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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
CURRENT REPORT
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_____ to _____
Commission File Number 0-22710
ATEC GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3673965
(State or other jurisdiction of (I.R.S. Identification
Employer corporation or organization) Number)
1952 Jericho Turnpike, East Northport, New York 11731
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (516) 462-2832
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock $.01 par value
Series A Preferred Stock
$.01 Par value.
ITEM 1. BUSINESS
General
ATEC Group, Inc. ("the Company"), through its wholly owned subsidiaries
American Computer Systems, Inc. ("ACS"), Cony Computer Systems, Inc. ("CONY"),
Innovative Business Micros, Inc. ("Innovative"), Micro Computer Stores, Inc.
("MCS") and Sun Computer and Software, Inc. ("SCSI"), is engaged in the sale of
computer hardware and software products to businesses, professionals, government
agencies and educational institutions. The Company provides its customers with a
wide range of services, including designing, integration and installing computer
systems, local area networks, high volume data communications, video
conferencing and internet ready solutions. The Company's subsidiaries are
authorized dealers for major manufacturers such as Apple, AST, Compaq, Epson,
Hewlett Packard, Hughes Networks, IBM, Microsoft, NEC, Novell, Oracle,
Panasonic, Sharp, Sybase and Toshiba. Hardware products sold include
microcomputer systems, laptop computers, local area network products, Direct PC,
Internet access and other computer peripherals.
The primary business market segments which the Company targets are
businesses, professionals and government agencies who are in need of computer
hardware and software integration and related support services. The Company
offers a full spectrum of services and support which management believes is of
critical importance in the current market environment. The Company believes that
computer systems have become too complex for a purchaser to be able to take it
home, take it out of the box, plug it in, and run it without experiencing
problems. Moreover, the integration of networks, internet access multimedia,
video conferencing, high volume information and communication systems has
necessitated a market of technical support and continued customer relations
after the sale. The Company believes that most consumers and business users do
not possess the time to investigate and locate the various computer components
necessary to establish an integrated computer system and therefore, strives to
provide "one-stop solutions" to their customers' computer needs in a cost
effective manner.
The Company advertises its products and services to businesses by
distributing brochures, direct mail solicitation, print advertisement and
participation in seminars, presentations and trade shows. The Company's
marketing strategy is to educate business customers as to the Company's ability
to provide a "one-stop solution" to all its computer needs from the initial
purchase and installation processes through required service and future
expansion requirements. The Company strives to quickly respond to its customers'
continually changing environment by providing flexible and economic solutions to
a user's need to expand and upgrade computer systems and applications.
The inventory of the Company consists of finished products sold by the
Company in the regular course of its business. At June 30, 1996 inventory was
approximately $2,800,000. The Company is aware that as a result of rapidly
changing technology in the computer field, and the consistent introduction of
new products, there is a significant risk that inventory can be rendered
obsolete or its value greatly reduced. The Company's strategy regarding
minimizing this risk focuses on limiting the time in which products remain in
inventory.
The Company's subsidiaries have entered into numerous vendor and dealer
agreements regarding the sale of hardware and software products. The Company
purchased approximately 41% of its hardware and software products from
Computerland Corporation (hereafter called "Computerland") during the year ended
June 30, 1996. Computerland is the only vendor who accounted for 10% or more of
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the purchases of the Company. In addition to its agreements with Computerland,
the Company has dealer/vendor agreements with Ingram, Merisel, Intelligence
Electronics, Micro Age and Tech Data. The majority of these agreements may be
canceled upon short term notice to the Company in the event that minimum
purchases are not made and for other reasons. The Company has not in the past
had any vendor/dealer agreement terminated, except those which the Company
desired to terminate. The Company did not experience any material difficulties
in obtaining products from its vendors during its prior year. The Company
believes that other suppliers would be able to adequately service the Company's
needs in the event that its existing vendor/dealer agreements were terminated.
Competition
The microcomputer market is very competitive. The Company competes directly
with a variety of local and national distributors, super stores, retailers, mail
order houses and other entities who offer computer products and services. Many
of the computer manufacturers offer their products for sale directly through
mail order distribution and may possess greater financial, purchasing and
marketing resources. The Company seeks to compete with its competitors based
upon the Company's commitment to provide its customers with complete computer
services rather than merely upon the price of hardware and software. While the
Company attempts to competitively price hardware and software items, management
believes that the Company's principal strength is its ability to offer customers
complete solutions to their individualized computer needs, including system
design and integration, local area network (LAN), data communications, and
Internet access. During the year ended June 30, 1996, the Company's service
related activities accounted for approximately 5% of total revenues.
Seasonality
The Company does not experience any material seasonal trends in its
operations except for approximately 10% sales increases during the months of
October, November and December and approximately 5% sales decreases during the
months of January, February, March, July, August and September.
Backlog
The Company does not have a significant backlog as it normally delivers and
installs the computer products purchased by its customers within a short time of
the date of order. Accordingly, the Company does not believe that backlog is
material to the Company's business or indicative of future sales.
Governmental Regulation and Contracts
The Company believes that it is in material compliance with federal and
state laws and regulations which are applicable to its operations. The Company
is not a party to any government contract which represents a material portion of
the Company's revenues or which, if terminated or renegotiated, would have a
material adverse effect on the Company's business.
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Patents and Trademarks
The Company does not currently rely upon the use of any patents and/or
trademarks in connection with its operations except for references in
advertising materials as an authorized dealer or vendor of specific products of
manufacturers with whom they have agreements. The Company believes however that
the ability to identify itself as the authorized dealer of such manufacturers is
an important aspect of their marketing strategy.
Employees
As of the date of this Annual Report, the Company had an aggregate of
approximately 72 employees, including its 9 administrators, 22 staff persons, 5
store managers, 23 full-time sales persons, 8 technical and 5 warehouse
personnel. The Company has no collective bargaining agreements and believes the
relations with their employees are good.
Recent Developments
In June 1996, the Company acquired 100% of the issued and outstanding
capital stock of Innovative, a New York corporation engaged in computer systems
integration business. Innovative's computer facility is located at 90 Adams
Avenue, Hauppauge, New York 11788. Innovative's principal shareholders were
Rajnish Rametra, Ashok Rametra and Surinder Rametra. Messrs. Ashok and Surinder
Rametra are the officers, directors and principal shareholders of the Company.
Rajnish is the brother of Surinder and Ashok. The consideration for the
Company's acquisition of Innovative was the issuance to the Shareholders of an
aggregate of 4,900,000 shares of the Company's Common Stock.
In September 1996, the Company formed a new Delaware subsidiary, VDOT.Net
Inc. ("VDOT"). VDOT has entered into an agreement to acquire certain assets of a
startup internet service provider, VDOT.Net Inc., a New York Corporation ("VDOT
NY") in exchange for shares of the Company's stock with an aggregate value of
$100,000. VDOT NY shall be entitled to receive additional shares of the
Company's Common Stock with a market value of $50,000 in the event VDOT reports
net income after taxes during the year ended June 30, 1997. Ed Gulmi and Pat
Prauge, the shareholders of VDOTNY, will enter into employment agreements with
VDOT as the president and vice president respectively of VDOT. The Company
intends to seek out additional acquisitions in the internet area.
ITEM 2. PROPERTIES
The Company's headquarters and executive offices are located at 1952
Jericho Turnpike, East Northport, New York. This location also serves as SCSI's
retail facility. These premises, consisting of approximately 3,300 square feet,
are leased pursuant to a lease expiring in 1998 providing for annual rental
payments of approximately $35,000 per year, plus certain expenses and taxes. MCS
maintains a retail location and warehouse facility in Albany, New York,
consisting of approximately 8,050 square feet. The Albany facility lease expires
on June 30, 2003 and requires annual rental payments of $96,600 through 1998 and
$108,192 thereafter, plus all expenses and taxes attributable to the operation
of the premises. The Albany facility is leased from former stockholders of SCSI
and MCS. ACS operates from leased premises located at 143 West 29th Street, New
York, New York. This location occupies 4,000 square feet and requires annual
rental payments of $39,000, plus certain expenses. CONY's operating premises is
located at 28 Knight Street, Norwalk, Connecticut. This location is leased by
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CONY pursuant to a three year lease expiring in 1997 and consists of
approximately 2,000 square feet. This lease requires annual payments of
approximately $24,000 per year plus other expenses. CONY has a sales office at
3001-B Route 17 South, Lodi, New Jersey. This location occupies 2,000 square
feet and requires annual rental payments of $17,250, plus certain expenses.
Innovative operates from leased premises located at 90 Adams Avenue, Hauppauge,
NY. This location occupies 5,600 square feet and requires annual rental payments
of $40,090 plus certain expenses.
The Company believes that its current facilities are suitable for its
present and projected needs. The Company does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
A third party action was commenced against Atlantic to Pacific Corp. ("AP")
d/b/a Hillside Bedding in the Supreme Court, Bronx County in 1993. The action
results from a claim by one of AP's former workers who was allegedly injured
while operating a forklift during the course of his employment. The worker
commenced an action against the Company which maintained the forklift, Mid
Hudson Clarklift ("MH"), seeking damages of $7,000,000 for the alleged failure
of such company to properly maintain and service the lift. MH instituted a third
party action against AP seeking judgment over and against AP for all or part of
any verdict or judgment which may be obtained against MH. The case is presently
in the discovery stages.
In 1990, an action entitled Bedding Discount Center, Inc., MJR Bedding Co.,
Inc., Hapat Bedding Corp. v. Sid Patterson, Hillside Bedding Corporation and
Robert Martire was brought against the Company in Supreme Court, Nassau County,
Index No. 3720-90. The suit seeks damages in the amount of $1,000,000 for
alleged disclosure of certain trade secrets and confidential information to the
Company, together with punitive damages in the amount of $10,000,000 and similar
monetary damages based upon the allegations that defendants interfered with and
impaired plaintiffs' contractual and business relations and the plaintiffs have
engaged in acts constituting a prima facie tort. The action has been nearly
inactive since commencement. The Company believes that the action has no merit.
There can be no assurances however that the Company will prevail in any such
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1996, the Company did not submit any matter to
the vote of its shareholders.
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock and Warrants are traded on the National
Association of Security Dealers Automated Quotation System ("NASDAQ") under the
symbol "ATEC" and "ATECW"), respectively. The following table sets forth the
high and low bid prices for the Company's Common Stock, Units and Warrants for
the periods indicated as reported by the NASDAQ. Such prices reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
5
not necessarily represent actual transactions. The following price information
has been adjusted to reflect the Company's September 9, 1994 one for ten Reverse
Stock Split.
Common Stock
High Low
------- -------
1994
Quarter ended 3/31.................................. 1 1/4 7/16
Quarter ended 6/30.................................. 1 5/16
Quarter ended 9/30.................................. 4 3/4 3/8
Quarter ended 12/31................................. 2 7/8 5/8
1995
Quarter ended 3/31.................................. 1 13/16 23/32
Quarter ended 6/30.................................. 1 15/16 11/16
Quarter ended 9/30.................................. 1 19/32 11/16
Quarter ended 12/31................................. 1 3/8 13/16
1996
Quarter ended 3/31.................................. 1 1/2 7/8
Quarter ended 6/30.................................. 1 7/16 15/16
WARRANTS
High Low
------- -------
1994
Quarter ended 3/31.................................. 1/2 1/8
Quarter ended 6/30.................................. 3/16 1/8
Quarter ended 9/30.................................. 1/4 5/32
Quarter ended 12/31................................. 5/32 1/8
1995
Quarter ended 3/31.................................. 5/32 3/32
Quarter ended 6/30.................................. 5/32 5/32
Quarter ended 9/30.................................. 5/32 5/32
Quarter ended 12/31................................. 5/32 1/16
1996
Quarter ended 3/31.................................. 1/2 1/16
Quarter ended 6/30.................................. 11/32 1/8
UNITS
High Low
------- -------
1994
Quarter ended 3/31.................................. 1 3/16 3/8
Quarter ended 6/30.................................. 1 1/16 1 1/32
Quarter ended 9/30.................................. 5 3/8
Quarter ended 12/31................................. 3 1 1/4
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On September 25, 1996, the closing bid and ask prices of the Company's
Common Stock were 11/16 and 3/4 respectively and the closing prices of the
Company's Warrants were 1/16 and 3/32, respectively.
On September 19, 1996, there were approximately 233 holders of record of
the Company's Common Stock; 22 holders of record of the Series A Preferred
Shares; 6 holders of record of the Units and 34 holders of record of the
Warrants. The number of record holders do not include holders whose securities
are held in street name.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
The holders of its Series A Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board. (See "Item
8-Financial Statements").
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in
the period ended June 30, 1996 have been derived from the audited financial
statements of the Company. This information should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report
and "management's Discussion and Analysis."
Operating Data 1996(2) 1995(2) 1994(2) 1993(2) 1992(1)(2)
- --------------- ------------ ------------ ------------ ------------ ------------
Operating Data
Net Sales $ 81,812,045 $ 47,565,542 $ 43,474,764 $ 49,474,764 $ 23,708,809
Income (Loss) from
continuing operations $ 838,349 $ (2,251,354) $ (226,079) $ 215,552 $ 57,453
Income (Loss) per common share-
Primary $ .06 $ (.25) $ (.04) $ .04 $ .01
Fully Diluted $ .04 $ (.25) $ (.04) $ .02 $ .01
Balance Sheet Data
Total Assets $ 13,322,133 $ 11,724,938 $ 7,728,352 $ 8,989,255 $ 3,130,980
Long-term obligations $ 228,322 $ 918,291 $ 1,580,255 $ 245,000 $ 139,709
Cash dividends per
common share Nil Nil Nil Nil Nil
(1) Information for these years is based on a combination of MCS (fiscal year
ended March 31), SCSI (fiscal year ended December 31) and are unaudited.
(2) Results have been restated to include the June 1996 acquisition of
Innovative Business Micros, Inc., accounted for as a pooling of interests.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Background
ATEC Group, Inc. (the "Company") through its wholly owned subsidiaries ACS,
Cony, Innovative, MCS and SCSI is engaged in the sale of computer hardware,
software, computer support and technical services. The computer hardware and
software related products are sold primarily to businesses, professionals,
government units and educational institutions. In addition, the Company provides
its clients with a full spectrum of computer services and technical support
including designing and installing computer systems, local area networks, high
volume data communications and Internet ready solutions. Additionally, the
Company sells hardware and software products to the consumer market through its
store facilities in Albany, NY, Long Island, NY, Norwalk, CT, New York City and
New Jersey.
RESULTS OF OPERATIONS
Fiscal 1996 compared to Fiscal 1995
The Company's revenues for the 1996 fiscal year increased to $81.8 million
from $47.6 million for the prior year, an increase of approximately 72%. This
increase is primarily attributable to the Company's acquisitions of ACS and CONY
in February and March of 1995, respectively, as well as its own internal growth.
Revenues are generated by the Company's sales of computer hardware and software,
and related support services. Gross margin for the year increased to $7.5
million for 1996 from $4.7 million for 1995, a 60% increase due to the increased
revenues. Gross margin as a percentage of revenues for the year were 9.1% as
compared to 9.9% for the prior year. These margins are expected to increase as
these companies attempt to increase their market share in more profitable
sectors of the business such as integration, hardware service/maintenance,
networking and training.
1996 operating expenses exclusive of amortization of intangible assets
increased to $6 million as compared to $4.6 million for the prior year. The 30%
increase in operating expenses are related to expanded business operations
through the 1995 acquisitions and the opening of a sales office in New Jersey in
the third quarter.
Amortization of intangible assets increased to $168,000 for the year from
$108,000 in the comparable 1995 period. Other expenses decreased $1.7 million
primarily due to the write-off of all costs associated with the 1994
reorganization and the satisfaction of debts of the former bedding operations.
The provision for income taxes for 1996 was $415,000 as compared to
$152,000 for 1995. The provision for income taxes in 1996 was lower than the
federal and state combined statutory rate of 46% primarily due to the effect of
deductible charges associated with the charge-off.
As a result of the above, the Company's net income increased to $838,000
for 1996 from a loss of $2,251,000 in 1995. The primary reason for the 1995 loss
resulted from costs associated with the write-off of various items related to
the Company's former bedding business, the 1994 acquisition, and the
reorganization of the Company's business. For 1996, net income per share was
8
$.04 compared to a loss of $.25 in the prior year. Primary and fully diluted
average shares outstanding were 20,476,000 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $1,667,031 at June 30, 1996, an increase of
$747,936 as compared to June 30, 1995. The Company's working capital at June 30,
1996 was $3,815,238 as compared to a working capital of $2,109,178 at June 30,
1995. The increase in cash and working capital primarily resulted from the sale
of 2,160,941 shares of Common Stock for net proceeds of $1,299,751. Net cash
used by operating activities was $646,704.
Cash used for investing activities totaled $81,779, including $206,588 used
to purchase property and equipment.
To accommodate the Company's financial needs for inventory financing,
Deutsche Financial Service (formerly ITT Commercial Finance) has granted a
credit line in the aggregate amount of $4,750,000. At June 30, 1996,
indebtedness of the Company to Deutsche Financial was $2,085,054, a decrease of
$875,579 compared to June 30, 1995. Substantially, all of the Company's tangible
and intangible assets are pledged as collateral for this facility.
Fiscal 1995 compared to Fiscal 1994
During 1995, the Company acquired two additional companies, ACS and CONY
engaged in the computer products and services business. As a result of the
acquisitions and internal growth, the Company's revenues for 1995 increased to
$47.5 million from $43.5 million for 1994, an 9.2% increase. Revenues are
generated by the Company's sales of computer hardware and software, and related
support services. Gross margin increased to $4.7 million for 1995 from $3.8
million for 1994, a 23.7% increase due to increased revenues. Gross margin as a
percentage of revenues for 1995 was 9.9% as compared to 8.7% for 1994.
Operating expenses exclusive of amortization of intangible assets increased
to $5 million for 1995 as compared to $4 million for 1994, a 25% increase. In
the fourth quarter of 1995, media credits of $448,000 which the Company acquired
during the period that it engaged in bedding operations before the acquisition
of its computer business were found to be worthless and were expended. The
remainder of the increase in operating expenses are related to expanded business
operations through the 1995 acquisitions of ACS and CONY. Amortization of
intangible assets increased to $2.1 million for 1995 from $0 in the comparable
1994 period, primarily due to the write-off of all costs associated with the
1994 reorganization of the Company and the satisfaction of bedding related
debts. Interest expense for 1995 amounted to $138,000 as compared to $48,000 for
the same period in 1994. Interest expenses in 1995 are primarily related to
increased lines of credit utilized to finance the Company's increased business
activity.
The provision for income taxes for 1995 was $151,000 as compared to $73,000
for the comparable period in 1994. The provision for income taxes in 1995 was
greater than the statutory rate of 34% primarily due to the effect of non
deductible charges associated with the charge-off of the Company's goodwill.
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As a result of the above, the Company's consolidated net loss increased to
$2.3 million for 1995 from $0.2 million in the comparable 1994 period. The
primary reason for such loss resulted from costs associated with the write-off
of various items related to the Company's former bedding business, the 1994
acquisition, and the reorganization of the Company's business. The operating
results reflected 12 months of operations for SCSI, MCS and Innovative, but only
five months for ACS, and three months for CONY. Primary and fully diluted net
loss per share for 1995 was $.25 as compared to a net loss of $.04 for the
comparable 1994 period. Primary and fully diluted average shares outstanding
were 8,872,333 and 5,289,573, respectively for 1995 and 1994. The calculation of
fully diluted earnings per share is deemed to be anti-dilutive and is therefore
not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On April 18, 1996, ATEC Group, Inc. (the "Registrant") engaged Weinick,
Sanders & Co. LLP ("WS") to audit the Company's consolidated financial
statements for the year ended June 30, 1996. The decision to change independent
auditors was recommended and approved by the Company's Board of Directors.
The accounting firm of Yohalem Gillman & Company, ("Yohalem"), which served
as the Company's independent auditor for the fiscal year ended June 30, 1995 was
dismissed by the Company on April 17, 1996. On June 28, 1995, the Company's
independent auditor for the fiscal year ended June 30, 1994, Bianculli, Pascale
& Company, P.C. ("B&P"), was dismissed by the Company. Yohalem's and B&P's
services for each such year included the audit of the Company's consolidated
financial statements and other services related to filings with the Securities
and Exchange Commission. During the Company's two most recent fiscal years and
the interim periods up until the date of dismissal of Yohalem, the Company had
no disagreement with Yohalem and/or B&P and there were no "reportable events",
as defined in Items 304(a)(1)(iv) and (v) of Regulation S-K involving the
Company, Yohalem and/or B&P on matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of such auditors, would have caused them to make
reference to such matters in their respective reports, with the exception of a
disagreement with Yohalem on the proposed accounting method to be applied to the
Company's proposed acquisition of Innovative. The proposed acquisition of
Innovative (the "Acquisition") contemplated the payment to Innovative
Shareholders of shares of the Company's Common Stock over a three year period
depending upon performance criteria ("Initial Acquisition Terms"). Innovative
was owned by Surinder Rametra and Ashok Rametra, the Company's principal
executive officer and principal financial officer, respectively, and their
brother, Rajnish Rametra. Surinder and Ashok Rametra owned 25% of the Common
Stock and Rajnish Rametra owned 75%. Surinder Rametra gave direction and
guidance to Rajnish Rametra for the operations of Innovative. A member of the
Company's board of directors discussed the matter with Yohalem. The Company
authorized Yohalem to respond fully to the inquiries of WS concerning the
subject matter of the disagreement. The accountant's reports on the Company's
financial statements for the years ended June 30, 1995 and 1994 did not contain
an adverse opinion or a disclaimer of opinion nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
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Management was of the opinion that APB 16 did not apply to the Initial
Acquisition Terms. APB 16, paragraph 5 excludes transfers and exchanges between
companies under common control, and assets and liabilities would be accounted
for at historical cost in a manner similar to that in pooling of interest
accounting (AIN ASPB 16.#39). Management also consulted with the AICPA's
technical hotline prior to formulating their opinion on the appropriate
accounting.
Yohalem, the Company's former independent accountants expressed
reservations concerning the accounting method applied in the pro forma financial
presentations included in the Company's Current Report on Form 8-K dated April
1, 1996 based on the Initial Acquisition Terms and the application of this
method to the pro forma financial statements. Yohalem believed, based on a
literal reading on the applicable authoritative accounting standards, that the
proposed accounting for Innovative based on the Initial Acquisition Terms was
not in accordance with those accounting standards, as currently written,
inasmuch as the Rametra family did not own a majority of the voting shares of
the Company before the Acquisition. Yohalem is aware the Financial Accounting
Standards Board is reconsidering the requirements for consolidations and,
accordingly suggested that the Company discuss this matter with the staff of the
SEC.
The Company requested WS's views on the proposed accounting for the
Innovative transaction based on the Initial Acquisition Terms. Based on the
facts as they existed at that point in time, it was their view that APB 16 did
not apply and the appropriate accounting would be the carryover of Innovative's
cost.
In June 1996, the Company negotiated new acquisition terms "New Acquisition
Terms" with the Rametras, pursuant to which the Company would acquire 100% of
Innovative's shares in exchange for 4,900,000 shares of the Company's Common
Stock all of which shares were payable at the Closing of the Acquisition. The
New Acquisition Terms did not involve the payment of any future consideration to
the Innovative Shareholders. In June 1996, the Acquisition was consummated based
on the New Acquisition Terms. The Company, in concurrence with WS accounted for
the Acquisition as a pooling of interests.
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current directors
and officers of the Company and the position in the Company held by them:
Name Age Position
---- --- --------
Surinder Rametra 56 Chairman of the Board and
Chief Executive Officer
Ashok Rametra 44 Treasurer, Chief Financial
Officer and Director
Balwinder Singh Bathla 40 President and Director
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Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
Surinder Rametra was appointed the Chief Executive Officer and Chairman of
the Board of the Company in June 1994 upon the Company's acquisition of MCS and
SCSI. From 1982 to the present Mr. Rametra has been the president of SCSI, a
company engaged in the sale of computer hardware and software primarily to
business users. Mr. Rametra received a Bachelor of Science Degree from the
Punjab Engineering College, India and a Masters of Science Degree in Engineering
from the University of I.I.T., India in 1965 and 1969 respectively. In 1976 Mr.
Rametra received a Masters of Business Administration Degree in Finance from New
York University.
Ashok Rametra was appointed Treasurer, Chief Financial Officer and Director
of the Company in June 1994 upon the closing of the Company's acquisition of MCS
and SCSI. From June 1994 to March 1995 Mr. Rametra also served as the Company's
president. From 1987 to the present Mr. Rametra has been the president of MCS, a
company engaged in the retail sale of computer hardware and software primarily
to business users. From 1985 through September 1993 Mr. Rametra was a principal
shareholder and officer of Empire State Computers International d/b/a Micro Age,
a company engaged in a business similar to MCS. Mr. Rametra received a Bachelor
of Science Degree from St. Johns University in accounting in 1980.
Balwinder Singh Bathla was appointed as the President and a Director of the
Company in March, 1995 pursuant to the terms of a Stock Acquisition Agreement
between the Company, Mr. Bathla and ACS. Pursuant to the Stock Acquisition
Agreement, the Company acquired 100% of the outstanding stock of ACS and Mr.
Bathla was elected as President and a Director of the Company. Since 1988, Mr.
Bathla was the sole shareholder of ACS and its principal operating officer prior
to the consummation of the Stock Acquisition Agreement. Mr. Bathla received a
Masters Degree in Statistics from Punjab University, Chandigar, India in 1979.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company
during its most recent fiscal year, the Company believes that there were no
Section 16(a) reports filed untimely during the Company's year ended June 30,
1996 or June 30, 1995. In April 1996 Form 4's on behalf of Surinder Rametra and
Balwinder S. Bathla were filed with the Commission. These Form 4's reported
transactions which occurred in both December 1995 and March 1996. In addition,
in September 1996 Form 4's were filed on behalf of Surinder Rametra and Ashok
Rametra with the Commission reporting transactions which occurred in June 1996,
July 1996 and September 1996. A Form 3 was filed on behalf of Rajnish Rametra in
June 1996 with the Commission reporting Mr. Rametra's status as a 10% owner.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Summary Compensation Table for the years ended June 30, 1996,
1995 and 1994 is provided herein. This table provides compensation information
on behalf of the Company's existing officers and directors as well as the
Company's former president. See "Item 13 Certain Relationships and Related
Transactions" for information regarding additional compensation paid to the
Company's former president after June 30, 1994. There are no Option/SAR Grants,
Aggregated Option/SAR Exercises or Fiscal Year-End Option/SAR Value Table for
the years ended June 30, 1996, 1995 and/or 1994. There are no long-term
12
incentive plan ("LTIP") awards, or stock option or stock appreciation rights
except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1996, 1995 and 1994
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual
and Compen- Compen- Restricted All other
Principal Year sation sation Stock Options/ LTIP Compen -
Position Ended Salary Bonus ($) ($) Awards ($) SARs Payouts sation
- -------- ----- ------- --------- --- ---------- ---- ------- ------
Surinder Rametra 6/30/96 $156,000 5,680(10)
6/30/95 $150,850 21,624(2) NONE NONE NONE
6/30/94 $89,000 $80,000(3) 17,456(4) NONE NONE NONE
Ashok Rametra 6/30/96 $150,020 6,508(11)
6/30/95 $180,520 8,113(5) NONE NONE NONE
6/30/94 $52,700 180,000 8,777(6) NONE NONE NONE
Robert Matire(1) 6/30/96
6/30/95
6/30/94 $52,000
Balwinder Singh
Bathla 6/30/96 $135,000 51,723(12)
6/30/95 $58,650 $86,470(7) 2,185(8) See (7) NONE NONE NONE
12/31/94 $31,200 $75,000 44,921(9) NONE NONE NONE
*Note: Salaries and compensation shown above for (i) Surinder Rametra have
been paid by SCSI except as noted below; and (ii) Ashok Rametra have
been paid by MCS; and (iii) Balwinder Singh Bathla have been paid by
ACS.
(1) Mr. Martire resigned as an officer and director of the Company in
September 1994. Subsequent to the year ended June 30, 1994 in
connection with obligations owed by the Company to Mr. Martire, the
Company paid Mr. Martire (i) $118,475; (ii) 88,968 post-split shares
of the Company's Common Stock and (iii) 250,000 shares of stock of an
unrelated NASDAQ Small Cap Market Company. In addition the Company
agreed to pay Mr. Martire an additional $53,950 on or before December
1995 (see "Certain Transactions" p. 18 for additional information
regarding payments to Mr. Martire.)
(2) Life Insurance $16,415, Major Medical $5,209
(3) Bonus of $55,000 from MCS
(4) Major Medical $5,309, Life Insurance $12,147
(5) Major Medical $1,129, Leased Auto $6,984
(6) Major Medical $1,793, Leased Auto $6,984
(7) Represents 70,768 shares of Common Stock issued pursuant to Mr.
Bathla's Employment Agreement.
(8) Major Medical $2,185
(9) Represents $16,000 in commissions, $9,600 in rent received, $19,321 as
an S-Corporation dividend
(10) Major medical $5,680
(11) Major medical $3,799, Leased Auto $2,710
(12) Major medical $4,465, Leased Auto $9,000, Interest income $38,258
13
In June 1994, the Company entered into employment agreements with Surinder
Rametra and Ashok Rametra. Surinder Rametra became the CEO and Chairman of the
Company while Ashok Rametra became the Company's President and Treasurer. The
Rametras are entitled to receive annual minimum salaries in the amount of
$150,000 each as well as fringe benefits including discretionary cash and stock
bonuses, pension, profit sharing plan and health benefits. The agreements expire
on June 30, 1997. Surinder Rametra's employment agreement also provides for a
mandatory stock bonus equal to 5% of the issued and outstanding shares of the
Company's Common Stock on June 30, 1995. 50% of this bonus is contingent upon
the Company's reporting combined revenues for MCS and SCSI of at least
$24,200,000 for the fiscal year ending June 30, 1995 or the fiscal year ending
June 30, 1996. The remaining 50% will be payable provided that the revenue
contingency noted above is satisfied and combined pre-tax net earnings for MCS
and SCSI are at least $825,000 during either the year ended June 30, 1995 or
1996. No stock bonus was earned for the years ended June 30, 1995 or 1996.
In 1995, the Company's wholly owned subsidiary ACS entered into an
employment agreement with Balwinder Singh Bathla, the Company's President,
pursuant to which ACS employed Mr. Bathla as ACS' president through December 31,
1997 at an annual base salary of $135,000 as well as fringe benefits including
discretionary cash and stock bonuses, pension, profit sharing and health
benefits. The following mandatory stock bonuses have been or will be paid to Mr.
Bathla:
(i) The Employee received Series G Preferred Stock which was convertible
into $86,470 worth of ATEC's Common Stock based upon ACS reporting
$10,959,000 in revenues for the period from July 1, 1994 through December
31, 1994. The series G stock was converted into 70,768 shares of Common
Stock.
(ii) For every $1,000,000 in annual revenues as reported on the Company's
audited financial statements for the year ended December 31, 1995 in excess
of the actual revenues reported on the Company's 1994 audited financial
statements, the Employee shall receive $25,000 worth of ATEC's Common Stock
based on the bid and asked prices for shares of ATEC's Common Stock as
reported in the over-the-counter market during the ten day trading period
ended December 31, 1995;
(iii) For every $100,000 in pretax income in excess of $400,000 as reported
on the Company's audited financial statements for the year ended December
31, 1995 the Employee shall receive $25,000 worth of ATEC's Common Stock as
reported in the over-the-counter market during the ten day trading period
ended December 31, 1995.
(iv) For every $1,000,000 in annual revenues as reported on the Company's
audited financial statements for the year ended December 31, 1996 in excess
of the higher of (i) actual revenues reported on the Company's 1995 audited
financial statements or (ii) the actual revenues reported on the Company's
1994 audited financial statements, the Employee shall receive $25,000 worth
of ATEC's Common Stock based on the bid and asked prices for shares of
ATEC's Common Stock as reported in the over-the-counter market during the
ten day trading period ended December 31, 1996;
(v) For every $100,000 in pretax income as reported on the Company's
audited financial statements for the year ended December 31, 1996 in excess
14
of the higher of (i) actual pre-tax income reported on the Company's 1995
audited financial statements or (ii) actual pre-tax income reported on the
Company's 1994 financial statements, the Employee shall receive $25,000
worth of ATEC's Common Stock as reported in the over-the-counter market
during the ten day trading period ended December 31, 1996;
(vi) For every $1,000,000 in annual revenues as reported on the Company's
audited financial statements for the year ended December 31, 1997 in excess
of the higher of (i) actual revenues reported on the Company's 1996 audited
financial statements; (ii) the actual revenues reported on the Company's
1995 audited financial statements; or (iii) the actual revenues reported on
the Company's 1994 audited financial statements, the Employee shall receive
$25,000 worth of ATEC's Common Stock based on the bid and asked prices for
shares of ATEC's Common Stock as reported in the over-the-counter market
during the ten day trading period ended December 31, 1997; and
(vii) For every $100,000 in pretax income as reported on the Company's
audited financial statements for the year ended December 31, 1997 in excess
of the higher of (i) actual net income reported on the Company's 1996
audited financial statements; (ii) the actual net income reported on the
Company's 1995 audited financial statements, or (iii) the actual net income
reported on the Company's 1994 audited financial statements, the Employee
shall receive $25,000 worth of ATEC's Common Stock as reported in the
over-the-counter market during the ten day trading period ended December
31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of June 26, 1996 certain information with
respect to the beneficial ownership of the Company's voting securities by (i)
any person (including any "group" as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") known by
the Company to be the beneficial owner of more than 5% of the Company's voting
securities, (ii) each director of the Company, (iii) each executive officer
named in the Summary Compensation table appearing herein, and (iv) all executive
officers and directors of the Company as a group. The table also sets forth the
respective general voting power of such persons taking into account the voting
power of the Common Stock and the Preferred Stock combined.
Name and Address Amount and Nature Amount and Nature
of Beneficial of Beneficial of Beneficial Percentage of
Owner Ownership of Ownership of Voting Stock
Outstanding Common Stock Preferred Stock Outstanding(1)
- ----------- ------------ --------------- --------------
Ashok Rametra(2) 1,150,705 300,000 Series J 7.7%
1952 E. Jericho Preferred Shares
Turnpike, 100,000 Series K
E. Northport, Preferred Shares
NY 11731
15
Name and Address Amount and Nature Amount and Nature
of Beneficial of Beneficial of Beneficial Percentage of
Owner Ownership of Ownership of Voting Stock
Outstanding Common Stock Preferred Stock Outstanding(1)
- ----------- ------------ --------------- --------------
Surinder Rametra(3) 2,724,166 225,000 Series J 15.4%
1952 E. Jericho Preferred Shares
Turnpike, 165,000 Series K
E. Northport, Preferred Shares
NY 11731
Balwinder Singh
Bathla (4)(5) 588,164 200,000 Series D 4.9%
American Computer Preferred Shares
Systems, Inc. 200,000 Series E
43 West 29th Street Preferred Shares
New York, NY 10001
Rajnish Rametra(6) 2,536,104 30,000 Series J 12.7%
90 Adams Avenue Preferred Shares
Hauppauge, NY 11716 10,000 Series K
Preferred Shares
All directors and
executive/officers
as a group (3 persons) 6,999,139 200,000 Series D 40.6%
Preferred Shares
200,000 Series E
Preferred Shares
555,000 Series J
Preferred Shares and
275,000 Series K
Preferred Shares
representing an
aggregate of
1,230,000 votes
(1) Computed based upon a total of 18,433,462 shares of Common Stock, 29,231
shares of Series A Preferred Stock, 1,458 shares of Series B Preferred
Stock, 400,000 shares of Series D Preferred Stock, 200,000 Shares of Series
E Preferred Stock, 800,000 shares of Series J Preferred Stock and 400,000
shares of Series K Preferred Stock. Each share of Common Stock and
Preferred Stock possess one vote per share. Accordingly, the foregoing
represents an aggregate of 20,264,151 votes. All shares in the table have
been adjusted to reflect the Company's September 1994 reverse stock split.
(2) Ashok Rametra is the Treasurer, Chief Financial Officer and a Director of
the Company. Ashok is the brother of Surinder Rametra and Rajnish Rametra.
The foregoing figure includes the ownership of 225,000 Series J Preferred
Shares and 75,000 Series K Preferred Shares owned by Mr. Rametra's
children. Mr. Rametra disclaims beneficial ownership of the following
shares owned by the following members of Mr. Rametra's family: Surinder
Rametra - 2,724,166 Common Shares, 225,000 Series J Preferred Shares and
16
165,000 Series K Preferred Shares; Munish Rametra - 275,462 Common Shares,
20,000 Series J Preferred Shares and 20,000 Series K Preferred Shares;
Seema Wasil - 141,935 Common Shares, 45,000 Series J Preferred Shares and
45,000 Series K Preferred Shares; Mona Sutaria - 9,032 Common Shares;
Rajnish Rametra - 2,536,104 Common Shares, 30,000 Series J Preferred shares
and 10,000 Series K Preferred Shares; Vijay Rametra - 162,357 Common
Shares, 30,000 Series J Preferred Shares and 10,000 Series K Preferred
Shares and Harry Gupta - 208,333 Common Shares, 150,000 Series J Preferred
Shares and 50,000 Series K Preferred Shares. None of such shares which
aggregate a total of 6,857,389 votes representing 33.8% of the outstanding
voting securities of the Company are reflected in the table above.
(3) Surinder Rametra is the Chief Executive Officer and Chairman of the Board
of the Company. Surinder is the brother of Ashok Rametra and Rajnish
Rametra. The foregoing figure includes the ownership of 603,448 Common
Shares by Nirmala Rametra, Surinder's wife, and 297,865 Common Shares,
35,000 Series J Preferred Shares and 35,000 Series J Preferred Shares owned
by Amit Rametra, Surinder's son. The foregoing figure does not include the
following shares owned by members of Mr. Rametra's family for which Mr.
Rametra disclaims beneficial ownership: Ashok Rametra - 1,150,705 Common
Shares, 300,000 Series J Preferred Shares and 100,000 Series K Preferred
Shares; Munish Rametra - 275,462 Common Shares, 20,000 Series J Preferred
Shares and 20,000 Series K Preferred Shares; Seema Wasil - 141,935 Common
Shares, 45,000 Series J Preferred Shares and 45,000 Series K Preferred
Shares; Mona Sutaria - 9,032 Common Shares; Rajnish Rametra - 2,536,104
Common Shares, 30,000 Series J Preferred shares and 10,000 Series K
Preferred Shares; Vijay Rametra - 162,357 Common Shares, 30,000 Series J
Preferred Shares and 10,000 Series K Preferred Shares; Harry Gupta -
208,333 Common Shares, 150,000 Series J Preferred Shares and 50,000 Series
K Preferred Shares; Priya Rametra - 75,000 Series J Preferred Shares and
25,000 Series K Preferred Shares; Puja Rametra - 75,000 Series J Preferred
Shares and 25,000 Series K Preferred Shares and Sumeet Rametra 75,000
Series J Preferred Shares and 25,000 Series K Preferred Shares. None of
such shares which aggregate a total of 5,593,928 votes representing 27.6%
of the outstanding voting securities of the Company are reflected in the
table above.
(4) Mr. Bathla is the President and a Director of the Company. The foregoing
figure does not include the following shares owned by members of Mr.
Bathla's family for which Mr. Bathla disclaims beneficial ownership:
Nuripinder Kauer Bathla - 10,631 Common Shares; Kamal J. Singh - 176,923
Common Shares and Parmjit Singh - 16,441 Common Shares. None of such shares
which aggregate a total of 203,995 votes representing 1% of the outstanding
voting securities of the Company are reflected in the table above.
(5) Shares of Series D and E Preferred Stock are convertible into shares of
Common Stock based upon the average bid and asked price of the Company's
Common Stock during the six month period commencing February 6, 1997 and
expiring August 6, 1997. Mr. Bathla is also entitled to receive additional
shares of the Company's Preferred Stock and Common Stock over the next two
years (See "Certain Transactions").
(6) Rajnish Rametra is the brother of Surinder Rametra and Ashok Rametra. The
foregoing figure includes shares owned by his wife and children. The
foregoing figure does not include the following shares owned by members of
Mr. Rametra's family for which Mr. Rametra disclaims beneficial ownership:
Surinder Rametra - 2,724,166 Common Shares, 225,000 Series J Preferred
Shares and 165,000 Series K Preferred Shares; Ashok Rametra - 1,150,705
Common Shares, 300,000 Series J Preferred Shares and 100,000 Series K
Preferred Shares; Munish Rametra - 275,462 Common Shares, 20,000 Series J
Preferred Shares and 20,000 Series K Preferred Shares; Seema Wasil -
141,935 Common Shares, 45,000 Series J Preferred Shares and 45,000 Series K
17
Preferred Shares; Mona Sutaria - 9,032 Common Shares; Vijay Rametra -
162,357 Common Shares, 30,000 Series J Preferred Shares and 10,000 Series K
Preferred Shares; Harry Gupta - 208,333 Common Shares, 150,000 Series J
Preferred Shares and 50,000 Series K Preferred Shares; Priya Rametra -
75,000 Series J Preferred Shares and 25,000 Series K Preferred Shares; Puja
Rametra - 75,000 Series J Preferred Shares and 25,000 Series K Preferred
Shares and Sumeet Rametra 75,000 Series J Preferred Shares and 25,000
Series K Preferred Shares. None of such shares which aggregate a total of
6,131,990 votes representing 30.3% of the outstanding voting securities of
the Company are reflected in the table above.
18
ITEM 13. CERTAIN TRANSACTIONS
Transactions Between Sun and the Former MCS and
SCSI Shareholders
The following transaction between the Company, Surinder Rametra Ashok
Rametra, MCS and SCSI took place in connection with the Company's acquisition of
MCS and SCSI and the issuance by the Company of in excess of 90% of the
Company's then outstanding voting securities.
Agreements Between Sun, SCSI and MCS Shareholders
In November 1993 Surinder Rametra the Chief Executive Officer and Chairman
of the Company began discussions with Raghbir Lambda, the sole director,
shareholder and controlling person of Sun Corporation (2000) Limited ("Sun").
Mr. Rametra and Mr. Lambda have known each other since 1990. Mr. Rametra at such
time was both shareholder of SCSI and MCS and a member of the Board of Directors
of both of such companies. The Company had been advised that Sun was engaged in
the business of investing in private and public companies. Mr. Rametra and Mr.
Lambda discussed the potential purchase by Sun of 100% of both MCS and SCSI.
Various negotiations ensued between the parties and a verbal agreement was
reached regarding the terms of sale of MCS and SCSI to Sun for an aggregate
maximum purchase price of $10,000,000 payable in securities of a publicly traded
company. In accordance with the verbal agreement, Mr. Rametra on behalf of the
SCSI and MCS Shareholders would have the right to approve or disapprove the
securities of a particular public company as payment for the MCS and SCSI
Shares. Accordingly, during the period from November 1993 through May 1994,
Messrs. Rametra and Lambda discussed potential transactions involving the
delivery by Sun to the MCS and SCSI Shareholders of the Shares of various public
companies. In May 1994 discussions began regarding the sale by Sun of the MCS
and SCSI shares to the Company. Mr. Rametra agreed to accept the securities of
the Company on behalf of the MCS and SCSI Shareholders, as suitable for payment
of the MCS and SCSI purchase price. At such time the verbal agreement reached
between Sun and Mr. Rametra on behalf of the MCS and SCSI shareholders in 1993
was memorialized.
Surinder Rametra and related parties (the "SCSI Shareholders") sold 100% of
the issued and outstanding shares of capital stock of SCSI to Sun. In
consideration for the SCSI Shares, Sun was required to deliver to the SCSI
Shareholders shares of a publicly traded Company's Common Stock ("Public
Shares") with a market value of $2,000,000 over a two year period. Sun is also
required to deliver to the SCSI Shareholders (i) for a period of three years,
Public Shares with a value of $500,000 payable upon SCSI reporting audited
revenues in an amount equal to or greater than $15,000,000 for the first year
and 10% growth thereafter; and (ii) for a period of three years additional
Public Shares with a value of $500,000 payable upon receipt of audited pre-tax
income on behalf of SCSI equal to or greater than $400,000 for the first year
with 10% growth thereafter. Sun agreed that in the event it entered into any
further agreement to sell the SCSI shares prior to the payment of all
compensation to the SCSI Shareholders, Sun would hold the consideration received
by it for the SCSI shares (up to the amount owed to the SCSI Shareholder) for
the benefit of the SCSI shareholders. In the event of a default by Sun in the
payment of any compensation to the SCSI Shareholders all consideration held by
Sun 2000 from the sale of SCSI shares to a third party would be immediately
deliverable to the SCSI Shareholders. In partial satisfaction of its obligations
to the SCSI Shareholders, Sun has delivered shares of Series B Preferred Stock
convertible into shares of Common Stock of the Company to Essential Metals
19
Industry Inc. ("EMI"), a company that is an affiliate of the SCSI Shareholders
and the Company's President, Ashok Rametra. The shares delivered to EMI were
acquired by Sun upon the sale by Sun to the Company of the SCSI shares as well
as 100% of the issued and outstanding shares of MCS. Sun is required to deliver
to the SCSI Shareholders the balance of the Public Shares described above.
Surinder Rametra, Ashok Rametra, Rajnish Rametra, Vijay Rametra and Harry
L. Gupta (the "MCS Shareholders") sold 100% of the issued and outstanding shares
of capital stock of MCS Inc. ("MCS") to Sun. Ashok Rametra, Rajnish Rametra, and
Vijay Rametra are the brothers of Surinder Rametra. Harry L. Gupta is the
brother-in-law of Surinder and Ashok Rametra. In consideration for the MCS
Shares, Sun was required to deliver to the MCS Shareholders shares of a publicly
traded Company's Common Stock ("Public Shares") with a market value of
$2,000,000 over a two year period. Sun is also required to deliver to the MCS
Shareholders (i) for a period of three years Public Shares with a value of
$500,000 payable upon MCS reporting audited revenues in an amount equal to or
greater than $15,000,000 for the first year and 10% growth thereafter; and (ii)
for a period of three years additional Public Shares with a value of $500,000
payable upon receipt of audited pre-tax income on behalf of MCS equal to or
greater than $400,000 for the first year with 10% growth thereafter. Sun agreed
that in the event it entered into any further agreement to sell the MCS shares
prior to the payment of all compensation to the MCS Shareholders, Sun would hold
the consideration received by it for the MCS shares (up to the amount owed to
MCS Shareholders) for the benefit of the MCS Shareholders. In the event of a
default by Sun in the payment of any compensation to the MCS Shareholders, all
consideration held from the sale of MCS shares to a third party would be
immediately deliverable to the MCS Shareholders. In partial satisfaction of its
obligation to the MCS Shareholders, Sun has delivered shares of Series B
Preferred Stock of the Company convertible into Common Stock of the Company to
EMI, a company that is an affiliate of Ashok Rametra and Surinder Rametra. The
shares delivered to EMI were acquired by Sun upon the sale by Sun to the Company
of the SCSI and MCS shares. Sun is required to deliver to the MCS Shareholders
the balance of the Public Shares described above.
As further partial payments to the MCS and SCSI Shareholders, Sun delivered
to such holders in May 1995 an aggregate of an additional 1,653.8 shares of
Series B Preferred Stock representing 400,000 shares of the Company's Common
Stock. The Company's Board has agreed to exchange these shares of the Company's
Common Stock held by MCS and SCSI Shareholders for a new class of Series I
Preferred Stock with an aggregate par value of $2,000,000. The Series I
Preferred Stock will be convertible into $2,000,000 of the Company's Common
Stock commencing in July 1996 based upon the average of the Company's bid and
asked prices for shares of Common Stock as reported in the over-the-counter
market during the ten day trading period preceding July 1, 1996 ("Exchange
Price"). In the event that the Exchange Price is less than the average of the
bid and asked prices for the Company's Common Stock during the ten day trading
period prior to December 31, 1996, additional Common Shares will be issued so
that an aggregate of $2,000,000 in shares of Common Stock will be delivered upon
conversion of all Series I Shares. Each share of Series I Preferred Stock
possesses one vote. In July 1996, 390,000 of such shares were exchanged for
1,666,665 shares of the Company's Common Stock.
In August 1995, Sun and the MCS and SCSI shareholders entered into an
agreement pursuant to which all obligations owed by Sun to such shareholders
were satisfied by Sun's transfer to the MCS and SCSI shareholders of an
aggregate of 5,312.9 shares of Series B Preferred Stock representing 1,284,978
shares of the Company's Common Stock. These shares were ultimately converted
into 84,978 Common Shares and the right to receive 800,000 shares of a new
Series J Preferred Stock with an aggregate par value of $4,000,000, 400,000
shares of a new class of Series K Preferred Stock with an aggregate par value of
20
$2,000,000. The Series J Preferred Stock will be convertible into $4,000,000 of
the Company's Common Stock commencing in July 1997 based upon the average of the
bid and ask prices for shares of the Company's Common Stock as reported in the
over-the-counter market during the ten trading days preceding July 1, 1997
("1997 Exchange Price"). In the event that the 1997 Exchange Price is less than
the average of the bid and ask prices for the Company's Common Stock during the
ten day trading period prior to December 31, 1997, additional Common Shares will
be issued so that an aggregate of $4,000,000 in shares of Common Stock will be
delivered upon conversion of all Series J Preferred Stock. The Series K
Preferred Stock will be convertible into $2,000,000 of the Company's Common
Stock commencing in July 1998 based upon the average of the Company's bid and
ask prices for shares of Common Stock as reported in the over-the-counter market
during the ten day trading period preceding July 1, 1998 ("1998 Exchange
Price"). In the event that the 1998 Exchange Price is less than the average of
the bid and ask prices for the Company's Common Stock during the ten day trading
period prior to December 31, 1998, additional Common Shares will be issued so
that an aggregate of $2,000,000 in shares of Common Stock will be delivered upon
conversion of all Series J Shares. Each share of Series J and Series K Preferred
Stock possess one vote.
The Stock Acquisition Agreement
In June 1994 pursuant to a stock acquisition agreement ("Acquisition
Agreement") the Company acquired 100% of the outstanding shares of Common Stock
of SCSI and MCS in exchange for the issuance by the Company of 94,431 shares of
its Common Stock and 30,900 Series B Preferred Stock. Each share of Series B
Preferred Stock is entitled to 241.86 votes per share and is convertible into
Common Stock at the rate of 241.86 shares of Common Stock. Accordingly, the
holders of the Company's Series B Preferred Stock possess voting control over
the Company. Upon closing of the Acquisition Agreement, Surinder Rametra was
appointed Chairman of the Board of the Company, Chief Executive Officer and
Secretary and Surinder's brother, Ashok Rametra became the President, Treasurer,
Chief Financial Officer and a Director of the Company. As described above upon
closing of the Acquisition Agreement EMI received from Sun shares of Series B
Preferred Stock convertible into 1,034,971 shares of the Company's Common Stock.
Transactions with Robert Martire
In connection with the acquisition by the Company of SCSI and MCS, the
Company's prior sole officer and director, Robert Martire agreed to resign his
position with the Company. In connection with his resignation Mr. Martire
received certain payments in satisfaction and termination of his employment
agreement and other obligations with the Company. Mr. Martire's Employment
Agreement required the Company to pay to him an annual salary of $260,000 per
year through July 31, 1997. Accordingly, the Company was obligated to make
further payments to Mr. Martire of approximately $540,000 under the terms of the
Employment Agreement. The Company believed that it was in its best interests to
have the Employment Agreement terminated and make to Mr. Martire the following
payments in settlement of all claims which Mr. Martire possessed against the
Company. Under the terms of the Acquisition Agreement and subsequent
arrangements, the Company paid Mr. Martire the following: (i) the sum of
$100,000; (ii) 88,968 post-split shares of the Company's Common Stock (which
shares the Company agreed to register under an S-8 Registration Statement) at
the time such shares were issued the bid price of the Company's Common Stock was
$3.125; and (iii) 250,000 shares of stock of a NASDAQ Small Cap Market company
valued at $200,000. The Company was required to pay to Mr. Martire the
difference between proceeds realized upon the sale of Sun stock and $150,000.
Since the sales proceeds realized by Mr. Martire on the sale of such securities
21
were only $77,522, the Company was required to deliver to Mr. Martire an
additional $72,425, $18,475 of such sum was paid on June 1, 1995 and $9,000 on
August 11, 1995. The total dollar figure attributable to payments made to Mr.
Martire (valuing the 88,968 post split shares referred to in (ii) above at
$3.125 per share) was $528,025. In December 1995 the Company and Mr. Martire
agreed to settle all sums due and owning to Mr. Martire through the issuance of
60,000 Shares of the Company's Common Stock, which shares have been registered
for resale.
Transactions with Balwinder Singh Bathla
In connection with the acquisition by the Company of ACS, the Company
agreed to issue to Balwinder Singh Bathla 100,000 shares of Series D Preferred
Stock with an aggregate par value of $500,000 on the day of the closing, 100,000
additional shares of Series D Preferred Stock with an aggregate par value of
$500,000 on the three month anniversary of the closing; 200,000 shares of Series
E Preferred Stock with an aggregate par value of $1,000,000 on the one year
anniversary of the closing; and 66,800 shares of Series F Preferred Stock with
an aggregate par value of $334,000 upon delivery of certain financial
information to the Company. In addition the Company agreed to issue to Mr.
Bathla shares of the Company's Common Stock up to a maximum value of $1,664,000
over a three year period subject to ACS meeting certain performance criteria of
the minimum annual revenues of $12,600,000, plus 10% in annual increases and
minimum annual income before taxes of $315,000, plus 10% in annual increases.
These performance related Common Stock payments will be valued according to the
average of the closing bid and ask prices of the Company's shares during the 10
day trading period preceding December 31 of each year. In connection with the
Stock Purchase Agreement, ACS and Mr. Bathla entered into an employment
agreement whereby Mr. Bathla is to serve as President of ACS through December
31, 1997. Mr. Bathla shall receive an annual base salary at the rate of $135,000
for the first year of employment, which rate shall be increased by 10% per
annum. Mr. Bathla shall be eligible to receive an annual cash and/or stock
bonus, the amount and timing of which will be in the sole discretion of the
Company's Board of Directors. Mr. Bathla shall also be entitled to receive a
mandatory stock bonus payable in connection with the delivery of financial
statements indicating specified levels of annual revenue and pre-tax income on
behalf of ACS. The 1994 mandatory bonus consisted of 1 share of Series G
Preferred Stock, which share has been earned by Mr. Bathla. Mandatory bonuses
for the subsequent years shall be payable in Common Stock of the Company upon
demonstration that ACS meets specified minimum levels of annual revenues and
pre-tax income. In July 1995 Mr. Bathla's Series F and G Preferred Shares were
converted into an aggregate of 344,118 shares of Common Stock.
The Company also guaranteed payment by ACS to Mr. Bathla of an aggregate of
$750,000 together with 10% interest thereon by December 31, 1997. As of June 30,
1996 and 1995, the balance owed by ACS to Mr. Bathla was $228,322 and $396,246
respectively. ACS and the Company entered into a verbal agreement whereby the
Company agreed to provide corporate services such as product purchasing,
customer referrals and general management advisory services on behalf of ACS.
The Company was compensated at the rate of $250 per hour for such services plus
75% of increases in ACS' gross margins which resulted from such services. The
total amount earned by the Company in this regard at December 31, 1994 was
$200,000. Of such amount $120,000 was for general management advisory service
and the balance of $80,000 from improvements to ACS' gross margins. The
agreement continued until the closing of the Company's acquisition of ACS.
22
Transactions with CONY Shareholders
In connection with the acquisition of CONY, the Company agreed to issue to
Arvinder Gulati, Patrick Hagerty and Kenneth Bohacs (collectively the "CONY
Shareholders") an aggregate of 437,990 shares of the Company's Common Stock and
200,000 shares of Series D $5.00 par value Preferred Stock. 100,000 of the
Series D Shares were delivered to the CONY Shareholders as of the closing and
the balance were delivered six months thereafter. The Company also agreed to
issue to the CONY Shareholders additional shares of the Company's Common Stock
with a maximum value of $1,000,000 over the next three fiscal years subject to
CONY meeting certain minimum revenue and gross profit benchmarks. These
additional shares are to be valued based upon the closing bid and ask price of
the Company's Common Stock as reported during ten trading days prior to the end
of each subject fiscal year.
In connection with the Stock Purchase Agreement, the CONY Shareholders
entered into employment agreements with CONY pursuant to which Mr. Gulati will
serve as the Chief Executive Officer of CONY, Mr. Hagerty will serve as CONY's
President and Mr. Bohacs as CONY's Secretary. Messrs. Gulati and Hagerty will
each receive an annual salary of $120,000 per year subject to annual increases.
Mr. Bohacs will receive an annual salary of $24,000 per year subject to annual
increases. The CONY Shareholders will be entitled to participate in a stock
bonus pool which will entitle them to receive additional shares of the Company's
Common Stock based upon CONY meeting specified levels of revenues and pre-tax
income during CONY's next three fiscal years.
CONY and the Company entered into a verbal agreement whereby the Company
agreed to provide corporate services such as product purchasing, customer
referrals and general management advisory services on behalf of CONY. The
Company was compensated at the rate of $250 per hour for such services plus a
percentage of increases in CONY's gross margins which resulted from such
services. The total amount earned by the Company in this regard from January 1,
1995 through March 31, 1995 was $175,000. 60% of such amount was for general
management advisory service and the balance from improvements to CONY's gross
margins. The agreement continued until the closing of the Company's acquisition
of CONY.
Transactions with Innovative Business Micros Inc.
In June, 1996, the Company acquired 100% of the outstanding capital stock
of Innovative Business Micros, Inc., a computer integrator located in Long
Island. Innovative was formerly owned by Surinder Rametra and Ashok Rametra, the
Company's Principal Executive Officer and Principal Financial Officer
respectively, and Rajnish Rametra the brother of Surinder and Ashok. The
consideration for the acquisition was the issuance by the Company of an
aggregate of 4,900,000 shares of the Company's Common Stock to the former
shareholders of Innovative. The terms of the acquisition were not negotiated in
an arms-length manner and there can be no assurance that an unaffiliated company
would have paid less consideration for Innovative than paid by the Company. The
Acquisition will be accounted for as a pooling of interest. (see "Business
General").
Sale and Purchase of Goods Between SCSI, MCS, ACS, CONY, Innovative and
Affiliates
During the period from July 1, 1995 to June 30, 1996, the Company's
subsidiaries SCSI, MCS, ACS, and Innovative sold and purchased goods to and from
23
each other as well as Essential Metals Inc., ESCI Inc., Compudata, Empire State
Computer International, Inc. ("Empire") and Micro Systems Leasing and Rental,
Inc. ("MSLR"). These corporations, with the exception of Empire are affiliates
of Surinder Rametra and/or Ashok Rametra. Empire is an affiliate of ACS. These
goods consisted of computer hardware and related products. The following
summarizes these related transactions. The Company believes that the terms of
such transactions were at least as favorable to the Company as would have been
reached with unaffiliated parties.
24
AMOUNT OF GOODS PURCHASED BY MCS FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 107,016 $ 29,539
SCSI $ 47,909 $ 94,393
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 14,637 $ 8,190
CONY $ 49,963 $ 39,020
Empire State Computer
International, Inc. $ -.- $ -.-
AMOUNT OF GOODS SOLD BY MCS TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1996
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 131,811 $ 1,560
SCSI $ 18,012 $ 200,558
ESCI Inc. $ -.- $ 228,310
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 233,952 $ 216,777
CONY $ 6,616 $ 215,190
Empire State Computer International, Inc. $ -.- $ -.-
AMOUNT OF GOODS PURCHASED BY SCSI FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 13,737 $ 14,812
MCS $ 18,012 $ 200,558
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 13,166 $ 4,695
CONY $ 183,920 $ 158,829
Empire State Computer International, Inc. $ -.- $ -.-
25
AMOUNT OF GOODS SOLD BY SCSI TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 194,463 $ 471,028
MCS $ 47,909 $ 94,393
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 305,746 $ -.-
CONY $ 665,638 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
MSLR $ 99,004 $ -.-
AMOUNT OF GOODS PURCHASED BY ACS FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 305,746 $ 82,341
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 233,952 $ 216,777
Empire State Computer International, Inc. $ -.- $ -.-
CONY $ 141,409 $ -.-
AMOUNT OF GOODS SOLD BY ACS TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 13,166 $ 4,595
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 14,637 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
CONY $ 20,150 $ 17,204
26
AMOUNT OF GOODS PURCHASED BY CONY FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 665,638 $ 165,011
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 6,616 $ 215,190
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ 20,150 $ 17,204
AMOUNT OF GOODS SOLD BY CONY TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 183,920 $ 158,829
ESCI Inc. $ -.- $ -.-
Essential Metals Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 79,963 $ 39,020
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ 141,409 $ -.-
AMOUNT OF GOODS PURCHASED BY INNOVATIVE FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
CONY $ -.- $ -.-
SCSI $ 194,463 $ -.-
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 131,811 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ -.- $ -.-
27
AMOUNT OF GOODS SOLD BY INNOVATIVE TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
CONY $ -.- $ -.-
SCSI $ 13,737 $ -.-
ESCI Inc. $ -.- $ -.-
Essential Metals Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 107,016 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ -.- $ -.-
As of June 30, 1995 and June 30, 1994 Surinder Rametra was indebted to SCSI
in the amount of $123,169 and $212,195 respectively. Subsequent to June 30,
1995, the loan, with the exception of approximately $16,000, was repaid by Mr.
Rametra.
ACS and Innovative borrowed funds from Ashok Rametra, Balwinder Singh
Bathla and Rajnish Rametra in order to assist the cash flow requirements of ACS
and Innovative. The following loans were outstanding as of dates indicated.
LOANS OWED BY ACS
-----------------
06/30/96 06/30/95 Interest Maturity
Lender Amount Amount Rate Date
- ------ -------- -------- -------- --------
Balwinder Singh Bathla $228,322 $396,246 10% 12/31/97
LOANS OWED BY INNOVATIVE
------------------------
06/30/96 06/30/95 Interest Maturity
Lender Amount Amount Rate Date
- ------ -------- -------- -------- --------
Rajnish Rametra $500,000 $230,000 10% 06/30/97
Ashok Rametra $150,000 $ -.- 10% 06/30/97
In September 1995, S&N Associates, a company controlled by Surinder
Rametra, loaned a total of $50,000 to the Company, bearing interest at the rate
of 10% per annum. The loan was paid on December 27, 1995.
During the year ended June 30, 1995, Surinder Rametra advanced $335,000 to
the Company for working capital purposes. $303,000 of such funds were repaid to
Mr. Rametra. At June 30, 1995, after giving effect to prior year
28
advance/repayment transactions, Mr. Rametra owed the Company $30,524. This
balance was repaid to the Company subsequent to June 30, 1995.
During the year ended June 30, 1996, Ashok Rametra advanced the Company
$125,000, bearing interest at the rate of 10% per annum. The loan was repaid
prior to March 31, 1996.
Surinder Rametra, Ashok Rametra, Balwinder Singh Bathla, Rajnish Rametra
and the CONY Shareholders have personally guaranteed the respective obligations
owed by SCSI, MCS, ACS, Innovative and CONY to Deutsche Financial Services
("Deutsche") in connection with inventory financing advanced by Deutsche.
MCS's office located in Albany, New York is leased pursuant to a lease
expiring in June 2003. The lease requires annual rental payments of
approximately $96,600 through 1998 and $108,192 thereafter, plus all expenses
and taxes attributable to the operation of the premises. This facility is leased
from 1962 Central Avenue Realty Associates (a partnership) controlled by former
stockholders of MCS and SCSI.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: /s/ Surinder Rametra
-----------------------------------------
Surinder Rametra, Chief Executive Officer
Dated: September 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Surinder Rametra September 27, 1996
- -----------------------------------------
Surinder Rametra, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/ Ashok Rametra September 27, 1996
- -----------------------------------------
Ashok Rametra, Chief Financial Officer, Treasurer,
and Director (Principal Financial Officer and
Principal Accounting Officer)
/s/ Balwinder Singh Bathla September 27, 1996
- -----------------------------------------
Balwinder Singh Bathla, President and Director
30
ATEC GROUP, INC. AND SUBSIDIARIES
I N D E X
---------
Page No.
--------
INDEPENDENT AUDITORS' REPORT OF WEINICK, SANDERS & CO. LLP................. F-1
INDEPENDENT AUDITOR'S REPORT OF YOHALEM GILLMAN & COMPANY ................. F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
OF BIANCULLI, PASCALE & CO. P.C. .................................. F-3
INDEPENDENT AUDITOR'S REPORT OF GEORGE S. GOLDBERG ........................ F-4
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 1996 and 1995 .......... F-5
Consolidated and Combined Statements of Operations
For the Years Ended June 30, 1996, 1995 and 1994 ............... F-6
Combining Statements of Operations of Micro Computer Store, Inc.,
Sun Computer and Software, Inc. and Innovative Business
Micros, Inc.
For the Year Ended June 30, 1994 ............................... F-7
Consolidated and Combined Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994 ............... F-8 - F-10
Combining Statement of Cash Flows of Micro Computer Store, Inc.,
Sun Computer and Software, Inc. and Innovative Business
Micros, Inc.
For the Year Ended June 30, 1994 ............................... F-11 - F-12
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 1994, 1995 and 1996 ............... F-13 - F-16
NOTES TO FINANCIAL STATEMENTS ............................................. F-17 - F-42
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and have therefore been omitted or
the required information is shown in the Financial Statements or the Notes
thereto.
[Letterhead of Weinick, Sanders & Co. LLP]
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the accompanying consolidated balance sheet of ATEC Group, Inc.
and Subsidiaries (formerly Hillside Bedding, Inc. and Subsidiaries) as at June
30, 1996, and the related consolidated statements of operations, cash flows, and
stockholders' equity 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 generally accepted auditing standards.
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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 1996, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Weinick, Sanders & Co. LLP
New York, New York
August 21, 1996
F-1
[Letterhead of Yohalem Gillman & Company]
Independent Auditor's Report
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the consolidated balance sheet of ATEC Group, Inc.
(formerly Hillside Bedding, Inc.) and Subsidiaries as of June 30, 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (before restatement for the 1996
pooling-of-interests, and not presented separately herein). 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 generally accepted auditing
standards. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ATEC Group, Inc. and Subsidiaries at June 30, 1995 and the consolidated results
of its operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Yohalem Gillman & Company
New York, New York
October 4, 1995
F-2
[LETTERHEAD OF BIANCULLI, PASCALE & CO. P.C.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
ATEC Group, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of stockholders'
equity of ATEC Group, Inc. and Subsidiaries (formerly Hillside Bedding, Inc. and
Subsidiaries) as of June 30, 1994 prior to its restatement for the June 14, 1996
pooling of interest discussed below and in the accompanying notes to the
financial statement. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standard 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 accounts 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.
In our opinion, the consolidated financial statement referred to above
presents fairly in all material respects, the consolidated stockholders' equity
of ATEC Group, Inc. and Subsidiaries for the year ended June 30, 1994, in
conformity with generally accepted accounting principles.
As more fully described in the accompanying notes to the financial
statements, on June 23, 1994, Hillside Bedding, Inc. acquired all of the
outstanding common stock of Micro Computer Store, Inc. and Sun Computer and
Software, Inc. These acquisitions have been treated for accounting purposes, as
a consolidation and merger of Micro Computer Store, Inc. and Sun Computer and
Software, Inc. and an acquisition by them of ATEC Group, Inc. and Subsidiaries
because, among other factors, the assets revenues and net earnings of Micro
Computer Store, Inc. and Sun Computer and Software, Inc. significantly exceeded
those of ATEC Group, Inc. and Subsidiaries and the management of these companies
control the Company after the acquisition.
We have also examined the historical statements of operations and cash
flows of Micro Computer Store, Inc. and Sun Computer and Software, Inc. for the
year ended June 30, 1994. These financial statements give effect to the
consolidation and merger of these companies as discussed above and in the notes
to the financial statement, as if their consolidation and merger was effected as
of July 1, 1992. Our examination was made in accordance with standards
established by the American Institute of Certified Public Accountants and,
accordingly, included such procedures as we considered necessary in the
circumstances.
In our opinion, the historical statements of operations and cash flows
described above present fairly, in all material respects, the results of
operations and cash flows for the year ended June 30, 1994 in conformity with
generally accepted accounting principles.
On June 14, 1996, ATEC Group, Inc. and Subsidiaries acquired all of the
stock of Innovative Business Micros, Inc., accounted for under the pooling of
interests method. We previously audited and reported on the consolidated
statement of stockholders' equity of ATEC Group, Inc. and Subsidiaries as of
June 30, 1994. The contribution of ATEC Group, Inc. and Subsidiaries to total
stockholders' equity represented 60.6 percent of the respective restated total.
Separate financial statements of Innovative Business Micros, Inc. included in
the restated consolidated statement of stockholders' equity were audited and
reported on separately by other auditors whose report is separately presented
herein.
/s/ Bianculli, Pascale & Co. P.C.
Farmingdale, NY
September 22, 1994
(Except in regard to the historical
combining statements of operations and
cash flows which date is March 20, 1995)
F-3
INDEPENDENT AUDITOR'S REPORT OF GEORGE S. GOLDBERG
George S. Goldberg
Certified Public Accountant
To the Board of Directors and Stockholders
Atec Group, Inc.
I have audited the accompanying balance sheets of Innovative Business Micros,
Inc. as of September 30, 1995 and the related statements of income,
stockholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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. I
believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Innovative Business Micros, Inc. as
of September 30, 1995 and the results of their operations and their cash flows
for the two years then ended in conformity with generally accepted accounting
principles.
/s/ George S. Goldberg
George S. Goldberg
Certified Public Accountant
Roslyn Heights, New York
December 12, 1995
F-4
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
June 30,
----------------------------
1996 1995
----------- -----------
Current assets:
Cash $ 1,667,031 $ 919,095
Accounts receivable - net 5,152,005 5,910,749
Inventories 2,813,937 1,726,541
Current portion of note receivable -
officer - 16,218
Due from officers and related parties 6,124 65,791
Deferred taxes 42,773 15,213
Other current assets 413,712 319,982
----------- ----------
Total current assets 10,095,582 8,973,589
Property and equipment - net 514,910 434,624
Goodwill - net 2,614,445 2,108,096
Note receivable - officer - 94,691
Other assets 97,196 113,938
----------- -----------
$13,322,133 $11,724,938
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,085,054 $ 2,960,633
Accounts payable 1,274,896 2,395,601
Notes payable - related parties 650,000 -
Accrued expenses 1,008,154 774,371
Deferred sales tax obligation 553,052 502,052
Due to related parties - 25,000
Other current liabilities 709,188 206,754
----------- ----------
Total current liabilities 6,280,344 6,864,411
Notes payable - related parties 228,322 918,291
----------- -----------
Total liabilities 6,508,666 7,782,702
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stocks 11,353,068 3,338,193
Common stock 218,765 177,321
Additional paid-in capital 5,026,332 2,855,666
Discount on preferred stocks ( 9,361,100) ( 1,167,000)
Deficit ( 423,598) ( 1,261,944)
----------- -----------
Total stockholders' equity 6,813,467 3,942,236
----------- -----------
$13,322,133 $11,724,938
=========== ===========
See accompanying notes to financial statements.
F-5
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-------------------------------------------
1996 1995 1994
------------ ------------ ------------
Net sales ............................ $ 81,812,045 $ 47,565,542 $ 43,474,764
Cost of sales ........................ 74,354,590 42,860,603 39,683,590
------------ ------------ ------------
Gross profit ......................... 7,457,455 4,704,939 3,791,174
------------ ------------ ------------
Operating expenses:
Selling and administrative ........ 5,962,547 4,563,337 4,043,171
Amortization of goodwill -
computer businesses ............ 168,285 52,655 --
Write-off of media advertising
credit ......................... -- 448,011 --
------------ ------------ ------------
Total operating expenses 6,130,832 5,064,003 4,043,171
------------ ------------ ------------
Income (loss) from operations ........ 1,326,623 ( 359,064) ( 251,997)
------------ ------------ ------------
Other income (expense):
Charge-off of goodwill relating to
the acquisition of Hillside .... -- (2,045,628) --
Loss on marketable securities ..... -- ( 4,136) ( 17,577)
(Loss) gain on sale of property
and equipment .................. ( 8,372) 4,432 --
Dividend and interest income ...... 45,866 22,708 59,555
Interest expense .................. ( 150,949) ( 138,553) ( 48,051)
Management fees ................... -- 375,000 --
Other income ...................... 39,718 45,433 104,512
------------ ------------ ------------
Total other income (expense) ......... ( 73,737) ( 1,740,744) 98,439
------------ ------------ ------------
Income (loss) before income taxes .... 1,252,886 ( 2,099,808) ( 153,558)
Provision for income taxes ........... 414,540 151,546 72,521
------------ ------------ ------------
Net income (loss) .................... $ 838,346 ( $ 2,251,354) ($ 226,079)
============ ============ ============
Net earnings (loss) per share:
Primary ........................... $ .04 ($ .25) ($ .04)
============ ============ ============
Fully diluted ..................... $ .04 ($ .25) $ N/A
============ ============ ============
Weighted average number of
shares - primary ............... 20,476,062 8,872,333 5,289,573
============ ============ ============
Weighted average number of
shares - fully diluted ......... 20,476,062 8,872,333 13,136,972
============ ============ ============
See accompanying notes to financial statements.
F-6
ATEC GROUP, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
Innovative
Micro Sun Computer Business
Computer and Software, Micros, Elimina- Combined
Store, Inc. Inc. Inc. tions Total
----------- ------------- --------- -------- ---------
Net Sales $13,504,221 $11,977,026 $18,386,621 $393,104 $43,474,764
Cost of sales 12,271,573 11,390,528 16,414,593 393,104 39,683,590
----------- ----------- ----------- -------- -----------
Gross profit 1,232,648 586,498 1,972,028 - 3,791,174
----------- ----------- ----------- -------- -----------
Operating expenses 1,563,741 603,787 1,875,643 - 4,043,171
----------- ----------- ----------- -------- -----------
Income (loss) from
operations ( 331,093) ( 17,289) 96,385 - ( 251,997)
----------- ----------- ---------- -------- -----------
Other income (expense):
Unrealized loss on val-
uation of marketable
securities - ( 15,985) - - ( 15,985)
Net loss on sale of
marketable securities - ( 1,592) - - ( 1,592)
Interest income 4,721 38,126 16,708 - 59,555
Other income - 72,543 31,969 - 104,512
Interest expense ( 14,209) ( 33,842) - - ( 48,051)
----------- ----------- ----------- -------- -----------
Total other income
(expense) ( 9,488) 59,250 48,677 - 98,439
----------- ----------- ---------- -------- -----------
Income (loss) before
income taxes ( 340,581) 41,961 145,062 - ( 153,558)
Provision for income
taxes - 11,271 61,250 - 72,521
----------- ----------- ----------- -------- -----------
Net income (loss) ($ 340,581) $ 30,690 $ 83,812 $ - ($ 226,079)
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