (loss) per common share are equal for all years presented because the assumed exercise of options and warrants is antidilutive. Recent Accounting Pronouncements Goodwill and Other Intangible Assets As of July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Under the new rules, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests in accordance with the Statement. Other intangible assets with finite lives will continue to be amortized over their useful lives. The goodwill amortization expense and net income (loss) of the Company for the three years ended June 30, 2002 and the three months ended September 30, 2001 and 2002 are as follows:
Three Months Ended Year Ended June 30 September 30 --------------------------------------------------------------- 2000 2001 2002 2001 2002 --------------------------------------------------------------- Reported net income $(2,053,237) $ 89,336 $(247,495) $(361,260) $1,345,076 Goodwill amortization, net of income taxes 89,000 87,297 73,000 24,217 - --------------------------------------------------------------- Adjusted net income (loss) $(1,964,237) $176,633 $(174,495) $(337,043) $1,345,076 =============================================================== Earnings per common share, basic: Reported net income (loss) $ (0.34) $ 0.01 $ (0.0.4) $ (0.06) $ 0.22 Goodwill amortization, net of income taxes 0.02 0.01 0.01 0.01 - --------------------------------------------------------------- Adjusted net income $ (0.32) $ 0.02 $ (0.03) $ (0.05) $ 0.22 ===============================================================
During the second quarter of fiscal year 2003, the Company completed phase one of the transitional impairment test under Statement 142. Based on the results of this test, management believes that the Company is likely to have an impairment charge for one of its reporting units. The Company will complete phase two of the transitional impairment test before the end of fiscal year 2003, at which time it will record the impairment charge as of July 1, 2002. There were no changes in the carrying amount of goodwill for the three-months ended September 30, 2002. 15 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements (Continued) Accounting for the Impairment or Disposal of Long-Lived Assets As of July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 supersedes and serves to clarify and further define the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. Statement 144 does not apply to goodwill and other intangible assets that are not amortized, and retains the Company's current policy to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted future cash flows and to measure the impairment loss as the difference between the carrying amount and the fair value of the asset. Reporting Extraordinary Items In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement 145). Among other changes, Statement 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, net of the related tax effect. Statement 145 provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they are unusual or infrequent or they otherwise meet the criteria for classification as an extraordinary item, and observes that debt extinguishment transactions would seldom, if ever, result in extraordinary item classification of the resulting gains and losses. The Company adopted Statement 145 in July 2002, and reports as other expenses (income) any extraordinary losses or gains that it incurs upon the extinguishment of debt. 16 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Accounting for Costs Associated with Exit or Disposal Activities In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Statement 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of Statement 146 is not expected to have a significant effect on the Company's results of operations and financial position. 2. Supplemental Disclosure of Cash Flow Information The Company paid interest of approximately $416,000, $553,000 and $629,000 in 2002, 2001 and 2000, respectively. Additionally, interest of $130,000 and $65,000 was paid for the three months ended September 30, 2001 and 2002, respectively. 3. Restatement of Prior Period Revenues and Expenses In fiscal year 2002, the Company determined that certain transactions in which it acted as an agent for a supplier were recorded improperly as if the Company was the principal in the transaction. Specifically, the Company recorded as revenues fees collected from customers on behalf of third party vendors for rights to unspecified future product upgrades, despite the fact that under generally accepted accounting principles the Company was not the principal obligor under the arrangement. The fees received from these customers were remitted, net of a commission to the Company, to the vendor solely obligated to perform under the arrangement. The amount remitted to the vendor was recorded as a cost of product sales. Under generally accepted accounting principles, the amount retained by the Company should be recorded net in the statement of operations as commission revenue. 17 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Restatement of Prior Period Revenues and Expenses (continued) The statements of operations for 2001 and 2000 have been restated to record as commission revenue only the amount retained by the Company in these transactions. The following summarizes the adjustments recorded:
Year ended June 30 2001 2000 ------------------------------------- Revenues as previously reported $ 33,010,750 $ 34,194,043 Adjustment to reduce revenue to record commissions net 2,139,272 1,038,692 ------------------------------------- Revenues, as restated $ 30,871,478 $ 33,155,351 ===================================== Cost of product sales, as previously reported $ 16,388,742 $ 17,267,541 Adjustment to eliminate costs incurred as an agent 2,139,272 1,038,692 ------------------------------------- Cost of product sales, as restated $ 14,249,470 $ 16,228,849 =====================================
4. Impairment Loss In fiscal year 2002, the Company determined that the goodwill and other long-lived assets of one of its subsidiaries were likely impaired due to recurring operating losses and changes in the estimates of the future estimated cash flows from these operations over the remaining amortization period. The Company determined that the carrying value of these assets exceeded their estimated fair values by $285,374 and recorded an impairment loss in that amount. The fair value of the long-lived assets was determined using discounted cash flows over the remaining estimated useful life of the assets. Of the recorded impairment loss of $285,374, $283,000 related to goodwill and the remainder related to fixed assets. 5. Borrowings Under Line-of-Credit The Company has entered into a revolving line-of-credit agreement with a financial institution which expires October 30, 2003, but is payable within 60 days of demand by the lender. The credit extended under this financing agreement is limited to the lesser of $4 million or 75% of the Company's aggregate outstanding eligible accounts receivable. The balance outstanding under this line-of-credit was $1,284,880 at September 30, 2002. Borrowings under this line-of-credit bear interest at the prime rate plus 1.5% and are secured by the assets of the Company. In addition, the bank has the right to restrict any prepayment of other indebtedness by the Company. Because the interest rate adjusts with changes in the prime rate, the estimated fair value of the borrowings under the line of credit was equal to the carrying amount. 18 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Long-Term Debt, Warrants and Gain on the Extinguishment of Debt At June 30, 2000 and 2001, the Company was obligated to one of its suppliers under a note agreement in the amount of $2.96 million, bearing interest at 6.5% per annum. The note as modified required interest only payments through September 30, 2001, with subsequent quarterly payments of principal and interest of $621,311 until maturity in December 2002. The Company was in default of specified financial covenants at June 30, 2001, and the note was therefore classified as current at that date. In August 2002, the Company entered into an agreement to extinguish the outstanding $2.96 million debt for a cash payment of $1.0 million and compliance with certain non-financial covenants. The Company obtained the $1.0 million due the lender from borrowings from a director and shareholder and from PlanetCAD Inc., each in the amount of $500,000. These borrowings totaling $1.0 million bear interest at 15% per annum. The loan from the director and shareholder matures on July 1, 2003 and is recorded as a note payable to related party in the accompanying balance sheet at September 30, 2002. The loan from PlanetCAD was due at the earlier of (i) the date on which Avatech became unable or refused to complete the merger, or (ii) July 1, 2003. Accordingly, this note is recorded within the current portion of long-term debt at September 30, 2002. As described more fully in Note 12, the Company completed its merger with PlanetCAD on November 19, 2002, at which time the $500,000 loan from PlanetCAD was eliminated in consolidation. The gain on the extinguishment of the debt of $1.96 million was recorded in August 2002 upon the settlement of the $2.96 million note for cash of $1.0 million and compliance with certain non-financial covenants. As of September 30, 2002, the Company issued $1,675,000 of 10% subordinated notes with attached nontransferable stock purchase warrants to purchase 69,000 shares. The notes bear simple interest at the rate of 10% per annum until all principal and accrued and unpaid interest has been paid. Interest only is payable quarterly until maturity. The notes are fully subordinated to the payment of senior indebtedness (line-of-credit) of the Company. In connection with the merger with PlanetCAD, Inc., approximately $1.4 million of subordinated notes outstanding at September 30, 2002 were converted into 570,000 shares of preferred stock on November 19, 2002. Accordingly, these subordinated notes are presented as short term debt subject to refinancing at September 30, 2002. Of the total subordinated notes, $725,000 were issued to related parties and those notes that were not converted into preferred stock are presented within the current portion of long term debt as their maturity date is July 1, 2003. The fair value of the long-term debt approximates its carrying value based on interest rates available to the Company for similar loans. The warrants to purchase 69,000 shares of common stock issued in connection with the 10% subordinated notes are exercisable for $5.75 per share and expire five years after 19 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Long-Term Debt, Warrants and Gain on the Extinguishment of Debt (continued) their date of issuance. Warrants for the purchase of 63,000 shares and 1,000 shares of common stock will expire in 2003 and 2004, respectively. The remaining 5,000 stock purchase warrants will expire in 2007. The number of shares or exercise price will be adjusted in the event of any stock dividend, stock splits, or recapitalization of the Company. The warrants issued in conjunction with the 10% subordinated notes were valued at $19,840, an estimate based on a valuation using the Black-Scholes Pricing Model, a generally accepted warrant valuation methodology. The estimated value of the warrants was recorded as additional paid-in capital and the notes have been recorded net of a discount of $19,840. The estimated fair value of the options was based on the Black-Scholes Pricing Model. The valuation assumptions used included an expected life of five years; an expected price volatility of 0.10; no dividend yield; risk-free interest rate of 5.5%; and the stock price at the date of grant of $4.25. At September 30, 2002, the balance outstanding under the 10% subordinated notes was $1,672,426. 7. Employee Stock Plans Effective April 2, 1998, the Company adopted the Avatech Solutions, Inc. 1998 Stock Option Plan. Effective January 1, 2000, the Company adopted the Avatech Solutions, Inc. 2000 Stock Option Plan. Both plans are administered by the Board of Directors and provide for the granting of either qualified or non-qualified stock options to purchase an aggregate of up to 750,000 shares of common stock to eligible employees, officers, and directors of the Company. The options granted under this plan vest in three equal installments on the anniversary date of the grant over a three year period. A summary of stock option activity and related information is included in the table below:
Year ended June 30 2002 2001 2000 -------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------------------------------------------------------------------- Outstanding at beginning of year 399,185 $ 4.25 274,300 $ 4.25 171,720 $ 4.25 Granted 423,022 4.25 176,355 4.25 174,440 4.25 Exercised - - - - - - Forfeited (126,910) 4.25 (51,470) 4.25 (71,860) 4.25 -------------------------------------------------------------------------------------- Outstanding at end of year 695,297 $ 4.25 399,185 $ 4.25 274,300 $ 4.25 ======================================================================================
20 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Exercisable at end of year 378,391 $ 4.25 186,489 $ 4.25 95,499 $ 4.25 ====================================================================================== Weighted-average fair value of options granted during the year $ 0.66 $ 0.95 $ 1.18 ============= ============== ============= Weighted-average remaining contractual life 8.7 Years 8.8 Years 9.2 Years ============= ============== =============
Pro Forma Information
Year ended June 30 2002 2001 2000 -------------------------------------------------------------- Net income (loss)--historical $ (247,495) $ 89,336 $ (2,053,237) Net (loss) income--pro forma $ (363,857) $ (99,456) $ (2,163,510) Basic and diluted net income (loss) per common share--historical $ (0.04) $ 0.01 $ (0.34) Basic and diluted net (loss) per common share--pro forma $ (0.06) $ (0.02) $ (0.36)
For the three years ended June 30, 2002, required pro forma net income (loss) and income (loss) per share information assuming that stock options were recorded at their fair value at the grant date was determined using the minimum value method. The minimum value method calculates the fair value of options as the excess of the estimated fair value of the underlying stock at the date of grant over the present value of both the exercise price and the expected dividend payments, each discounted at the risk-free rate, over the expected life of the option. In determining the estimated fair value of granted stock options under the minimum value method, the risk-free interest rate was assumed to be 4.48%, 5.21%, and 5.5% in 2002, 2001 and 2000, respectively, the dividend yield was estimated to be 0% and the expected life of granted options was assumed to be five years. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the minimum value method and other methods of estimating fair value do not necessarily provide a single measure of the fair value of its employee stock options. 21 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Employee Stock Plans (continued) Effective May 1, 1998, the Company adopted the 1998 Employee Stock Purchase Plan for all employees meeting certain eligibility requirements. Under the Plan, employees may purchase shares of the Company's common stock, subject to certain limitations, at 85% of its market value as determined by the Board of Directors. Purchases are limited to 10% of an employee's eligible compensation. A total of 150,000 shares are available for sale to employees under this Plan. The Board of Directors authorized the suspension of this Plan in March 2000. During 2000, the Company sold approximately 18,810 shares to employees under this Plan. The Plan does not contain a provision requiring the Company to repurchase shares from terminated employees. However, the Company elected to purchase 18,147 shares for $65,529 in 2002 and 31,564 shares for $113,381 in 2001 from former employees. At June 30, 2002, the Company has reserved 814,000 shares of common stock for future issuance upon the exercise of any stock options granted under the 1998 and 2000 Stock Option Plans and upon the exercise of outstanding warrants. 8. Income Taxes Significant components of the Company's deferred tax assets and liabilities are as follows: June 30 2002 2001 ----------------------------- Deferred tax assets: Net operating loss carryforward $ 1,860,991 $ 1,688,082 Allowance for doubtful accounts 43,214 81,974 Accrued vacation pay - 1,822 Book over tax depreciation 77,341 76,571 --------------------------- Total deferred tax assets 1,981,546 1,848,449 Valuation allowance for deferred tax assets (1,608,546) (1,848,449) --------------------------- Net deferred tax assets $ 373,000 $ - =========================== 22 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Income Taxes (continued) As of June 30, 2001, the Company recorded a valuation allowance equal to its deferred tax assets due to the inability to conclude that it was more likely than not that those assets would be realized from future taxable income. In August 2002, as described more fully in Note 6, the Company realized a $1.96 million taxable gain from the extinguishment of certain debt. This gain provided significant evidence of the likelihood of taxable income in fiscal year 2003, and the Company therefore at June 30, 2002 recorded a valuation allowance of $1.6 million that resulted in net deferred tax assets of $373,000, or the amount that management estimated was likely to be realizable from taxable income in 2003. In the first quarter of 2003, the Company recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax assets in 2003 upon the use of net operating loss carryforwards to reduce taxable income resulting from the $1.96 million taxable gain reported in the first quarter upon the extinguishment of the aforementioned debt. The ultimate amount of the net operating loss carryforward used to reduce 2003 taxable income may ultimately differ from the amount estimated, and it is reasonably possible that the difference may be material. The Company's provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate of 34%, as summarized in the table below.
Year ended June 30 2002 2001 2000 ---------------------------------------- Expected federal income tax expense (benefit) at 34% $(181,048) $ 30,374 $(698,100) Expenses not deductible for income tax purposes 153,566 26,879 47,419 State income taxes, net of federal benefit (24,601) 8,580 (94,860) Change in valuation allowance for deferred taxes (239,903) (54,441) 735,900 Other 6,986 1,608 9,641 ---------------------------------------- $(285,000) $ 13,000 $ - ========================================
At June 30, 2002, the Company has net operating loss carryforwards totaling approximately $4,800,000, which will begin to expire in 2012. Certain net operating loss carryforwards at June 30, 2002, are related to subsidiaries of the Company, and are available only to offset future taxable income of those subsidiaries. 23 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Commitments and Contingencies Operating Leases The Company leases certain office space and equipment under noncancellable operating lease agreements that expire in various years through 2006, and generally do not contain significant renewal options. The Company also leases one office location from an entity controlled by a stockholder under a noncancellable operating lease, which expires in 2003. Future minimum payments under all noncancellable operating leases with initial terms of one year or more consisted of the following at June 30, 2002:
Related Party Other Total ------------------------------------------------------- Year ended June 30 $ 42,552 $ 821,490 $ 864,042 2003 2004 - 469,621 469,621 2005 - 115,934 115,934 2006 - 25,515 25,515 ------------------------------------------------------ Total minimum lease payments $ 42,552 $ 1,432,560 $ 1,475,112 =======================================================
Rent expense consisted of the following for the years ended June 30:
2002 2001 2000 ------------------------------------------------------ Office space $ 1,162,344 $ 1,066,818 $ 1,009,056 Equipment 40,361 69,132 99,915 ------------------------------------------------------ $ 1,202,705 $ 1,135,950 $ 1,108,971 ======================================================
Rent expense for the years ended June 30, 2002, 2001 and 2000 included amounts paid to related parties of approximately $85,000, $83,000 and $82,000, respectively. 24 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Commitments and Contingencies (continued) Agreements with Executives The Company has entered into agreements with three executives that provide for payments of eighteen months of salary and immediate vesting of all stock options not previously vested upon termination of the executive or change in control of the Company, as defined. At September 30, 2002, the total contingency was approximately $500,000. Litigation On May 21, 2002, a former employee filed a lawsuit against the Company alleging breach of employment contract in connection with the former employee's dismissal. The lawsuit alleges damages in the amount of $187,500. As of September 30, 2002, this lawsuit was settled for an agreed upon cash payment. 10. Employee Benefit and Incentive Compensation Plans Effective January 1, 1998, the Company adopted the Avatech Solutions, Inc. 401(k) Retirement Savings Plan and Trust (the "Plan"). The Plan is a defined contribution plan, which covers substantially all employees of the Company, or its wholly-owned subsidiaries, who have attained age 21 and have completed 6 months of service. Participants may elect to contribute from 1% to 15% of eligible annual compensation to the Plan. Maximum salary deferrals are currently $10,000 per year. The Company will match 25% of the participant salary deferrals up to 6% of a participant's compensation for all participants employed on the last day of the Plan year. The Company may also make discretionary profit-sharing contributions to the Plan for all participants who are employed on the last day of the Plan year. The total amount recorded by the Company as expense during the years ended June 30, 2002, 2001 and 2000, was approximately $62,000, $79,000 and $86,000, respectively. The Company did not contribute to the plans for the three months ended September 30, 2001 and 2002, respectively. 11. Significant Supplier Approximately 92%, 87% and 80% of the Company's purchases for the years ended June 30, 2002, 2001 and 2000, respectively, were from one vendor and approximately 81% and 85% of accounts payable at June 30, 2002 and 2001, respectively, were due to this vendor. The Company's purchases for the three months ended September 30, 2002 were 95% from this same vendor and approximately 60.0% of accounts payable at September 30, 2002 were due to this vendor. 25 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Plan of Merger and Subsequent Events On November 19, 2002, the Company consummated a merger with PlanetCAD, Inc., whereby shareholders of the Company exchanged their shares of the Company's common stock for common stock of PlanetCAD. Upon completion of the merger, the shareholders of the Company owned 75% of the outstanding common stock of PlanetCAD. PlanetCAD develops, markets, and supports cycle time reduction software solutions that integrate engineering processes and data for the manufacturing supply chain. Subsequent to the acquisition, PlanetCAD changed its name to Avatech Solutions, Inc. In connection with the merger, options and warrants to purchase the common stock of the Company were converted into options and warrants to acquire common stock of the post-merger entity based on the merger exchange ratio. In addition, $1.5 million of outstanding subordinated notes of the Company were converted into 610,000 shares of convertible preferred stock of the Company. Each share of preferred stock is convertible into 1.1 shares of common stock. For accounting purposes, the Company was deemed to have acquired PlanetCAD, as its shareholders own a majority of the outstanding common stock of the surviving entity. The purchase method of accounting was used to record the acquisition, and the cost of acquiring PlanetCAD of $2.2 million, including estimated acquisition costs of $947,000, was assigned to acquired assets and liabilities based on their estimated fair value, as determined by an independent appraisal. The cost of the acquisition was allocated to acquired assets and liabilities at the acquisition date, as summarized below. Assets Cash $ 995,000 Accounts receivable 155,000 Prepaid expenses and other current assets 611,000 Property and equipment 314,000 Acquired technology and other amortizable intangible assets 686,000 Goodwill 278,000 ------------ Total assets 3,039,000 ============ Liabilities Accounts payable and accrued expenses 860,000 Deferred revenue 229,000 ------------ Total liabilities 1,089,000 ------------ Cost of net assets acquired, excluding acquired in-process research and development assets of $282,000 $ 1,950,000 ============ Upon the completion of the merger, the new Company has 2,973,556 shares of outstanding common stock, 2,230,167 of which were issued to shareholders of the 26 Avatech Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Plan of Merger and Subsequent Events (continued) Company in connection with the merger. The Company also has 610,000 shares of outstanding preferred stock. Unaudited summarized pro forma operating data, assuming that the acquisition occurred on September 30, 2002 is as follows:
Year ended June 30, Three Months Ended 2002 September 30, 2002 ----------------------------------------- Revenue $31,580,291 $6,170,737 Net loss $(7,818,128) $ (238,490) Loss per common share, basic and diluted $ (2.63) $ (0.08)
13. Liquidity and Capital Resources As discussed more fully in Note 12, in November 2002, the Company completed the acquisition of PlanetCAD, Inc. In connection with the acquisition, the Company incurred approximately $0.9 million of merger costs, and PlanetCAD incurred approximately $1.3 million of merger costs. These costs have reduced the amount of working capital that the Company has available for its operations. Management is currently negotiating with service providers to reduce the amounts billed and extend the terms for payment of unpaid obligations related to the merger. One of the Company's directors or officers has expressed their intention of lending the Company, up to $500,000, to fund any needed working capital deficiencies. Based on an evaluation of the likely cash generated from operations in the near term, available capital resources and the timing of cash payments to vendors, management believes that it has sufficient sources of working capital to fund its operations in the normal course of business through at least June 30, 2003. The Company has engaged an investment banking firm to assist in obtaining long-term financing. Additionally, the Company plans to raise between $1.0 million to $2.0 million of short term financing on acceptable terms by June 30, 2003. 27 EX-99.4 ACQ AGREEMNT 8 dex994.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Exhibit 99.4 99.4 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sabarnes-Oxley Act of 2002). Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Donald R. Walsh, Chief Executive Officer (principal executive officer) of Avatech Solutions, Inc. (the "Registrant"), hereby certify that to the best of my knowledge, based upon a review of the Report on Form 8-K for the period ended September 30, 2002 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Donald R. Walsh - ------------------------ Name: Donald R. Walsh Date: January 31, 2003 EX-99.5 HOLDERS RTS 9 dex995.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Exhibit 99.5 99.5 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Gary Rever, Chief Financial Officer (principal financial officer) of Avatech Solutions, Inc. (the "Registrant"), hereby certify that to the best of my knowledge, based upon a review of the Report on Form 8-K for the period ended September 30, 2002 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Gary Rever - ---------------------- Name: Gary Rever Date: January 31, 2003 EX-99.6 ADVSER CONTR 10 dex996.txt SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Exhibit 99.6 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------- ------------ -------------------------------- ---------------- ---------------- ADDITIONS -------------------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS - BALANCE AT END DESCRIPTION PERIOD EXPENSES - DESCRIBE DESCRIBE OF PERIOD - -------------------------------------- ------------ --------------- --------------- ---------------- ---------------- Year Ended June 30, 2002: Deducted from assets accounts: Allowance for doubtful accounts: $ 212,000 $ 76,000 $ - $ (176,000)(1) $ 112,000 ============ =============== =============== ============ ============= Year Ended June 30, 2001: Deducted from assets accounts: Allowance for doubtful accounts: $ 282,000 $ 7,000 $ - $ (77,000)(1) $ 212,000 ============ =============== =============== ============ ============= Year Ended June 30, 2000: Deducted from assets accounts: Allowance for doubtful accounts: $ 83,000 $ 289,000 $ - $ (90,000)(1) $ 282,000 ============ =============== =============== ============ =============
(1) Uncollectible accounts written off, net of recoveries. -----END PRIVACY-ENHANCED MESSAGE-----