As filed with the Securities and Exchange Commission on July 23, 1996
Registration No. 333-2070
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
ATEC GROUP, INC.
(Name of Issuer in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
13-367965
(I.R.S. Employee Identification No.)
--------------------
1952 Jericho Turnpike
East Northport, New York 11731
(914) 462-6700
(Address and telephone number of principal executive offices and
principal place of business)
--------------------
Surinder Rametra, Chief Executive Officer
ATEC Group, Inc.
1952 Jericho Turnpike
East Northport, New York 11731
(516) 462-6700
(Name, address and telephone
number of agent for
service) Copies of all
communications to:
Anthony M. Collura, Esq.
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
(212) 779-8600
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
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<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (1) Price (1) Fee
- -------------------------------------------------------------------------------
Common Stock,
$.01 Par
Value(2)(3) 18,334,285 $1.00 $18,334,285 $6,322.17
================================================================================
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) Includes an aggregate of 2,900,000 Shares of Common Stock underlying
outstanding Warrants.
(3) Includes such additional number of Shares as may become issuable by reason
of anti-dilution provisions pursuant to Rule 416.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
ATEC GROUP, INC.
Cross-Reference Sheet to Prospectus on Form S-1
Furnished Pursuant to Item 501(b) of Regulation S-K
Item From S-1 Caption Location in Prospectus
- ---- ---------------- ----------------------
1. Forepart of the Registration Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus Outside Front Cover Page
3. Summary Information, Risk Prospectus Summary; Selected
Factors and Ratio of Earnings Financial Data; Risk Factors
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Resales by Selling Securities
Holders
8. Plan of Distribution Cover Page; Underwriting;
Resales by Selling Securities
Holders
9. Description of Securities Description of Securities;
to be Registered Shares Eligible for Future Sale
10. Interest of Named Experts Experts and Legal Matters
and Counsel
11. Information with Respect to Business; Description of
the Registrant Securities; Financial Statements;
Selected Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Certain Transactions;
Management; Price Range of Common
Stock Dividend Policy; Principal
Shareholders
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act Liabilities
iii
<PAGE>
[TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE]
[RED HERRING LEGEND]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
iv
<PAGE>
PROSPECTUS
- ----------
DATED JULY 24, 1996 SUBJECT TO COMPLETION
ATEC GROUP, INC.
18,334,285 SHARES OF COMMON STOCK
This Prospectus relates to the possible resale of up to 15,434,285 shares
(the "Shares") of the common stock, $.01 par value (the "Common Stock") of ATEC
Group, Inc. (the "Company") currently outstanding as well as up to 2,900,000
additional shares of Common Stock underlying currently outstanding Common Stock
Purchase Warrants (the "Warrants"). The Warrants consist of 925,000 Class W
Warrants, 925,000 Class X Warrants, 425,000 Class Y Warrants and 625,000 Class Z
Warrants.
Each Class W Warrant entitles the holder to purchase one share of Common
Stock at a price of $.75 through June 30, 1996 ("Class W Warrants"). Each Class
X Warrant entitles the holder to purchase one share of Common Stock at a price
of $1.00 through August 31, 1996 ("Class X Warrants"). Each Class Y Warrant
entitles the holder to purchase one share of Common Stock at a price of $1.25
through October 31, 1996 ("Class Y Warrants"). Each Class Z Warrant entitles the
holder to purchase one share of Common Stock at a price of $1.50 through
December 31, 1996 ("Class Z Warrants"). The Class W, Class X, Class Y and Class
Z Warrants are hereafter sometimes collectively referred to as the Warrants.
The Company will not receive any proceeds from possible resales by the
Selling Security holders of their respective shares of Common Stock of the
Company. The Company will receive gross proceeds of (i) $693,750 upon exercise
of all Class W Warrants; (ii) $925,000 upon exercise of all Class X Warrants;
(iii) $531,250 upon exercise of all Class Y Warrants; and (iv) $937,500 upon
exercise of all Class Z Warrants. There can be no assurance that any of the
Warrants will be exercised.
The Selling Securityholders may sell their shares of Common Stock from time
to time, in market transactions, in negotiated transactions, through the writing
of options, or a combination of such methods of sale, at fixed prices which may
be changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling their shares of Common
Stock to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders and/or the purchasers of such shares of Common Stock for
whom such broker-dealer may act as agents or to whom they may sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions.) The Company has agreed to bear all
expenses in connection with the registration of the shares of Common Stock to
which this Prospectus relates.
Shares of the Company's Common Stock are quoted on the NASDAQ SmallCap
Market System ("NASDAQ System") under the symbol "ATEC". On June 10, 1996 the
last sale price of the Common Stock as reported on the NASDAQ System was $1
7/32.
THESE SECURITIES ARE HIGHLY SPECULATIVE. THEY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. THEY SHOULD BE PURCHASED ONLY BY PERSONS
WHO CAN AFFORD TO SUSTAIN A TOTAL LOSS OF THEIR ENTIRE INVESTMENT
(SEE "RISK FACTORS" - PAGE 7)
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _________, 1996
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<PAGE>
ADDITIONAL INFORMATION
With respect to the securities offered hereby, the Company has filed with
the principal office of the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act of 1933, as amended (the "Securities Act"). For purposes
hereof, the term "Registration Statement" means the original Registration
Statement and any and all amendments thereto. This Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto, to which reference hereby is made. Each statement made in this
Prospectus concerning a document filed as an exhibit to the Registration
Statement is not necessarily complete and is qualified in its entirety by
reference to such exhibit for a complete statement of its provisions. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934 (the "Exchange Act") and in accordance there with files reports and
other information with the Commission. Any interested party may inspect the
Registration Statement and its exhibits and other reports and information filed
by the Company with the Commission without charge, or obtain a copy of all or
any portion thereof, at prescribed rates, at the public reference facilities of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Registration Statement and exhibits
may also be inspected at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York 10048.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHEN
OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION CONTAINED IN THIS
PROSPECTUS REFLECT A ONE FOR TEN REVERSE STOCK SPLIT EFFECTIVE SEPTEMBER 9,
1994.
The Company
- -----------
ATEC Group, Inc. (the "Company"), formerly Hillside Bedding, Inc., was
incorporated in July 1992 under the laws of the State of Delaware to engage in
the operation of retail bedding locations. In June 1994 the Company discontinued
its bedding operations and changed its business focus to engage in the
installation, sale and service of computer hardware and software products. In
June 1994 the Company acquired Sun Computer and Software, Inc. ("SCSI") and
Microcomputer Stores, Inc. ("MCS"). In February 1995 the Company acquired
American Computer Systems Corp. and Laptop and Office Solutions, Inc.
(collectively referred to as "ACS"). In March 1995 the Company acquired Cony
Computer Systems, Inc. ("Cony"). SCSI, MCS, ACS and Cony are wholly owned
subsidiaries of the Company and are hereinafter sometimes collectively referred
to as the Company.
The Company is engaged in the sale of computer hardware and software to
businesses, professionals, governmental agencies and educational institutions.
The Company provides customers with a range of services including designing and
installing computer systems, training system users and maintaining and repairing
hardware and software products. The Company maintains retail facilities in New
York City, Long Island, New York, Albany, New York and Norwalk, Connecticut. The
Company's subsidiaries are authorized dealers and value added resellers for
major manufacturers such as Hewlett Packard, Compaq, IBM, Panasonic, Toshiba,
Sharp, AST, Epson and NEC. Hardware products sold by the Company include
microcomputer systems, laptop computers, monitors, data storage devices,
printers, keyboards and related products. The Company also sells a vast number
of different software packages for both IBM compatible and Apple applications.
The software products include packages which address a variety of business,
personal productivity, utility, educational and entertainment functions. The
Company also provides its customers with a wide range of computer support
services including network analysis and design, system configuration, physical
installation, software loading, application trading, continuing education,
maintenance and repair services.
The Company is actively seeking the acquisition of other computer system
integrators in order to expand its revenue base. In this regard the Company
recently acquired 100% of the issued and outstanding shares of capital stock of
Innovative Business Micros, Inc. ("Innovative") a Long Island based computer
systems integrator. Innovative is owned by Surinder Rametra and Ashok Rametra,
the Company's principal executive officer and principal financial officer,
respectively, and their brother Rajnish Rametra. There can be no assurance that
the Company will acquire any other computer system integrators (see "Business -
General").
The Company's corporate headquarters are located at 1952 Jericho Turnpike,
East Northport, New York 11731. The Company's telephone number is 516 462-6700.
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<PAGE>
Securities Outstanding Shares of Common Stock 18,443,462
Shares of Series A Preferred Stock 28,897
Shares of Series B Preferred Stock 3,111.28
Shares of Series D Preferred Stock 400,000
Shares of Series E Preferred Stock 200,000
Shares of Series J Preferred Stock 800,000
Shares of Series K Preferred Stock 400,000
Shares Underlying Common Stock
Purchase Warrants (1) 3,250,000
Risk Factors: An investment in the Company's securities involves a
high degree of risk. For discussion of certain risk
factors effecting the Company, see "Risk Factors".
NASDAQ Symbol: ATEC
(1) Represents (i) 925,000 shares issuable upon exercise of Class W Warrants;
(ii) 925,000 shares issuable upon exercise of Class X Warrants; (iii) 425,000
shares issuable upon exercise of Class Y Warrants; and (iv) 625,000 Shares
issuable upon exercise of Class Z Warrants and (v) 350,000 shares issuable upon
exercise of Class C Common Stock Purchase Warrant. Class C Warrants are
exercisable at $3.00 per share. The Company is in the process of issuing the
Class C Warrants along with 350,000 Shares Class C Preferred Stock.
(See"Description of Securities")
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Operating Data 1995 (2) 1994 1993 1992(1) 1991(1)
- -------------- -------- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $29,738,315 $25,481,246 $39,836,094 $15,722,000 $9,438,933
Income (Loss) from $(2,347,655) $ (309,891) $ 133,605 $ (12,160) $ (51,689)
continuing operations
Income (Loss)
per common share - primary $(.59) $(.80) $.34 $(.03) $(.03)
fully diluted $(.59) $(.80) $.02 $(.03) $(.03)
Balance Sheet Data
- ------------------
Total Assets $ 8,056,607 $4,856,611 $ 5,888,036 $ 2,261,025 $ 1,456,995
Long-term obligations $ 396,246 $ 970,255 $ 0 $ 39,709 $ 562,255
Cash dividends per
common share Nil Nil Nil Nil Nil
</TABLE>
(1) Information for these years are based on a combination of MCS (fiscal year
ended March 31) and SCSI (fiscal year ended December 31) and are unaudited.
(2) See pages 40 and 41, F-13 to F-15 for a discussion of the 1995 acquisitions
of ACS and Cony.
Operating Data Nine Months Ended
- -------------- -----------------
March 31, 1996 March 31, 1995
-------------- --------------
(Unaudited) (Unaudited)
Net Sales $45,196,268 $17,498,148
Income (loss) from
Continuing Operations 308,099 (785,932)
Income (loss)
per Common Share - Primary .03 (.25)
Fully diluted .02 (.25)
Balance Sheet Data March 31, 1996
- ------------------ --------------
(Unaudited)
Total Assets $9,668,438
Working Capital 2,647,909
Long-Term Obligations 397,244
6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk, including, but not necessarily limited to, the risk factors described
below. Prospective investors must carefully consider, among other things, the
following factors in evaluating an investment in the Company's securities.
1. MICROCOMPUTER INDUSTRY CONDITIONS. The microcomputer industry has been
characterized by intense price cutting among the major hardware and software
vendors which could materially adversely affect the Company's future operating
results. Given the Company's limited financial resources, its anticipated
expenses and the highly competitive environment in which the Company operates,
there can be no assurance that the Company's current rate of revenue growth will
continue in the future or that the Company's future operations will remain
profitable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements." The Company's future results
of operations are dependent upon continued demand for microcomputer products.
This industry experienced rapid growth until 1988 and thereafter has grown at a
substantially slower rate. Distributors in the microcomputer industry currently
face a number of adverse business conditions, including price and gross profit
margin pressures and market consolidation. During the past six years all major
hardware vendors have instituted extremely aggressive price reductions in
response to lower component costs and discount pricing by certain microcomputer
manufacturers. The increased price competition among major hardware vendors had
resulted in declining gross margins for many microcomputer distributors and may
result in a reduction in existing vendor subsidies. Management of the Company
believes, however, that these current conditions, which are forcing certain of
the Company's direct competitors out of business, may present the Company with
opportunities to expand its business. There can be no assurance that the Company
will be able to continue to compete effectively in this industry given the
intense price reductions and competition currently existing in the microcomputer
industry. See "Business Industry; Suppliers; and Competition."
2. COMPETITION. The microcomputer market is highly competitive. The Company
is in direct competition with local, regional and national distributors of
microcomputer products and related services. Several of these competitors offer
most of the same basic products as the Company. In addition, the tri-state
Metropolitan New York area, to which the Company markets its products and
services, is particularly characterized by highly discounted pricing on
microcomputer products from various sources of competition. The Company faces
competition from microcomputer vendors that sell their products through direct
sales forces and from manufacturers and distributors that emphasize mail order
and telemarketing. The Company has an insignificant market share of sales in the
microcomputer industry and the service markets which the Company serves. Certain
of the Company's competitors on the regional and national level are
substantially larger, have more personnel and have materially greater financial
and marketing resources than the Company and operate within a larger geographic
area than does
7
<PAGE>
the Company. Accordingly, there can be no assurance the Company will be
able to continue to compete effectively in the marketplace. See "Business -
Competition."
3. DEPENDENCE ON SUPPLIERS. The Company is an authorized dealer for
microcomputers and related products of more than twenty five manufacturers. The
Company's authorized dealer agreements with suppliers are typically subject to
periodic renewal and to termination on short notice or immediately upon the
occurrence of certain events. The dealer agreements also provide for periodic
audits by the supplier. A supplier could also terminate an authorized dealer
agreement for reasons unrelated to the Company's performance. In addition, the
Company competes with other suppliers to obtain products on the most favorable
contract terms, which are often available only to companies substantially larger
than the Company. The loss of a major supplier or the deterioration of the
Company's relationship with those major suppliers whose products are in demand,
or a change in current terms of its dealer agreements could have a material
adverse effect on the Company's business.
4. PROPOSED EXPANSION. The Company intends to continue to seek to expand
its current level of operations through acquisitions. While the Company has
grown during the last several years, there can be no assurance that the Company
will be able to further expand its operations successfully. Expansion of the
Company's operations will depend on, among other things, the continued growth of
the microcomputer industry, the Company's ability to withstand intense price
competition, its ability to obtain new clients, retain skilled technicians,
engineers, sales and other personnel in order to expand its technical and
marketing capabilities, secure adequate sources of products which are then in
demand on commercially reasonable terms, successfully manage growth (including
monitoring an expanded level of operations and controlling costs) and the
availability of adequate financing.
The Company seeks to expand its operations through potential acquisitions.
The Company previously reviewed various potential acquisitions and believes
there are numerous opportunities presently available. In June 1996, the Company
acquired Innovative. There can be no assurance that the Company will be able to
effect any other acquisitions or that, if the Company is able to effect any
acquisitions, it will be able to successfully integrate into its operations any
acquired business and expand the Company's operations. Moreover, the Innovative
acquisition is a related party transaction which was not negotiated on an
arms-length basis. There can be no assurance that the consideration paid by the
Company for Innovative would not have been at a more beneficial rate had the
Company and Innovative not been affiliated parties. In addition, possible
conflicts of interest may occur regarding the acquisition and and future
transaction between the Company and Innovative (see "Business - General"). The
Company may use authorized but unissued Common Shares to purchase businesses or
assets of companies. In the event that the Company makes an acquisition through
a leveraged transaction, of which it has no present intention, there can be no
assurance that the Company will have sufficient income to satisfy the interest
payments. If the Company enters into a leveraged transaction and does not have
sufficient income to meet interest payments they would have to be paid from
proceeds of this offering. See "Use of Proceeds" and "Business."
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<PAGE>
5. TECHNOLOGICAL CHANGE. The microcomputer products market is characterized
by rapid technological change and frequent introduction of new products and
product enhancements. The Company's ability to compete successfully depends, in
large part, on its ability to obtain products when needed and on favorable terms
from those suppliers and vendors which are able to adapt to technological
changes and advances in the microcomputer industry. The Company has access to
state-of-the-art technical databases which provide it with information
concerning technological advances from major vendors as soon as it is published.
While this allows the Company the flexibility to shift rapidly from one vendor
to another, there can be no assurance that the Company's current vendors and
suppliers will be able to achieve the technological advances necessary to remain
competitive or that the Company will be able to obtain authorizations from new
vendors or for new products that gain market acceptance. There can be no
assurance that the Company will be able to continue to keep pace with the
technological demands of the marketplace to successfully enhance its outsourced
support services to be compatible with new microcomputer products. See
"Business"
6. DEPENDENCE ON CERTAIN CUSTOMERS. The Company has approximately 2,000
active clients. However, for Fiscal 1995, approximately 18% of the Company's
revenues were derived from sales to one major customer. The Company's agreements
with its customers are usually subject to termination by the customer at will.
Although the Company's customer base has increased, the loss of a major customer
would be expected to have a material adverse effect on the Company's operations
during the short-term until the Company was able to generate replacement
business, although there can be no assurance of obtaining such business. See
"Business"
7. POSSIBLE NEED FOR ADDITIONAL FINANCING. Depending upon the Company's
then current level of sales, the Company may require additional funds, including
the proceeds, if any, generated upon the exercise of the Warrants, in order to
expand its activities. The Company anticipates, based on currently proposed
plans and assumptions relating to this operation, that projected cash flow from
operations and currently available financing arrangements, will be sufficient to
satisfy its contemplated cash requirements for at least the next 12 months. In
the event that the Company's plans change or its assumptions change or prove to
be inaccurate, or if the projected cash flow proves to be insufficient to fund
operations (due to unanticipated expenses, possible acquisitions, technical
problems or difficulties or otherwise), the Company may find it necessary or
advisable to seek additional funding and/or to reallocate some of the proceeds
or to use portions thereof for other purposes. There can be no assurance that
additional financing, whether debt or equity, will be available to the Company
on commercially reasonable terms, or at all.
Even if additional financing were available, the company may not be able to
obtain any additional financing, since all of the Company's assets are pledged
to secure the Company's outstanding bank indebtedness and inventory financing,
respectively, as described in the following paragraph. Any inability to obtain
additional financing could have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail
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<PAGE>
its planned expansion. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
8. MARKETING CAPABILITY. Substantially all of the Company's marketing
activities are being conducted by its officers, directors and limited number of
salespersons. Management will continue to devote a substantial amount of time
developing and maintaining continuing personal relationships with the Company's
customers. The Company's growth prospects, however, will be largely dependent
upon the Company's ability to achieve greater penetration of the Microcomputer
industry. Achieving market penetration will require the Company to be able to
attract skilled marketing personnel. See "Use of Proceeds" and "Business."
9. LACK OF PATENTS AND PROPRIETARY PROTECTION. The Company holds no patents
and has no trademarks or copyrights registered in the United States Patent and
Trademark Office or in any state. While such protection may become important to
the Company, it is not considered essential to the success of its business. The
Company relies on the know-how, experience and capabilities of its management
personnel. Without trademark and copyright protection, however, the Company has
no protection from other parties attempting to offer similar services. The
Company has access to state-of-the-art technical databases of various leading
vendors, which enables it to learn of technical breakthroughs as soon as they
are published; however, the Company has no proprietary right to these databases.
See "Business - Proprietary Information."
10. CONTROL BY CURRENT MANAGEMENT. The Company's officers and their
relatives currently possess voting rights representing approximately 36% of the
Company's outstanding voting securities. Accordingly, the Company's current
management and their relatives are able to exercise substantial control over the
Company including influencing the election of the Company's directors, and
generally directing the affairs of the Company. See "Management," and "Principal
Shareholders."
11. DEPENDENCE ON KEY PERSONNEL. The success of the Company is largely
dependent on the personal efforts of Surinder Rametra, Ashok Rametra and B.J.
Singh. Although the Company has entered into employment agreements with Messrs.
Rametra, Rametra and Singh, the loss of their services would have a material
adverse effect on the Company's business and prospects. The Company does not
maintain "key man" life insurance on the lives of Messrs. Rametra, Rametra and
Singh. The success of the Company is also dependent upon its ability to hire and
retain additional qualified engineering, technical and marketing personnel.
There can be no assurance that the Company will be able to hire or retain such
necessary personnel in the future. See "Management".
10
<PAGE>
12. BOARD DISCRETION IN APPLICATION OF PROCEEDS. The estimated proceeds of
this offering have been primarily allocated for working capital and potential
acquisitions. No acquisition agreements are currently pending and there can be
no assurance that any acquisitions will be made. Accordingly, the Company's
Management will have broad discretion as to the application of such proceeds.
See "Use of Proceeds" and "Certain Transactions."
13. DILUTION. The purchasers of Common Shares following the exercise of the
Warrants will incur an immediate substantial dilution in the net tangible book
value of each share issued. The current shareholders of the Company will realize
an immediate increase in the net tangible book value of their shares. See
"Dilution".
14. NO DIVIDENDS. The Company has not paid any cash dividends on its Common
Shares and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."
15. ARBITRARY EXERCISE PRICE. The exercise price of the Warrants were
arbitrarily determined by the Company and is not necessarily related to the
Company's asset value, book value, results of operations or any other investment
criteria. The exercise price of the Warrants should not be regarded as an
indication of the future market price of the Common Shares. See "Description of
Securities - Representative's Warrants."
16. PUBLIC MARKET FOR THE COMPANY'S SECURITIES; POSSIBLE VOLATILITY OF
COMMON SHARE PRICE. There is no assurance that a market for the Company's Common
Stock will continue. Accordingly, the purchasers of the Common Shares offered
hereby upon exercise of the Warrants may still experience difficulty in selling
their securities should they desire to do so. The market price for the Company's
securities has been and may at times continue to be highly volatile. Factors
such as the Company's financial results, introduction of new products in the
marketplace, status of compliance with certain regulations governing the sale of
its products and various factors affecting the computer industry generally may
have a significant impact on the market price of the Company's securities.
Additionally, in the last several years, the stock market has experienced a high
level of price and volume volatility and market prices for many companies,
particularly small and emerging growth companies, the common stock of which
trades in the over-the-counter-market, have experienced wide price fluctuations
which have not necessarily been related to the operating performance of such
companies. See "Shares Eligible for Future Sale."
17. INABILITY TO EXERCISE WARRANTS IN CERTAIN STATES. The Company will be
unable to issue Common Shares to those persons desiring to exercise their
Warrants unless and until the Common Shares are qualified for sale in
jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdiction. There can be no assurance that the
Company will be able to effect any required qualification. The Warrants may be
deprived of any value and the market for the Warrants may be 11 limited if the
Common Shares are not qualified or exempt from qualification in the
jurisdictions in which the holders of the Warrants reside. See "Description of
Securities - Warrants." of Securities - Warrants."
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<PAGE>
18. NECESSITY OF CONTINUING POST-EFFECTIVE AMENDMENTS TO REGISTRATION
STATEMENT. The Warrants will not be exercisable unless the Company maintains a
current Registration Statement on file with the Securities and Exchange
Commission through subsequent post-effective amendments to this Registration
Statement. While the Company intends to file post-effective amendments to this
Registration Statement and to maintain a current Registration Statement on file
with the Securities and Exchange Commission relating to the Warrants, there can
be no assurance that such will be accomplished or that the Common Shares
issuable upon the exercise of the Warrants will continue to be so registered.
The Warrants may be deprived of any value and the market for the Warrants may be
limited in that there is no current prospectus under an effective registration
statement covering the Common Shares issuable upon exercise of the Warrants. See
"Description of Securities - Warrants."
19. Speculative Nature of Warrants. Warrants are generally more speculative
than Common Shares which are purchasable upon the exercise thereof. During the
term of the Warrants, the holders thereof are given the opportunity to profit
from a rise in the market price of the Company's Common Shares, subject to the
Company's right of redemption. See "Potential Adverse Effect of Redemption of
Warrants" below. Historically, the percentage increase or decrease in the market
price of a warrant has tended to be greater than the percentage increase or
decrease in the market price of the underlying common shares. A Warrant may
become valueless, or of reduced value, if the market price of the Common Shares
decrease, or increases only modestly, over the term of the Warrant. See
"Description of Securities - Warrants."
20. FUTURE SALES OF COMMON SHARES UNDER RULE 144 OR OTHERWISE. Of the
18,443,462 (21,343,462 upon the exercise of the outstanding Warrants) Common
Shares issued and outstanding as of the date of this Prospectus a significant
number of such shares are "restricted securities" as that term is defined under
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). However, all restricted shares are currently eligible for
sale under Rule 144. In general, under Rule 144, a person (or persons whose
shares are aggregate) who has satisfied a two-year holding period may sell
"restricted securities" within any three-month period limited to a number of
shares which does not exceed the greater of one percent of the then outstanding
shares or the average weekly trading volume during the four calendar weeks prior
to such sale. Rule 144 also permits the sale (without any quantity limitation)
of "restricted securities" by a person who is not an affiliate of the issuer and
who has satisfied a three-year holding period. The Company cannot predict the
effect that sales made under Rule 144, sales made pursuant to other exemptions
under the securities laws or under registration statements may have on any then
prevailing market price. Nevertheless, the possibility exists that the sale of
any of these shares may have a depressive effect on the price of the Company's
securities in any public trading market. See "Shares Eligible for Future Sale"
and "Principal Shareholders."
12
<PAGE>
USE OF PROCEEDS
The Company intends to utilize the proceeds received from the exercise
of the Warrants, estimated to be $3,087,500 if all Warrants are exercised in
full, for general corporate and working capital purposes as well as to continue
the Company's expansion plans. There can be no assurance that any of the
Warrants will be exercised. The foregoing represents the Company's best estimate
of its use of proceeds generated from the possible exercise of Warrants based
upon the current state of its business operations, its current plans and current
economic and industry conditions. Any changes in the use of proceeds will be
made at the sole discretion of the Board of Directors of the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 (unaudited) and as adjusted to give effect to the possible
issuance of up to 2,900,000 shares of Common Stock upon exercise of the
outstanding Warrants. There can be no assurance that any of the Warrants will be
exercised.
March 31, 1996 March 31, 1996
Actual As Adjusted
------ -----------
Current Assets $7,192,287 $10,279,787
Current Liabilities $4,544,378 $ 4,544,378
Notes payable - Officers 397,244 397,244
Stockholders' Equity
Common Stock $.01 par
value 60,000,000 shares
authorized; 11,083,591
shares issued and
outstanding; 13,983,591
shares outstanding as
adjusted 141,138 170,138(1)
Preferred Stock 1,957,396 1,957,396(1)
Additional Paid in Capital 4,085,300 7,143,800(1)
Retained Earnings (Deficit) (1,457,018) (1,457,018)(1)
Total Stockholders Equity 4,726,816 7,814,316(1)
Total Capitalization $9,668,438 $12,755,938
(1) Assumes exercise in full of all 2,900,000 outstanding Class W, X, Y and Z
Warrants generating aggregate proceeds of $3,087,500.
13
<PAGE>
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. Trading of the Company's Units, under
the symbol "BEDSL" was discontinued on October 31, 1994. 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 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
---- ---
1993
- ----
Quarter ended 3/31 7 3/4 3 1/4
Quarter ended 6/30 4 2
Quarter ended 9/30 9 7/8 2 1/2
Quarter ended 12/31 2 7/8 3/4
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 1 1/16
Quarter ended 9/30 1 19/32 1 1/16
Quarter ended 12/31 1 3/8 1 3/16
1996
- ----
Quarter ended 3/31 1 1/2 7/8
WARRANTS
--------
High Low
---- ---
1993
- ----
Quarter ended 3/31 2 3/8 1/2
Quarter ended 6/30 1 1/2
Quarter ended 9/30 2 3/4 1/2
Quarter ended 12/31 11/16 1/8
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
14
<PAGE>
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 3/32 1/16
1996
- ----
Quarter ended 3/31 1/2 1/16
UNITS
-----
High Low
---- ---
1993
- ----
Quarter ended 3/31 10 1/2 3
Quarter ended 6/30 5 2 1/2
Quarter ended 9/30 9 2 1/2
Quarter ended 12/31 2 7/8 3/4
1994
- ----
Quarter ended 3/31 1 3/16 3/8
Quarter ended 6/30 1 1/16 11/32
Quarter ended 9/30 5 3/8
Quarter ended 12/31 3 1 1/4
On June 10, 1996, the closing bid and ask prices of the Company's Common
Stock were 1 7/32 and 1 1/4 respectively and the closing prices of the
Company's Warrants were 3/16 and 11/32, respectively.
On March 29, 1996, there were approximately 196 holders of record of the
Company's Common Stock; 22 holders of record of the Series A Preferred Shares;
six holders of record of the Units and 39 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").
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in
the period ended June 30, 1995 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
Prospectus and "Management's Discussion and Analysis or Plan of Operation."
<TABLE>
<CAPTION>
Operating Data 1995 (2) 1994 1993 1992(1) 1991(1)
- -------------- -------- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $29,738,315 $25,481,246 $39,836,094 $15,722,000 $9,438,933
Income (Loss) from $(2,347,655) $ (309,891) $ 133,605 $ (12,160) $ (51,689)
continuing operations
Income (Loss) from
per common share - primary $(.59) $(.80) $.34 $(.03) $(.03)
Fully diluted $(.59) $(.80) $.02 $(.03) $(.03)
Balance Sheet Data
- ------------------
Total Assets $ 8,056,607 $ 4,856,611 $ 5,888,036 $ 2,261,025 $1,456,995
Long-term obligations $ 396,246 $ 970,255 $ 0 $ 39,709 $ 562,255
Cash Dividends
per common share Nil Nil Nil Nil Nil
</TABLE>
(1) Information for these years are based on a combination of MCS (fiscal year
ended March 31) and SCSI (fiscal year ended December 31) and are unaudited.
(2) See pages 40 and 41, F-13 to F-15 for a discussion of the 1995 acquisition
of ACS and Cony.
Operating Data Nine Months Ended
- -------------- -----------------
March 31, 1996 March 31, 1995
-------------- --------------
(Unaudited) (Unaudited)
Net Sales $45,196,268 $17,498,148
Net Income (loss) 308,099 (785,932)
Income (loss) per
common share - primary .03 (.25)
Fully Diluted .02 (.25)
Balance Sheet Data March 31, 1996
- ------------------ --------------
(Unaudited)
Total Assets $9,668,438
Working Capital 2,647,909
Long-Term Obligations 397,244
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Background
ATEC Group, Inc. (the "Company") through its wholly owned subsidiaries
Sun Computer and Software, Inc. (SCSI), Micro Computer Store, Inc. (MCS),
American Computer Systems Corp., Inc. (ACS), and CONY Computer Systems, Inc.
(CONY) is principally 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, governmental
units and educational institutions. In addition, the Company provides it
customers with a full spectrum of computer services and technical support
including designing and installing computer systems, training system users and
maintaining and repairing hardware and software products. Additionally, the
Company sells hardware and software products to the consumer market through its
store facilities in Albany, New York, Long Island, New York, Norwalk,
Connecticut and New York City.
RESULTS OF OPERATIONS
Nine Months
1996 compared to 1995
- ---------------------
In February and March 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 the
nine months increased to $45.2 million from $17.5 million for the prior year.
Revenues have almost tripled from the previous year. Revenues are generated by
the Company's sales of computer hardware and software, and related support
services. Gross margin for the six months increased to $3.6 million for 1996
from $2.4 million for 1995, a 50% increase due to the increased revenues. Gross
margin as a percentage of revenues for the nine months were 7.9% as compared to
13.9% for the prior year. The decrease in gross margin percentage is primarily
due to lower margins of the acquired companies and a 2.5% decline in the third
quarter. The third quarter margin decline of approximately $300,000 arose from
adverse weather conditions resulting in a decrease in retail business that has
higher margins. 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.
Operating expenses exclusive of amortization of intangible assets increased
to $3.0 million as compared to $1.7 million for the prior year. The increase in
operating expenses are related to expanded business operations through the 1995
acquisitions of ACS and CONY and the opening of a sales office in New Jersey in
the third quarter.
17
<PAGE>
Amortization of intangible assets increased to $108,000 for the nine months
from $0 in the comparable 1995 period. Other expenses decreased $1.2 million
primarily due to the write-off over twelve months of all costs associated with
the 1994 reorganization and the satisfaction of bedding related debts of the
former bedding operations.
The provision for income taxes was $205,400 as compared to $314,862 for the
comparable period in 1995. The provision for income taxes in 1995 was greater
than the federal and state combined statutory rate of 40% primarily due to the
effect of non deductible charges associated with the charge-off of Hillside's
goodwill.
As a result of the above, the Company's net income increased to $308,099
for the nine months form a loss of $785,932 in the comparable 1995 period. For
the quarter ended March 31, 1996, net income increased to $6,485 from a loss of
$325,970 in the prior year. 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 the nine months ended March 31, 1996, net income per
share was $.03 compared to a loss of $.25 in the comparable period of the prior
year. Primary and fully diluted average shares outstanding were 8,868,008 and
12,513,200 for the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $1,159,430 at March 31, 1996, an increase
of $17,968 as compared to June 30, 1995. The Company's working capital at March
31, 1996 was $2,647,909 as compared to a working capital of $l,027,436 at June
30, 1995. The increase in cash and working capital resulted from the sale of
1,860,941 shares of common stock for net proceeds of $1,074,751. Net cash used
by operating activities was $353,012.
Cash used for investing activities totaled $99,460 to purchase property and
equipment.
To accommodate the Company's financial needs for inventory financing,
Deutsche Financial Service (formally ITT Commercial Finance) has granted a
credit line in the amount of $3.25 million. At March 31, 1996, indebtedness of
the Company to Deutsche Financial was $2.4 million, or an increase of $742,821
compared at June 30, 1995. Substantially, all of subsidiary company 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
$29.7 million from $25.4 million for 1994, a 17% increase. Revenues are
generated by the Company's sales of computer hardware and software, and related
support services. Gross margin increased to $2.9 million for 1995 from $1.8
million for 1994, a 61% increase due to increased revenues. Gross margin as a
percentage of revenues for 1995 was 9.7% as compared to 7% for 1994. The
increase in gross
18
<PAGE>
margin percentage is primarily due to the Company's focus on increasing its
market share in more profitable sectors of the business such as integration,
hardware service/maintenance, networking, and training.
Operating expenses exclusive of amortization of intangible assets increased
to $3.4 million for 1995 as compared to $2.2 million for 1994, a 55% 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 in February
1994, 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 $138,553 as
compared to $48,051 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 $87,014 as compared to $11,271
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.
As a result of the above, the Company's consolidated net loss increased to
$2.3 million for 1995 from $0.3 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 Company's
operating computer stores, SCSI, MCS, Cony and ACS, without giving effect to
such reorganization costs and write offs, reported income before taxes of
approximately $319,000 and income after taxes of approximately $214,000. These
store operating results reflected 12 months of operations for SCSI and MCS, but
only three months for Cony and five months for ACS. Primary and fully diluted
net loss per share for 1995 was $.59 as compared to a net loss of $.80, for the
comparable 1994 period. Primary and fully diluted average shares outstanding
were 3,972,333 and 389,573, respectively for 1995 and 1994.
Fiscal 1994 compared to Fiscal 1993
- -----------------------------------
Net revenues during the twelve months ended June 30, 1994 were $25.5
million representing a decrease of 37% compared with the Company's net revenues
of $39.8 million for the corresponding period of the previous year. The decline
in revenues was attributable to the elimination of sales to a former major
customer whose contribution to gross margin was significantly lower than that of
sales to other customers. Despite such decreases in overall revenues, the
Company's gross profit percentage increased to 7% for 1994 from 5% for 1993
primarily due to improvements in inventory management and the loss of $14
million in revenues from the former customer whose contribution to gross margin
was only 3%.
19
<PAGE>
Operating expenses increased from $1.94 million during 1993 to $2.16
million during 1994. The increase in expenses resulted primarily from the
relocation of the Company's Albany operations to much larger facilities, higher
compensation to the Company's sales personnel commensurate with the increase in
gross margin, and increasing servicing operations with the addition of more
technically oriented personnel. Interest and other income was $115,300 in 1994
compared to $38,200 in 1993. Interest expense was $48,000 in 1994 compared to
$69,000 in 1993. The changes in interest expense reflect changes in the levels
of notes payable and short-term borrowings and long-term debt outstanding as
well as interest rate changes during the respective periods.
The Company's effective tax rate decreased by 37% from 1993 to 1994 due to
a loss in 1994. The Company lost $310,000 in 1994 versus a profit of $133,600 in
1993 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $441,462 at June 30, 1995, an increase of
$219,003 as compared to June 30, 1994. The Company's working capital at June 30,
1995 was $1,027,436 as compared to a working capital deficit of $77,700 at June
30, 1994. Net cash used by operating activities was $336,699 for the year ended
June 30, 1995 as compared to $374,189 used in 1994. Accounts receivable and
inventory increased approximately $1.7 and $0.5 million, respectively, as
compared to June 30, 1994 as a result of companies acquired in 1995. In
addition, to support the Company's expanded operations, other current assets
increased by $196,492.
Cash used in investing activities totalled $197,328, of which $22,528 was
used to acquire two businesses and to purchase property and equipment amounting
to $38,384. Additional goodwill expenses relating to the Hillside acquisition
was $156,475. Cash provided by financing activities was $753,030 substantially
all of which were provided by related parties.
To accommodate the Company's financial needs for inventory financing,
Deutsche Financial Service (formally ITT Commercial Finance) has granted a
credit line of $3.25 million. At June 30, 1995, indebtedness of the Company to
Deutsche Financial was $1.7 million compared to $0.7 million at June 30, 1994.
Substantially, all of subsidiary company tangible and intangible assets are
pledged as collateral for this facility.
20
<PAGE>
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 Registrant'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 Registrant's independent auditor for the fiscal year ended June 30, 1995
was dismissed by the Registrant on April 17, 1996. On June 28, 1995 the
Registrant's independent auditor for the fiscal year ended June 30, 1994
Bianculli, Pascale & Company, P.C. ("B&P"), was dismissed by the Registrant.
Yohalem's and B&P's services for each such year included the audit of the
Registrant's consolidated financial statements and other services related to
filings with the Securities and Exchange Commission. During the Registrant's two
most recent fiscal years and the interim periods up until the date of dismissal
of Yohalem, the Registrant had no disagreements 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 Registrant, 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 Registrant's proposed acquisition of
Innovative Business Micros, Inc., ("Innovative"). The proposed acquisition of
Innovative comtemplated the payment to Innovative Shareholders of shares of the
Company's common stock over a three year period depending upon performance
criteria ("Initial Acquisition Term"). 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 gives direction and guidance to Rajnish Rametra for the
operations of Innovative. A member of the board of directors discussed the
matter with the Yohalem. The Company has authorized Yohalem to respond fully to
the inquiries of WS concerning the subject matter of the disagreement. The
accountant's reports on the Registrant'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.
Management was of the opinion that APB 16 did not apply to the Initial
Acquisition Term. 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 interests
accounting
21
<PAGE>
(AIN APB 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 has expressed
reservations concerning 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 to be included in a proposed
amendment to the Registrant's pending registration statement on Form S-1.
Yohalem believed, based on a literal reading of 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 have suggested that the company discuss this
matter with the staff of the SEC.
The Company had 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 will account
for the Acquisition as a pooling of interests.
22
<PAGE>
BUSINESS
General
- -------
ATEC Group, Inc. ("the Company"), through its wholly owned subsidiaries
SCSI, MCS, CONY and ACS is engaged in the sale of computer hardware and software
products to businesses, professionals, government agencies and educational
institutions. The Company also provides its customers with a wide range of
services, including designing and installing computer systems, and local area
networks, the integration of micro computer products, training system users, and
maintaining and repairing hardware and software products. The Company maintains
retail facilities in New York City; Long Island, New York; Albany, New York and
Norwalk , Connecticut.
The Company's subsidiaries are authorized dealers and value-added resellers
for major manufacturers such as Microsoft, Novell, Sybase, Oracle, Hewlett
Packard, Compaq, Apple, IBM, Panasonic, Toshiba, Sharp, AST, Epson and NEC.
Hardware products sold include microcomputer systems, laptop computers,
monitors, data storage devices, local area network products, printers, modems,
keyboards and other peripheral products. The Company also sells a vast number of
different software packages for both IBM compatible and Apple applications. The
software products include packages which serve a variety of businesses, personal
productivity, utility, educational and entertainment needs of today's consumers.
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. In connection
with the sale of hardware and software products, 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, fax/modem, CD Rom and on-line 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.
During the year ended June 30, 1995 and the nine months ended March 31,
1996 Computer Discount Warehouse ("CDW") was the only customer of the Company
that accounted for 10% or more of the Company's consolidated sales. Sales to CDW
represented approximately 18% of total revenues.
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
23
<PAGE>
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.
Since the acquisition by the Company of MCS and SCSI, the Company has been
actively engaged in seeking the purchase of additional entities engaged in the
computer integration business. Consistent with such goals the Company acquired
ACS and CONY. The Company is actively seeking additional acquisition candidates.
In June 1996, the Company acquired 100% of the issued and outstanding
capital stock of Innovative Business Micros, Inc. ("Innovative"), a New York
corporation engaged in computer systems integration business. Innovative's
computer facility is located at 90 Adams Avenue, Happauge, New York 11788.
Innovative's principal shareholders are Rajnish Rametra, Ashok Rametra and
Surinder Rametra (collectively the "Shareholders"). 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. Innovative and
Rajnish Rametra intend to enter into a three year employment agreement pursuant
to which Mr. Rametra will serve as the Chief Executive Officer of Innovative at
an annual salary of $125,000 per year subject to annual increases. Mr. Rametra
will also be provided with major medical health coverage as well as other
benefits.
There can be no assurance that future acquisitions will occur. In light of
the fact that the transaction is a non-arms-length one, the Company has incured
pro-forma financial statements reflecting the effect on the Company's financial
statements of the acquisition of Innovative as well as two year historical
audited financials on behalf of Innovative (see "Financial Statements pages F-53
to F-65.
While the Company does not presently have any other letters of intent
and/or definitive agreements to acquire any specific computer companies, the
Company constantly searches for potential acquisition candidates. The Company
desires to build a network of computer businesses through acquisitions in order
to achieve the benefits of economies of scale in its operations by realizing
more preferential buying terms with reduced fixed overhead costs.
The inventory of the Company consists of products sold by the Company in
the regular course of its business. At June 30, 1995 inventory was approximately
$1,400,000. 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 by purchasing products
which the Company believes, based upon information from its customers, will be
promptly purchased as well as the negotiation, on a case by case basis, of
return privileges with vendors.
24
<PAGE>
The Company's subsidiaries have entered into numerous vendor and dealer
agreements regarding the sale of hardware and software products. The Company
purchased approximately 33% of its hardware and software products from Data-Go,
a division of Computerland Corporation (hereafter called "Computerland") during
the year ended June 30, 1995. Computerland, as well as Ingram Micro, American
P.C. and Intelligence Electronics are the only vendors who accounted for 10% or
more of 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, as 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. Many of the Company's competitors
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 top-quality system design, installation
and technical support service. During the year ended June 30, 1995, the
Company's service related activities accounted for approximately 2% 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.
25
<PAGE>
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.
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 Registration Statement, the Company had an aggregate
of approximately 50 employees, including its 6 administrators, 11 staff persons,
three store managers, 17 fulltime sales persons, 8 technical and 5 warehouse
personnel. The Company has no collective bargaining agreements and believes the
relations with their employees are good.
Properties
----------
The Company's headquarters and executive offices are located at 1952
Jericho Turnpike, East Northport, New York 11731. 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 10011. 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 Ninth Street, Norwalk, Connecticut
06851. This location is leased by 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.
The Company believes that its current facilities are suitable for its
present and projected needs. The Company does not own any real property.
26
<PAGE>
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
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.
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
Micro Computer Systems, Inc. ("MCS") and Sun Computers and Software, Inc.
("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.
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 is the president and chairman of the board of Future
Information Systems Inc. ("FIS"), a public corporation engaged, through its
wholly owned subsidiary, in the equipment leasing business. FIS is currently
seeking out potential business acquisitions. 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.
27
<PAGE>
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 American Computer Systems, Inc. ("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 Registrant
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,
1995 or June 30, 1994. In September 1995 Form 4's on behalf of Surinder Rametra,
Ashok Rametra, Raghbir Lambda and Sun Corporation (2000) Limited were filed with
the Commission. These Form 4's reported transactions which occurred in both
August 1995 and May 1995.
EXECUTIVE COMPENSATION
- ----------------------
The Company's Summary Compensation Table for the years ended June 30, 1995,
1994 and 1993 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, 1995, 1994 and/or 1993. There are no long-term
incentive plan ("LTIP") awards, or stock option or stock appreciation rights
except as discussed below.
28
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1995, 1994 and 1993
Annual Compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(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 6/30/95 $150,850 -- 21,624(2) NONE NONE NONE
6/30/94 $ 89,000 $ 80,000(3) 17,456(4) NONE NONE NONE
6/30/93 $ 75,300 45,400 29,424(5) NONE NONE NONE
Ashok Rametra 6/30/95 $180,520 -- 8,113(6) NONE NONE NONE
6/30/94 $ 52,700 180,000 8,777(7) NONE NONE NONE
6/30/93 $ 21,200 24,500 5,309(8) NONE NONE NONE
Robert Martire(1) 6/30/95
6/30/94 $ 52,000 -- --
6/30/93 $200,000 -- --
Balwinder Singh
Bathla 6/30/95 $ 58,650 $ 86,470(9) 2,185(10) See (9) NONE NONE NONE
12/31/94 $ 31,200 $ 75,000 44,921(11) NONE NONE NONE
12/31/93 $ 30,000 $ 30,000 41,426(12) NONE NONE NONE
</TABLE>
*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. 41 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) Award from Computer Vendors $11,968; Major Medical $5,309; Life Insurance
$12,147;
(6) Major Medical $1,129, Leased Auto $6,984
(7) Major Medical $1,793; Leased auto $6,984
(8) Major Medical $5,309
(9) Represents 70,768 shares of common stock issued pursuant to Mr. Bathla's
Employment Agreement.
(10) Major Medical $2,185
(11) Represents $16,000 in commissions, $9,600 in rent received and $19,321
as an S-Corporation dividend.
(12) Represents $8,000 in rent received and $33,426 as an S-Corporation
dividend.
29
<PAGE>
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 and 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 a pre-tax net earnings for MCS
and SCSI are at least $825,000 during either the year 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 Hillside'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 Hillside's common stock based on the bid and asked prices for shares
of Hillside'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
Hillside'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 Hillside's common stock based
on the bid and
30
<PAGE>
asked prices for shares of Hillside'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 of the higher of (a) actual pre-tax income reported on the
Company's 1995 audited financial statements or (b) actual pre-tax
income reported on the Company's 1994 financial statements, the
Employee shall receive $25,000 worth of Hillside'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 Hillside's
common stock based on the bid and asked prices for shares of Hillside'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 Hillside's common stock as
reported in the over-the-counter market during the ten day trading
period ended December 31, 1997.
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.
31
<PAGE>
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(1) Preferred Stock(1) Outstanding(2)
- ----------- --------------- ------------------ --------------
Ashok Rametra(3) 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
Surinder Rametra(4) 2,426,301 238,750 Series J 14.0%
1952 E. Jericho Preferred Shares
Turnpike, 165,000 Series K
E. Northport, Preferred Shares
NY 11731
Balwinder Singh
Bathla (5)(6) 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 2,536,104 30,000 Series J 12.8%
90 Adams Avenue Preferred Shares
Hauppauge, NY 11716 10,000 Series K
Preferred Shares
All directors and
executive/officers
as a group (3 persons) 4,165,170 200,000 Series D 26.6%
Preferred Shares
200,000 Series E
Preferred Shares
538,750 Series J
Preferred Shares and
265,000 Series K
Preferred Shares
representing an
aggregate of
1,203,750 votes
(1) Except as otherwise noted, the persons named in the table have sole voting
and investment power with respect to such shares.
(2) Computed based upon a total of 18,443,462 shares of common stock, 28,897
shares of Series A Preferred Stock, 3,111.28 shares of Series B Preferred
Stock, 200,000 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 Series
A, D, E, J and K Preferred Stock possess one vote per share and each share
Series B Preferred Stock has 241.86 votes per share. Accordingly, the
foregoing represents an aggregate of 20,147,645 votes. All shares in the
table have been adjusted to reflect the Company's September 1994 reverse
stock split.
32
<PAGE>
(3) Ashok Rametra is the Treasurer, Chief Financial Officer and a Director of
the Company. Mr. Rametra disclaims beneficial ownership of the following
shares owned by the following members of Mr. Rametra's family: Amit Rametra
- 297,865 common shares, 35,000 Series J Preferred Shares and 35,000 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 -
725,760 common shares, 30,000 Series J Preferred shares and 10,000 Series K
Preferred Shares, Vijay Rametra - 41,667 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 2,480,054 votes representing 12.3%
of the outstanding voting securities of the Company are reflected in the
table above.
(4) Surinder Rametra is the Chief Executive Officer and Chairman of the Board
of the Company. Mr. Rametra disclaims beneficial ownership of the following
shares owned by the following members of Mr. Rametra's family: Amit Rametra
- 297,865 common shares, 35,000 Series J Preferred Shares and 35,000 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 -
725,760 common shares, 30,000 Series J Preferred shares and 10,000 Series K
Preferred Shares, Vijay Rametra - 41,667 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 2,480,054 votes representing 12.3%
of the outstanding voting securities of the Company are reflected in the
table above.
(5) Mr. Bathla is the President and Director of the Company.
33
<PAGE>
(6) 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").
RESALES BY SELLING SECURITIES HOLDERS
This Prospectus relates to the proposed resale by the Selling
Securityholders of up to 15,434,285 shares of outstanding Common Stock as well
as the resale by Selling Securityholders of up to 2,900,000 shares of Common
Stock issued upon exercise of the Warrants. The following table sets forth as of
June 26, 1996 certain information with respect to the persons for whom the
Company is registering the Shares for sale to the public except as footnoted
below. None of such persons has had a material relationship with or has held any
position or office with the Company or any of its affiliates within three years,
other than as footnoted below (see "Certain Transactions"). The Company will not
receive any of the proceeds from the sale of the Shares.
# of Shares
# of Common Shares Offered for
Names of Selling Beneficially Owned Prior Account of Beneficial
Security Holders to June 1996 Owner Common Stock
- ---------------- ---------------- ------------------
Balwinder Singh 588,164 588,164
Patrick Hagerty 505,788 505,788
Arvin Gulati 454,544 454,544
Kenneth Bohacs 61,863 61,863
Ashok Rametra 1,150,705 1,150,705
Surinder Rametra 2,426,301 2,426,301
Louis Fugazy 20,000 20,000
Seema Wasil 141,935 141,935
Munish Rametra 275,462 275,462
Mona Sutaira 9,032 9,032
Amit Rametra 297,865 297,865
Vijay Rametra 162,357 162,357
Sushma Gupta 725,760 725,760
Harry Gupta 208,333 208,333
Rajnish Rametra 684,093 684,093
Arvind and Ila Vora 15,390 15,390
Bhupatlal Sutaria 15,000 15,000
Raj Sutaria 153,900 153,900
Sachin Bhutani 30,000 30,000
Nitin Bhutani 30,000 30,000
Praveen Bhutani 40,000 40,000
Michael Thuroff 7,500 7,500
Sheetal Rametra 603,448 603,448
Soyna Rametra 402,138 402,138
Shivani Rametra 402,379 402,379
Nikhil Rametra 402,379 402,379
Veena Langer 301,724 301,724
Savita Rametra 120,690 120,690
34
<PAGE>
# of Shares
# of Common Shares Offered for
Names of Selling Beneficially Owned Prior Account of Beneficial
Security Holders to February 1996 Owner Common Stock
- ---------------- ---------------- ------------------
Dr. K.L. Kantu 38,375 38,375
Beverly Mestel 15,390 15,390
Ray Irngy 92,308 92,308
John Newton 14,823 14,823
Angelo Romanelli 39,228 39,228
Shirley Holley 6,620 6,620
Donald Holley - Bank One 11,020 11,020
Barry Basior 24,237 24,237
Maria Garuffi 8,627 8,627
Ross Cannon 33,620 33,620
Theodore Gaillard 17,516 17,516
Albert Barnhardt 3,917 3,917
Kenneth Stuart 21,727 21,727
George Goldberg 40,000 40,000
Silverman, Collura & Chernis, P.C. 150,000 150,000
Gracechurch Corp. (1) 100,000 100,000
International Corporate
Consultants, Inc. (2) 100,000 100,000
Global Internet, Inc.(3) 500,000 500,000
James Charles (4) 150,000 150,000
M.D. Sabbah (5) 500,000 500,000
United Acquisition III Corp.(6) 600,000 600,000
Corinth Shipping, Inc. 15,385 15,385
Ocean Shipping International, Inc. 30,770 30,770
Unitek Consultants, Inc. (7) 1,000,000 1,000,000
Robert Martire 148,968 148,968
First National Funding Corporation 100,000 100,000
R. Wagli & Cie AG 153,846 153,856
Mike & Laura Lalich 61,538 61,538
Kamal J. Singh 76,923 76,923
Akiva & Rose Mitzmacher 153,846 153,846
Dreyton Investment Ltd. 92,308 92,308
Edua Rozsa 92,308 92,308
Diethelm Wendler 92,308 92,308
Burnadette Viaggio 30,769 30,769
Mutual Indemnity (Bermuda) Ltd. (8) 69,231 69,231
Avnit Nanda 3,609 3,609
Prashanth R. Vemuganti 7,941 7,941
K. Shobha Lakshmanan 25,048 25,048
Ranjit Panikar 8,733 8,733
Pritam Singh Arora 11,276 11,276
Raj Deep 8,654 8,654
Som Kiran Singh Sodhi 9,474 9,474
Parmjit Singh 16,441 16,441
Nuripinder Kaur Bathla 10,631 10,631
Danny Prefer 36,207 36,207
Elise Prefer 36,207 36,207
Alan Prefer 120,690 120,690
Geetika Rametra 120,690 120,690
Nirmala Rametra 603,448 603,448
Chrono Designs, Inc. 603,448 603,448
35
<PAGE>
(1) Represents a total of 100,000 shares of Common Stock underlying Class W
(25,000), X (25,000), Y (25,000) and Z (25,000) Warrants. Class W Warrants
are exercisable at $.75 per share through June 30, 1996; Class X Warrants
are exercisable at $1.00 through August 31, 1996; Class Y Warrants are
exercisable at $1.25 per share through October 31, 1996; and Class Z
Warrants are exercisable at $1.50 per share through December 31, 1996.
(2) Represents a total of 100,000 shares of Common Stock underlying Class W
(25,000), X (25,000), Y (25,000) and Z (25,000) Warrants.
(3) Represents a total of 500,000 shares of Common Stock underlying Class W
(125,000), X (125,000), Y (125,000) and Z (125,000) Warrants.
(4) Represents 50,000 shares of Common Stock owned by Mr. Charles and 100,000
Shares underlying Class W Warrants.
(5) Represents 500,000 Shares underlying Class X Warrants.
(6) Represents a total of 600,000 shares of Common Stock underlying Class W
(150,000), X (150,000), Y (150,000) and Z (150,000) Warrants.
(7) Represents a total of 1,000,000 shares of Common Stock underlying Class W
(500,000), X (100,000), Y (100,000) and Z (300,000) Warrants.
(8) Shares held under nominnee name Bank of Butherfield.
The Selling Securityholders may effect the sale of their shares from time
to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Common Stock, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
The Company is not aware of any agreements, undertakings or arrangements
with any Underwriters or broker-dealers regarding the sale of their securities
in the United States, nor to the Company's knowledge is the sale of shares on
behalf of the Selling Securityholders in the United States. The Selling
Securityholders may effect such transactions by selling the Shares, as
applicable, directly to purchasers or to or through broker-dealers which may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Securityholders,
and/or the purchasers of their Shares, as applicable, for which such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Securityholders and any broker-dealers that
act in connection with the sale of their Shares might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act.
The Company has notified the Selling Securityholders of the prospectus
delivery requirements for sales made pursuant to this Prospectus and that, if
there are material changes to the stated plan of distribution, a post-effective
amendment with current information would need to be filed before offers are made
and no sales could occur until such amendment is declared effective.
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<PAGE>
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 has been advised that Sun is 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
37
<PAGE>
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 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 (the Company's President), 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
38
<PAGE>
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 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
$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
39
<PAGE>
from Sun 2000 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
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 pursuant to this Prospectus.
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
40
<PAGE>
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,
1995 and March 31, 1996, the balance owed by ACS to Mr. Bathla was $396,246 and
$397,244 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.
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 to be 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
41
<PAGE>
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 then paid by the Company will
be accounted for as a polling of interest. (see "Business - General").
Sale and Purchase of Goods Between SCSI, MCS, ACS, CONY and Affiliates
----------------------------------------------------------------------
During the period from July 1, 1994 to June 30, 1995 the Company's
subsidiaries SCSI, MCS, ACS and CONY sold and purchased goods to and from each
other as well as Innovative Business Micros Inc., Essential Metals Inc., ESCI
Inc., Compudata, Empire State Computer International, Inc. ("Empire"). 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.
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<PAGE>
AMOUNT OF GOODS PURCHASED BY MCS FROM RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $29,539 $ -
SCSI $94,393 $ 53,841
ESCI Inc. $ - $ -
Essential Metals, Inc. $ - $ -
Compudata $ - $ -
ACS $ 8,190 $ 9,500
Cony $39,020 $ 21,987
Empire State Computer International, Inc. $ - $ -
AMOUNT OF GOODS SOLD BY MCS TO RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $ 1,560 $ 59,563
SCSI $200,558 $ 21,465
ESCI Inc. $228,310 $ -
Essential Metals Inc. $ - $ -
Compudata $ - $ -
ACS $216,777 $ 21,153
Cony $215,190 $ -
Empire State Computer International, Inc. $ - $ -
AMOUNT OF GOODS PURCHASED BY SCSI FROM RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $ 14,812 $ 12,126
MCS $200,558 $ 21,465
ESCI Inc. $ - $ -
Essential Metals, Inc. $ - $ -
Compudata $ - $ 8,096
ACS $ 4,595 $ 14,621
Cony $158,829 $106,992
Empire State Computer International, Inc. $ - $ -
43
<PAGE>
AMOUNT OF GOODS SOLD BY SCSI TO RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $471,028 $ 95,834
MCS $ 94,393 $ 53,841
ESCI Inc. $ - $ -
Essential Metals Inc. $ - $ -
Compudata $ - $ -
ACS $ 82,341 $118,797
Cony $165,011 $500,482
Empire State Computer International, Inc. $ - $ -
AMOUNT OF GOODS PURCHASED BY ACS FROM RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
---- ------ ------
Innovative Business Micros Inc. $ - $ -
SCSI $ 82,341 $118,797
ESCI Inc. $ - $ -
Essential Metals, Inc. $ - $ -
Compudata $ - $ -
MCS $216,777 $ 21,153
Empire State Computer International, Inc. $ - $ -
Cony $ - $ 59,500
AMOUNT OF GOODS SOLD BY ACS TO RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $ - $ -
SCSI $ 4,595 $ 14,621
ESCI Inc. $ - $ -
Essential Metals Inc. $ - $ -
Compudata $ - $ -
MCS $ 8,190 $ 9,500
Empire State Computer International, Inc. $ - $ -
Cony $17,204 $452,212
44
<PAGE>
AMOUNT OF GOODS PURCHASED BY CONY FROM RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $ - $ -
SCSI $165,011 $500,482
ESCI Inc. $ - $ -
Essential Metals, Inc. $ - $ -
Compudata $ - $ -
MCS $215,190 $ -
Empire State Computer International, Inc. $ - $ -
ACS $ 17,204 $452,212
AMOUNT OF GOODS SOLD BY CONY TO RELATED PARTIES
YEAR ENDED NINE MONTHS ENDED
JUNE 3O, 1995 MARCH 31, 1996
NAME AMOUNT AMOUNT
- ---- ------ ------
Innovative Business Micros Inc. $ - $ -
SCSI $158,829 $106,992
ESCI Inc. $ - $ -
Essential Metals Inc. $ - $ -
Compudata $ - $ -
MCS $39,020 $ 21,987
Empire State Computer International, Inc. $ - $ -
ACS $ - $ 59,500
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.
SCSI and MCS borrowed funds from Ashok Rametra and certain relatives of
Surinder Rametra in order to assist the cash flow requirements of MCS and SCSI.
The following loans were outstanding as of dates indicated.
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<PAGE>
LOANS OWED BY MCS
6/30/94 6/30/95 12/31/95 Interest
Lender Amount Amount Amount Rate Maturity Date
- ------ ------ ------ ------ ---- -------------
Ashok Rametra $350,000 $0 $0 10% 12/31/95
LOANS OWED BY SCSI
6/30/94 6/30/95 12/31/95 Interest
Lender Amount Amount Amount Rate Maturity Date
- ------ ------ ------ ------ ---- -------------
Munish Rametra $37,834 $0 $0 10% 12/31/97
Seema Wasil $81,417 $0 $0 10% 12/31/97
Amit Rametra $50,463 $0 $0 10% 12/31/97
Mona Sutara $ 5,041 $0 $0 10% 12/31/97
All of the foregoing loans were subsequently converted by each Lender into
shares of the Company's Common Stock at the price of $.62 per share.
Accordingly, an aggregate of 981,878 shares were issued to the aforementioned
parties.
In September 1995, S&N Associates, a company controlled by Surinder
Rametra, loaned a total of $50,000 to the Company. The loan bears interest at
the rate of 10% per annum and 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
advance/repayment transactions, Mr. Rametra owed the Company $30,524. This
balance was repaid to the Company subsequent to June 30, 1995.
During the nine months ended March 31, 1996 Ashok Rametra advanced the
Company $125,000. The advance bears interest at the rate of 10% per annum and
was repaid prior to March 31, 1996
Surinder Rametra, Ashok Rametra, Balwinder Singh Bathla and the Cony
Shareholders have personally guaranteed the respective obligation owed by SCSI,
MCS, ACS 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.
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DESCRIPTION OF SECURITIES
The Company is Authorized to Issue Up to 70,000,000 Shares Of Common Stock,
$.01 Par Value and 10,000,000 Shares of Preferred Stock.
Common Stock
- ------------
Each holder of Common Stock is entitled to one vote per share on all
matters to be voted upon by the Company's stockholders. Stockholders do not have
cumulative voting rights in the election of directors. Subject to preferences
that may be applicable to any shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. The Company has not paid, and does not presently intend to pay,
dividends on its Common Stock. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets, remaining after payment of liabilities, subject to prior
distribution rights of holders of Preferred Stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions available to the
Common Stock. All 18,443,462 outstanding shares of Common Stock are validly
authorized and issued and are fully paid and non-assessable, and the shares of
Common Stock to be issued upon exercise of the Warrants will be validly
authorized and issued, fully paid and non-assessable.
Preferred Stock
- ---------------
The Company is authorized to issue 10,000,000 shares of undesignated
Preferred Stock. The Board of Directors will have the authority to issue the
undesignated Preferred Stock from time to time in one or more series and to
establish the rights, preferences, privileges and restrictions granted to or
imposed upon any unissued shares of undesignated Preferred Stock and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by the stockholders. Any future issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
As of the date of this Prospectus the Company had outstanding 28,897 shares of
Series A Preferred Stock, 3,111.28 shares of Series B Preferred Stock, 200,000
shares of Series D, 200,000 shares of Series E Preferred Stock. 390,000 shares
of Series I Preferred Stock, 800,000 shares of Series J Preferred Stock and
400,000 shares of Series K Preferred Stock. In addition the Company has
authorized the issuance of 350,000 shares of Series C Preferred Stock.
Series A Preferred Stock
- ------------------------
The holders of Series A Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock or any other capital stock of
the Company junior to Series A Preferred, when, as and if declared by the
Company. Each share of Series A Preferred
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<PAGE>
Stock is entitled to one vote on all matters submitted to security holders
of the Company. Series A Preferred Shareholders shall possess a liquidation
preference right over shares of Common Stock and Junior Securities in an amount
equal to $10.00 per share. Series A Preferred Shares are convertible into common
stock on a one for one basis. The Company, in its sole discretion, may redeem
the Series A Preferred Shares at a price of $10.00 per share plus accrued
dividends if, during 20 consecutive trading days within 30 days prior to giving
notice of redemption the price of the Common Stock is at least $12.00
Series B Preferred Stock
- ------------------------
The holders of Series B Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock or any other capital stock of
the Company junior to Series B Preferred, when, as and if declared by the
Company. Shares of Series B Preferred Stock are superior to the Company's common
shares. Each share of Series B Preferred Stock entitles the holder to 241.86
votes on matters submitted to securityholders of the Company. Series B Preferred
shareholders possess a liquidation preference right over shares of Common Stock
in an amount equal to $241.86 per share through June 23, 1996. Each share of
Series B Preferred Stock is convertible into 241.86 common shares until June 23,
1996. Notwithstanding the foregoing each share of Series B Preferred Stock shall
be automatically converted into one share of Common Stock, be entitled to one
vote per share and possess a liquidation preference $1.00 per share after June
23, 1996.
Series D Preferred Stock
- ------------------------
The holders of Series D Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock, any other capital stock of
the Company junior to Series D Preferred Stock, when, as and if declared by the
Company. Each shares of Series D Preferred Stock is entitled to one vote on all
matters submitted to securityholders of the Company. Series D Preferred
Shareholders possess a liquidation preference right over shares of Common Stock
and shares junior to Series D Preferred Stock in an amount equal to $5.00 per
share. All 200,000 shares of Series D Preferred Stock are convertible into
$500,000 of the Company's Common Stock during the six month period commencing
February 6, 1997 and expiring August 6, 1997 based on the average price of the
Common Stock during the ten trading days preceding February 6, 1997, subject to
adjustment based upon future value of the Common Stock.
Series E Preferred Stock
- ------------------------
The holders of Series E Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock and any other capital stock
of the Company junior to Series E Preferred Stock, when, as and if declared by
the Company. Each share of Series E Preferred Stock is entitled to one vote on
all matters submitted to securityholders of the Company. Series E Preferred
Shareholders possess a liquidation preference right over share of Common Stock
and shares junior to Series E Preferred Stock in an amount equal to $5.00 per
share. Each share of Series E Preferred Stock is convertible into one share of
Common Stock during the six month period commencing February 6, 1997 and
expiring August 6, 1997. All 200,000 shares
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<PAGE>
of Series E Preferred Stock are convertible into $1,000,000 of the
Company's common stock based on the average price of the common shares during
the ten trading days preceding February 6, 1997, subject to adjustment based
upon future value of the Company's common stock.
Series I Preferred Stock
- ------------------------
The holders of Series I Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock, any other capital stock of
the Company junior to Series I Preferred Stock, when, as and if declared by the
Company. Each shares of Series I Preferred Stock is entitled to one vote on all
matters submitted to securityholders of the Company. Series I Preferred
Shareholders possess a liquidation preference right over shares of Common Stock
and shares junior to Series I Preferred Stock in an amount equal to $5.1282 per
share. The Series I Preferred Stock is convertible into $2,000,000 of the
Company's common stock based on the average price of the common shares during
the ten trading days preceding July 1, 1996, subject to adjustment based upon
future value of the Company's common stock.
Series J Preferred Stock
- ------------------------
The holders of Series J Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock, any other capital stock of
the Company junior to Series J Preferred Stock, when, as and if declared by the
Company. Each shares of Series J Preferred Stock is entitled to one vote on all
matters submitted to securityholders of the Company. Series J Preferred
Shareholders possess a liquidation preference right over shares of Common Stock
and shares junior to Series J Preferred Stock in an amount equal to $5.00 per
share. The Series J Preferred Stock is convertible into $4,000,000 of the
Company's common stock based on the average price of the common shares during
the ten trading days preceding July 1, 1997, subject to adjustment based upon
future value of the Company's common stock.
Series K Preferred Stock
- ------------------------
The holders of Series K Preferred Stock are entitled to receive dividends,
in preference to holders of shares of Common Stock, any other capital stock of
the Company junior to Series K Preferred Stock, when, as and if declared by the
Company. Each shares of Series K Preferred Stock is entitled to one vote on all
matters submitted to securityholders of the Company. Series K Preferred
Shareholders possess a liquidation preference right over shares of Common Stock
and shares junior to Series K Preferred Stock in an amount equal to $5.00 per
share. The Series K Preferred Stock is convertible into $2,000,000 of the
Company's common stock based on the average price of the common shares during
the ten trading days preceding July 1, 1998, subject to adjustment based upon
future value of the Company's common stock.
49
<PAGE>
Class W Warrants
- ----------------
The Company issued 925,000 Class W Warrants in 1996. Each Class W Warrant
entitles the holder thereof to purchase one Share of the Company's common stock
at an exercise price of $.75 per share, subject to adjustment in certain
situations as described below. The Class W Warrants are exercisable through June
30, 1996. The Class W Warrants are not redeemable by the Company. In the event
the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, (iii) combine or reclassify its outstanding shares of Common Stock into
a smaller number of shares, (iv) issue additional shares in the event of a
statutory merger or statutory business combination, or (v) issue, retire,
combine, exchange, subdivide or reclassify its outstanding shares of Common
Stock as part of any similar event or transaction not herein specified, the
exercise price of the Class W Warrants in effect at the time of the effective
date or record date, as the case may be, for such sale, dividend or distribution
or of the record date of such subdivision, combination or reclassification shall
be adjusted so that it shall equal the price determined by multiplying the
exercise price of the Class W Warrants by a fraction, the denominator of which
shall be the number of shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such action. Whenever the exercise price
payable upon exercise of the Class W Warrants is adjusted pursuant to (i)
through (v) above, the number of shares of Common Stock purchasable upon
exercise of the Class W Warrants shall simultaneously be adjusted by multiplying
the number of shares of Common Stock initially issuable upon exercise of the
Class W Warrants by the exercise price of the Class W Warrants in effect on the
date hereof and dividing the product so obtained by the exercise price of the
Class W Warrants as adjusted.
The Class W Warrants may be exercised upon surrender of the warrant
certificate representing the Class W Warrants on or prior to the expiration date
of the Class W Warrants accompanied by payment of the exercise price of the
Class W Warrants. The holders of the Class W Warrants will not have any rights
or privileges of holders of common shares until the Class W Warrants are
exercised. The Company has agreed to register the shares of Common Stock
underlying the Class W Warrants under the Securities Act of 1933 as amended (the
"Act").
Class X Warrants
- ----------------
The Company issued 925,000 Class X Warrants in 1996. Each Class X Warrant
entitles the holder thereof to purchase one share of the Company's common stock
at an exercise price of $1.00 per share, subject to adjustment in certain
situations as described below. The Class X Warrants are exercisable through
August 31, 1996. The Class X Warrants are not redeemable by the Company. In the
event the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, (iii) combine or reclassify its outstanding shares of Common Stock into
a smaller number of shares, (iv) issue
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<PAGE>
additional shares in the event of a statutory merger or statutory business
combination, or (v) issue, retire, combine, exchange, subdivide or reclassify
its outstanding shares of Common Stock as part of any similar event or
transaction not herein specified, the exercise price of the Class X Warrants in
effect at the time of the effective date or record date, as the case may be, for
such sale, dividend or distribution or of the record date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the exercise price of the Class X Warrants by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Whenever the exercise price payable upon exercise of the Class X
Warrants is adjusted pursuant to (i) through (v) above, the number of shares of
Common Stock purchasable upon exercise of the Class X Warrants shall
simultaneously be adjusted by multiplying the number of shares of Common Stock
initially issuable upon exercise of the Class X Warrants by the exercise price
of the Class X Warrants in effect on the date hereof and dividing the product so
obtained by the exercise price of the Class X Warrants as adjusted.
The Class X Warrants may be exercised upon surrender of the warrant
certificate representing the Class X Warrants on or prior to the expiration date
of the Class X Warrants accompanied by payment of the exercise price of the
Class X Warrants. The holders of the Class X Warrants will not have any rights
or privileges of holders of common shares until the Class X Warrants are
exercised. The Company has agreed to register the shares of Common Stock
underlying the Class X Warrants under the Securities Act of 1933 as amended (the
"Act").
Class Y Warrants
- ----------------
The Company issued 425,000 Class Y Warrants in 1996. Each Class Y Warrant
entitles the holder thereof to purchase one share of the Company's common stock
at an exercise price of $1.25 per share, subject to adjustment in certain
situations as described below. The Class Y Warrants are exercisable through
October 31, 1996. The Class Y Warrants are not redeemable by the Company. In the
event the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, (iii) combine or reclassify its outstanding shares of Common Stock into
a smaller number of shares, (iv) issue additional shares in the event of a
statutory merger or statutory business combination, or (v) issue, retire,
combine, exchange, subdivide or reclassify its outstanding shares of Common
Stock as part of any similar event or transaction not herein specified, the
exercise price of the Class Y Warrants in effect at the time of the effective
date or record date, as the case may be, for such sale, dividend or distribution
or of the record date of such subdivision, combination or reclassification shall
be adjusted so that it shall equal the price determined by multiplying the
exercise price of the Class Y Warrants by a fraction, the denominator of which
shall be the number of shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such action. Whenever the exercise price
payable upon exercise of the Class Y Warrants is adjusted pursuant to (i)
through (v) above, the number of shares of Common Stock
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<PAGE>
purchasable upon exercise of the Class Y Warrants shall simultaneously be
adjusted by multiplying the number of shares of Common Stock initially issuable
upon exercise of the Class Y Warrants by the exercise price of the Class Y
Warrants in effect on the date hereof and dividing the product so obtained by
the exercise price of the Class Y Warrants as adjusted.
The Class Y Warrants may be exercised upon surrender of the warrant
certificate representing the Class Y Warrants on or prior to the expiration date
of the Class Y Warrants accompanied by payment of the exercise price of the
Class Y Warrants. The holders of the Class Y Warrants will not have any rights
or privileges of holders of common shares until the Class Y Warrants are
exercised. The Company has agreed to register the shares of Common Stock
underlying the Class Y Warrants under the Securities Act of 1933 as amended (the
"Act").
Class Z Warrants
- ----------------
The Company issued 625,000 Class Z Warrants in 1996. Each Class Z Warrant
entitles the holder thereof to purchase one share of the Company's common stock
at an exercise price of $1.50 per share, subject to adjustment in certain
situations as described below. The Class Z Warrants are exercisable through
December 31, 1996. The Class Z Warrants are not redeemable by the Company. In
the event the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, (iii) combine or reclassify its outstanding shares of Common Stock into
a smaller number of shares, (iv) issue additional shares in the event of a
statutory merger or statutory business combination, or (v) issue, retire,
combine, exchange, subdivide or reclassify its outstanding shares of Common
Stock as part of any similar event or transaction not herein specified, the
exercise price of the Class Z Warrants in effect at the time of the effective
date or record date, as the case may be, for such sale, dividend or distribution
or of the record date of such subdivision, combination or reclassification shall
be adjusted so that it shall equal the price determined by multiplying the
exercise price of the Class Z Warrants by a fraction, the denominator of which
shall be the number of shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such action. Whenever the exercise price
payable upon exercise of the Class Z Warrants is adjusted pursuant to (i)
through (v) above, the number of shares of Common Stock purchasable upon
exercise of the Class Z Warrants shall simultaneously be adjusted by multiplying
the number of shares of Common Stock initially issuable upon exercise of the
Class Z Warrants by the exercise price of the Class Z Warrants in effect on the
date hereof and dividing the product so obtained by the exercise price of the
Class Z Warrants as adjusted.
The Class Z Warrants may be exercised upon surrender of the warrant
certificate representing the Class Z Warrants on or prior to the expiration date
of the Class Z Warrants accompanied by payment of the exercise price of the
Class Z Warrants. The holders of the Class Z Warrants will not have any rights
or privileges of holders of common shares until the
52
<PAGE>
Class Z Warrants are exercised. The Company has agreed to register the
shares of Common Stock underlying the Class Z Warrants under the Securities Act
of 1933 as amended (the "Act").
Possible Anti-Takeover Effects of Authorized But Unissued Stock
- ---------------------------------------------------------------
The Company has significant shares of authorized but unissued capital
stock. One of the effects of the existence of authorized but unissued capital
stock may be to enable the Board of Directors to render more difficult or to
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise, and thereby to protect the continuity
of the Company's management. If in the due exercise of its fiduciary
obligations, for example, the Board of Directors were to determine that a
takeover proposal was not in the Company's best interests, such shares could be
issued by the Board of Directors without stockholder approval in one or more
private placements or other transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by diluting the
voting or other rights of the proposed acquiror or insurgent stockholder or
stockholder group, by creating a substantial voting block in institutional or
other hands that might undertake to support the position of the incumbent Board
of Directors, by effecting an acquisition that might complicate or preclude the
takeover, or otherwise. In this regard, the Company's Articles of Incorporation
grant the Board of Directors broad power to establish the rights and preferences
of the authorized and unissued Preferred Stock, one or more series of which
could be issued entitling holders to vote separately as a class on any proposed
merger or share exchange, to convert Preferred Stock into a large number of
shares of Common Stock or other securities, to demand redemption at a specified
price under prescribed circumstances related to a change in control, or to
exercise other rights designed to impede a takeover.
Certain Charter and Bylaws Provisions
- -------------------------------------
Limitation of Liability
The Company's Amended Certificate of Incorporation and Amended and Restated
Bylaws limit the liability of directors and officers to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a corporation
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, including gross negligence, except liability for (i) breach
of the directors' duty of loyalty; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption, and
(iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not permit a corporation to eliminate a director's
duty of care, and this provision of the Company's Amended and Restated
Certificate of Incorporation has no effect on the availability of equitable
remedies, such as injunction or rescission, based upon a director's breach of
the duty of care.
The Company's Amended and Restated Certificate of Incorporation authorizes
the Company to purchase and maintain insurance for the purposes of
indemnification. At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent
53
<PAGE>
for which indemnification will be required or permitted under the Company's
Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws
or indemnification agreements. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
Corporation Takeover Provisions
- -------------------------------
Section 203 of the Delaware General Corporation Law
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
stockholder became an interested stockholder, unless (i) the corporation has
elected in its original certificate of incorporation not to be governed by
Section 203 (the Company did not make such an election) (ii) the business
combination was approved by the Board of Directors of the corporation before the
other party to the business combination became an interested stockholder (iii)
upon consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to render or vote stock held by
the plan) or, (iv) the business combination was approved by the Board of
Directors of the corporation and ratified by two-thirds of the voting stock
which the interested stockholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an "interested stockholder" involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as a stockholder who,
together with affiliates and associates, owns (or, within three years prior, did
own) 15% or more of a Delaware corporation's voting stock. Section 203 could
prohibit or delay a merger, takeover or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
Stockholder Meetings and Other Provisions
- -----------------------------------------
Under the Amended and Restated By-laws, special meetings of the
stockholders of the Company may be called only by the Company's President or by
the Company's President and Secretary at the request of a majority of the
members of the Board of Directors. Stockholders are required to comply with
certain advance notice provisions with respect to any nominations
54
<PAGE>
of candidates for election to the Company's Board of Directors or other
proposals submitted for stockholder vote. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
the Company.
Transfer Agent and Registrar
- ----------------------------
The Transfer Agent and Registrar for the Common Stock is North American
Stock Transfer & Trust Company, 147 West Merrick Road, Freeport, New York,
11520.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of the Prospectus the Company had outstanding 18,443,462
shares of Common Stock. In addition upon exercise in full of the Warrants an
additional 2,900,000 shares of Common Stock will be outstanding. A significant
portion of these shares, and all shares issued on exercise of the Warrants will
be freely tradeable without restriction or further registration under the
Securities Act except for any shares purchased by an "affiliate" of the Company,
which will be subject to the limitations of Rule 144 promulgated under the
Securities Act ("Rule 144"). The balance of outstanding shares may not be
publicly sold unless they are registered under the Securities Act or is sold
pursuant to an applicable exemption from registration, inducing an exemption
pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares of Common Stock
for at least two years, including persons who are "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock of the Company (shares immediately after the Offering assuming no exercise
of the Over-Allotment Option), or (ii) the average weekly trading volume of the
Common Stock during the four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. Under Rule 144, however, a person who has held shares of Common Stock
for a minimum of three years and who is not, and for the three months prior to
the sale of such shares has not been, an affiliate of the company is free to
sell such shares without regard to the volume, manner-of-sale and certain other
limitations contained in Rule 144.
LEGAL PROCEEDINGS
On March 4, 1994, the Company settled a class action suit commenced in the
United States District Court, Southern District of New York against it on
October 14, 1993. The suit alleged numerous claims against the Company
including allegations of material misstatements and/or omissions from the
Company's initial public offering prospectus dated February 1993 as well as
improprieties concerning the filing of certain registration statements under
Form S-8. The settlement of such action was approved by the District Court on
June 6, 1994. In full settlement of all claims made against the Company in the
class action suit, Hillside agreed to
55
<PAGE>
issue a total of 350,000 shares of Series C Preferred stock and five year
warrants to purchase an aggregate of 350,000 additional shares of common stock
at $3.00 per share to the class action claimants. Hillside also assigned all of
its rights to the class action claimants regarding claims against other
defendants in the suit. Each ten shares of Series C Preferred Stock will be
convertible into one share of the Company's common stock for a period of five
years from its date of issuance. The Company is in the process of issuing such
shares and warrants.
In May 1994, Brown Raysman & Millstein ("Brown") commenced an action
against the Company with respect to outstanding fees for general corporate legal
work previously performed by Brown. The summons and complaint were filed in the
New York Supreme Court, New York County. The complaint set forth two causes of
action, one for breach of contract and one for unjust enrichment. Each cause of
action sought damages in the amount of $85,330.31. In September 1995 the parties
agreed to settle this action by the Company's payment to Brown of a total of
$67,500 over an 18 month period in equal monthly installments of $3,750 each.
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.
A breach of contract action, Anderson Street Realty Corp. d/b/a Anderson
Street Realty Company v. RHMB New Rochelle Leasing Corp. d/b/a a/k/a Hillside
Bedding and/or Atlantic to Pacific Bedding Corp. d/b/a Hillside Bedding, Index
No. 00360/93 is currently pending in the Supreme Court, Westchester County
relating to a store lease dispute. The claim is in an amount in excess of
$100,000 representing the amount of payments remaining under the lease. The
action is in the early stages of discovery.
An action entitled Steinbock, Braff, Inc. T/A Kat-Nap Products v. Hillside
Bedding, Inc., Index No. 9980-94 was commenced in the Supreme Court, Kings
County for breach of contract involving an inventory dispute whereby plaintiff
demands $61,079.93. The matter is 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.
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<PAGE>
The Company believes that the action has no merit. There can be no
assurances however that the Company will prevail in any such action.
LEGAL MATTERS
Certain legal matters in connection with the securities being offered
hereby will be passed upon for the Company by Silverman, Collura & Chernis,
P.C., 381 Park Avenue South, New York, New York 10016. Members of the firm of
Silverman, Collura & Chernis, P.C. own an aggregate of 150,000 shares of the
Company's common stock, which shares are included in this Prospectus.
EXPERTS
The consolidated financial statements and related financial statement
schedules of Hillside Bedding, Inc. (name subsequently changed to ATEC Group,
Inc.) at June 30, 1995 and for the year then ended appearing in this Prospectus
and Registration Statement have been audited by Yohalem Gillman & Company,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and in this Registration Statement, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements and related financial statement
schedules of Hillside Bedding, Inc. (name subsequently changed to ATEC Group,
Inc.) at June 30, 1994 and 1993 and for the years then ended appearing in this
Prospectus and Registration Statement have been audited by Bianculli, Pascale &
Co., independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in this Registration Statement, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The pro forma combined financial statements of ATEC Group, Inc. and
Innovative Business Mircos, Inc. (including the pro forma adjustments) and the
interim consolidated financial statements and related financial statement
schedules of the Company at March 31, 1996 and for the nine month periods ended
March 31, 1996 and 1995 included in this Prospectus and Registration Statement
were not audited, examined, reviewed or compiled by Yohalem Gillman & Company
and that firm does not express an opinion or any other form of assurance on
them.
The financial statements of Innovative Business Micros, Inc. at June 30,
1995 and 1994 and for the years then ended appearing in this Prospectus and
Registration Statement have been audited by George S. Goldberg, CPA, independent
auditor, as set forth in his report thereon appearing elsewhere herein and in
this Registration Statement and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
57
<PAGE>
============================================ ==============================
No dealer, salesman or any other person
has been authorized to give any information
or to make any representations other
than those contained in this
Prospectus in connection with
the offer made by this Prospectus
and, if given or made, such ATEC GROUP, INC.
information or representations
must not be relied upon as having
been authorized by the Company or
the Representative. Neither the
delivery of this Prospectus nor
any sale made hereunder shall
under any circumstances create any
implication that there has been no
change in the affairs of the Company
since the date hereof. This Prospectus 18,334,285
does not constitute an offer or SHARES OF
solicitation by anyone in any COMMON STOCK
jurisdiction in which such offer or
solicitation is not authorized or in
which the person making such offer or
solicitation is not qualified to do so
or to anyone to whom it is unlawful to
make such offer or solicitation.
TABLE OF CONTENTS
Page
----
Additional Information......................
Prospectus Summary..........................
Risk Factors................................
Dividend Policy.............................
Selected Financial Data.....................
Management's Discussion and ---------------
Analysis of Financial Condition............ PROSPECTUS
Business.................................... ---------------
Government Regulation.......................
Management..................................
Principal Shareholders......................
Resales by Selling Security Holders.........
Certain Transactions........................
Description of Securities...................
Shares Eligible for Future Sale.............
Underwriting................................
Legal Matters...............................
Experts.....................................
Financial Statements........................
--------------------
Until, _________ 1996 all dealers effecting
transactions in the registered securities,
whether or not participating in this
distribution, may be required to deliver a _______________, 1996
Prospectus. This delivery requirement is in
addition to the obligation of dealers to
deliver a Prospectus when acting as
underwriters and with respect to their
unsold allotments or subscriptions.
============================================ ==============================
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
Independent Auditors's Report of Yohalem
Gillman & Company F-1
Report of Independent Certified Public Accountants
of Bianculli Pascale & Co. P.C. F-2
The following consolidated financial statements of
Hillside Bedding, Inc. and Subsidiaries are
included in Item 8: -
Consolidated Balance Sheets - June 30, 1995 and 1994 F-3
Consolidated and Combined Statements of Operations -
Years Ended June 30, 1995, 1994 and 1993 F-4
Combining Statement of Operations of Micro Computer
Store, Inc. and Sun Computer and Software, Inc.
For the Year Ended June 30, 1994 F-5
For the Year Ended June 30, 1993 F-6
Consolidated and Combined Statements of Cash Flows -
Years Ended June 30, 1995, 1994 and 1993 F-7
Combined Statements of Cash Flows of Micro Computer
Stores, Inc. and Sun Computer and Software, Inc.
For the Year Ended June 30, 1994 F-9
For the Year Ended June 30, 1993 F-11
Consolidated Statements of Stockholders' Equity -
Years Ended June 30, 1995 and 1994 F-13
Notes to Financial Statements - June 30, 1995, 1994 and 1993 F-16
The Registrant's changes in stockholders' equity
for the year ended June 30, 1993 is not presented
herein because it is not relevant in view of the
change in reporting entity in 1994 discussed in
Note 1 to the financial statements.
<PAGE>
YOHALEM GILLMAN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditors's Report
Shareholders and Board of Directors
Hillside Bedding, Inc.
We have audited the accompanying consolidated balance sheet of 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. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on 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 Hillside Bedding, 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.
New York, New York
October 4, 1995
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Hillside Bedding, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Hillside
Bedding, Inc. and Subsidiaries as of June 30, 1994 and the related consolidated
statement of stockholders' equity for the year then ended. we have also audited
the accompanying transitional statements of earnings and cash flows of the
Company's wholly-owned subsidiaries Micro Computer Store, Inc. and Sun Computer
and Software, Inc. for the three months and six months ended June 30, 1994,
respectively. 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. The consolidated financial statements of Hillside
Bedding, Inc. and Subsidiaries as of June 30, 1993 and for the year then ended
were audited by other auditors whose report dated August 9, 1993 on those
statements included an explanatory paragraph that described an uncertainty about
the Company's ability to continue as a going concern. The financial statements
of Micro Computer Store, Inc. and Sun Computer and Software, Inc. as of March
31, 1994 and December 31, 1993, respectively, and for the years then ended, were
audited by other auditors whose reports dated August 15, 1994 and August
12, 1994, respectively, expressed unqualified opinions on those statements.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the June 30, 1994 consolidated balance sheet and the
related, consolidated statement of stockholders' equity and the transitional
statements of earnings and cash flows of the Company's wholly-owned subsidiaries
referred to above, present fairly in, all material respects, the financial
position of Hillside Bedding, Inc. and Subsidiaries as of June 30, 1994 and the
results of operations and cash flows of its wholly-owned subsidiaries Micro
Computer Store, Inc. and Sun Computer and Software, Inc. for the three and six
month periods ended June 30, 1994 respectively, in conformity with generally
accepted accounting principles.
F-2A
<PAGE>
As more fully described in Notes 1A, 1B and 8, 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, for
accounting purposes, have been treated as a consolidation and merger of Micro
Computer Store, Inc. and Sun Computer and Software, Inc. and an acquisition by
them of Hillside Bedding, 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 Hillside Bedding,
Inc. and Subsidiaries and the management of these companies control the Company
after the acquisition.
We have also examined the historical combining statements of earnings and
cash flows and the historical combined schedules, II, IV, and VIII of Micro
Computer Store, Inc. and Sun Computer and Software, Inc. for each of the two
years ended June 30, 1994. These financial statements and schedules give effect
to the consolidation and merger of these companies as discussed in Notes 1A, 1B,
1K and 8 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 combining statement of operations and cash
flows described above present fairly, in all material respects, the results of
operations and cash flows for the two years ended June 30, 1994 in conformity
with generally accepted accounting principles.
Farmingdale, New York
September 22, 1994
(except in regard to the historical combining statements of operations and
cash flows and historical combined schedules which date is March 20, 1995)
F-2A
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
--------------------------------
1995 1994
---- ----
Current assets
Cash $ 441,462 $ 222,459
Accounts receivable, net 3,129,688 1,446,221
Inventories 1,438,126 898,477
Current portion of note
receivable - officer 16,218 20,119
Due from officers and related parties 65,791 130,091
Deferred taxes 15,213 6,285
Other current assets 310,336 54,571
------- ------
Total current assets 5,416,834 2,778,223
--------- ---------
Property and equipment, net 340,493 292,047
Media advertising credits -- 448,011
Goodwill, net 2,108,096 1,210,000
Note receivable - officer 94,691 109,155
Other assets 96,493 19,175
------ ------
$ 8,056,607 $ 4,856,611
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving inventory line of credit $ 1,668,371 $ 665,020
Accounts payable 1,597,144 869,939
Notes payable - related parties -- 300,000
Accrued expenses 390,077 428,741
Deferred sales tax obligation 502,052 443,212
Due to related parties 25,000 26,615
Other current liabilities 206,754 122,396
--------- ---------
Total current liabilities 4,389,398 2,855,923
Convertible notes payable -- 415,500
Notes payable - related parties 396,246 554,755
--------- ---------
Total liabilities 4,785,644 3,826,178
Commitments and contingencies
Stockholders' equity
Preferred stocks 3,338,193 5,898
Common stock 128,321 53,441
Additional paid-in capital 2,736,566 388,246
Discount on preferred stock (1,167,000) --
Retained earnings (deficit) (1,765,117) 582,848
---------- -------
Total stockholders' equity 3,270,963 1,030,433
--------- ---------
$ 8,056,607 $ 4,856,611
=========== ===========
F-3
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
THREE YEARS ENDED JUNE 30,
1994 1993
1995 See Page (F-5) See Page (F-6)
---------- -------------- --------------
Net sales $ 29,738,315 $ 25,481,246 $ 39,836,094
Cost of sales 26,848,934 23,662,100 37,658,588
---------- ---------- ----------
Gross profit 2,889,381 1,819,146 2,177,506
---------- ---------- ----------
Operating expenses
Selling and administrative 2,892,604 2,167,528 1,944,577
Amortization of goodwill -
computer businesses 52,655 -- --
Write-off of media
advertising credits 448,011 -- --
--------- --------- ---------
Total operating expenses 3,393,270 2,167,528 1,944,577
--------- --------- ---------
(Loss) income from operations (503,889) (348,382) 232,929
---------- ---------- ---------
Other income (expense)
Charge-off of goodwill
relating to acquisition
of Hillside (2,045,628) -- --
(Losses) gain on marketable
securities (4,136) (17,577) 11,445
Gain on sale of fixed assets 4,432 -- --
Dividend and interest income 14,472 42,847 37,057
Interest expense (138,553) (48,051) (69,028)
Management fees 375,000 -- --
Other income 37,661 72,543 1,124
---------- --------- ---------
(1,756,752) 49,762 (19,402)
----------- --------- ----------
(Loss) income before provision
for income taxes (2,260,641) (298,620) 213,527
Provision for income taxes 87,014 11,271 79,922
----------- --------- ----------
Net (loss) income $ (2,347,655) $ (309,891) $ 133,605
============== ============== ==============
Net earnings (loss) per share:
Primary $ (.59) $ (.80) $ .34
============== ============== =============
Fully diluted $ (.59) $ N/A $ .02
============== ============== =============
Weighted average number
of shares - primary 3,972,333 389,573 389,573
============== ============== =============
Weighted average number
of shares - fully diluted 3,972,333 8,236,972 8,236,972
============== ============== =============
See accompanying notes.
F-4
<PAGE>
HILLSIDE BEDDING, INC., AND SUBSIDIARIES
COMBINING STATEMENT OF OPERATIONS
MICRO COMPUTER STORE, INC. AND
SUN COMPUTER AND SOFTWARE, INC.
FOR THE YEAR ENDED
June 30, 1994
(Notes 1B and K)
Micro Sun Computer
Computer and Software Elim- Combined
Store, Inc. Inc. inations Total
----------- ---------------- -------- ---------
Sales (Note 1G) $13,504,221 $11,977,026 $(281,842) $25,481,246
Cost of sales
(Note 10C) 12,271,573 11,390,528 (281,842) 23,662,100
---------- ---------- --------- ----------
Gross profit 1,232,648 586,498 -- 1,819,146
---------- ---------- --------- ----------
Operating expenses:
General and
administrative 1,455,394 412,907 -- 1,868,301
Selling 108,347 190,880 -- 299,227
---------- ---------- --------- ----------
Total operating
expenses 1,563,741 603,787 -- 2,167,528
---------- ---------- --------- ----------
Income (loss)
from operations (331,093) (17,289) -- (348,382)
---------- ---------- --------- ----------
Other income
(expense)
Unrealized loss on
valuation of market-
able securities -- (15,985) -- (15,985)
Net gain (loss) on
sale of market-
able securities -- ( 1,592) -- ( 1,592)
Interest income
(Note 4) 4,721 38,126 -- 42,847
Other income -- 72,543 -- 72,543
Interest expense
(Note 10) (14,209) (33,842) -- (48,051)
--------- ---------- --------- ----------
Total other income (9,488) 59,250 -- 49,762
--------- ---------- --------- ----------
Earnings (loss)
before income
taxes (340,581) 41,961 -- (298,620)
Provision for income
taxes (Note 13) -- 11,271 -- 11,271
--------- ---------- --------- ----------
Net earnings
(loss) $ (340,581) $ 30,690 -- $ (309,891)
========== =========== ========= ===========
Net earnings per share (Note 1f)
Primary $ (.80)
===========
Fully diluted N/A
====
Weighted average number of shares-primary 389,573
===========
Weighted average number of shares-fully diluted 8,236,972
===========
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
HILLSIDE BEDDING, INC., AND SUBSIDIARIES
COMBINING STATEMENT OF OPERATIONS
MICRO COMPUTER AND SOFTWARE, INC.
FOR THE YEAR ENDED
June 30, 1993
(Notes 1B and K)
Micro Sun Computer
Computer and Software Elim- Combined
Store, Inc. Inc. inations Total
----------- ---------------- -------- ---------
Sales (Note 1G) $31,080,446 $8,755,648 $(546,055) $39,836,094
Cost of sales
(Note 10C) 29,685,568 7,973,020 (546,055) 37,658,588
---------- --------- -------- ----------
Gross profit 1,394,878 782,628 -- 2,177,506
---------- - ------- -------- ----------
Operating expenses:
General and
administrative 714,260 414,968 -- 1,129,228
Selling 632,539 182,810 -- 815,349
---------- --------- -------- ----------
Total operating
expenses 1,346,799 597,778 -- 1,944,577
---------- --------- -------- ----------
Income from
operations 48,079 184,850 -- 232,929
---------- --------- -------- ----------
Other income
(expense)
Net gain on
sale of market-
able securities -- 11,445 -- 11,445
Dividend income -- 2,330 -- 2,330
Interest income
(Note 4) 13,671 21,056 -- 34,727
Other income -- 1,124 -- 1,124
Interest income
(Note 10) (33,621) (35,407) -- (69,028)
---------- --------- -------- ----------
Total other income (19,950) 548 -- (19,402)
---------- --------- -------- ----------
Earnings before
income taxes 28,129 185,398 -- 213,527
Provision for income
taxes (Note 13) 5,866 74,056 -- 79,922
---------- --------- -------- ----------
Net earnings $ 22,263 $ 111,342 $ -- $ 133,605
=========== ========== ======== ==========
Net earnings per
share (Note 1f)
Primary $ .34
==========
Fully diluted $ .02
==========
Weighted average number of shares-primary $ 389,573
==========
Weighted average number of shares-fully diluted $8,236,972
==========
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JUNE 30,
1994 1993
1995 See Page (F-9) See Page (F-11)
---------- -------------- ---------------
Cash flows from operating
activities
Net (loss) income $(2,347,655) $ (309,891) $ 133,605
Adjustments to reconcile
net (loss) income to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization 64,488 46,689 26,791
Amortization of good-
will - computer
business 52,655 -- --
Charge-off of goodwill
relating to acquisition
of Hillside 2,045,628 -- --
Write-off of media credits 448,011 -- --
Expenses charged to
earnings paid by issuances
of capital stock 204,319 -- --
Loss on sale of marketable
securities 4,136 -- --
Gain on sale of fixed assets (4,432) -- --
Unrealized losses on market-
able securities -- 15,985 --
Changes in assets and
liabilities, net in 1995
of effects from purchase
of ACS and CONY:
Accounts receivable 116,876 2,985,151 (1,030,748)
Receivables from officers
and related parties -- 14,897 (18,114)
Inventories 63,037 (111,026) (279,257)
Deferred taxes (8,928) -- --
Other current assets (364,518) 7,347 2,276
Other assets (47,701) -- --
Revolving inventory line
of credit 1,003,351 (1,761,603) 1,506,916
Accounts payable (1,368,813) (1,083,278) (7,806)
Accrued expenses (122,551) (197,575) 286,270
Deferred sales tax
obligation 58,840 -- --
Payables to related
parties -- 19,115 --
Other current liabilities (133,442) -- --
---------- ------------ -------------
Net cash (used in)
provided by
operating
activities (336,699) (374,189) 619,933
---------- ------------ -------------
F-7
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Continued)
THREE YEARS ENDED JUNE 30,
1994 1993
1995 See Page (F-9) See Page (F-11)
------ -------------- ---------------
Cash flows from investing
activities
Addition to goodwill
relating to acquisi-
tion of Hillside $(156,475) $ -- $ --
Acquisition costs of
ACS and CONY (22,528) -- --
Purchase of fixed
assets (38,384) (277,953) (15,234)
Security deposits -- 1,568 (2,068)
Purchase of marketable
securities -- -- (38,451)
Sales of marketable
securities 6,864 11,917 106,937
Sale of fixed assets 13,195 -- --
--------- ----------- -----------
Net cash (used in)
provided by
investing
activities (197,328) (264,468) 51,184
--------- ----------- -----------
Cash flows from financing
activities
Payment of bank over-
draft assumed net of
cash acquired in ACS
and CONY acquisitions (112,113) -- --
Contribution of
capital -- 25,000 100,000
Proceeds from bank loan -- -- 150,000
Repayment of bank loan -- (150,000) --
Proceeds from notes
payable - related
parties 618,975 -- --
Repayments from related
parties -- 149,878 --
Advances from related
parties 928,180 680,000 --
Repayments of related
parties (845,146) (59,022) (1,018,477)
Advances to related
parties -- -- (232,701)
Bank overdraft 163,134 -- --
--------- -------- ---------
Net cash provided
by (used in)
financing
activities 753,030 645,856 (1,001,178)
--------- -------- ----------
Net increase (decrease)
in cash 219,003 7,199 (330,061)
Cash - beginning of year 222,459* 214,577 544,638
--------- -------- ----------
Cash - end of year $ 441,462 $ 221,776 $ 214,577
========= =========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during
the year for
Income taxes $ 181,065 $ 3,796 $ 3,232
Interest 27,403 48,051 69,027
Supplemental Disclosure of Noncash Investing and
Financing Activities - see Note 12
*Includes $683 of Hillside Bedding, Inc. as of June 30, 1994.
See accompanying notes.
F-8
<PAGE>
HILLSIDE BEDDING, INC., AND SUBSIDIARIES
COMBINING STATEMENTS OF CASH FLOWS
MICRO COMPUTER STORE, INC. AND
SUN COMPUTERS AND SOFTWARE, INC.
FOR THE YEAR ENDED
June 30, 1994
(Notes 1B and 1K)
Micro Sun Computer
Computer and Software Combined
Store, Inc. Inc. Total
----------- ------------ --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss) $ (340,581) $ 30,690 $ (309,891)
Noncash items included
in net earnings:
Depreciation and
amortization 24,556 22,133 46,689
Unrealized loss on
marketable securities -- 15,985 15,985
Changes in:
Accounts receivable 2,779,732 205,419 2,985,151
Accounts receivable
related party (6,186) 14,229 8,043
Note receivable -
officer -- 6,854 6,854
Inventory 155,105 (266,131) (111,026)
Prepaid expenses 4,186 3,161 7,347
Accounts payable -
trade (1,110,920) 27,642 (1,083,278)
Revolving inventory
line of credit -
net (1,729,009) (32,594) (1,761,603)
Accounts payable
related party 19,115 -- 19,115
Accrued liabilities (44,552) (153,023) (197,575)
---------- -------- ------------
Total adjustments 92,027 (156,325) (64,298)
========== ======== ===========
Net cash provided (used)
by operating activities (248,554) (125,635) (374,189)
---------- -------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of fixed assets (271,191) (6,762) (277,953)
Security deposits -- 1,568 1,568
Sales of marketable
securities -- 11,917 11,917
---------- -------- -----------
Net cash provided (used)
by investing activities (271,191) 6,723 (264,468)
---------- -------- -----------
Sub total (519,745) (118,912) (638,657)
---------- -------- -----------
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
HILLSIDE BEDDING, INC., AND SUBSIDIARIES
COMBINING STATEMENTS OF CASH FLOWS
MICRO COMPUTER STORE, INC. AND
SUN COMPUTERS AND SOFTWARE, INC.
FOR THE YEAR ENDED
June 30, 1994
(Notes 1B and 1K)
Micro Sun Computer
Computer and Software Combined
Store, Inc. Inc. Total
----------- ------------- --------
Balance Forward $(519,745) $ (118,912) $(638,657)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Contribution of Capital 25,000 -- 25,000
Repayments of bank loan -- (150,000) (150,000)
Repayments from related
parties -- 149,878 149,878
Advances from related
parties 680,000 -- 680,000
Repayments to related
parties -- ( 59,022) (59,022)
--------- ---------- ---------
Net cash provided
(used) by financing
activities 705,000 ( 59,144) 645,856
--------- ---------- ---------
NET INCREASE (DECREASE) IN CASH 185,255 (178,056) 7,199
CASH AT BEGINNING OF PERIODS 5,104 209,473 214,577
--------- ---------- ---------
CASH AT JUNE 30, 1994 $ 190,359 $ 31,417 $ 221,776
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest expense $ 14,209) $ 33,842 $ 48,051
--------- ---------- ---------
Income Taxes -- $ 3,796 $ 3,796
--------- ---------- ---------
The accompanying notes are an integral part of these statements.
F-10
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
COMBINING STATEMENTS OF CASH FLOWS
MICRO COMPUTER STORE, INC. AND
SUN COMPUTERS AND SOFTWARE, INC.
FOR THE YEAR ENDED
June 30, 1993
(Notes 1B and 1K)
Micro Sun Computer
Computer and Software Combined
Store Inc. Total
-------- ------------ ---------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 22,263 $ 111,342 $ 133,605
Non cash items included
in net earnings:
Depreciation and
amortization 13,917 12,874 26,791
Changes in:
Accounts receivable (872,414) (158,334) (1,030,748)
Accounts receivable
related party (22,646) (13,080) (35,726)
Note receivable -
officer -- 17,612 17,612
Inventory (166,887) (112,370) (279,257)
Prepaid expenses 383 1,893 2,276
Accounts payable -
trade (62,838) 55,032 (7,806)
Revolving inventory
line of credit - net 1,272,649 234,267 1,506,916
Accrued liabilities 240,368 45,902 286,270
--------- --------- ----------
Total adjustments 402,532 83,796 486,328
--------- --------- ----------
Net cash provided
(used) by operating
activities 424,795 195,138 619,933
--------- --------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of fixed
assets (15,234) -- (15,234)
Security deposits -- (2,068) (2,068)
Purchase of marketable
securities -- (38,451) (38,451)
Sales of marketable
securities -- 106,937 106,937
--------- --------- ----------
Net cash provided (used)
by investing activities (15,234) 66,418 51,184
--------- --------- ----------
Sub total 409,561 261,556 671,117
--------- --------- ----------
The accompanying notes are an integral part of these statements.
F-11
<PAGE>
HILLSIDE BEDDING, INC., AND SUBSIDIARIES
COMBINING STATEMENTS OF CASH FLOWS
MICRO COMPUTER STORE, INC. AND
SUN COMPUTERS AND SOFTWARE, INC.
FOR THE YEAR ENDED
June 30, 1993
(Notes 1B and 1K)
Micro Sun Computer
Computer and Software Combined
Store, Inc. Inc. Total
----------- ------------- --------
Balance Forward $ 409,561 $ 261,556 $ 671,117
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contribution of capital 100,000 -- 100,000
Proceeds from bank loan -- 150,000 150,000
Advances of related parties (125,000) (107,701) (232,701)
Repayment to related
parties (514,998) (503,479) (1,018,477)
--------- --------- -----------
Net cash provided
(used) by financing
activities (539,998) (461,180) (1,001,178)
-------- --------- ----------
NET INCREASE (DECREASE)
IN CASH (130,437) (199,624) (330,061)
CASH AT BEGINNING OF PERIOD 135,541 409,097 544,638
-------- --------- ----------
CASH AT JUNE 30, 1993 $ 5,104 $209,473 $ 214,577
-------- -------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest Expense $ 68,038 $ 989 $ 69,027
-------- -------- ---------
Income Taxes $ 3,232 $ -- $ 3,232
-------- -------- ---------
The accompanying notes are an integral part of these statements.
F-12
<PAGE>
<TABLE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994 AND 1995
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stocks Additional Discount on Retained Total
----------------- ----------------- Paid-in Preferred Earnings Stockholders'
Shares Amount Shares Amount Capital Stock (Deficit) Equity
------ ------ ------ ------ ---------- ----------- --------- -------------
Balance at June 30, 1993 184,276 $ 18,427 31,000 $ 3,100 $ 5,200,210 $ -- $(4,293,218) $ 928,519
Sale of common stock for
cash 202,811 20,281 -- -- 1,760,229 -- -- 1,780,510
Shares issued as
compensation 50,000 5,000 -- -- 195,000 -- -- 200,000
Conversion of Series A
preferred stock on
June 10, 1994 2,922 292 (2,922) (292) -- -- -- --
June 23, 1994 transactions:
Stock issued for
acquisition 94,413 9,441 30,900 3,090 1,130,438 -- -- 1,142,969
Capital contribution -- -- -- -- 185,000 -- -- 185,000
Hillside net loss for
fiscal 1994 -- -- -- -- -- -- (4,069,413) (4,069,413)
Elimination of Hillside
deficit -- -- -- -- (8,362,631) -- 8,362,631 --
Paid-in capital and
retained earnings of
acquiring companies -- -- -- -- 280,000 -- 582,848 862,848
---------- ---------- --------- --------- ------- --------- ------- -------
Balance at June 30, 1994
(carried forward) 534,422 53,441 58,978 5,898 388,246 -- 582,848 1,030,433
------- ------ ------ ----- ------- ------- ---------
</TABLE>
F-13
<PAGE>
<TABLE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994 AND 1995
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stocks Additional Discount on Retained Total
----------------- ----------------- Paid-in Preferred Earnings Stockholders'
Shares Amount Shares Amount Capital Stock (Deficit) Equity
------ ------ ------ ------ ---------- ----------- --------- -------------
Balance at June 30, 1994
(brought forward) 534,422 $ 53,441 58,978 $ 5,898 $ 388,246 $ -- $ 582,848 $1,030,433
------- ---------- ------ -------- ---------- --------- --------- ----------
Stock dividend on
Preferred Series A -- -- 3,100 310 -- -- (310) --
Conversion of Preferred
Series A for common
stock 1,947 20 (1,947) (195) 175 -- -- --
Shares issued for the
cancellation of an
employment agreement 88,968 890 -- -- 178,826 -- -- 179,716
Shares issued for
conversion of Preferred
Series B 4,400,609 44,006 (18,196) (1,820) (42,186) -- -- --
Shares issued on
conversion of notes
payable, including
interest 181,335 1,813 -- -- 453,496 -- -- 455,309
Shares issued for
services 40,000 400 -- -- 23,600 -- -- 24,000
Shares of Preferred
stock for the acquisition
of American Computer
Systems, Inc.
Series D -- -- 200,000 1,000,000 -- (500,000) -- 500,000
Series E - to be issued
February 6, 1996 -- -- 200,000 1,000,000 -- -- -- 1,000,000
Series F - to be issued
October 6, 1995 -- -- 66,800 334,000 -- (167,000) -- 167,000
--------- -------- ------- ------- ---------- --------- ----------- ----------
Balance (carried forward) 5,247,281 100,570 508,735 2,338,193 1,002,157 (667,000) 582,538 3,356,458
--------- ------- ------- --------- --------- -------- ------- ---------
</TABLE>
F-14
<PAGE>
<TABLE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994 AND 1995
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stocks Additional Discount on Retained Total
----------------- ----------------- Paid-in Preferred Earnings Stockholders'
Shares Amount Shares Amount Capital Stock (Deficit) Equity
------ ------ ------ ------ ---------- ----------- --------- -------------
Balance (brought forward) 5,247,281 $100,570 508,735 $2,338,193 $ 1,002,157 $ (667,000) $ 582,538 $ 3,356,458
--------- -------- ------- ----------- ----------- ----------- ---------- -----------
Shares issued for
conversion of notes
payable 520,000 5,200 -- -- 155,875 -- -- 161,075
Shares of Preferred Series
H - issued for conversion
of notes payable -- -- 83,520 835 449,548 -- -- 450,383
Shares issued for the
acquisition of CONY
Computer Systems, Inc.
Common Stock 437,990 4,380 -- -- 443,570 -- -- 447,950
Preferred Series D -- -- 100,000 500,000 -- (250,000) -- 250,000
Preferred Series D -
to be issued
September 30, 1995 -- -- 100,000 500,000 -- (250,000) -- 250,000
Shares issued for
conversion of loans
payable 981,878 9,819 -- -- 598,946 -- -- 608,765
Shares of Preferred stock
for compensation per
employment agreement
Series G to be issued
in July 1995 -- -- 1 -- 86,470 -- -- 86,470
Shares issued for
conversion of Preferred
Series H 835,200 8,352 (83,520) (835) -- -- -- 7,517
Net loss for the year -- -- -- -- -- -- (2,347,655) (2,347,655)
--------- ------- ------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1995 8,022,349 $128,321 708,735 $3,338,193 $2,736,566 $(1,167,000) $(1,765,117) $ 3,270,963
========= ======== ======= ========== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-15
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 1 - General and Accounting Policies
Organization and Presentation of Financial Statements
-----------------------------------------------------
Hillside Bedding, Inc. was incorporated under the laws of the State of
Delaware on on July 17, 1992. Prior to February 1994, Hillside operated a chain
of retail bedding stores and two franchises under the "Hillside Bedding" trade
name. Each store was operated as a separate wholly owned subsidiary.
Hereinafter, Hillside Bedding, Inc. and its wholly owned bedding subsidiaries
are referred to as "Hillside". In 1994, due to recurring losses and substantial
negative working capital, Hillside closed its retail bedding stores.
On June 23, 1994, Hillside Bedding, Inc. acquired, in a stock for stock
transaction, two microcomputer distributors, Sun Computer and Software, Inc.
("SCSI") located in Suffolk County, NY and Micro Computer Store, Inc. ("MCS")
located in Albany, NY. For accounting purposes the acquisition of SCSI and MCS
has been treated as a consolidation and merger of these companies and an
acquisition by them of Hillside, because, among other factors, the assets,
revenues and earnings of MCS and SCSI significantly exceed those of Hillside and
the management of MCS and SCSI controlled the Company subsequent to the
acquisition. These acquisitions resulted in a change in reporting entity for the
Registrant. The legal name has remained Hillside Bedding, Inc. As the
acquisition constituted a change in reporting entity, the combined statements of
operations and cash flows of MCS and SCSI for each of the two years in the
period ended June 30, 1994 have been presently herein as those of the reporting
entity. These combined statements of operations and cash flows do not include
any of the Hillside Bedding, Inc. operations. The consolidated statement of
stockholders' equity for the year ended June 30, 1994 presents Hillside's
changes in stockholders' equity for fiscal 1994 and the accounting effects of
the change in reporting entity.
On February 6, 1995, Hillside Bedding, Inc. acquired all of the stock of
American Computer Systems, Inc. and its wholly owned subsidiary, Laptop
Solutions, Inc. ("ACS"), located in New York City. On March 31, 1995, Hillside
Bedding, Inc. acquired all the stock of CONY Computer Corp. ("CONY") located in
Norwalk, CT. The consolidated statements of operations and cash flows for the
year ended June 30, 1995 includes the accounts of ACS and CONY since their dates
of acquisition.
Hillside Bedding, Inc. and its wholly owned subsidiaries, MCS, SCSI, ACS
and CONY, hereinafter are referred to as the "Company".
Principal Business Activity
- ---------------------------
The Company operates in one industry segment and is engaged primarily in
the sale of computer hardware and software to businesses, professionals,
governmental units and educational institutions. Additionally, the Company sells
hardware and software to the consumer market in New York City, NY, Albany, NY,
East Northport, NY and Norwalk, CT. The Company also provides its customers with
a full spectrum of computer services and technical support; revenues derived
from such services are not significant.
F-16
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 1 - General and Accounting Policies (continued)
Summary of Significant Accounting Policies
------------------------------------------
Consolidation Policy
The accompanying consolidated financial statements include the accounts of
Hillside Bedding, Inc. and all its wholly owned active subsidiaries. All
significant intercompany transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out cost method. Inventories consist of microcomputer hardware, software
and related peripherals and accessories.
Property and Equipment
Property and equipment are carried at cost. When assets are sold or
retired, the cost and related accumulated depreciation are eliminated from the
accounts, and any resulting gain or loss is reflected in income for the period.
The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and replacements which substantially extend the lives of
the assets are capitalized.
Depreciation is computed on accelerated methods over useful lives ranging
from 5 to 10 years. Leasehold improvements are amortized over the shorter of the
useful life of the improvement or the life of the related lease.
Goodwill
Goodwill relating to the acquisition of Hillside has been charged off over
twelve months. Goodwill relating to the acquisitions of CONY and ACS is being
amortized over a period of fifteen years.
Revenue Recognition
The Company recognizes revenue at the time products are shipped to its
customers, or when sales are made on a "cash and carry" basis.
F-17
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 1 - General Accounting Policies (continues)
Income Taxes
The Company adopted, as of June 30, 1992, Statement of Financial Accounting
Standards No. 109 which utilizes a balance sheet approach for financial
accounting and reporting of income taxes, and requires that deferred tax assets
and liabilities be established at income tax rates expected to apply to taxable
income in periods in which the deferred tax liability or asset is expected to be
settled or realized.
Earnings Per Share
The primary loss per share for 1995 has been calculated based on the
weighted average number of common shares outstanding during the year. Common
stock equivalents (relative to convertible preferred stocks for Series, D, E, F,
and G) were not considered in the primary per share data because their effect
would be anti-dilutive. All the convertible preferred stocks and the contingent
issuances of common stock pursuant to business acquisition and employment
agreements were excluded from the computation of fully diluted per share data
because the effect of their inclusion also would be anti-dilutive (i.e., would
have the effect of reducing loss per share).
Had the conversions of debt and preferred stock in 1995 taken place at the
beginning of the year, the primary loss per share for 1995 would have been
$(.32).
The per share data for 1994 and 1993 has been calculated based on the
weighted average shares outstanding (389,573 shares for each year) and assuming
that the acquisition shares were outstanding for the full period. Fully diluted
earnings per share (8,236,972 shares for each year) are based on the assumption
that all common stock equivalents were converted as of the beginning of the
year.
Reclassification
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
Combining Financial Statements and Principles of Combination
The combining statements of operations and cash flows for 1994 and 1993
presents the combined results of operations and cash flows of MCS and those of
SCSI for each of the two years in the period ended June 30, 1994. These
financial statements give effect to the consolidation and merger of these
companies (but not Hillside) as if their consolidation and merger was effected
as of July 1, 1992.
F-18
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 2 - Acquisitions
Sun 2000
--------
On June 23, 1994, Hillside, pursuant to the terms of a stock acquisition
agreement with Sun 2000 (a corporation organized under the laws of the British
Virgin Islands) exchanged 94,413 shares (944,131 per-reverse split shares) of
its common stock and 30,900 (309,000 pre-reverse split shares) of its Series B
Convertible voting preferred stock for 100% of the common stock of both SCSI and
MCS. Each of the preferred shares is convertible to 241.86 shares of common
stock and has the equivalent current voting rights for the first two years
subsequent to issuance; thereafter, the conversion ratio is one-to-one with each
preferred share receiving one vote.
The transaction has been accounted for as a consolidation and merger of MCS
and SCSI and an acquisition by these companies of Hillside, because, among other
factors, the assets, revenues and earnings of MCS and SCSI significantly
exceeded those of Hillside and the management of MCS and SCSI control the
Company subsequent to the acquisition. Further, (for the first two fiscal years
subsequent to the acquisition) the voting stockholders of Hillside will have
approximately 5.5% of the voting power of the Company, approximately 13% of the
Company's voting power is controlled by the combination of the former
stockholders of SCSI and the former small stockholder group of MCS. Subsequent
to the end of the two year period, the voting rights of the Series B preferred
stockholders change significantly.
At the date of acquisition, Hillside had liabilities in excess of its
assets in the amount of approximately $900,000. This amount is in effect, Micro
Computer Store, Inc. and Sun computer and Software, Inc.'s cost of the
acquisition. Accordingly, this amount has been included on the consolidated
balance sheet as goodwill as of June 30, 1994. In addition, transaction expenses
amounting to $310,000 were also included in goodwill, resulting in total
goodwill at June 30, 1994 of $1,210,000. The additional cost of $310,000 were
comprised of $110,000 for professional fees and $200,000 for the termination of
an employment agreement with the former CEO of Hillside Bedding, Inc. Of the
professional fees, approximately $50,000 was paid for by the stockholders of Sun
2000 on behalf of the Company.
Preacquisition contingency adjustments and other previously contingent
transaction expenses amounting to approximately $836,000 were recognized during
the year ended June 30, 1995. These were comprised of: $368,000 to terminate
employment agreements with former officers of Hillside, $287,000 of estimated
losses relating to various legal proceedings associated with the former
operations, $125,000 for a finders fee, and $56,000 of various other net items.
These amounts, totalling approximately $2,046,000, have been recorded as
goodwill, which is viewed as organizational costs and have been amortized
entirely during the year ended June 30, 1995.
F-19
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 2 - Acquisitions (continued)
American Computer Systems Corp.
-------------------------------
As of February 6, 1995 (the "Closing"), Hillside Bedding, Inc., pursuant to
a Stock Purchase Agreement, acquired 100% of the issued and outstanding capital
stock of American Computer Systems Corp., a New York Corporation, and its wholly
owned subsidiary, Laptop and Office solutions, Inc. (hereinafter American
Computer Systems Corp. and Laptop and Office Solutions, Inc. are collectively
referred to as "ACS") from the sole shareholder of ACS. ACS is a computer
systems integration company located in New York City. As consideration for the
shares of ACS stock, the Company agreed to issue shares of Series D Preferred
Stock with an aggregate par valve of $500,000 and shares of Series F Preferred
Stock with an aggregate par value of $334,000. In addition, shares of the
Company's Preferred Stock will be issued as follows:
1) Shares of Series D Preferred Stock with an aggregate par value of
$500,000 on the three month anniversary of the Closing;
2) Shares of Series E Preferred Stock with an aggregate par value of
$1,000,000 on the one year anniversary of the Closing:
The aforementioned preferred shares to be issued have been recorded in the
1995 financial statements.
The preferred shares have been valued based on the specified dollar amount
equivalents of common stock of the Company into which they are convertible (see
Note 5), resulting in a discount from par value on their issuance.
The Company also agreed to issue 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 minimum annual revenues of $12,600,000 plus 10%
annual increases and minimum annual income before taxes of $315,000 plus 10%
annual increases. The performances-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 ten-day trading period preceding December 31 of each year.
The acquisition has been accounted for under the purchase method. The cost
of the ACS acquisition amounted to approximately $1,690,000, including the fair
value of preferred stocks to be issued therefor. The investment in ACS exceeded
the net assets acquired by approximately $1,496,000 which had been recorded as
goodwill and will be amortized over a period of fifteen years.
CONY Computer Systems, Inc.
- ---------------------------
On March 31, 1995 (the "Closing"), the Company, pursuant to the terms of a
stock purchase agreement, acquired 100% of the issued and outstanding capital
stock of CONY Computer Systems, Inc. (a Connecticut corporation located in
Norwalk, CT). As consideration for the shares of CONY stock, the Company agreed
to issue 437,990 shares of its common stock as well as shares of Series D
Preferred Stock with an aggregate par value of $500,000. In addition, shares of
Series D Preferred Stock with an aggregate par value of $500,000 will be issued
on the six month anniversary of the closing.
F-20
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 2 - Acquisitions (continued)
The aforementioned preferred shares to be issued have been recorded in the
1995 financial statements.
The preferred shares have been valued based on the specified dollar amount
equivalents of common stock of the Company into which it is convertible (ss Note
5), resulting in a discount from par value of their issuance.
The Company also agreed to issue shares of the Company's common stock up to
a maximum value of $1,000,000 over a three year period subject to CONY meeting
certain performance criteria of minimum annual revenues of $12,000,000 plus 10%
annual increases and minimum annual income before taxes of $200,000 plus 10%
annual increases. The 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 ten-day trading period preceding December 31 of each year.
The acquisition has been accounted for under the purchase method. The cost
of the CONY acquisition amounted to approximately $948,000, including the air
value of preferred stocks to be issued therefor. The investment in CONY exceeded
the net assets acquired by approximately $665,000 which has been recorded as
goodwill and will be amortized over a period of fifteen years.
Pro Forma Information
- ---------------------
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if Hillside, ACS and CONY had been
acquired as of the beginning of the periods presented, after including the
impact of certain adjustments, such as , elimination of intercompany
transactions, amortization of intangibles and related income tax effects. The
summary does not include the former bedding operations of Hillside nor does it
include adjustments relating to officer/employee compensation.
1995 1994
(Unaudited) (Unaudited)
----------- -----------
Net sales $53,038,000 $64,145,000
Net loss $ (635,000) $(2,486,000)
Net loss per share - Primary $ (.15) $ (3.00)
The pro forma results are not necessarily indicative of what actually would
have occured if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
F-21
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 3 - Nonmonetary Transaction
In February 1994, Hillside entered into an agreement (expiring in February
1999) with the Intrac Group (a wholesale advertising agency/broker) under which
it exchanged inventory for various credits including advertising and other
business items. These credits have been recorded based on the cost of the
Hillside inventory (management's estimate of the credits' fair market value) of
$548,000 less the cash paid by Intrac of $100,000. These credits can be used by
the Company to purchase various business items including advertising in various
media. The Company must first reimburse Intrac for Intrac's wholesale cost of
the advertising purchased; the Company can then utilize these credits to "pay"
for the difference between Intrac's wholesale cost and the retail value that the
Company would otherwise be required to pay. Management initially determined that
it will either utilize these credits (requiring an estimated $2,250,000 in cash
outlays) or sell them over the next several years. Accordingly, they have been
classified as other non-current assets in the accompanying June 30,1 994
consolidated balance sheet.
In June 1995, the Company tried to utilize a portion of the media
advertising credits and discovered that the cash required was in excess of the
cost of acquiring the product in the market place. The Company now believes that
it would not be economically feasible to devote the effort necessary to utilize
or sell these credits and therefore concludes that the credits are worthless.
Accordingly, they were written off as a direct charge to operations in 1995.
Note 4 - Deferred Sales Tax Obligation
In April 1994, Hillside negotiated a settlement with the New York State
Department of Taxation and Finance regarding certain sales tax obligations
whereby penalties were abated leaving a balance due of approximately $843,000.
The agreement calls for an initial payment of $400,000 (which was paid on April
26, 1994) and subsequent monthly payments of $500 per month commencing November
15, 1994 (of which $3,000 was paid in fiscal year 1995). Interest at 12% per
annum accrues on balances outstanding. Any additional principal payments can be
made at the Company's discretion. The aforementioned agreement provides for the
parties to negotiate a formal deferred payment agreement on any balances
outstanding as of April 25, 1995. The Company is awaiting a proposal from the
taxing authorities.
The balance outstanding at June 30, 1995 amounted to $502,052, including
accrued interest of $61,840.
Note 5 - Equity Securities
Reverse Stock Split
-------------------
On September 9, 1994, the Company split Common, Series A Preferred and
Series B Preferred shares outstanding, issuing one share in exchange for each
ten shares outstanding (a "reverse" split). By action of the board of directors,
the Company did not alter the amounts allocated between the stock accounts and
additional paid-in capital. Per share information has been adjusted
retroactively to reflect the reverse split in the accompanying consolidated
financial statements and related notes.
F-22
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 5 - Equity Securities (continued)
Capital Stock
-------------
The Company's capital stock consists of the following:
Amount
(including
Shares Shares to shares to
Issued be Issued be issued
Shares and for for
Authorized Outstanding Acquisition acquisition)
---------- ----------- ----------- -----------
June 30, 1995
- -------------
Preferred Stocks:
Series A cumulative
convertible 29,233 29,231 -- $ 2,923
Series B convertible 30,900 12,704 -- 1,270
Series D convertible 400,000 300,000 100,000 2,000,000
Series E convertible 200,000 200,000 -- 1,000,000
Series F convertible 66,800 -- 66,800 334,000
Series G convertible 1 -- 1 --
Series H convertible 83,520 -- -- --
Series I convertible 390,000 -- -- --
---------- ----------- ----------
Total preferred 541,935 166,801 $3,338,193
Common stock 10,000,000 8,022,349 -- $ 128,321
June 30, 1994
preferred Stocks:
Series A cumulative
convertible 1,000,000 28,078 -- $ 2,808
Series B convertible 309,000 30,900 -- 3,090
---------- ----------- ----------
Total preferred 58,978 -- $ 5,898
Common stock 10,000,000 534,422 -.- $ 53,441
The Company plans to seek approval of its shareholders to increase the
number of authorized shares of common and preferred stock. The par value of the
common stock is $.01.
Series A Cumulative Convertable Preferred Stock
On February 2, 1993, Hillside's board of director adopted a resolution
providing for the issuance of a Series A 10% cumulative preferred stock, par
value $.01.
F-23
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 5 - Equity Securities (continued)
Outlined below is a summary of the more significant rights associated with
these shares:
- Dividend rights - The shares have a stated annual cumulative dividend
rate of 10% each, beginning one year after issuance. The dividend for
the first year is payable in shares of Series A preferred stock on the
basis of one share for each ten shares held. These dividends are prior
to any declaration or payment of any dividend on common shares or any
stock ranking junior to these shares. In July 1994, the Company issued
a stock dividend of 3, 100 shares of Series A preferred stock in
satisfaction of the first year dividend requirement. Due to
immateriality, the retroactive effect of this stock dividend is not
reflected in the accompanying June 30, 1994 consolidated financial
statements. At June 30, 1995, the dividends in arrears aggregated
$2,923.
- Voting rights - Each share has the right to one vote.
- Dissolution rights - On liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $100.00 per share plus
any dividend arrearage.
- Conversion - Commencing February 11, 1994, each stockholder may
convert each share into one share of common stock.
- Redemption - Commencing February 11, 1994, the corporation may, but
shall not be obligated to redeem shares at a rate of $100.00 per share
provided among other criteria that the trading price of the Company's
common stock equals or exceeds $120.00.
Series B Convertible Preferred Stock
------------------------------------
On June 23, 1994, the Company's board of directors adopted a resolution
providing for the issuance of approximately 30,900 shares of Series B
convertible preferred stock, par value $.01, in connection with an acquisition.
Outlined below is a summary of the more significant rights associated with these
shares.
- Dividend rights - The shares have a stated annual noncumulative
dividend rate of $1.00 each, beginning on the second year after
issuance, declaration of which is prior to any declaration or payment
of any dividend on common shares or any stock ranking junior to these
shares.
- Voting rights - Until the second anniversary of the date of issuance,
each preferred stockholder has the right to 241.86 votes for each
share, thereafter each share has the right to one vote.
F-24
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 5 - Equity Securities (continued)
- Dissolution rights- Until the second anniversary of the date of
issuance, each stockholder is entitled to receive an amount equal to
$2,418.60 per share prior to any distributions to common stockholders
or other junior stockholders, thereafter each stockholder would be
entitled to $10.00 per share.
- Conversion- At the holder's option, each stockholder may convert each
share into 241.86 shares of common stock until the second anniversary
date, thereafter the shares are convertible on a one-to-one basis. See
Note 13 for partial conversion to common stock subsequent to year end.
These shares rank junior to the Company's Series A 10% cumulative
convertible preferred stock.
Series D Convertible Preferred Stock
------------------------------------
On February 6, 1995, the Company's board of directors adopted a resolution
providing for the issuance of 200,000 shares of Series D preferred stock, par
value $5.00. On March 31, 1995, the Company's board adopted another resolution
providing for an additional issuance of 200,000 shares of Series D preferred
stock, par value $5.00. Outlined below is a summary of the more significant
rights associated with these shares.
- Dividend rights - The shares shall not be entitled to any dividends
except as authorized at the sole discretion of the board of directors
of the Company.
- Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
- Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5.00 per share plus
any accrued dividends.
- Conversion - Commencing February 6, 1997 through August 6, 1997, these
shares may be exchangeable into shares of common stock of the Company
with an aggregate market value of $1,000,000. The shares have been
converted to common stock subsequent to year end.
Series E Convertible Preferred Stock
-----------------------------------
On February 6, 1995, the Company's board of directors adopted a resolution
providing for the issuance of 200,000 shares of a Series E preferred stock, par
value $5.00. Outlined below is a summary of the more significant rights
associated with these shares:
- Dividend rights - The shareholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
- Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
F-25
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 5 - Equity Securities (continued)
- Dissolution rights - On liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5.00 per share plus
any accrued dividends.
- Conversion - Commencing February 6, 1997 through August 6, 1997, these
shares may be exchangeable into shares of common stock of the Company
with an aggregate market value of $1,000,000.
Series F Convertible Preferred Stock
------------------------------------
On February 6, 1995, the Company's board of directors adopted a resolution
providing for the issuance of 66,800 shares of Series F preferred stock, par
value $5.00. Outlined below is a summary of the more significant rights
associated with these shares:
- Dividend rights - The shareholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
- Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
- Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5.00 per share plus
any accrued dividends.
- Conversion -Commencing July1, 1995 through July 31, 1995, these shares
may be exchangeable into shares of common stock of the Company with an
aggregate market value of $167,000. The shares have been converted to
common stock subsequent to year end.
Series G Convertible Preferred Stock
------------------------------------
On February 6, 1995, the Company's board of directors adopted a resolution
providing for the issuance of 1 share of Series G preferred stock, par value
$.01. Outlined below is a summary of the more significant rights associated with
this share:
- Dividend rights - The shareholder shall not be entitled to any
dividends except as authorized at the sole discretion of the the board
of directors of the Company.
- Voting rights - The holders of this share have one vote per share at
all meetings of the shareholders.
- Dissolution rights - On the liquidation or dissolution of the Company,
the preferred shareholder would be entitled to $5.00 plus any accrued
dividends.
F-26
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 5 - Equity Securities (continued)
- Conversion - Commencing July 1, 1995 through July 31, 1995, this share
may be exchangeable into shares of the Company's common stock with an
aggregate market value of $25,000 for every $1,000,000 in annual
revenues in excess of $7,500,000 for the six month period July 1, 1994
through December 31, 1994. The share has been converted to common
stock subsequent to year end.
Series H Convertible Preferred Stock
------------------------------------
On February 6, 1995, Hillside's board of directors adopted a resolution
providing for the issuance of 83,520 shares of a Series H preferred stock, par
value $.01. Outlined below is a summary of the more significant rights
associated with these shares:
- Dividend rights - The shareholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
- Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
- Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $.625 per share plus
any accrued dividends.
- Conversion - The holder of these shares may convert each share into
ten shares of the common stock of the Company. This series was
converted to common stock during fiscal 1995.
Series I Convertible Preferred Stock
------------------------------------
On April 28, 1995, the Company's board of directors adopted a resolution
providing for the issuance of 390,000 shares of a Series I preferred stock par
value $5.1282. Outlined below is a summary of the more significant rights
associated with these shares:
- Dividend rights - The shareholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
- Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
- Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5.00 per share plus
any accrued dividends.
- Conversion - Commencing July 1, 1996 through December 31, 1996, each
stockholder may convert each share into the equivalent number of
shares of common stock of the Company with an aggregate market value
of $2,000,000.
See Note 13 for issuance of Series I Preferred shares subsequent to year end.
F-27
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 5 - Equity Securities (continued)
Warrants
--------
At June 30, 1995, the Company had outstanding warrants for the purchase of
620,000 shares of the Company's common stock, at a price of $84.00 per share.
The warrants are carried at no amounts in the accompanying financial statements
as the value is de minimis and they expire in February 1998.
Note 6 - Operating Leases
The Company conducts it operation under five noncancellable operating
leases expiring at various dates through 2003. Future minimum rent payments are
as follows:
For the Year Ending
June 30, MCS SCSI CONY ACS Total
- ------------------- ------- -------- ------- -------- --------
1996 $ 96,600 $ 34,338 $ 41,000 $ 38,800 $ 210,738
1997 96,600 35,366 20,250 40,800 193,016
1998 96,600 5,923 -- 34,000 136,523
1999 108,192 -- -- -- 108,192
2000 108,192 -- -- -- 108,192
Thereafter 324,576 -- -- -- 324,576
------- ------- ------- ------- ---------
$830,760 $75,627 $ 61,250 $113,600 $1,081,237
======== ======= ======== ======== ==========
MCS leases its premises from former stockholders of MCS and SCSI under a
triple net lease arrangement at fair market values. The SCSI lease provides for
escalations based on increases in the consumer price index and pro rata real
estate tax increases.
Total rent expense for June 30, 1995 and 1994 amount to $199,000 and
$58,000, respectively.
Note 7 - Employment Agreements
MCS and SCSI
------------
Pursuant to the stock acquisition agreement of SCSI and MCS, the Company
entered into two similar employment agreements with the former
officers/stockholders of MCS and SCSI, hereby the former vice president of MCS
and president of SCSI who are now the Company's treasurer and CEO and chairman,
respectively, are to receive:
A salary of $150,000 with annual increases based on increases in the
consumer price index.
A stock bonus equal to 5% of the issued and outstanding shares of the
Company's common stock on June 30, 1995, payable to the employee or his
designee. Half of this bonus is contingent on the combined revenues of MCS
and SCSI, being at least $24,200,000 for the fiscal year ending June 30,
1995 or the fiscal year ending June 30, 1996. The remaining half will be
payable when the revenue contingency noted above is satisfied and, in
addition to revenues, the combined pre-tax net earnings are at least
$825,000 during either of the fiscal years ending June 30, 1995 and 1996.
No bonus was earned under the agreement as of June 30, 1995.
F-28
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 7 - Employment Agreements (continued)
The agreements also provide for various fringe benefits including
discretionary cash or stock bonuses, pension and profit sharing participations,
etc. and expire on June 30, 1997.
In addition, the above individuals, as part of the transfer of their
ownership in MCS and SCSI to Sun 2000, have rights to receive additional
compensation based on the performance of MCS and SCSI.
ACS
- ---
Pursuant to the stock acquisition agreement of ACS, the Company entered
into an employment agreement with the former stockholder who is now the
president of the Company, who shall receive:
Salary of $135,000 with 10% annual increases.
Mandatory stock bonus - 1995 - equal to $25,000 of Series G Convertible
Preferred Stock for every $1,000,000 in annual revenues in excess of
$7,500,000 for the six month period July 1, 1994 through December 31, 1994.
Annual revenues for the six month period ended December 31, 1994 amounted
to approximately $10,959,000. As a result, a stock bonus of Series G
Preferred stock is due to the former stockholder of ACS with an aggregate
market value of approximately $86,000. This share was issued in July 1995
and has been recorded as of June 30, 1995. Additionally, the employee shall
receive $25,000 worth of the Company's common stock for every $1,000,000 in
annual revenues for the year ended December 31, 1995 in excess of the
actual revenues reported on ACS's December 31, 1994 financial statements.
Also, the employee shall receive $25,000 worth of the Company's common
stock for every $100,000 in pretax income in excess of $400,000 as reported
on ACS's financial statements for the year ended December 31, 1995. No
additional common stock was earned under the agreement at June 30, 1995.
Mandatory stock bonus- 1996 - the employee shall receive $25,000 worth of
the Company's common stock for every $1,000,000 in annual revenues for the
year ended December 31, 1996 in excess of the higher of actual revenues on
the December 31, 1995 or 1994 financial statements. Also, the employee
shall receive $25,000 worth of the Company's common stock for every
$100,000 in pretax income for the year ended December 31, 1996 in excess of
the higher of the income reported on the 1995 or 1994 financial statements.
Mandatory stock bonus - 1997 - the employee shall receive $25,000 worth of
the Company's common stock for every $1,000,000 in annual revenues for the
year ended December 31, 1997 in excess of the higher of actual revenues on
the December 31, 1996, 1995 or 1994 financial statements. Also, the
employee shall receive $25,000 worth of the Company's common stock for
every $100,000 in pretax income for the year ended December 31, 1997 in
excess of the higher of the income reported on the December 31, 1996, 1995
or 1994 financial statements.
F-29
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 7 - Employment Agreements (continued)
CONY
----
Pursuant to the stock acquisition agreement of CONY, the Company entered
into three employment agreements with the former stockholders, two of whom are
to receive salaries of $120,000 and the other $24,000, with annual increases
based upon increases of the national consumer price index.
All three employees will be eligible to share in a bonus pool of additional
shares of the Company's common stock. The percentages of such pool that the
employees shall receive will be determined by the board of directors of the
Company. The mandatory bonuses are outlined as follows:
Mandatory stock bonus - 1995 - the stock bonus pool shall receive $25,000
worth of the Company's common stock for every $1,000,000 of annual revenues
as reported on CONY's financial statements for the year ended December 31,
1995 in excess of the higher of the actual revenues reported on the year
ended December 31, 1994 financial statements or $15,000,000. Also, the
bonus pool shall receive $25,000 worth of the Company's common stock for
every $100,000 in pretax income as reported on the 1995 financial
statements in excess of the higher of the December 31, 1994 financial
statements or $300,000. No stock bonus was earned under the agreement at
June 30, 1995.
Mandatory stock bonus - 1996 - the stock bonus pool shall receive $25,000
worth of the Company's common stock for every $1,000,000 of annual revenues
as reported on CONY's financial statement for the year ended December 31,
1996 in excess of the higher of the actual revenues reported on the 1995 or
1994 financial statements or $15,000,000. Also, the bonus pool shall
receive $25,000 worth of the Company's common stock for every $100,000 in
pretax income as reported on the 1996 financial statements in excess of the
higher of the 1995 or 1994 financial statements or $300,000.
Mandatory stock bonus - 1997 - the stock bonus pool shall receive $25,000
worth of the Company's common stock for every $1,000,000 of annual revenues
as reported on CONY's financial statement for the year ended December 31,
1997 in excess of the higher of the actual revenues reported on the 1996,
1995 or 1994 financial statements or $15,000,000. Also, the bonus pool will
receive $25,000 worth of the Company's common stock for every $100,000
pretax income as reported on the 1997 financial statements in excess of the
higher of the 1996, 1995 or 1994 financial statements or $300,000.
F-30
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 8 - Revolving Inventory Line of Credit
MCS, SCSI, CONY and ACS each have agreements with Deutsche Financial
Services, (formerly ITT Financial Services) whereby certain inventory
acquisitions are financed. Under the terms of the agreements, vendor invoices
are submitted by the vendors directly to Deutsche. Qualifying vendor invoices
which have been financed by Deutsche are payable by the Company to Deutsche and
are classified into two categories, one whose terms of payment are net 30 days
and bear interest at prime plus 1-1/2% per annum and the other whose terms are
net 10 days plus 25 basis points and bear interest at prime plus 2-1/2% per
annum. The maximum amounts that can be outstanding on these facilities are
$1,000,000 for both ACS and MCS, $750,000 for SCSI and $500,000 for CONY. All
the companies have pledged their tangible and intangible assets as collateral.
In addition, the former owners of all of the locations have signed personal
guarantees on their particular credit lines.
As of June 30, 1995 and 1994, the following amounts were outstanding under
the terms of these agreements:
1995 1994
---------- --------
MCS $ 405,948 $463,347
SCSI 279,033 201,673
CONY 45,558 --
ACS 937,832 --
---------- --------
$1,668,371 $665,020
========== ========
Note 9 - Litigation
Settlement of Class Action and Commitment to Issue Securities
-------------------------------------------------------------
On March 4, 1994, Hillside agreed to the settlement of a class action suit
commenced on October 14, 1993 which was approved by the Court on June 6, 1994.
The action relates to the filing of a registration statement of February 11,
1993, pursuant to which , the Company offered 310,000 units of securities, and
was based on allegations that the registration statement was misleading and
contained material misstatements and omissions with respect to management, plans
for expansion, advertising, sales and revenues and its use of proceeds of the
offering, financial position and misleading statements in sales by underwriters.
The Class includes an individual both personally and as representative of those
persons who purchased or otherwise acquired the securities of the Company during
the period February 12, 1993 through October 8, 1993 and excludes defendants,
their immediate families and affiliates of the individual and corporate
defendants.
F-31
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 9 - Litigation (continued)
In full settlement of all claims, the Company agreed to issue a total of
350,000 unrestricted shares of Series C Preferred stock and 350,000 warrants to
the claimants. Each share of the Series C Preferred stock shall be convertible
into the Company's Common Stock at the rate of one share of common stock for
each ten shares of Series C Preferred. Each warrant, which is exercisable for a
period of five years from its date of issuance, entitles the holder to purchase
one share of common stock at an exercise price of $3.00 per share (after giving
effect to the one for ten reverse stock split). The issuance of these shares is
pending a proposal to increase the Company's authorized capital. These warrants
have a nominal, if any, value as of June 30, 1995 and 1994. Further, the type,
nature and other terms of these shares were unspecified in the agreement. There
is no certainty as to if or when the Series C Preferred stock and warrant
holders will choose to convert these securities into common stock. Therefore
there is a possibility of further dilution to the existing shareholders that
will not exceed 1/2%.
In addition, Hillside agreed to assign to the Class any and all claims or
courses of action that Hillside has or may have in law or equity against other
defendants in the class action. Any net recovery (after deduction of fees and
expenses) resulting from these claims shall be shared 65% to the Class and 35%
to Hillside.
Based on the foregoing, the Company, as of June 30, 1995, is unable to
determine the cost it will incur as a result of this settlement. In the opinion
of management, based on the advice of counsel, the ultimate outcome of this
settlement will not have a material impact on the Company's consolidated
financial statements.
Other Matters
- -------------
Hillside is a defendant in a legal action alleging breach of contract and
unjust enrichment. The plaintiff is a law firm that has provided Hillside
certain legal services. Each of the two causes of action seek damages of
approximately $85,000. During September 1995, the parties agreed to settle this
action by a Company payment to the plaintiffs of a total of $67,000 over an 18
month period in equal monthly installments of $3,750 each.
An action was commenced by Steinback Braff, Inc. for breach of contract
involving and inventory dispute whereby the plaintiff demands $61,080 plus
interest. A motion filed by the Company to dismiss the action is currently
pending.
A landlord, Anderson Street Realty Corp., who held the lease for one of the
bedding stores which was abandoned, commenced an action against Hillside in the
amount of approximately $155,000 plus interest. The action is in the early phase
of discovery.
F-32
<PAGE>
HILLSIDE BEDDING, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 9 - Litigation (continued)
Prudential Insurance, Inc. has filed a claim against Hillside seeking
$23,000 for a premium claim. Previous arrangements for a settlement payment were
dishonored by the bank. As a result, Prudential is still seeking payment.
An action was commenced by Bestar Ltd. for breach of contract involving an
inventory dispute. As of June 30, 1995, there was a judgment entered against
Hillside amounting to approximately $32,000. An attempt to vacate such judgment
was made without success subsequently to June 30, 1995
Management has estimated that the probable loss at June 30, 1995, relating
to the aforementioned cases will total approximately $287,000, which amount has
been recorded in the 1995 financial statements.
During 1990, a competitor of hillside commenced an action against it and
one of its advertising agents. The complaint seeks $1,000,000 in damages for
alleged disclosure of certain trade secrets, and $10,000,000 in punitive damages
and $10,000,000 based upon allegations that Hillside interfered with and
impaired the competitor's business relations. Management believes that there is
no merit to this action. There have been no motions made with respect to this
case since March 14, 1990.
A third party lawsuit was commenced against Hillside by Mid Hudson
Clarklift as a result of a claim filed against them by a former employee of
Hillside who sustained an injury while operating a forklift. The lawsuit
consists of four causes of action each for $5,000,000 and one cause of action by
the former employee's wife for $2,000,000. The lawsuit is in the early phase of
discovery.
In July 1993, the SEC notified the Company that it was conducting a private
investigation regarding certain transactions which occurred while the Company
operated as a retail bedding business. Counsel has advised that the SEC has not
expanded its inquiry beyond these matters. Although the SEC has not formally
closed the investigation, counsel believes that the investigation will not have
any material adverse effect on the Company's financial condition. The Company's
present management, which had nothing to do with the subject matter of the
inquiry, has cooperated fully with the SEC in this inquiry.
F-33
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 10 - Income Taxes
The Company's income tax provision consists of the following:
1995 1994 1993
-------- -------- --------
Current tax provision
Federal $64,342 $11,613 $69,071
State 31,600 4,938 18,458
------- ------- -------
95,942 16,551 87,529
Deferred tax benefit relating
to temporary differences (8,928) (5,300) (7,607)
-------- ------- -------
Income tax provision $87,014 $11,251 $79,922
======= ======= =======
A reconciliation of the above effective tax rate to the federal statutory
rate is as follows:
1995 1994 1993
------------------- ----------------- ----------------
Tax at statutory
rate (34.0)% $(768,400) 34.0% $ -- 34.0% $ 72,599
State income tax,
net of federal
tax benefit (7.0) (158,200) 7.0 -- 7.0 14,947
Effect of non-
deductibility
of:
Charge off of
goodwill
relating to
Hillside
acquisition 37.1 838,450 -- -- -- --
Media advertising
credits written
off 8.1 183,685 -- -- -- --
Prior year (over)
underaccruals -- -- -- -- 2.8 6,057
Tax loss
limitations (.4) (8,521) -- 16,571 -- --
Effect of
graduated rates -- -- -- -- (2.8) (6,074)
-------- -------- ----- ------- ------ ------
3.8% $ 87,014 41,0% $16,571 41.0% $87,529
======= ======== ===== ======= ===== =======
F-34
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 10 - Income Taxes (continued)
The Company's deferred tax asset (liability) at June 30, 1995 and 1994
amounted to approximately $15,213 and $6,285, respectively, and resulted from
the following temporary differences:
1995 1994
--------- --------
Allowance for doubtful accounts $15,213 $ --
Reduction in value of marketable securities -- (6,285)
--------- --------
$15,213 $ (6,285)
========= ========
Note 11 - Related Party Transactions
Receivable from Officers
------------------------
During September 1990, SCSI advanced $202,675 to its former sole
stockholder, who now serves as the Company's CEO and chairman, under the terms
of a ten year unsecured note receivable requiring 120 equal monthly repayments
of $2,673, including interest at 10%. As of June 30, 1995 and 1994, the balance
due the Company amounted to $110,909 and $129,273, respectively. During August
1995, the entire balance was repaid to the Company
During the normal course of business, SCSI made advances to its former sole
shareholder. These loans bear interest at 8%, are unsecured and are due on
demand. The balance at June 30, 1995 and 1994 amounted to $30,524 and $82,822
respectively.
Interest income on these loans for the years ended June 30, 1995, 1994 and
1993, amounted to approximately $12,022, $20,900 and $18,800, respectively.
Notes Payable - Related Parties
- -------------------------------
To assist in financing working capital requirements, MCS had borrowed
$300,000 in fiscal year 1994 from three individuals, two of whom are officers
and directors of the Company and all of whom are employees. The loans were
evidenced by promissory notes and bear interest at 10% per annum. These notes
were unsecured and were due on demand. During August 1994, these notes were
paid, including interest of $3,000.
To assist in financing working capital requirements, MCS had borrowed
$380,000 from its vice president who also was a member of the board of directors
during fiscal year 1994. In addition, SCSI borrowed $174,755 from family members
of its former sole stockholder, who presently is CEO and chairman of the Board.
The loans were evidenced by unsecured promissory notes and bore interest at 10%
per annum. On December 31, 1994, each note holder signed an agreement to either
convert their loans to common shares of the Company or receive payment in order
to satisfy the obligations. During May 1995, the family members of the Company
with an aggregate market value, discounted for restrictions placed on the
shares, of approximately $609,000.
F-35
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 11 - Related Party Transactions (continued)
ACS, prior to acquisition by Hillside, entered into an agreement with its
sole stockholder, now President of the Company, to borrow up to $750,000 at 10%
interest and due December 1997. Hillside Bedding, Inc. has guaranteed payment of
this loan. The balance due at June 30, 1995 amounted to $396,246. Interest for
the year ended June 30, 1995 amounted to $11,992.
Leases See Note 6.
------
Sales
-----
During the normal course of business, each entity sells to other entities
owned by relatives of former stockholders of MCS and SCSI. These former
stockholders now serve as the Company's CFO and CEO and Chairman, as well as
board members. Sales to these related parties amounted to approximately
$701,000, $375,000 and $285,000 for the years ended June 30, 1995, 1994 and
1993, respectively. As of June 30, 1995 and 1994, the Company is due from this
related party the amount of $19,053 and $47,269, respectively.
Purchases
---------
During the normal course of business, each entity buys from other entities
owned by relatives of former stockholders of MCS and SCSI. Purchases from these
related parties amounted to approximately $44,400, $455,000 and $355,000 for the
years ended June 30, 1995, 1994 and 1993, respectively. As of June 30, 1995 and
1994, the Company was obligated to this related party in the amount of $882 and
$19,115, respectively.
Note 12 - Other Financial Information
Accounts Receivable, Net
------------------------
Accounts receivable, net at June 30, 1995 and 1994 consists of the following:
1995 1994
---------- -----------
Accounts receivable $3,220,988 $1,472,521
Allowance for doubtful accounts and
reserves for returns and discounts (91,300) (26,300)
----------- -----------
$3,129,688 $1,446,221
=========== ===========
F-36
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 12 - Other Financial Information (continued)
Other Current Assets
--------------------
Other current assets consist of the following at June 30, 1995 and 1994:
1995 1994
--------- --------
Receivable from suppliers $143,168 --
Marketable securities 33 $11,002
Prepaid expenses 112,216 11,625
Prepaid income taxes 54,919 --
Restricted cash -- 31,944
--------- --------
$310,336 $54,571
======== =======
Goodwill, Net
-------------
Goodwill, net at June 30, 1995 and 1994 consists of the following:
1995 1994
---------- ----------
Goodwill relating to Hillside
acquisition $ -- $1,210,000
Goodwill relating to computer
businesses acquired 2,160,751 --
Accumulated amortization (52,655) --
---------- ----------
$2,108,096 $1,210,000
========== ==========
Property and Equipment
----------------------
Property and equipment are carried at cost and consisted of the
following at June 30, 1995 and 1994:
1995 1994
--------- --------
Leasehold improvements $337,860 $313,073
Furniture and fixtures 92,146 74,626
Office equipment 85,680 40,582
Automobiles 56,116 50,264
--------- --------
571,802 478,545
Less: accumulated depreciation
and amortization 231,309 186,498
-------- --------
$340,493 $292,047
======== ========
F-37
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 12 - Other Financial Information (continued)
Other Assets
------------
Other assets consist of the following at June 30, 1995 and 1994:
1995 1994
--------- ---------
Bid deposits $74,360 $ --
Investment 12,000 12,000
Deposits and other assets 10,133 7,175
--------- ---------
$96,493 $19,175
========= =========
Other Current Liabilities
-------------------------
Other current liabilities consist of the following at June 30, 1995
and 1994:
1995 1994
--------- ---------
Bank overdraft $163,134 $ --
Loans payable 10,000 --
Income taxes payable -- 55,129
Other 33,620 67,267
--------- ----------
$206,754 $122,396
========= ==========
Convertible Notes Payable
-------------------------
During December 1993 and February 1994, the Company borrowed amounts
ranging from $9,000 to $90,000 from several individuals. The obligations, which
amounted to $415,500 are evidenced by 90 day promissory notes that bear interest
at 12% per annum and are convertible into shares of common stock of the Company.
As of June 30, 1994, these notes were past due. In October 1994, in order to
fulfill the obligations under the terms of the notes, the Company issued a total
of 181,335 shares of its common stock. A portion of these shares, amounting to
14,818, were issued to cover the interest portion of the obligations.
F-38
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30,1995, 1994 AND 1993
Note 12 - Other Financial Information (continued)
Notes Payable
-------------
During June 1994 and November 1994, the Company borrowed approximately
$752,000 from six foreign stockholders. The obligations are convertible
into Preferred Series H Convertible and common shares of the Company.
During June 1994, certain stockholders of Sun 2000 advanced, through funds
held by an attorney in escrow, $135,000 to Hillside to pay specified
operating expenses and expenses related to the acquisitions of Sun 2000.
Concurrent with the execution of the stock acquisition agreement, these
advances were deemed capital contributions and, accordingly, have been
classified as additional paid-in capital in the accompanying June 30,1994
consolidated balance sheet and statement of stockholders' equity. During
March and May 1995, the company issued a total of 1,355,200 common shares
of the Company with an aggregate market value, discounted for restrictions
placed on the shares, of approximately $752,000 with respect to the
aforementioned amounts borrowed and advanced.
Supplemental Disclosure of Noncash Investing and Financing Activities
---------------------------------------------------------------------
The following noncash investing and financing activities occurred in 1995:
Fair values of common and preferred shares issued and to be issued for
the acquisitions of ACS and CONY, aggregating $2,614,950, exceeded the
net assets acquired ($476,727) by $2,138,223 which was added to
goodwill.
Issuances of common shares, with an aggregate fair value of
$1,816,074, for conversion of notes and loans payable, including
interest.
Addition to goodwill relating to acquisition of Hillside, aggregate
$679,154 consisting of $179,716 fair value of common stock issued for
cancellation of employment agreement, and $499,438 of unpaid costs at
June 30, 1995.
Concentration of Credit Risk
----------------------------
The Company grants thirty-day payment terms to qualifying businesses.
The Company's operations consist of the sale (as a distributor) and
services of microcomputer hardware, software and related peripherals and
accessories to commercial, governmental and educational enterprises through
its four locations, Suffolk County, NY, Albany, NY, Norwalk, CT and New
York City. Accounts receivable at June 30, 1995 were concentrated in the
Albany, NY area (39%) and Long Island area (34%). The June 30, 1994 credit
receivables concentrated in the Albany area were 79.5% and those
concentrated in the Long Island area were approximately 20.5%. Retail sales
are made on a "cash and carry basis".
F-39
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 12 - Other Financial Information (continued)
Settlement with Pre-Acqusition CEO
----------------------------------
Pursuant to arrangements with the pre-acquisition CEO, he was given,
in 1994, shares of a NASDAQ small cap market stock valued at $200,000 with
downside protection against a reduction in value below $150,000. The value
of the small cap market stock was included in goodwill at June 30, 1994.
During fiscal 1995, the Company made a payment to the former CEO of
$100,000 together with 88,968 shares of its common stock valued at
$180,700. Upon sale (in 1995) of the small cap market stock by the former
CEO, the gross proceeds amounted to $77,525, resulting in an additional
cash payment to him of $72,475. The additional amounts expended in 1995
(including the fair value of the common stock) was also added to goodwill,
which was entirely charged to operations during the year ended June 30,
1995. The total settlement attributable to the former CEO aggregated
approximately $553,000.
Transactions with Major Customers and Suppliers
-----------------------------------------------
During the year ended June 30, 1995, one customer accounted for
approximately 18% of the Company's net sales.
Both MCS and SCSI are what is termed in the industry "aggregators" for
Computerland Corporation through its merchandising division Datago. As
aggregators, MCS and SCSI pay for merchandise on a cost plus basis. This is
in contrast to a franchisee who would pay a lesser amount on the initial
purchase but who would be required to pay, in addition to franchise fees,
royalties on all gross sales
During October 1995, MCS signed an agreement which alters its
relationship with Computerland Corporation from that of an aggregator to a
franchisee. During the year ended June 30, 1995, MCS and SCSI purchased
inventory from Datago amounting to approximately $8,497,000.
Management Agreement
--------------------
During 1994, ACS and CONY entered into verbal agreements with the
Company, whereby the Company provided consulting services for product
purchasing, customer referrals and general management advisory services.
These agreements were terminated upon the Company's acquisition of ACS and
CONY. Total management fees earned by the Company amounted to $375,000 for
the year ended June 30, 1995.
Pension Plan
------------
The Company has a 401(k) deferred compensation plan. The benefits are
based on the employees' compensation once eligibility requirements are
attained. The Company has the option of matching up to 100% of the deferral
once employees are fully vested. No matching contributions were made during
the years ended June 30, 1995 and 1994.
F-40
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Note 12- Other Financial Information (continued)
Fourth Quarter Adjustments
--------------------------
The Company's quarterly reports on Form 10-QSB for the 1995 fiscal
year are being revised primarily with respect to the charge-off of goodwill
relating to the Hillside acquisition.
The $448,011 media advertising credits referred to in Note 3 were
written off during the fourth quarter of fiscal 1995.
Note 13 - Subsequent Events
During August 1995, the Company's board of directors adopted
resolutions providing for the issuance of 800,000 shares of Series J
Preferred Stock, par value $5.00 and 400,000 shares of Series K Preferred
Stock, par value $5.00. Each series of shares is not entitled to any
dividends, except as authorized at the sole discretion of the board of
directors of the Company. The holders of these shares have one vote per
share at all meetings of the shareholders. On the dissolution of the
Company, each Series J and K Preferred shareholder is entitled to $5,00 per
share plus any accrued dividends.
The Series J and K Preferred shares may be exchangeable into shares of
common stock of the Company with an aggregate market value of $4,000,000
and $2,000,000, respectively, during the period July 1, 1997 through
December 31, 1997 for Series J and July 1, 1998 through December 31, 1998
for Series K.
During August 1995, 200,000 shares of Series D Preferred Stock, 66,800
shares of Series F Preferred Stock and 1 share of Series G Preferred Stock
were converted into 344,119 shares of common stock of the Company.
During August 1995, 5,312.9 shares of Series B Preferred Stock were
converted into 84,978 shares of common stock and the right to receive
800,000 shares of Series J Preferred Stock and 400,000 shares of Series K
Preferred Stock with an aggregate par value of $2,000,000 and $4,000,000,
respectively.
During October 1995, 1,653.8 shares of series B Preferred Stock were
converted into 400,000 shares of common stock which were exchanged into
390,000 shares of Series I Preferred Stock with an aggregate par value of
$2,000,000.
The number of common shares ultimately to be issued on conversion of
the Series I, J and K Preferred Stock will, of course, depend on the future
market price of the common stock at that time. Series I, J and K Preferred
Stocks are considered common stock equivalents for purposes of computing
primary earnings per share and, therefore, could result in a material
dilution of any future income per share.
F-41
<PAGE>
The interim consolidated financial statements and related financial
statement schedules of the Company at March 31, 1996 and for the nine month
periods ended March 31, 1996 and 1995 included in this Prospectus and
Registration Statement were not audited, reviewed or compiled by Yohalem Gillman
& Company or Bianculli, Pascale & Co., and those firms do not express an opinion
or any other form of assurance on them.
F-42
<PAGE>
ATEC GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
March 31, 1996
--------------
ASSETS
Current Assets
Cash $1,159,430
Accounts receivable, net 3,551,284
Inventories 1,884,553
Current portion of note receivable - officer --
Due from officers and related parties --
Deferred taxes 15,213
Other current assets 581,807
----------
Total current assets 7,192,287
----------
Property and equipment, net 384,124
Goodwill, net 2,000,045
Note receivable - officer --
Other assets 91,982
----------
$9,668,438
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving inventory line of credit $2,411,192
Accounts payable 706,009
Accrued expenses 923,807
Deferred sales tax obligation 502,052
Due to related parties --
Other current liabilities 1,318
----------
Total current liabilities 4,544,378
Notes payable - officers 397,244
----------
Total liabilities 4,941,622
Stockholders' equity
Preferred stock 11,003,496
Common stock 141,138
Additional paid-in capital 4,085,300
Discount on preferred stock (9,046,100)
Retained earnings (deficit) (1,457,018)
----------
Total stockholders' equity 4,726,816
----------
$9,668,438
==========
F-43
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31,
1996 1995
------------ ------------
Net sales $45,196,268 $17,498,148
Cost of sales 41,585,007 15,064,451
----------- -----------
Gross profit 3,611,261 2,433,697
----------- -----------
Operating expenses
Selling and administrative 2,965,989 1,671,567
Amortization of goodwill - computer
businesses 108,051 --
----------- -----------
Total operating expenses 3,074,040 1,671,567
----------- -----------
Income from operations 537,221 762,130
----------- -----------
Other income (expense)
Charge-off of goodwill relating to
acquisition of Hillside -- (1,255,840)
Miscellaneous income 12,199 52,941
Interest income 6,745 17,208
Interest expense (42,666) (47,509)
----------- -----------
Total other (expense) income (23,722) (1,233,200)
----------- -----------
Income (loss) before provision for
income taxes 513,499 (471,070)
Provision for income taxes 205,400 314,862
----------- -----------
Net income (loss) $ 308,099 $ 785,932
=========== ===========
Net earnings (loss) per share:
Primary $0.03 ($0.25)
=========== ===========
Fully Diluted $0.02 ($0.25)
=========== ===========
Weighted average number of share -
primary 8,868,008 3,184,240
========== ===========
Weighted average number of share -
fully diluted $12,513,922 $ 3,184,240
=========== ===========
F-44
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
1996 1995
------------- -------------
Net cash provided by (used in) operating
activities ($ 353,012) ($ 861,851)
Cash flows from investing activities:
Purchase of property and equipment ( 99,460) ( 76,466)
Additional acquisition costs -- ( 280,821)
------------ -----------
Net cash (used in) provided by investing
activities ( 99,460) ( 357,287)
----------- -----------
Cash flows from financing activities:
Notes payable officers 998 --
Sale of common stock (private placement) 1,074,751 --
Shares issued to noteholders -- 415,500
Notes receivable - officer 94,691 --
Long term borrowings -- 278,064
Short term borrowings -- 414,544
----------- -----------
Net cash (used in) provided by financing
activities 1,170,440 1,108,108
----------- -----------
Net increase in cash 717,968 (111,030)
Cash and cash equivalents - Beginning of
period 441,462 254,403
----------- -----------
Cash and cash equivalents - End of period $ 1,159,430 $ 143,373
=========== ===========
F-45
<PAGE>
<TABLE>
ATEC GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1996
<CAPTION>
Common Value Series Value Additional Discount on Retained Total
Shares Common Preferred Preferred Paid-In Preferred Earnings Stockholders'
Issued Stock Issued Stock Capital Stock (Deficit) Equity
------ ----- ------ ----- ------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 8,022,349 $128,321 708,736 $ 3,338,193 $2,736,566 $1,167,000 (1,765,117) $3,270,963
Shares issued for
conversion of Preferred
Series F and G 344,119 3,441 (66,801) (334,000) 213,659 (116,900) -- --
Shares issued for
services 20,004 200 -- -- 7,798 -- -- 7,998
Shares issued for
conversion of
Preferred Series B 1,119,897 11,199 1,193,033 5,999,303 (10,497) 6,000,000 -- 5
Shares issued for
conversion of
Preferred Series I (400,000) (4,000) 390,000 2,000,000 -- 1,996,000 -- --
Shares issued for
satisfaction of debts 116,281 116 -- -- 64,884 -- -- 65,000
Shares issued in a
private placement 1,860,941 1,861 -- -- 1,072,890 -- -- 1,074,751
Net income for the Nine
Months Ended March 31,
1996 -- -- -- -- -- -- 308,099 308,099
Balance at March 31,
1996 11,083,591 141,138 2,224,968 $11,003,496 $4,085,300 $9,046,100 ($1,457,018) $4,726,816
========== ======= ========= =========== ========== ========== =========== ==========
</TABLE>
F-46
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED MARCH 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
Basis of Presentation
The accompanying interim unaudited consolidated financial statements
include the accounts of ATEC Group, Inc. and its wholly owned subsidiaries Sun
Computer and Software, Inc. (SCSI), Micro Computer Store, Inc. (MCS), American
Computer Systems Corp., Inc. (ACS), and Cony Computer Systems, Inc. (CONY) which
are hereafter referred to as (the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position and the results of operations
and cash flows for the interim periods presented. The results of operations for
these interim periods presented. The results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's report on Form 10-K dated October 1995, for the year ended June 30,
1995.
2. Equity Securities
On September 9, 1994, the Company's Board of Directors authorized a reverse
stock split pursuant to which each ten (10) outstanding shares of common stock
and preferred stock were automatically converted into one (1) share of common
stock and/or preferred stock. Average number of shares outstanding and per share
amounts have been retroactively restated to reflect this reverse stock split.
F-47
<PAGE>
Note 2 - Equity Securities (continued)
Capital Stock
The Company's capital stock consists of the following:
Amount
(including
Shares Shares to shares to
issued be issued be issued
Shares and for for
Authorized Outstanding Acquisition Acquisition
---------- ----------- ----------- -----------
December 31, 1995
- -----------------
Preferred Stock:
Series A cumulative
convertible 29,233 29,231 -- $ 2,923
Series B convertible 30,900 5,736 -- 573
Series D convertible 400,000 300,000 100,000 2,000,000
Series E convertible 200,000 200,000 -- 1,000,000
Series H convertible 83,520 -- -- --
Series I convertible 390,000 390,000 -- 2,000,000
Series J convertible 800,000 800,000 -- 2,000,000
Series K convertible 400,000 400,000 -- 4,000,000
Total preferred 2,124,967 100,000 11,003,496
Common Stock 70,000,000 11,083,591 -- $ 141,136
In March 1996, the Company sold 1,860,941 shares of common
stock for net proceeds of $1,072,890
F-48
<PAGE>
3. Computation of Earnings Per Share
Earnings per share are based on the weighted average number of common
shares outstanding. Fully diluted earnings per share are based on the assumption
that all common stock equivalent were converted as of the end of each period.
4. Goodwill
Goodwill relating to the 1994 acquisition of the retail bedding operations is
being charged off over twelve months. Goodwill relating to the acquisition of
CONY and ACS is being amortized over a period of fifteen years.
5. Legal Proceedings
On March 4, 1994, the Company settled a class action suit commenced in the
United States District court, Southern District of New York against it on
October 14, 1993. The suit alleged numerous claims against the Company including
allegations of material misstatements and/or omissions form the Company's
initial public offering prospectus dated February 1993 as well as improprieties
concerning the filing of certain registration statements under Form S-8. The
settlement of such action was approved by the District Court on June 6, 1994. In
full settlement of all claims made against the Company in the class action suit,
Hillside agreed to issue a total of 350,000 shares of Series C Preferred stock
and five year warrants to purchase on aggregate of 350,000 additional shares of
common stock at $3.00 per share to the class action claimants. Hillside also
assigned all of its rights to the class action claimants regarding claims
against other defendants in the suit. Each ten shares of Series C Preferred
Stock will be convertible into one share of the Company's common stock for a
period of five years from its date of issuance. The Company intends to issue
such shares and warrants upon approval by the Company's shareholders of a
proposal to increase the number of authorized shares of the Company at the
Company's Annual Meeting scheduled for December 14, 1995.
In May 1994, Brown Raysman & Millstein ("Brown") commenced an action
against the Company with respect to outstanding fees for general corporate legal
work previously performed by Brown. The summons and complaint were filed in the
New York Supreme Court, New York County. The complaint set forth two causes of
action, one for breach of contact and one for unjust enrichment. During
September 1995, the parties agreed to settle this action by a Company's payment
to Brown of a total of $67,500 over an 18 month period in equal monthly
installments of $3,750 each.
F-49
<PAGE>
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.
A breach of contract action, Anderson Street Realty Corp. d/b/a Anderson
Street Realty Company v. RHMB New Rochelle Leasing Corp. d/b/a a/k/a Hillside
Bedding and/or Atlantic to Pacific Bedding Corp. d/b/a Hillside Bedding, Index
No. 00360/93 is currently pending in the Supreme Court, Westchester County
relating to a store lease dispute. The claim is in an amount 9in excess of
$100,000 representing the amount of payments remaining under the lease. the
action is in the early stages of discovery.
An action entitled Steinbrock, Braff, Inc. T/A Kat-Nap Products v. Hillside
Bedding, Inc., Index No. 9980-94 was commenced in the Supreme Court, Kings
County for breach of contract involving an inventory dispute whereby plaintiff
demands $61,079.93. A motion filed by the Company to dismiss the action is
currently pending.
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.
Prudential Insurance, Inc. has filed a claim against Hillside seeking
$23,00 for a premium claim. Previous arrangements for a settlement payment were
dishonored by the bank. As a result, Prudential is still seeking payment.
An action was commenced by Bestar Ltd. for breach of contract involving an
inventory dispute. As of June 30, 1995, there was a judgment entered against
Hillside amounting to approximately $32,000. An attempt to vacate such judgment
was made without success.
F-50
<PAGE>
Management has estimated that the probable loss relating to the
aforementioned cases will total approximately $287,000, an amount which has been
previously recorded.
6. At the annual meeting of shareholders' held on December 14, 1995, the
Company's name was changed from Hillside Bedding, Inc. to Atec Group, Inc.
7. On December 22, 1995, the Company entered into a letter of intent to
acquire the computer operations of Technical Services Group, Inc. On April 4,
1996, the Company entered to a letter of intent to acquire 100% of the issued
and outstanding capital stock of Innovative Business Micros, Inc.
("Innovative"). Innovative's principal shareholders are Rajnish Rametra, Ashok
Rametra and Surinder Rametra. Messrs. Ashok and Surinder Rametra are officers,
directors and principal shareholders of the Company. Rajnish is the brother of
Surinder and Ashok.
F-51
<PAGE>
George S. Goldberg
Certified Public Accountant
To the Stockholders
Innovative Business Micros, Inc.
I have audited the accompanying balance sheet of Innovative Business
Micros, Inc. as of September 30, 1995 and 1994 and the related statements of
income, retained earnings, and cash flows for the 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 financials 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 statement referred to above present fairly, in
all material respects, the financial position of Innovative Business Micros,
Inc. as of September 30, 1995 and 1994 and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
George S. Goldberg
Certified Public Accountant
Roslyn Heights, New York
December 12, 1995
F-52
<PAGE>
Innovative Business Micros, Inc.
Balance Sheet
September 30, 1995 and 1994
1995 1994
------------ ------------
ASSETS
Current Assets
Cash $ 477,633 $ 9,612
Accounts receivable, net 2,787,683 2,571,996
Inventories 288,415 213,530
Other assets 9,646 2,459
---------- ----------
Total current assets 3,563,377 2,797,597
---------- ----------
Property and equipment, net 94,131 60,130
Other assets 17,445 15,480
---------- ---------
$3,674,953 $2,873,207
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $2,097,341 $1,341,094
Accrued expenses 384,294 347,141
---------- ----------
Total current liabilities 2,481,635 1,688,235
Notes payable - shareholders 522,045 610,000
---------- ----------
Total liabilities 3,003,680 2,298,235
Stockholders' equity
Common stock of no par value 60,000 60,000
Additional paid-in capital 108,100 108,100
Retained earnings 503,173 406,872
--------- ---------
Total stockholders' equity 671,273 574,972
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $3,674,953 $2,873,207
========== ==========
See accompanying notes
F-53
<PAGE>
Innovative Business Micros, Inc.
Statement of Operations
For the year Ended September 30, 1995 and 1994
1995 1994
----------- -----------
Net sales $18,194,799 $18,386,621
Cost of sales 16,379,241 16,414,593
----------- -----------
Gross profit 1,815,558 1,972,028
----------- -----------
Operating expenses
General & administrative 1,565,192 1,050,891
Selling 105,541 824,752
----------- -----------
Total operating expense 1,670,733 1,875,643
----------- -----------
Income from operations 144,825 96,385
----------- -----------
Other income
Interest income 8,236 16,708
Other income 7,772 31,969
----------- -----------
Total other (expense) income 16,008 48,677
----------- -----------
Income before taxes 160,833 145,062
Provision for income taxes 64,532 61,250
----------- -----------
Net income $ 96,301 $ 83,812
=========== ===========
See accompanying notes
F-54
<PAGE>
Innovative Business Micro, Inc.
Statements of Cash Flows
For the Years Ended September 30, 1995 and 1994
1995 1994
----------- -----------
Cash Flows From Operating Activities
Net income from operations $ 96,301 $ 83,812
Noncash item included in net income
Depreciation and amortization 17,349 11,922
Changes in:
Accounts receivable 216,364 (132,255)
Merchandise inventory 74,885 (46,351)
Prepaid expenses 6,511 (4,380)
Deposits 1,965 2,000
Franchise fee -- 5,000
Accounts payable (633,651) 586,009
Customer credit balances (33,875) 43,383
Accrued liabilities (125,873) 47,431
--------- ---------
Total adjustment (511,023) 488,915
--------- ---------
Net Cash Provided By
(Used By) Operating
Activities 607,324 (405,103)
Cash Flows From Investing Activities
Capital expenditures 51,349 3,800
--------- ---------
Net Cash Provided By
(Used By) Investing
Activities 51,349 3,800
Cash Flows From Financing Activities
Borrowings (87,955) 365,000
--------- ---------
Net Cash Provided By
(Used By) Financing
Activities (87,955) 365,000
--------- ---------
Net Increase (Decrease) In Cash 468,020 (43,903)
Cash at Beginning of Year 9,612 53,515
--------- ---------
Cash at End of Year $ 477,632 $ 9,612
========= =========
See accompanying notes
F-55
<PAGE>
Innovative Business Micros, Inc.
Notes to Financial Statements
September 30, 1995
Note 1: General and Accounting Policies
-------------------------------
Innovative Business Micros, Inc. was incorporated under the laws of the State of
New York on February 1, 1986 and began its operations on June 1, 1987.
Principal Business Activity:
The company operates in one industry segment and is engaged primarily in the
sale of computer hardware and software to businesses, and professional
health care facilities. The Company also provides its customers with a full
spectrum of computer services and technical support; revenues derived from such
services are insignificant.
Inventories:
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventories consist of microcomputer hardware, software and
related peripherals and accessories.
Property and Equipment:
Property and equipment are carried at cost. When assets are sold or
retired the cost and related accumulation of depreciation are eliminated from
the accounts, and any gain or loss is reflected in income for the period. the
cost of maintenance and repairs is charged to expense as incurred; significant
renewals and replacements which substantially extend the lives of the assets are
capitalized.
Depreciation is computed on accelerated methods over useful lives ranging
from 5 to 7 years. Leasehold improvements are amortized over the shorter of the
useful life of the improvements or the life of the related lease.
Revenue Recognition:
The Company recognizes revenue at the time products are shipped to its
customers, or when sales are made on a "cash and carry" basis.
Note 2: Other Financial Information
---------------------------
Accounts Receivables:
Accounts receivable, net at September 30, 1995 consists of the following:
Trade receivables $2,802,183
Less allowance for doubtful accounts 14,500
----------
Net receivables $2,787,683
==========
F-56
<PAGE>
Property and Equipment:
Property and equipment are carried at cost and consist of the following at
September 30, 1995:
Automotive equipment $103,586
Furniture and fixture 36,857
Leasehold improvements 31,334
Machinery and equipment 17,076
--------
188,853
Less accumulated depreciation
and amortization 94,722
--------
Total $ 94,131
========
Line of Credit:
To accommodate the Company's financial needs for inventory financing, the
Company has in place credit lines with Deutsche Financial Services and IBM
Corporation ($1,500,000 and $250,000 respectively). IBM Corporation has
temporarily increased the credit line to $500,000. At September 30, 1995, the
indebtedness was as follows:
Deutsche Financial Services $1,184,716
IBM Corporation 107,546
----------
Total lines of credit $1,292,262
==========
Related Party Transactions:
Sales: During the normal course of business, the Company sells to other
entities owned by relatives of former shareholders of Micro Computer Store, Inc.
(MCS) and Sun Computers and Software, Inc. (SCSI). MCS and SCSI were merged into
Hillside Bedding, Inc. a publicly held corporation. Sales to these related
parties for the two years ended September 30, 1995 were $3,080 and $6,816
respectively. As of September 30, 1995, the Company is due from SCSI the amount
of $4,154.
Purchaser: During the normal course of business, the Company buys from
other entities owned by relatives of former shareholders of MCS and SCSI.
Purchases from these related parties amounted to $104,444 and $363,772
respectively for the two years ended September 30, 1995. As of September 30,
1995 and 1994, the Company was indebted to MCS and SCSI in the amount of $10,776
and $1,466, respectively.
F-57
<PAGE>
George S. Goldberg
Certified Public Accountant
To the Board of Directors and Stockholders
Innovative Business Micros, Inc.
Hauppauge, New York
I have audited the accompanying balance sheets of Innovative Business Micros,
Inc. as of September 30, 1994 and 1993 and the related statements of income,
retained earnings, and cash flows for the 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, 1994 and 1993 and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ George S. Goldberg
George S. Goldberg
Certified Public Accountant
Roslyn Heights, New York
January 12, 1995
F-58
<PAGE>
Innovative Business Micros, Inc.
Balance Sheet
September 30, 1994 and 1993
1994 1993
========== ==========
ASSETS
Current Assets
Cash $ 9,612 $ 53,515
Accounts receivable, net 2,571,996 2,704,251
Inventories 213,530 259,881
Other assets 2,459 6,839
---------- ----------
Total currrent assets 2,797,597 3,024,486
---------- ----------
Property and equipment, net 60,130 68,253
Other assets 15,480 8,480
---------- ----------
TOTAL ASSETS $2,873,207 $3,101,219
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $1,341,094 $1,970,486
Accrued expenses 347,141 394,573
---------- ----------
Total current liabilities 1,688,235 2,365,059
Notes payable - shareholders 610,000 245,000
---------- ----------
Total liabilities 2,298,235 2,610,059
Stockholders' equity
Common stock of no par value 60,000 60,000
Additional paid-in capital 108,100 108,100
Retained earnings 406,872 323,060
---------- ----------
Total stockholders' equity 574,972 491,160
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $2,873,207 $3,101,219
========== ==========
See accompanying notes
F-59
<PAGE>
Innovative Business Micros, Inc.
Statement of Operations
For the Year Ended September 30, 1994 and 1993
1994 1993
----------- -----------
Net sales $18,386,621 $10,590,098
Cost of sales 16,414,593 9,044,985
----------- -----------
Gross profit 1,972,028 1,545,113
----------- -----------
Operating expenses
General & administrative 1,050,891 849,809
Selling 824,752 576,478
----------- -----------
Total operating expenses 1,875,643 1,426,287
----------- -----------
Income from operations 96,385 118,826
----------- -----------
Other income
Interest income 16,708 1,834
Other income 31,969 1,612
----------- -----------
Total other (expense) income 48,677 3,446
----------- -----------
Income before taxes 145,062 122,272
Provision for income taxes 61,250 40,325
----------- -----------
Net income $ 83,812 $ 81,947
=========== ===========
See accompanying notes
F-60
<PAGE>
Innovative Business Micros, Inc.
Statement of Cash Flows
For the Year Ended September 30, 1994 and 1993
1994 1993
----------- -----------
Cash Flows From Operating Activities
Net income from operations $ 83,812 $ 81,947
Noncash items included in net income
Depreciation and amortization 11,922 36,048
Changes in:
Accounts receivable (132,255) 2,149,180
Merchandise inventory (46,351) 139,550
Prepaid expenses (4,380) 3,878
Deposits 2,000 6,040
Franchise fee 5,000 --
Accounts payable 586,009 (1,789,118)
Customer credit balances 43,383 (31,291)
Accrued liabilities 47,431 (299,307)
----------- -----------
Total adjustment 488,915 142,884
----------- -----------
Net Cash Provided By (Used By)
Operating Activities (405,103) (60,937)
Cash Flows From Investing Activities
Capital expenditures 3,800 40,044
----------- -----------
Net Cash Provided By (Used By)
Investing Activities 3,800 40,044
Cash Flows From Financing Activities
Borrowings 365,000 29,600
----------- -----------
Net Cash Provided By (Used By)
Financing Activities 365,000 29,600
----------- -----------
Net Increase (Decrease) In Cash (43,903) (71,381)
Cash at Beginning of Year 53,515 124,896
----------- -----------
Cash at End of Year $ 9,612 $ 53,515
=========== ===========
See accompanying notes
F-61
<PAGE>
Innovative Business Micros, Inc.
Notes to Financial Statements
September 30, 1994 and 1993
Note 1: General and Accounting Policies
Innovative Business Micros, Inc. was incorporated under the laws of the State of
New York on February 1, 1986 and began its operations on June 1, 1987.
Principal Business Activity:
The Company operates in one industry segment and is engaged primarily in the
sale of computer hardware and software to businesses and professional health
care facilities. The Company also provides its customers with a full spectrum of
computer services and technical support; revenues derived from such services are
insignificant.
Inventories:
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventories consist of microcomputer hardware, software and
related peripherals and accessories.
Property and Equipment:
Property and equipment are carried at cost. When assets are sold or returned,
the cost and related accumulation of depreciation are eliminated from the
accounts, and any gain or loss is reflected in income for the period. The cost
of maintenance and repairs is changed to expense as incurred; significant
renewals and replacements which substantially extend the lives of the assets are
capitalized.
Depreciation is computed on accelerated methods over useful lives ranging from 5
to 7 years. Leasehold improvements are amortized over the shorter of the useful
life of the improvements or the life of the related lease.
Revenue Recognition:
The Company recognizes revenue at the time products are shipped to its
customers, or when sales are made on a "cash and carry" basis.
F-62
<PAGE>
Note 2: Other Financial Information
Accounts Receivable:
The Company's trade accounts receivable at September 30, are detailed as
follows:
1994 1993
---- ----
Current $1,133,903 $1,817,106
Over 30 days 935,411 648,624
Over 60 days 277,499 187,838
Over 90 days 62,563 21,719
Over 120 days 162,620 24,749
---------- ----------
Totals $2,571,996 $2,700,036
========== ==========
Property and Equipment:
Property and equipment are carried at cost and consists of the following at
September 30,
1994 1993
---- ----
Automotive equipment $ 69,395 $ -.-
Furniture and fixture 39,974 25,569
Leasehold improvements 108,134 108,134
-------- --------
217,503 133,703
======== ========
Less: accumulated depreciation
and amortization 157,373 65,451
-------- --------
Total $ 60,130 $ 68,253
======== ========
F-63
<PAGE>
Line of Credit:
To accommodate the Company's financial needs for inventory financing, the
Company has in place credit lines with ITT Commercial Finance and IBM
Corporation ($1,500,000 and $250,000 respectively).
Commitments:
The Company occupies its offices and warehouse facilities at 90 Adams Avenue,
Hauppauge, New York under a non-cancelable operating lease for a term of five
years and fifteen days expiring February 15, 1998.
The lease commitment is as follows:
Fiscal year ended September 30, 1995 $ 36,917
September 30, 1996 38,656
September 30, 1997 40,580
September 30, 1998 13,745
---------
$ 129,798
=========
Related Party Transactions:
During the normal course of business, the Company sells to and buys from other
entities owned by relatives of former shareholders of Micro Computer Store, Inc.
and Sun Computers and Software, Inc. Micro Computer Store, Inc. (MCS) and Sun
Computers and Software, Inc. (SCSI) were merged into Hillside Bedding, Inc., a
publicly held corporation. Sales to these related parties for the year ended
September 30, 1993 were $11,449 and $45,681, respectively. Purchases from same
were $29,804 and $395,160, respectively. As of September 30, 1993 the Company
was due from SCSI the amount of $1,952, and was indebted to MCS and SCSI in the
amount of $47,842 and $125,308, respectively.
F-64
<PAGE>
The Pro Forma Combined Financial Statements (including the Pro Forma
Adjustments) of ATEC Group, Inc. and Innovative Business Micros, Inc. As at
March 31, 1996 and June 30, 1995 and 1994 and for the nine month period and the
years then ended included in this Prospectus and Registration Statement were not
examined, reviewed or compiled by Yohalem Gillman & Company or Bianculli,
Pascale & Co., and those firms do not express an opinion or any other form of
assurance on them.
F-65
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEETS (Unaudited)
March 31, 1996
<CAPTION>
Proforma Proforma
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash $ 1,159,430 $ 335,757 $ 1,495,187
Accounts receivable, net 3,551,284 4,325,978 (29,844) 7,847,418
Inventories 1,884,553 166,408 2,050,961
Deferred taxes 15,213 -- 15,213
Other current assets 581,807 5,632 587,439
----------- ---------- -----------
Total current assets 7,192,287 4,833,775 11,996,218
----------- ---------- -----------
Property and equipment, net 384,124 85,760 469,884
Goodwill, net 2,000,045 -- 2,000,045
Other assets 91,982 22,445 114,427
----------- ---------- -----------
$ 9,668,438 $4,941,980 $14,580,574
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving inventory line of credit $ 2,411,192 $ -- $ 2,411,192
Accounts payable 706,009 3,343,119 29,844 4,019,284
Accrued expenses 923,807 130,009 1,053,816
Deferred sales tax obligation 502,052 -- 502,052
Other current liabilities 1,318 -- 1,318
----------- ---------- -----------
Total current liabilities 4,544,378 3,473,128 7,987,662
Notes payable - officers and shareholders 397,244 500,000 897,244
----------- ---------- -----------
Total liabilities 4,941,622 3,973,128 8,884,906
Stockholders' equity
Preferred stocks 11,003,496 -- 11,003,496
Common Stock 141,138 60,000 (55,100) 146,038
Additional paid-in capital 4,085,300 108,100 55,100 4,248,500
Discount on preferred stock (9,046,100) -- (9,046,100)
Retained earnings (deficit) (1,457,018) 800,752 (656,266)
----------- ---------- -----------
Total stockholders' equity 4,726,816 968,852 5,695,668
----------- ---------- ----------
$ 9,668,438 $4,941,980 $14,580,574
=========== ========== ===========
</TABLE>
F-66
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PROFORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 1996
<CAPTION>
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales $ 45,196,268 $ 17,677,340 230,999 62,642,609
Cost of sales 41,585,007 16,229,026 (230,999) 57,583,034
------------ ------------ ------------
Gross profit 3,611,261 1,448,314 5,059,575
------------ ------------ ------------
Operating expenses
Selling and administrative 2,965,989 1,112,155 4,078,144
Amortization of goodwill -
computer businesses 108,051 -.- 108,051
------------ ------------ ------------
Total operating expenses 3,074,040 1,112,155 4,186,195
------------ ------------ ------------
Income (Loss) from operations 537,221 336,159 873,380
------------ ------------ ------------
Other income (expense)
Miscellaneous income 12,199 8,490 20,689
Interest income 6,745 20,235 26,980
Interest expense (42,666) -.- (42,666)
------------ ------------ ------------
Total other (expense) income (23,722) 28,725 5,003
------------ ------------ ------------
Income (loss) before provision for
income taxes 513,499 364,884 878,383
Provision for income taxes 205,400 134,034 339,434
------------ ------------ ------------
Net income (loss) $ 308,099 $ 230,850 $ 538,949
============ ============ ============
Net earnings (loss) per share:
Primary $ 0.03 N/A $ 0.04
============ ============ ============
Fully Diluted $ 0.02 N/A $ 0.03
============ ============ ============
Weighted average number of
share - primary 8,868,008 N/A 13,768,008
============ ============ ============
Weighted average number of
share - fully diluted 12,513,922 N/A 17,413,922
============ ============ ============
</TABLE>
F-67
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PROFORMA COMBINED BALANCE SHEETS (UNAUDITED)
June 30, 1995
<CAPTION>
Proforma Proforma
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 441,462 $ 477,633 $ 919,095
Accounts receivable, net 3,129,688 2,787,683 (6,622) 5,910,749
Inventories 1,438,126 288,415 1,726,541
Current portion of note receivable
- officer 16,218 -- 16,218
Due from officers and related parties 65,791 -- 65,791
Deferred taxes 15,213 -- 15,213
Other Current assets 310,336 9,846 319,982
---------- ---------- ------------
Total current assets 5,416,834 3,563,577 8,973,589
---------- ---------- ------------
Property and equipment, net 340,493 94,131 434,624
Goodwill, net 2,108,096 -- 2,108,096
Note receivable - officer 94,691 -- 94,691
Other assets 96,493 17,445 113,938
---------- ---------- -----------
$ 8,056,607 $3,674,953 $11,724,938
========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving inventory line of credit $ 1,668,371 -- $ 1,668,371
Accounts payable 1,597,144 2,097,341 6,622 3,687,863
Accrued expenses 390,077 384,294 774,371
Deferred sales tax obligation 502,052 -- 502,052
Due to related parties 25,000 -- 25,000
Other current liabilities 206,754 -- 206,754
----------- ---------- ------------
Total current liabilities 4,389,398 2,481,635 6,684,411
Notes payable - related parties 396,246 522,045 918,291
----------- ---------- ------------
Total liabilities 4,785,644 3,003,680 7,782,702
----------- ---------- ------------
Stockholders' equity
Preferred stocks 3,338,193 -- 3,338,193
Common stock 128,321 60,000 (55,100) 133,221
Additional paid-in capital 2,736,566 108,100 55,100 2,899,766
Discount on preferred stock (1,167,000) -- (1,167,000)
Retained earnings (deficit) (1,765,117) 503,173 (1,261,944)
----------- ---------- -----------
Total stockholders' equity 3,270,963 671,273 3,942,236
----------- ---------- -----------
$ 8,056,607 $3,674,953 $11,724,938
=========== ========== ===========
</TABLE>
F-68
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PROFORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 30, 1995
<CAPTION>
Proforma Proforma
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales $29,738,315 $18,194,799 367,572 47,565,542
Cost of sales 26,848,934 16,379,241 (367,572) 42,860,603
----------- ----------- ----------
Gross profit 2,889,381 1,815,558 4,704,939
----------- ----------- ----------
Operating expenses
Selling and administrative 2,892,604 1,670,733 4,563,337
Amortization of goodwill -
computer businesses 52,655 -- 52,655
Write-off of media advertising credits 448,011 -- 488,011
----------- ----------- ----------
Total operating expenses 3,393,270 1,670,733 5,064,003
----------- ----------- ----------
Income (Loss) from operations (503,889) 144,825 (359,064)
----------- ----------- ----------
Other Income (expense)
Charge-off of goodwill relating to
acquisition of Hillside (2,045,628) -- (2,045,628)
(Losses) gain on marketable securities (4,136) -- (4,136)
Gain on sale of fixed assets 4,432 -- 4,432
Dividend and interest income 14,472 8,236 22,708
Interest expense (138,553) -- (138,553)
Management fees 375,000 -- 375,000
Other income 37,661 7,772 45,433
----------- ----------- ----------
Total other (expense) income (1,756,752) 16,008 (1,740,744)
----------- ----------- ----------
Income (loss) before provision for
income taxes (2,260,641) 160,833 (2,099,808)
Provision for income taxes 87,014 64,532 151,546
----------- ----------- ----------
Net income (loss) ($2,347,655) $ 96,301 ($2,251,354)
=========== =========== ===========
Net earnings (loss) per share:
Primary ($0.59) N/A ($0.25)
=========== =========== ===========
Fully Diluted ($0.59) N/A ($0.25)
=========== =========== ===========
Weighted average number of
share - primary 3,972,333 N/A 8,872,333
=========== =========== ===========
Weighted average number of
share - fully diluted 3,972,333 N/A 8,872,333
=========== =========== ===========
</TABLE>
F-69
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PRO FROMA COMBINED BALANCE SHEETS (UNAUDITED)
June 30, 1994
<CAPTION>
Proforma Proforma
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 222,459 $ 9,612 $ 232,071
Accounts receivable, net 1,446,221 2,571,996 (1,466) 4,016,751
Inventories 898,477 213,530 1,112,007
Current portion of note
receivable - officer 20,119 -- 20,119
Due from officers and related parties 130,091 -- 130,091
Deferred taxes 6,285 -- 6,285
Other current assets 54,571 2,459 57,030
---------- ---------- ----------
Total current assets 2,778,223 2,797,597 5,574,354
---------- ---------- ----------
Property and equipment, net 292,047 60,130 352,177
Media advertising credits 448,011 -- 448,011
Goodwill, net 1,210,000 -- 1,210,000
Notes receivable - officer 109,155 -- 109,155
Other assets 19,175 15,480 34,655
---------- ---------- ----------
$4,856,611 $2,873,207 $7,728,352
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving inventory line of credit $ 665,020 $ -- $ 665,020
Accounts payable 869,939 1,341,094 1,466 2,209,567
Notes payable - related parties 300,000 -- 300,000
Accrued expenses 428,741 347,141 775,882
Deferred sales tax obligation 443,212 -- 443,212
Due to related parties 26,615 -- 26,615
Other current liabilities 122,396 -- 122,396
---------- ---------- ----------
Total current liabilities 2,855,923 1,688,235 4,542,692
Convertible notes payable 415,500 -- 415,500
Notes payable - related parties 554,755 610,000 1,164,755
---------- ---------- ----------
Total liabilities 3,826,178 2,298,235 6,122,947
---------- ---------- ----------
Stockholders' equity
Preferred stocks 5,898 -- 5,898
Common stock 53,441 60,000 55,100 58,341
Additional paid-in capital 388,246 108,100 (55,100) 551,446
Discount on preferred stock -- -- --
Retained earnings (deficit) 582,848 406,872 989,720
---------- ---------- ----------
Total stockholders' equity 1,030,433 574,972 1,605,405
---------- ---------- ----------
$4,856,611 $2,873,207 $7,728,352
========== ========== ==========
</TABLE>
F-70
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PROFORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 30, 1994
<CAPTION>
Proforma Proforma
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales $25,481,246 $18,386,621 111,262 43,756,605
Cost of sales 23,662,100 16,414,593 (111,262) 39,965,431
----------- ----------- ----------
Gross profit 1,819,146 1,972,028 3,791,174
----------- ----------- ----------
Operating expenses
Selling and administrative 2,167,528 1,875,643 4,043,171
Amortization of goodwill -
computer businesses -- -- --
Write-off of media advertising credits -- -- --
----------- ----------- ----------
Total operating expenses 2,167,528 1,875,643 4,043,171
----------- ----------- ----------
Income (Loss) from operations (348,382) 96,385 (251,997)
----------- ----------- ----------
Other income (expense)
Charge-off of goodwill relating to
acquisition of Hillside -- -- --
(Losses) gain on marketable securities (17,577) -- (17,577)
Gain on sale of fixed assets -- -- --
Dividend and interest income 42,847 16,708 59,555
Interest expense (48,051) -- (48,051)
Management fees -- -- --
Other income 72,543 31,969 104,512
----------- ----------- ----------
Total other (expense) income 49,762 48,677 98,439
----------- ----------- ----------
Income (loss) before provision for
income taxes (298,620) 145,062 (153,558)
Provision for income taxes 11,271 61,250 72,521
----------- ----------- ----------
Net income (loss) ($309,891) $ 83,812 ($226,079)
=========== =========== ==========
Net earnings (loss) per share:
Primary ($0.80) N/A ($.04)
=========== =========== ==========
Fully Diluted N/A N/A ($.04)
Weighted average number of share
- primary 389,573 N/A 5,289,573
=========== =========== ==========
Weighted average number of share
- fully diluted 389,573 N/A 5,289,573
=========== =========== ==========
</TABLE>
F-71
<PAGE>
<TABLE>
ATEC GROUP, INC. AND SUBSIDIARIES
PROFORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 30, 1993
<CAPTION>
Proforma Proforma
ATEC Group, Inc. Innovative Adjustments Combined
---------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales $ 39,836,094 $ 10,590,098 522,094 49,904,098
Cost of sales 37,658,588 9,044,985 (522,094) 46,181,479
------------ ------------ ------------
Gross profit 2,177,506 1,545,113 3,722,619
------------ ------------ ------------
Operating expenses
Selling and administrative 1,944,577 1,426,287 3,370,864
Amortization of goodwill -
computer businesses -.- -.- 0
------------ ------------ ------------
Total operating expenses 1,944,577 1,426,287 3,370,864
------------ ------------ ------------
Income (Loss) from operations 232,929 118,826 351,755
------------ ------------ ------------
Other income (expense)
Miscellaneous income 1,124 1,612 2,736
Dividend and interest income 37,057 1,834 38,891
Intereest expense (69,028) -.- (69,028)
------------
Gain on marketable securities 11,445 -.- 11,445
------------ ------------ ------------
Total other (expense) income (19,402) 3,446 (15,956)
------------ ------------ ------------
Income (loss) before provisio
for income taxes 213,527 122,272 335,799
Provision for income taxes 79,922 40,325 120,247
------------ ------------ ------------
Net income (loss) $ 133,605 $ 81,947 $ 215,552
============ ============ ============
Net earnings (loss) per share:
Primary $ 0.34 N/A $ 0.04
============ ============ ============
Fully Diluted $ 0.02 N/A $ 0.02
============ ============ ============
Weighted average number of
share - primary 389,573 N/A 5,289,573
============ ============ ============
Weighted average number of
share - fully diluted 8,236,972 N/A 13,136,972
============ ============ ============
</TABLE>
F-72
<PAGE>
ATEC GROUP, INC.
NOTES TO PRO FORMA COMBINED
FINANCIAL STATEMENTS
Innovative Business Micros, Inc.
1. Basis of Presentation
The pro forma combined financial statements include historical financial
statements of ATEC Group, Inc. and Innovative Business Micros, Inc.
("Innovative"). Innovative's year end is September 30. The proforma financial
statements at March 31, 1996 includes its results of operations for the nine
months ended March 31, 1996. The proforma financial statements at March 31, 1996
includes sales of $4,562,132 and net income of $46,371 for the three months
ended September 30, 1995, which are also included in the historical financial
statements for the year ended September 30, 1995. Innovative will change its
fiscal year end to June 30. The audited information at September 30, 1995, 1994
and 1993 of Innovative is included in the proforma combined financial statements
at June 30, 1995, 1994 and 1993. All intercompany transactions have been
eliminated.
2. Acquisition
On June 13, 1996, the Company acquired Innovative, a Long Island, NY
computer systems integrator. The Company acquired 100% of the issued and
outstanding capital stock of Innovative. As consideration for the Innovative
stock, the Company agreed to issue to the Shareholders 4,900,000 shares of the
Company's common stock.
Innovative is owned by Surinder Rametra, Ashok Rametra (officers, directors
and shareholders of ATEC) and Rajnish Rametra. Rajnish Rametra is the brother of
Surinder and Ashok Rametra. The transaction will be accounted for by application
of the pooling of interests method.
3. Intercompany sales and purchases
For the nine months endedMarch 31, 1996 and the year ended June 30, 1995
ATEC and Innovative had intercompany sales and purchases of $108,262 and
$367,572 respectively. Intercompany sales and purchases were $111,262 for the
year ended June 30, 1994. These transactions have been eliminated in the
accompanying pro forma combined statements. There was 29,844 of intercompany
receivables or payables March 31, 1996.
F-73
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC Registration Fee $
Printing $
Legal Fees and Expenses $
Accounting Fees and Expenses $
Miscellaneous Expenses (including travel $
and promotional expenses)
TOTAL
*Estimated
The Selling Security Holders will not be paying any portion of the
foregoing expenses of issuance and distribution.
Item 14. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware and
Article 7 of the Company's Articles of Incorporation contain provisions for
indemnification of officers, directors, employees and agents of the Company. The
Articles of Incorporation require the Company to indemnify such person in any
proceeding if he acted in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interest of the Company.
Indemnification would cover expenses, including attorney's fees, judgments,
fines and amounts paid in settlement.
The Company's By Laws also provided that the Company's Board of Directors
may cause the Company to purchase and maintain insurance on behalf of any
present or past director or officer insuring against any liability asserted
against such person incurred in the capacity of direct or officer or arising out
of such status, whether or not the Company would have the power to indemnify
such person. The Company may seek to obtain directors' and officers' liability
insurance.
In addition, the Underwriting Agreement provides for indemnification by the
Representative of the Registrant, its directors and officers against certain
liabilities, including liabilities under the Securities Act.
Item 15. Precent Sales of Unregistered Securities.
The following information sets forth all shares of the $.001 par value
Common Stock of the Registrant sold by it within the past three years which were
not registered under the Securities Act of 1933, as amended, as adjusted to give
effect to the Company's one for ten reverse split effected in September 1994.
The Registrant was incorporated as a Delaware corporation on July 17, 1992.
II-1
<PAGE>
The total number of outstanding shares of Common Stock, issued and
delivered by the Company as of February 28, 1996 was 9,106,369. The Company is
also required to issue an aggregate of 2,9000,000 shares of Common Stock upon
exercise of all outstanding Common Stock Purchase Warrants.
Date Name Number of Shares
- ---- ---- ----------------
4/29/93 Marketing Services Group of American, Inc. 7,500
5/27/93 The Winthrop Group 15,000
6/25/93 Sebat Corporation Ltd. 30,000
7/6/93 Mistrial International Ltd. 10,000
8/3/93 White Sand Projection Inc. 50,000
8/3/93 Xandau International, Inc. 50,000
8/3/93 Victima International, Inc. 50,000
9/17/93 Midpacific Bank N.U. 16,700
9/3/93 Trex International 11,111
10/15/93 Aurium Estblishart 10,000
10/15/93 Aureys Estblishart 10,000
10/15/93 Ingbert Haine 5,000
3/30/94 Jonathan Mende 30,000
5/26/94 Jonathan Mende 20,000
8/9/94 Arthur Rock Holding Co. 45,413
8/9/94 Goldstein Finesod 45,000
8/17/94 Plena Ltd. 30,000
8/24/94 Plena Ltd. 15,000
8/24/94 Altissimo Ltd. 45,000
8/24/94 Euro Partners SPA 45,000
8/24/94 Morgan Perigold 45,000
9/2/94 Asset Growth, Inc. 45,000
9/23/94 Robert Martire 88,968
9/27/94 Morgan Perigold 317,500
9/28/94 Euro Partners SPA 317,500
9/29/94 John Newton 7,000
9/29/94 Angelo Romanelli 18,000
9/29/94 Shirley Holley 3,000
9/29/94 Donald Holley 5,000
9/29/94 Barry Basior 11,000
9/29/94 Maria Garuffi 4,000
9/29/94 Ross Cannon 15,300
9/29/94 Theodore Gaillard 8,000
9/29/94 Albert Barnhardt 1,800
9/29/94 Kenneth Stewart 10,000
10/3/94 Altissimo Ltd. 152,280
10/3/94 Plena Ltd. 152,280
10/3/94 Pamplemouse Ltd. 197,281
II-2
<PAGE>
10/10/94 Verity Managment 197,281
10/13/94 Astec Mortgage Corp. 130,000
10/13/94 Asset Growth Inc. 187,000
10/17/94 Authorock Holding 337,087
10/17/94 Goldberg Finstein & Sons Co. 317,500
12/8/94 West Ventures 397,000
12/8/94 Johnson Partners 382,500
12/8/94 CCI Corporation 311,900
12/15/94 John Newton 7,823
12/15/94 Angelo Romanelli 21,228
12/15/94 Shirley Holley 3,620
12/15/94 Bank One East Lansing 6.020
12/15/94 Barry Bestwell 13,327
12/15/94 Maria Garuffi 4,627
12/15/94 Lost Cannon 18,320
12/15/94 Theodore Gaillard 9,516
12/15/94 Albert Barnhardt 2,117
12/15/94 Kenneth Stuart 11,727
12/20/94 George Goldberg 40,000
3/15/95 Goldberg, Finstein & Sons 200,000
3/15/95 Morgan Parigold 320,000
3/20/95 Ventanic Consulting Ltd. 382,500
5/4/95 Patrick Hagerty 335,200
5/4/95 Arvin Gulatti 183,956
5/4/95 Kenneth Bohacs 18,834
5/31/95 Seema Wasil 141,935
5/31/95 Amit Rametra 89,532
5/31/95 Munish Rametra 67,129
5/31/95 Mona Sutaira 9,032
5/31/95 Ashok Rametra 432,315
5/31/95 Surinder Rametra 161,290
5/31/95 Rajnish Rametra 80,645
5/31/95 Surinder Rametra 100,000
5/31/95 Munish Rametra 50,000
5/31/95 Amit Rametra 50,000
5/31/95 Rajnish Rametra 100,000
5/31/95 Harry Gupta 50,000
5/31/95 Surinder Rametra 30,000
5/31/95 B.J. Rametra 10,000
5/31/95 Rajnish Rametra 10,000
5/19/95 Johnson Partners 152,000
5/19/95 Sundown Investments 160,000
5/19/95 Ra Corporation 320,000
5/19/95 Euro Partners SPA 203,200
8/24/95 Balwinder Singh 344,119
10/2/95 Louis Fugazy 20,000
II-3
<PAGE>
11/30/95 Surinder Rametra 130,000
11/30/95 Ashok Rametra 100,000
11/30/95 Harry Gupta 50,000
11/30/95 Munish Rametra 50,000
11/30/95 Amit Rametra 50,000
11/30/95 B.J. Rametra 10,000
11/30/95 Rajnish Rametra 10,000
11/30/95 Surinder Rametra 1,119,897
2/96 Arvin and Ila Vora 15,390
2/96 Bhupatlal Sutaria 15,000
2/96 Maganlal Sutaria 153,900
2/96 Sachin Bhutani 30,000
2/96 Praveen Bhutani 50,310
2/96 Michael Thuroff 7,500
2/96 Dr. Kil Kantu 48.375
2/96 Kaaljib Singh 100,000
2/96 Beverly Mestel 15,390
2/96 Ray Irngy 92,308
2/96 Corinth Shipping, Inc. 15,385
2/96 Ocean Shipping International, Inc. 30,770
2/96 Robert Martire 88,568
2/96 First National Funding Corporation 100,000
2/96 R.Wagli & Cie AG 153,846
2/96 Mike & Laura Lalich 61,538
2/96 Kamal J. Singh 76,923
2/96 Akiva & Rose Mitzmacher 150,846
2/96 Dreyton Investment Ltd. 92,308
2/96 Edua Rozsa 92,308
2/96 Diethelm Wendler 92,308
2/96 Burnadette Viaggio 30,769
2/96 Mutual Indemnity (Bermuda) Ltd. 69,231
2/96 James Charles 50,000
2/96 Silverman, Collura & Chernis, P.C. 150,000
2/96 Patrick Hagerty 76,923
2/96 Arvin Gulatti 76,923
6/ Ashok Rametra 612,500
- -- ------------- -------
6/ Surinder Rametra 612,500
- -- ---------------- -------
6/ Rajnish Rametra 3,675,000
- -- --------------- ---------
II-4
<PAGE>
In February, 1996 the Company issued the following common stock purchase
warrants to acquire applied shares of the Company's common stock:
1. Gracechurch Corp. 25,000 Class W Common Stock Purchase Warrants.
25,000 Class Y Common Stock Purchase Warrants, 25,000 Class X
Common Stock Purchase Warrants, 25,000 Class Z Common Stock
Purchase Warrants. Class W Warrants are exercisable at $.75 per
share through June 30, 1996; Class Warrants are exercisable at
$1.00 per share through August 31, 1996; Class Y Warrants are
exercisable at $1.25 per share through October 31, 1996; and
Class Z Warrants are exercisable at $1.50 per share trough
December 31, 1996;
2. International Corp. Consultants, Inc. 25,000 Class W
Warrants, 25,000 Class X Warrants, 25,000 Class Y
Warrants, 25,000 Class Z Warrants:
3. West Venture, Ltd. 125,000 Class W Warrants, 125,000 Class X
Warrants, 125,000 Class Y Warrants, 125,000 Class Z Warrants;
4. James Charles, 100,000 Class W Warrants
5. United Acquisition III, 150,000 Class W Warrants, 150,000 Class X
Warrants, 150,000 Class Y Warrants, 150,000 Class Z Warrants;
6. M.D. Sabbah, 500,000 Class Z Warrants;
7. Unitek Consultants, Inc., 500,000 Class W Warrants 100,000
Class X Warrants, 100,000 Class Y Warrants, 300,000 Class Z
Warrants
The sales set forth above are exempt from Registration with the Securities
and Exchange Commission pursuant to Regulation S as transaction with non U.S.
persons or Section 4(2) as transactions by an Issuer not involving any public
offering in that said transactions involved the issuance and sale by the
Registrant of Shares of its Common Stock to financially sophisticated
individuals who are fully aware of the Registrants' activities, as well as its
business and financial condition, and purchased said securities for investment
purposes or securities 3(a)(a) as a transaction with an existing security
holder.
The Registrant has placed a restrictive legend on all of the certificates
representing the shares issued above and have given appropriate "stop transfer"
instructions to the Registrant's transfer agent, until such time as those
shares are registered pursuant to the Securities Act of 1933, as amended (the
"Act"), or a valid exemption from Registration exists under the Act. Certain of
such shares became eligible for sale under the provisions of Rule 144 and
Regulation S promulgated under the act.
II-5
<PAGE>
Item 16. Exhibits and financial Statement Schedule
The Following exhibits marked with an * are included with this Registration
Statement.
(1) 4.1 Revised Form of Unit Purchase Option
(1) 4.2 Form of Warrant Agreement between the Company and North
American Transfer Co.
(1) 4.3 Purchase Agreement dated as of July 16, 1992 between the Company
and certain of the Selling Stockholders
(1) 4.4 Purchase Agreement dated as of July 17, 1992 between the Company
certain of the Selling Stockholders
(1) 4.5 Purchase Agreement dated as of July 20, 1992 between the Company
certain of the Selling Stockholders
(1) 4.6 Purchase Agreement dated as of November 10, 1992 between the
Company and certain of the Selling Stockholders
(1) 4.7 Form of Common Stock Certificate
(1) 4.8 Form of Warrant Certificate
(1) 4.9 Form of Preferred Stock Certificate
* 5.1 Opinion of Silverman, Collura & Chernis, P.C.
(1) 10.1 1992 Stock Option plan of the Company
(1) 10.2 Form of Incentive Stock Option Agreement
(1) 10.3 Form of Non-Incentive Stock Option Agreement
(1) 10.4 Employment Agreement between Robert Martire and the Company dated
October 30, 1992
(1) 10.5 Employment Agreement between Morton Swirsky and the Company dated
as of July 31, 1992
(1) 10.6 Assignment Agreement between LLJ Enterprises Corp. and the
Company dated October 30, 1992
(1) 10.7 Form of Standard Franchise Agreement
(1) 10.8 Revised Form of Financial Advisory and Investment Banking
Agreement between the Company and Elliot Allen & Co., Inc.
(1) 10.9 Option Agreement dated October 23, 1992 between the Company and
certain of the Company's franchisees
(1)10.10 Option Agreement dated October 16, 1992 by and among the
Company, Steinbock Braff, Inc., G-MAT Distributors, Inc. and
Corey Steinbock
(1)10.11 Rights Termination Agreement dated January 12, 1993 by and among
the Company, H.B. Franchising Corp. and G-MAT Dist. Inc.
(1)10.12 Deferred Payment Agreement dated January 15, 1993 between the
Company and the New York State Sales Tax Authority
(2)10.13 Consulting Agreement dated May 27, 1993 between the Company and
the Winthrop Group, Inc.
(3)10.14 Consulting Agreement dated July 22, 1993 between the Company and
White Sands Properties, Inc.
II-6
<PAGE>
(3)10.15 Consulting Agreement dated July 22, 1993 between the Company and
Xanadu International, Inc.
(3)10.16 Consulting Agreement dated July 22, 1993 between the Company and
Victima International, Inc.
(3)10.17 Consulting Agreement dated April 1, 1993 between the Company and
White Sands Properties, Inc.
(1)10.18 Stock Purchase Agreement dated as of October 6, 1993 by and among
the Company, Today's World, Inc., Paul A. Reece, Marilyn Reece,
Dennis Moody and Earl Oltz.
(1)10.19 Mortgage dated February 26, 1993 between Eritram Realty Corp.
and Emmanuel Ciminello, Jr.
(1)10.20 Security Agreement dated February 26, 1993 between Eritram Realty
Corp. and Emmanuel Ciminello, Jr.
(1)10.21 Collateral Assignment of Lease and Rents dated February 26, 1993
between Eritram Realty Corp. and Emmanuel Cimininello, Jr.
(1)10.22 Lease dated February 26, 1993 between Eritram Realty Corp. and
the Company
(4)10.23 Agreement between the Company and Sun Corporation (2000) Ltd.
(5)10.24 Agreement between the Company, Balwinder Singh Bathla and
American computer Systems Corporation
(6)10.25 Agreement between the Company, Arvinder Gulati, Patrick Hegarty,
Kenneth Bohacks and CONY Computers, Inc.
* 11 Statement re: computation of per share earnings
* 21.1 Subsidiaries of the Company
* 24.1 Consent of Yohalem, Gillman & Company
* 24.2 Consent of Bianculi Pascale & Co.
* 24.3 Consent of Silverman, Collura & Chernis, P.C. (included in
opinion filed as Exhibit 5.1)
(1) Incorporated by reference from Registration Statement on Form SB-2
(registration No. 33-54356) filed by the Company with the Securities and
Exchange Commission on November 9, 1992.
(2) Incorporated by reference from Registration Statement on Form S-8
(registration No. 33-63740) filed by the Company with the Securities and
Exchange Commission on July 26, 1993.
(3) Incorporated by reference from Registration Statement on Form S-8
(registration No. 33-54356) filed by the Company with the Securities and
Exchange Commission on July 26, 1993.
(4) Incorporated by reference from Current Report on Form 8K dated June 23,
1994.
(5) Incorporated by reference from Current Report on Form 8K dated February
20, 1995.
II-7
<PAGE>
(6) Incorporated by reference from Current Report on Form 8K dated March 31,
1995.
b. Financial Statement Schedules.
The following Financial Statement schedules are included as exhibits to the
Registration Statement:
(i) Schedule II - Accounts Receivable from Related Parties and
Underwriter, Promoters, and Employees Other than Related Parties
(ii) Schedule IV - Indebtedness of and to Related Parties - Not Current
(iii) Schedule VIII - Validation and Qualifying Accounts
(iv) Schedule IX - Short-Term Borrowings
(v) Schedule X - Supplementary Income Statement Information
Item 17. Undertakings.
(a) Rule 415 Offerings.
The undersigned issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the Registration Statement; and
(iii) Includes any additional or changed material information on
the plan of distribution.
provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information
required in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
II-8
<PAGE>
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnifications is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the issuer in the successful defense of any action, suit
or proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such court.
(2) For determining any liability under the Securities Act of 1933, as
amended, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
II-9
<PAGE>
SIGNATURES
In accordance with the acquirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of New York
on June 28, 1996.
ATEC Group, Inc.
By:s/Surinder Rametra
------------------------------
Surinder Rametra, CEO
POWER OF ATTORNEY
Each person whose signature appear below constitutes and appoints Surinder
Rametra his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and to take such actions in, and file with
the appropriate authorities in, whatever states said attorney-in-fact and agent
shall determine, such applications, statements, consents and other documents as
may be necessary or expedient to register securities of the Company for sale,
granting unto said attorney-in-fact and agent full power and authority to do so
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof and the Registrant hereby confers like
authority on its behalf.
In accordance with the requirements of the Securities Act of 1933, this
Registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
--------- ----- ----
Principal Executive Officer July 24, 1996
and Chairman of the Board
and as Power of Attorney
s/Surinder Rametra for Members of the Board
- ------------------
Surinder Rametra
Principal Financial Officer July 24, 1996
Principal Accounting
s/Ashok Rametra Officer and Director
- ---------------
Ashok Rametra
s/Balwinder Singh Bathla President and Director July 24, 1996
- ------------------------
Balwinder Singh Bathla
II-10
<PAGE>
EXHIBIT 5.1
OPINION OF SILVERMAN, COLLURA & CHERNIS, P.C.
<PAGE>
[LETTERHEAD OF SILVERMAN, COLLURA & CHERNIS, P.C.]
July 24, 1996
ATEC Group, Inc.
1952 Jericho Turnpike
East Northport, New York 11731
Re: Amendment #2 to the Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to ATEC Group, Inc. (the "Company"), a Delaware
corporation, in preparation of Amendment #2 to the Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission on July 24, 1996
(the "Registration Statement"), covering 18,334,285 shares of the Company's
Common Stock, $.01 par value (the "Shares"), including shares issuable upon
exercise of outstanding warrants ("Warrants"). The Shares and the Warrants are
hereinafter referred to as the "Securities".
In acting as counsel for the Company and arriving at the opinions as
expressed below, we have examined and relied upon originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of pubic officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination we have assumed the genuineness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of natural persons and the conformity to original documents of
all documents submitted to us as certified or photostated copies.
Based on the foregoing, and subject to the qualifications and limitations
set forth herein, it is our opinion that:
1. The Company has authority to issue the Securities in the manner and
under the terms set forth in the Amendment #2 to the Registration Statement.
<PAGE>
SILVERMAN COLLURA & CHERNIS, P.C.
ATEC Group, Inc.
July 24, 1996
Page 2
2. The Securities have been duly authorized and when issued, delivered and
paid for in accordance with their respective terms, will be validly issued,
fully paid and non-assessable.
We express no opinion with respect to the laws other than those of the
State of New York and Federal Laws of the United States of America, and we
assume no responsibility as to the applicability thereto, the effect thereon, of
the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and its use as part of the Registration Statement.
We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement. It is not to be used, circulated,
quoted or otherwise referred to for any other purpose. Other than the Company no
one is entitled to reply on this opinion.
Very truly yours.
SILVERMAN, COLLURA & CHERNIS, P.C.
/s/ SILVERMAN, COLLURA & CHERNIS, P.C.
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER COMMON SHARE
FOR THE YEAR ENDED JUNE 30,1995
PRIMARY
-------
Net loss for primary loss
per common share $(2,347,655)
===========
Weighted average number of common shares
outstanding during the year 3,972,333*
===========
Primary loss per common share $ (.59)
===========
FULLY DILUTED
-------------
Net loss for fully diluted net loss
per common share $(2,347,655)
===========
Weighted average number of shares used in
calculating primary loss per common share 3,972,333*
===========
Fully diluted loss per common share $ (.59)
===========
* Common stock equivalents were excluded from the computations of primary and
fully diluted loss per share because their effect would be anti-dilutive.
See Note 1 to the financial statements.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Micro Computer Stores, Inc.
Sun Computer & Software, Inc.
American Computer Systems, Inc.
Laptop & Office Solutions, Inc.
Cony Computer Systems, Inc.
Innovative Business Micros, Inc.
<PAGE>
EXHIBIT 24.1
CONSENT OF YOHALEM, GILLMAN & COMPANY
CONSENT OF BIANCULLI, PASCALE & CO.
CONSENT OF GEORGE S. GOLDBERG
<PAGE>
YOHALEM GILLMAN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
477 MADISON AVENUE, NEW YORK, NY 10022
------
(212) 371-2100
CONSENT OF INDEPENDENT AUDITORS
We have issued our reports dated October 4, 1995 on the financial
statements and financial statement schedules of Hillside Bedding, Inc. at June
30, 1995 and for the year then ended contained in the Registration Statement on
Form S-1 expected to be filed with the Securities and Exchange Commission on
July 24, 1996. We consent to the use of the aforementioned reports in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
The interim consolidated financial statements and related financial
statement schedules of ATEC Group, Inc. (formerly named Hillside Bedding, Inc.)
at March 31, 1996 and for the three and nine month periods ended March 31, 1996
and 1995 included in the aforementioned Prospectus and Registration Statement
were not audited, reviewed or compiled by us, and we do not express an opinion
or any other form of assurance on them.
The pro forma combined financial statements of ATEC Group, Inc. and
Innovative Business Micros, Inc. (including the pro forma adjustments) included
in the aforementioned Prospectus were not examined, reviewed or compiled by us
and we do not express an opinion or any other form of assurance on them.
YOHALEM GILLMAN & COMPANY
New York, New York
July 24, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
I have issued my reports dated December 12, 1995 and January 12, 1995 on the
financial statements of Innovative Business Micros, Inc. At September 30, 1995,
1994 and 1993 contained in Registration Statement No. 2 - on Form S-1. I consent
to the use of the aformentioned reports in the Registration Statement and
Prospectus.
George S. Goldberg
Certified Public Accountant
Rosyln Heights, New York
July 24, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated September 22, 1994 on the financial
statements and financial statement schedules of Hillside Bedding, Inc. at June
30, 1994 and for the two years then ended contained in Registration Statement
No. 2- on Form S-1. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
BIANCULLI, PASCALE & CO., P.C.
Farmingdale, New York
July 24, 1996
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENT SCHEDULES
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
The following consolidated financial statement
schedules of Hillside, Bedding, Inc. and
Subsidiaries are included in Item 14(d):
Schedule II - Amounts receivable from related
parties and underwriters, promoters,
and employees other than related parties F-42
Schedule IV - Indebtedness of and to Related Parties
- Not Current F-43
Schedule VIII - Valuation and Qualifying Accounts F-44
Schedule IX - Short-term Borrowings F-45
Schedule X - Supplementary Income Statement
Information (1995 only) F-46
All other 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 inapplicable,
and therefore have been omitted.
<PAGE>
Report of Independent Certified Public Accountant's
on Financial Statements Schedules
Shareholders and Board of Directors Hillside Bedding, Inc.
In connection with our audit of the consolidated financial statements of
Hillside Bedding, Inc. and Subsidiaries referred to in our report dated October
4, 1995, which is included in the Prospectus constituting Part 1 of this
Registration Statement, we have also audited Schedules !!, IV, VIII, IX X for
the year ended June 30, 1995. In our opinion, these schedules when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
New York, New York
October 4, 1995
<PAGE>
<TABLE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
Balance at
Deductions End of Period
Balance at ---------- -------------
Beginning Amounts Amounts Not
Name of Debtor of Period Additions Collected Amortized Current Current
- -------------- --------- --------- --------- --------- ------- -------
Year Ended June 30, 1995:
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Surinder Rametra
- note receivable $129,174 $ -- $( 18,265) $ -- $ 16,218 $ 94,691
Surinder Rametra
- advances 82,823 303,263 (355,562) -- 30,524 --
-------- -------- --------- -------- -------- --------
$211,997 $303,263 $(373,827) $ -- $ 46,742 $ 94,691
======== ======== ========= ======== ======== ========
Year Ended June 30, 1994:
- ------------------------
Surinder Rametra
- note receivable $136,127 $ -- $ (6,953) $ -- $ 20,019 $109,155
Surinder Rametra
- advances 107,701 483,004 (507,882) -- 82,823 --
-------- -------- --------- -------- -------- --------
$243,828 $483,004 $(514,835) $ -- $102,842 $109,155
======== ======== ========= ======== ======== ========
Year Ended June 30, 1993:
- ------------------------
Surinder Rametra
- note receivable $153,739 $ -- $ (17,612) $ -- $ 6,953 $129,174
Surinder Rametra
- advances -- 394,202 (286,501) -- 107,701 --
-------- -------- --------- ------- -------- --------
$153,739 $394,202 $(304,113) $ -- $114,654 $129,174
======== ======== ========= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
INDEBTEDNESS OF INDEBTEDNESS TO
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Balance at Balance Balance at Balance
Person Beginning Additions Deductions at End Beginning Additions Deductions at End
- ------ --------- --------- --------- ------ --------- --------- ---------- ------
Year Ended June 30, 1995:
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Seema Rametra $ -- $ -- $ -- $ -- $ 81,417 $ 6,583 $( 88,000) $ --
Mona Suturia -- -- -- -- 5,041 559 (5,600) --
Amit Rametra -- -- -- -- 50,463 5,047 (55,510) --
Surinder Rametra 109,155 -- (14,464) 94,691 -- -- -- --
Munish Rametra -- -- -- -- 37,834 3,786 (41,620) --
Ashok Rametra -- -- -- -- 380,000 38,000 (418,000) --
Balwinder Singh
Bathla -- -- -- -- -- 396,246 -- 396,246
---------- ------- -------- ------- -------- -------- --------- --------
$ 109,155 $ -- $(14,464) $94,691 $554,755 $450,221 $(608,730) $396,246
========= ======= ======== ======= ======== ======== ========= ========
</TABLE>
<PAGE>
<TABLE>
Year Ended June 30, 1994:
- ------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Seema Rametra $ -- $ -- $ -- $ -- $ 40,000 $ 43,792 $ (2,375) $ 81,417
Mona Suturia -- -- -- -- -- 5 041 -- 5,041
Amit Rametra -- -- -- -- 45,875 4,588 -- 50,463
Surinder Rametra 129,174 -- (20,019) 109,155 -- -- -- --
Munish Rametra -- -- -- -- 46,667 4,667 (13,500) 37,834
Ashok Rametra -- -- -- -- -- 38,000 -- 380,000
---------- ------- -------- -------- -------- -------- --------- --------
$ 129,174 $ -- $(20,019) $109,155 $132,542 $438,088 $ (15,875) $554,755
========== ======= ======== ======== ======== ======== ========= ========
Seema Rametra $ -- $ -- $ -- $ -- $ 30,375 $ 40,000 $ (30,375) $ 40,000
Amit Rametra -- -- -- -- 45,875 -- -- 45,875
Surinder Rametra 136,127 -- ( 6,953) 129,174 -- -- -- --
Munish Rametra -- -- -- -- 46,667 -- -- 46,667
---------- ------- -------- -------- -------- -------- --------- --------
$ 136,127 $ -- $( 6,963) $129,174 $122,917 $ 40,000 $ (30,375) $132,542
========== ======= ======== ======== ======== ======== ========= ========
</TABLE>
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
Additions
---------
Balance at Charged Charged Balance at
Beginning to Costs to Other End
Description of Period and Expenses Accounts Deductions of Period
- ----------- --------- ------------ -------- ---------- ----------
Year Ended June 30, 1995:
- ------------------------
Allowance for
doubtful
accounts $26,300 $65,000 $ -- $ -- $91,300
======= ======= ======== ========= =======
Year Ended June 30, 1994:
- ------------------------
Allowance for
doubtful
accounts $26,300 $ -- $ -- $ -- $26,300
======= ======= ======== ========= =======
Year Ended June 30, 1993:
- ------------------------
Allowance for
doubtful
accounts $ -- $26,300 $ -- $ -- $26,300
======= ======= ========= ======== =======
<PAGE>
<TABLE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
Maximum Average Weighted
Category of amount amount average
aggregate Balance Weighted outstanding outstanding interest rate
short-term at end average during during during
borrowings of period interest rate the period the period the period
- ---------- --------- ------------- ---------- ---------- ----------
June 30, 1995
- -------------
<S> <C> <C> <C> <C> <C>
Revolving inventory
line of credit $1,668,371 13,50% $2,308,628 $1,485,534 2,55%
========== ===== ========== ========== ====
June 30, 1994
- -------------
Revolving inventory
line of credit $ 742,009 13,50% $1,124,013 $ 835,228 N/A
========== ===== ========== ==========
June 30, 1993
- -------------
Revolving inventory
line of credit $ 146,933 13.50% $ 324,089 $ 158,610 N/A
========== ===== ========== ==========
</TABLE>
<PAGE>
HILLSIDE BEDDING, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEAR ENDED JUNE 30, 1995
Charged to costs
Item and expenses
- ---------------------------- --------------------------------
June 30, 1995
- -------------
Charge-off of goodwill,
relating to acquisition
Hillside $2,045,638
==========
<PAGE>
The interim consolidated financial statements and related financial
statement schedules of the Company at March 31, 1996 and for the nine months
then ended March 31, 1996 and 1995 included in this Prospectus and Registration
Statement were not audited, reviewed or compiled by Yohalem Gillman & Company or
Bianculli, Pascale & Co., and those firms do not express an opinion or any other
form of assurance on them.
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - ACCOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITER
PROMOTER, AND EXPLOYEES OTHER THAN RELATED PARTIES
NINE MONTHS ENDED MARCH 31, 1996
UNAUDITED
<TABLE>
<CAPTION>
Balance at
Deductions At End of Period
Balance at ---------- ----------------
Beginning Amounts Amounts Not
Name of Debtor of Period Additions Collected Amortized Current Current
- -------------- --------- --------- --------- --------- ------- -------
March 31, 1996
- --------------
<S> <C> <C> <C> <C> <C> <C>
Surinder Rametra
- - note receivable $110,909 -- ($110,909) -- -- --
Surinder Rametra
- -Advances 30,524 $135,000 ( 165,524) -- -- --
--------- -------- --------- ------- -------- -------
$ 141,433 $135,000 ($276,433) -- -- --
========= ======== ========= ======= ======== =======
</TABLE>
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT
NINE MONTHS ENDED MARCH 31, 1996
UNAUDITED
<TABLE>
<CAPTION>
INDEBTEDNESS OF INDEBTEDNESS TO
-------------------------------------- --------------------------------------
Balance at Balance Balance at Balance
Person Beginning Additions Deductions at End Beginning Additions Deductions at End
- ------ --------- --------- ---------- ------ --------- --------- ---------- ------
March 31, 1996
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Surinder Rametra -- -- -- -- -- -- -- --
Balwinder Singh
Bathla -- -- -- -- $396,246 $998 -- $397,244
---------- --------- ------ ------- -------- ---- -------- --------
-- -- -- -- $396,246 $998 -- $397,244
========== ========= ====== ======= ======== ==== ======== =======
</TABLE>
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTSRTIES - NOT CURRENT
NINE MONTHS ENDED MARCH 31, 1996
UNAUDITED
Additions
--------------------------------------------
Balance at Charged Charged Balance at
Beginning to Costs to Other End
Description of Period and Expenses Accounts Deductions of Period
- ----------- --------- ------------ -------- ---------- ---------
March 31, 1996
- --------------
Allowance for
doubtful
accounts $91,000 -- -- -- $91,000
======= ========= ======= ======= =======
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT TERM BORROWINGS
NINE MONTHS ENDED MARCH 31, 1996
UNAUDITED
<TABLE>
<CAPTION>
Maximum Average Weighted
Category of amount amount average
aggregate Balance Weighted outstanding outstanding interest rate
short-term at end average during during during
borrowings of period interest rate the period the period the period
- ---------- --------- ------------- ---------- ---------- ----------
March 31, 1996
- --------------
<S> <C> <C> <C> <C> <C>
Revolving Inventory
line of credit $2,411,192 -- $3,084,578 $1,708,592 .98%
========== ============= ========== ==========
</TABLE>
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
NINE MONTHS ENDED MARCH 31, 1996
UNAUDITED
Charged to cost
Item and expenses
- --------------------------- ------------------------------
March 31, 1996
- --------------
Amortization of goodwill
for computer business $108,051
========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-30-1996
<CASH> 1,495,187
<SECURITIES> 0
<RECEIVABLES> 7,847,418
<ALLOWANCES> 0
<INVENTORY> 2,050,961
<CURRENT-ASSETS> 11,996,218
<PP&E> 469,884
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,580,574
<CURRENT-LIABILITIES> 7,987,662
<BONDS> 0
0
11,003,496
<COMMON> 146,038
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,580,574
<SALES> 62,642,609
<TOTAL-REVENUES> 62,642,609
<CGS> 57,583,034
<TOTAL-COSTS> 57,583,034
<OTHER-EXPENSES> 4,186,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,666
<INCOME-PRETAX> 878,383
<INCOME-TAX> 339,434
<INCOME-CONTINUING> 538,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 538,949
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1993
<PERIOD-END> JUN-30-1993
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 49,904,098
<TOTAL-REVENUES> 49,904,098
<CGS> 46,181,479
<TOTAL-COSTS> 46,181,479
<OTHER-EXPENSES> 3,370,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,028
<INCOME-PRETAX> 335,799
<INCOME-TAX> 120,247
<INCOME-CONTINUING> 120,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,247
<EPS-PRIMARY> .04
<EPS-DILUTED> .02
</TABLE>
