SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K/A
CURRENT REPORT
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_____ to _____
Commission File Number 0-22710
ATEC GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3673965
(State or other jurisdiction of (I.R.S. Identification
Employer corporation or organization) Number)
1952 Jericho Turnpike, East Northport, New York 11731
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (516) 462-2832
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock $.01 par value
Series A Preferred Stock
$.01 Par value.
<PAGE>
ITEM 1. BUSINESS
General
ATEC Group, Inc. ("the Company"), through its wholly owned subsidiaries
American Computer Systems, Inc. ("ACS"), Cony Computer Systems, Inc. ("CONY"),
Innovative Business Micros, Inc. ("Innovative"), Micro Computer Stores, Inc.
("MCS") and Sun Computer and Software, Inc. ("SCSI"), is engaged in the sale of
computer hardware and software products to businesses, professionals, government
agencies and educational institutions. The Company provides its customers with a
wide range of services, including designing, integration and installing computer
systems, local area networks, high volume data communications, video
conferencing and internet ready solutions. The Company's subsidiaries are
authorized dealers for major manufacturers such as Apple, AST, Compaq, Epson,
Hewlett Packard, Hughes Networks, IBM, Microsoft, NEC, Novell, Oracle,
Panasonic, Sharp, Sybase and Toshiba. Hardware products sold include
microcomputer systems, laptop computers, local area network products, Direct PC,
Internet access and other computer peripherals.
The primary business market segments which the Company targets are
businesses, professionals and government agencies who are in need of computer
hardware and software integration and related support services. The Company
offers a full spectrum of services and support which management believes is of
critical importance in the current market environment. The Company believes that
computer systems have become too complex for a purchaser to be able to take it
home, take it out of the box, plug it in, and run it without experiencing
problems. Moreover, the integration of networks, internet access multimedia,
video conferencing, high volume information and communication systems has
necessitated a market of technical support and continued customer relations
after the sale. The Company believes that most consumers and business users do
not possess the time to investigate and locate the various computer components
necessary to establish an integrated computer system and therefore, strives to
provide "one-stop solutions" to their customers' computer needs in a cost
effective manner.
The Company advertises its products and services to businesses by
distributing brochures, direct mail solicitation, print advertisement and
participation in seminars, presentations and trade shows. The Company's
marketing strategy is to educate business customers as to the Company's ability
to provide a "one-stop solution" to all its computer needs from the initial
purchase and installation processes through required service and future
expansion requirements. The Company strives to quickly respond to its customers'
continually changing environment by providing flexible and economic solutions to
a user's need to expand and upgrade computer systems and applications.
The inventory of the Company consists of finished products sold by the
Company in the regular course of its business. At June 30, 1996 inventory was
approximately $2,800,000. The Company is aware that as a result of rapidly
changing technology in the computer field, and the consistent introduction of
new products, there is a significant risk that inventory can be rendered
obsolete or its value greatly reduced. The Company's strategy regarding
minimizing this risk focuses on limiting the time in which products remain in
inventory.
The Company's subsidiaries have entered into numerous vendor and dealer
agreements regarding the sale of hardware and software products. The Company
purchased approximately 41% of its hardware and software products from
Computerland Corporation (hereafter called "Computerland") during the year ended
June 30, 1996. Computerland is the only vendor who accounted for 10% or more of
2
<PAGE>
the purchases of the Company. In addition to its agreements with Computerland,
the Company has dealer/vendor agreements with Ingram, Merisel, Intelligence
Electronics, Micro Age and Tech Data. The majority of these agreements may be
canceled upon short term notice to the Company in the event that minimum
purchases are not made and for other reasons. The Company has not in the past
had any vendor/dealer agreement terminated, except those which the Company
desired to terminate. The Company did not experience any material difficulties
in obtaining products from its vendors during its prior year. The Company
believes that other suppliers would be able to adequately service the Company's
needs in the event that its existing vendor/dealer agreements were terminated.
Competition
The microcomputer market is very competitive. The Company competes directly
with a variety of local and national distributors, super stores, retailers, mail
order houses and other entities who offer computer products and services. Many
of the computer manufacturers offer their products for sale directly through
mail order distribution and may possess greater financial, purchasing and
marketing resources. The Company seeks to compete with its competitors based
upon the Company's commitment to provide its customers with complete computer
services rather than merely upon the price of hardware and software. While the
Company attempts to competitively price hardware and software items, management
believes that the Company's principal strength is its ability to offer customers
complete solutions to their individualized computer needs, including system
design and integration, local area network (LAN), data communications, and
Internet access. During the year ended June 30, 1996, the Company's service
related activities accounted for approximately 5% of total revenues.
Seasonality
The Company does not experience any material seasonal trends in its
operations except for approximately 10% sales increases during the months of
October, November and December and approximately 5% sales decreases during the
months of January, February, March, July, August and September.
Backlog
The Company does not have a significant backlog as it normally delivers and
installs the computer products purchased by its customers within a short time of
the date of order. Accordingly, the Company does not believe that backlog is
material to the Company's business or indicative of future sales.
Governmental Regulation and Contracts
The Company believes that it is in material compliance with federal and
state laws and regulations which are applicable to its operations. The Company
is not a party to any government contract which represents a material portion of
the Company's revenues or which, if terminated or renegotiated, would have a
material adverse effect on the Company's business.
3
<PAGE>
Patents and Trademarks
The Company does not currently rely upon the use of any patents and/or
trademarks in connection with its operations except for references in
advertising materials as an authorized dealer or vendor of specific products of
manufacturers with whom they have agreements. The Company believes however that
the ability to identify itself as the authorized dealer of such manufacturers is
an important aspect of their marketing strategy.
Employees
As of the date of this Annual Report, the Company had an aggregate of
approximately 72 employees, including its 9 administrators, 22 staff persons, 5
store managers, 23 full-time sales persons, 8 technical and 5 warehouse
personnel. The Company has no collective bargaining agreements and believes the
relations with their employees are good.
Recent Developments
In June 1996, the Company acquired 100% of the issued and outstanding
capital stock of Innovative, a New York corporation engaged in computer systems
integration business. Innovative's computer facility is located at 90 Adams
Avenue, Hauppauge, New York 11788. Innovative's principal shareholders were
Rajnish Rametra, Ashok Rametra and Surinder Rametra. Messrs. Ashok and Surinder
Rametra are the officers, directors and principal shareholders of the Company.
Rajnish is the brother of Surinder and Ashok. The consideration for the
Company's acquisition of Innovative was the issuance to the Shareholders of an
aggregate of 4,900,000 shares of the Company's Common Stock.
In September 1996, the Company formed a new Delaware subsidiary, VDOT.Net
Inc. ("VDOT"). VDOT has entered into an agreement to acquire certain assets of a
startup internet service provider, VDOT.Net Inc., a New York Corporation ("VDOT
NY") in exchange for shares of the Company's stock with an aggregate value of
$100,000. VDOT NY shall be entitled to receive additional shares of the
Company's Common Stock with a market value of $50,000 in the event VDOT reports
net income after taxes during the year ended June 30, 1997. Ed Gulmi and Pat
Prauge, the shareholders of VDOTNY, will enter into employment agreements with
VDOT as the president and vice president respectively of VDOT. The Company
intends to seek out additional acquisitions in the internet area.
ITEM 2. PROPERTIES
The Company's headquarters and executive offices are located at 1952
Jericho Turnpike, East Northport, New York. This location also serves as SCSI's
retail facility. These premises, consisting of approximately 3,300 square feet,
are leased pursuant to a lease expiring in 1998 providing for annual rental
payments of approximately $35,000 per year, plus certain expenses and taxes. MCS
maintains a retail location and warehouse facility in Albany, New York,
consisting of approximately 8,050 square feet. The Albany facility lease expires
on June 30, 2003 and requires annual rental payments of $96,600 through 1998 and
$108,192 thereafter, plus all expenses and taxes attributable to the operation
of the premises. The Albany facility is leased from former stockholders of SCSI
and MCS. ACS operates from leased premises located at 143 West 29th Street, New
York, New York. This location occupies 4,000 square feet and requires annual
rental payments of $39,000, plus certain expenses. CONY's operating premises is
located at 28 Knight Street, Norwalk, Connecticut. This location is leased by
4
<PAGE>
CONY pursuant to a three year lease expiring in 1997 and consists of
approximately 2,000 square feet. This lease requires annual payments of
approximately $24,000 per year plus other expenses. CONY has a sales office at
3001-B Route 17 South, Lodi, New Jersey. This location occupies 2,000 square
feet and requires annual rental payments of $17,250, plus certain expenses.
Innovative operates from leased premises located at 90 Adams Avenue, Hauppauge,
NY. This location occupies 5,600 square feet and requires annual rental payments
of $40,090 plus certain expenses.
The Company believes that its current facilities are suitable for its
present and projected needs. The Company does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
A third party action was commenced against Atlantic to Pacific Corp. ("AP")
d/b/a Hillside Bedding in the Supreme Court, Bronx County in 1993. The action
results from a claim by one of AP's former workers who was allegedly injured
while operating a forklift during the course of his employment. The worker
commenced an action against the Company which maintained the forklift, Mid
Hudson Clarklift ("MH"), seeking damages of $7,000,000 for the alleged failure
of such company to properly maintain and service the lift. MH instituted a third
party action against AP seeking judgment over and against AP for all or part of
any verdict or judgment which may be obtained against MH. The case is presently
in the discovery stages.
In 1990, an action entitled Bedding Discount Center, Inc., MJR Bedding Co.,
Inc., Hapat Bedding Corp. v. Sid Patterson, Hillside Bedding Corporation and
Robert Martire was brought against the Company in Supreme Court, Nassau County,
Index No. 3720-90. The suit seeks damages in the amount of $1,000,000 for
alleged disclosure of certain trade secrets and confidential information to the
Company, together with punitive damages in the amount of $10,000,000 and similar
monetary damages based upon the allegations that defendants interfered with and
impaired plaintiffs' contractual and business relations and the plaintiffs have
engaged in acts constituting a prima facie tort. The action has been nearly
inactive since commencement. The Company believes that the action has no merit.
There can be no assurances however that the Company will prevail in any such
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1996, the Company did not submit any matter to
the vote of its shareholders.
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock and Warrants are traded on the National
Association of Security Dealers Automated Quotation System ("NASDAQ") under the
symbol "ATEC" and "ATECW"), respectively. The following table sets forth the
high and low bid prices for the Company's Common Stock, Units and Warrants for
the periods indicated as reported by the NASDAQ. Such prices reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
5
<PAGE>
not necessarily represent actual transactions. The following price information
has been adjusted to reflect the Company's September 9, 1994 one for ten Reverse
Stock Split.
Common Stock
High Low
------- -------
1994
Quarter ended 3/31.................................. 1 1/4 7/16
Quarter ended 6/30.................................. 1 5/16
Quarter ended 9/30.................................. 4 3/4 3/8
Quarter ended 12/31................................. 2 7/8 5/8
1995
Quarter ended 3/31.................................. 1 13/16 23/32
Quarter ended 6/30.................................. 1 15/16 11/16
Quarter ended 9/30.................................. 1 19/32 11/16
Quarter ended 12/31................................. 1 3/8 13/16
1996
Quarter ended 3/31.................................. 1 1/2 7/8
Quarter ended 6/30.................................. 1 7/16 15/16
WARRANTS
High Low
------- -------
1994
Quarter ended 3/31.................................. 1/2 1/8
Quarter ended 6/30.................................. 3/16 1/8
Quarter ended 9/30.................................. 1/4 5/32
Quarter ended 12/31................................. 5/32 1/8
1995
Quarter ended 3/31.................................. 5/32 3/32
Quarter ended 6/30.................................. 5/32 5/32
Quarter ended 9/30.................................. 5/32 5/32
Quarter ended 12/31................................. 5/32 1/16
1996
Quarter ended 3/31.................................. 1/2 1/16
Quarter ended 6/30.................................. 11/32 1/8
UNITS
High Low
------- -------
1994
Quarter ended 3/31.................................. 1 3/16 3/8
Quarter ended 6/30.................................. 1 1/16 1 1/32
Quarter ended 9/30.................................. 5 3/8
Quarter ended 12/31................................. 3 1 1/4
6
<PAGE>
On September 25, 1996, the closing bid and ask prices of the Company's
Common Stock were 11/16 and 3/4 respectively and the closing prices of the
Company's Warrants were 1/16 and 3/32, respectively.
On September 19, 1996, there were approximately 233 holders of record of
the Company's Common Stock; 22 holders of record of the Series A Preferred
Shares; 6 holders of record of the Units and 34 holders of record of the
Warrants. The number of record holders does not include holders whose securities
are held in street name.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
The holders of its Series A Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board. (See "Item
8-Financial Statements").
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in
the period ended June 30, 1996 have been derived from the audited financial
statements of the Company. This information should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report
and "management's Discussion and Analysis."
<TABLE>
<CAPTION>
Operating Data 1996(2) 1995(2) 1994(2) 1993(2) 1992(1)(2)
- --------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Data
Net Sales $ 81,812,045 $ 47,565,542 $ 43,474,764 $ 49,474,764 $ 23,708,809
Income (Loss) from
continuing operations $ 838,346 $ (2,251,354) $ (226,079) $ 215,552 $ 57,453
Income (Loss) per common share-
Primary $ .04 $ (.25) $ (.04) $ .04 $ .01
Fully Diluted $ .04 $ (.25) $ N/A $ .02 $ .01
Balance Sheet Data
Total Assets $ 13,322,133 $ 11,724,938 $ 7,728,352 $ 8,989,255 $ 3,130,980
Long-term obligations $ 228,322 $ 918,291 $ 1,580,255 $ 245,000 $ 139,709
Cash dividends per
common share Nil Nil Nil Nil Nil
</TABLE>
(1) Information for these years is based on a combination of MCS (fiscal year
ended March 31), SCSI (fiscal year ended December 31) and are unaudited.
(2) Results have been restated to include the June 1996 acquisition of
Innovative Business Micros, Inc., accounted for as a pooling of interests.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Background
ATEC Group, Inc. (the "Company") through its wholly owned subsidiaries ACS,
Cony, Innovative, MCS and SCSI is engaged in the sale of computer hardware,
software, computer support and technical services. The computer hardware and
software related products are sold primarily to businesses, professionals,
government units and educational institutions. In addition, the Company provides
its clients with a full spectrum of computer services and technical support
including designing and installing computer systems, local area networks, high
volume data communications and Internet ready solutions. Additionally, the
Company sells hardware and software products to the consumer market through its
store facilities in Albany, NY, Long Island, NY, Norwalk, CT, New York City and
New Jersey.
RESULTS OF OPERATIONS
Fiscal 1996 compared to Fiscal 1995
The Company's revenues for the 1996 fiscal year increased to $81.8 million
from $47.6 million for the prior year, an increase of approximately 72%. This
increase is primarily attributable to the Company's acquisitions of ACS and CONY
in February and March of 1995, respectively, as well as its own internal growth.
Revenues are generated by the Company's sales of computer hardware and software,
and related support services. Gross margin for the year increased to $7.5
million for 1996 from $4.7 million for 1995, a 60% increase due to the increased
revenues. Gross margin as a percentage of revenues for the year were 9.1% as
compared to 9.9% for the prior year. These margins are expected to increase as
these companies attempt to increase their market share in more profitable
sectors of the business such as integration, hardware service/maintenance,
networking and training.
1996 operating expenses exclusive of amortization of intangible assets
increased to $6 million as compared to $4.6 million for the prior year. The 30%
increase in operating expenses are related to expanded business operations
through the 1995 acquisitions and the opening of a sales office in New Jersey in
the third quarter.
Amortization of intangible assets increased to $168,000 for the year from
$53,000 in the comparable 1995 period. Other expenses decreased $1.7 million
primarily due to the write-off of all costs associated with the 1994
reorganization and the satisfaction of debts of the former bedding operations.
The provision for income taxes for 1996 was $415,000 as compared to
$152,000 for 1995. The provision for income taxes in 1996 was lower than the
federal and state combined statutory rate of 46% primarily due to the effect of
deductible charges associated with the charge-off.
As a result of the above, the Company's net income increased to $838,000
for 1996 from a loss of $2,251,000 in 1995. The primary reason for the 1995 loss
resulted from costs associated with the write-off of various items related to
the Company's former bedding business, the 1994 acquisition, and the
reorganization of the Company's business. For 1996, net income per share was
8
<PAGE>
$.04 compared to a loss of $.25 in the prior year. Primary and fully diluted
average shares outstanding were 20,476,000 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $1,667,031 at June 30, 1996, an increase of
$747,936 as compared to June 30, 1995. The Company's working capital at June 30,
1996 was $3,815,238 as compared to a working capital of $2,109,178 at June 30,
1995. The increase in cash and working capital primarily resulted from the sale
of 2,160,941 shares of Common Stock for net proceeds of $1,299,751. Net cash
used by operating activities was $646,704.
Cash used for investing activities totaled $81,779, including $206,388 used
to purchase property and equipment.
To accommodate the Company's financial needs for inventory financing,
Deutsche Financial Service (formerly ITT Commercial Finance) has granted a
credit line in the aggregate amount of $4,750,000. At June 30, 1996,
indebtedness of the Company to Deutsche Financial was $2,085,054, a decrease of
$875,579 compared to June 30, 1995. Substantially, all of the Company's tangible
and intangible assets are pledged as collateral for this facility.
Fiscal 1995 compared to Fiscal 1994
During 1995, the Company acquired two additional companies, ACS and CONY
engaged in the computer products and services business. As a result of the
acquisitions and internal growth, the Company's revenues for 1995 increased to
$47.5 million from $43.5 million for 1994, an 9.2% increase. Revenues are
generated by the Company's sales of computer hardware and software, and related
support services. Gross margin increased to $4.7 million for 1995 from $3.8
million for 1994, a 23.7% increase due to increased revenues. Gross margin as a
percentage of revenues for 1995 was 9.9% as compared to 8.7% for 1994.
Operating expenses exclusive of amortization of intangible assets increased
to $5 million for 1995 as compared to $4 million for 1994, a 25% increase. In
the fourth quarter of 1995, media credits of $448,000 which the Company acquired
during the period that it engaged in bedding operations before the acquisition
of its computer business were found to be worthless and were expended. The
remainder of the increase in operating expenses are related to expanded business
operations through the 1995 acquisitions of ACS and CONY. Amortization of
intangible assets increased to $2.1 million for 1995 from $0 in the comparable
1994 period, primarily due to the write-off of all costs associated with the
1994 reorganization of the Company and the satisfaction of bedding related
debts. Interest expense for 1995 amounted to $138,000 as compared to $48,000 for
the same period in 1994. Interest expenses in 1995 are primarily related to
increased lines of credit utilized to finance the Company's increased business
activity.
The provision for income taxes for 1995 was $151,000 as compared to $73,000
for the comparable period in 1994. The provision for income taxes in 1995 was
greater than the statutory rate of 34% primarily due to the effect of non
deductible charges associated with the charge-off of the Company's goodwill.
9
<PAGE>
As a result of the above, the Company's consolidated net loss increased to
$2.3 million for 1995 from $0.2 million in the comparable 1994 period. The
primary reason for such loss resulted from costs associated with the write-off
of various items related to the Company's former bedding business, the 1994
acquisition, and the reorganization of the Company's business. The operating
results reflected 12 months of operations for SCSI, MCS and Innovative, but only
five months for ACS, and three months for CONY. Primary and fully diluted net
loss per share for 1995 was $.25 as compared to a net loss of $.04 for the
comparable 1994 period. Primary and fully diluted average shares outstanding
were 8,872,333 for 1995 and 5,289,573 and 13,136,972 for primary and fully
diluted respectively, for 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On April 18, 1996, ATEC Group, Inc. (the "Registrant") engaged Weinick,
Sanders & Co. LLP ("WS") to audit the Company's consolidated financial
statements for the year ended June 30, 1996. The decision to change independent
auditors was recommended and approved by the Company's Board of Directors.
The accounting firm of Yohalem Gillman & Company, ("Yohalem"), which served
as the Company's independent auditor for the fiscal year ended June 30, 1995 was
dismissed by the Company on April 17, 1996. On June 28, 1995, the Company's
independent auditor for the fiscal year ended June 30, 1994, Bianculli, Pascale
& Company, P.C. ("B&P"), was dismissed by the Company. Yohalem's and B&P's
services for each such year included the audit of the Company's consolidated
financial statements and other services related to filings with the Securities
and Exchange Commission. During the Company's two most recent fiscal years and
the interim periods up until the date of dismissal of Yohalem, the Company had
no disagreement with Yohalem and/or B&P and there were no "reportable events",
as defined in Items 304(a)(1)(iv) and (v) of Regulation S-K involving the
Company, Yohalem and/or B&P on matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of such auditors, would have caused them to make
reference to such matters in their respective reports, with the exception of a
disagreement with Yohalem on the proposed accounting method to be applied to the
Company's proposed acquisition of Innovative. The proposed acquisition of
Innovative (the "Acquisition") contemplated the payment to Innovative
Shareholders of shares of the Company's Common Stock over a three year period
depending upon performance criteria ("Initial Acquisition Terms"). Innovative
was owned by Surinder Rametra and Ashok Rametra, the Company's principal
executive officer and principal financial officer, respectively, and their
brother, Rajnish Rametra. Surinder and Ashok Rametra owned 25% of the Common
Stock and Rajnish Rametra owned 75%. Surinder Rametra gave direction and
guidance to Rajnish Rametra for the operations of Innovative. A member of the
Company's board of directors discussed the matter with Yohalem. The Company
authorized Yohalem to respond fully to the inquiries of WS concerning the
subject matter of the disagreement. The accountant's reports on the Company's
financial statements for the years ended June 30, 1995 and 1994 did not contain
an adverse opinion or a disclaimer of opinion nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
10
<PAGE>
Management was of the opinion that APB 16 did not apply to the Initial
Acquisition Terms. APB 16, paragraph 5 excludes transfers and exchanges between
companies under common control, and assets and liabilities would be accounted
for at historical cost in a manner similar to that in pooling of interest
accounting (AIN ASPB 16.#39). Management also consulted with the AICPA's
technical hotline prior to formulating their opinion on the appropriate
accounting.
Yohalem, the Company's former independent accountants expressed
reservations concerning the accounting method applied in the pro forma financial
presentations included in the Company's Current Report on Form 8-K dated April
1, 1996 based on the Initial Acquisition Terms and the application of this
method to the pro forma financial statements. Yohalem believed, based on a
literal reading on the applicable authoritative accounting standards, that the
proposed accounting for Innovative based on the Initial Acquisition Terms was
not in accordance with those accounting standards, as currently written,
inasmuch as the Rametra family did not own a majority of the voting shares of
the Company before the Acquisition. Yohalem is aware the Financial Accounting
Standards Board is reconsidering the requirements for consolidations and,
accordingly suggested that the Company discuss this matter with the staff of the
SEC.
The Company requested WS's views on the proposed accounting for the
Innovative transaction based on the Initial Acquisition Terms. Based on the
facts as they existed at that point in time, it was their view that APB 16 did
not apply and the appropriate accounting would be the carryover of Innovative's
cost.
In June 1996, the Company negotiated new acquisition terms "New Acquisition
Terms" with the Rametras, pursuant to which the Company would acquire 100% of
Innovative's shares in exchange for 4,900,000 shares of the Company's Common
Stock all of which shares were payable at the Closing of the Acquisition. The
New Acquisition Terms did not involve the payment of any future consideration to
the Innovative Shareholders. In June 1996, the Acquisition was consummated based
on the New Acquisition Terms. The Company, in concurrence with WS accounted for
the Acquisition as a pooling of interests.
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current directors
and officers of the Company and the position in the Company held by them:
Name Age Position
---- --- --------
Surinder Rametra 56 Chairman of the Board and
Chief Executive Officer
Ashok Rametra 44 Treasurer, Chief Financial
Officer and Director
Balwinder Singh Bathla 40 President and Director
11
<PAGE>
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
Surinder Rametra was appointed the Chief Executive Officer and Chairman of
the Board of the Company in June 1994 upon the Company's acquisition of MCS and
SCSI. From 1982 to the present Mr. Rametra has been the president of SCSI, a
company engaged in the sale of computer hardware and software primarily to
business users. Mr. Rametra received a Bachelor of Science Degree from the
Punjab Engineering College, India and a Masters of Science Degree in Engineering
from the University of I.I.T., India in 1965 and 1969 respectively. In 1976 Mr.
Rametra received a Masters of Business Administration Degree in Finance from New
York University.
Ashok Rametra was appointed Treasurer, Chief Financial Officer and Director
of the Company in June 1994 upon the closing of the Company's acquisition of MCS
and SCSI. From June 1994 to March 1995 Mr. Rametra also served as the Company's
president. From 1987 to the present Mr. Rametra has been the president of MCS, a
company engaged in the retail sale of computer hardware and software primarily
to business users. From 1985 through September 1993 Mr. Rametra was a principal
shareholder and officer of Empire State Computers International d/b/a Micro Age,
a company engaged in a business similar to MCS. Mr. Rametra received a Bachelor
of Science Degree from St. Johns University in accounting in 1980.
Balwinder Singh Bathla was appointed as the President and a Director of the
Company in March, 1995 pursuant to the terms of a Stock Acquisition Agreement
between the Company, Mr. Bathla and ACS. Pursuant to the Stock Acquisition
Agreement, the Company acquired 100% of the outstanding stock of ACS and Mr.
Bathla was elected as President and a Director of the Company. Since 1988, Mr.
Bathla was the sole shareholder of ACS and its principal operating officer prior
to the consummation of the Stock Acquisition Agreement. Mr. Bathla received a
Masters Degree in Statistics from Punjab University, Chandigar, India in 1979.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company
during its most recent fiscal year, the Company believes that there were no
Section 16(a) reports filed untimely during the Company's year ended June 30,
1996 or June 30, 1995. In April 1996 Form 4's on behalf of Surinder Rametra and
Balwinder S. Bathla were filed with the Commission. These Form 4's reported
transactions which occurred in both December 1995 and March 1996. In addition,
in September 1996 Form 4's were filed on behalf of Surinder Rametra and Ashok
Rametra with the Commission reporting transactions which occurred in June 1996,
July 1996 and September 1996. A Form 3 was filed on behalf of Rajnish Rametra in
June 1996 with the Commission reporting Mr. Rametra's status as a 10% owner.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Summary Compensation Table for the years ended June 30, 1996,
1995 and 1994 is provided herein. This table provides compensation information
on behalf of the Company's existing officers and directors as well as the
Company's former president. See "Item 13 Certain Relationships and Related
Transactions" for information regarding additional compensation paid to the
Company's former president after June 30, 1994. There are no Option/SAR Grants,
Aggregated Option/SAR Exercises or Fiscal Year-End Option/SAR Value Table for
the years ended June 30, 1996, 1995 and/or 1994. There are no long-term
12
<PAGE>
incentive plan ("LTIP") awards, or stock option or stock appreciation rights
except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1996, 1995 and 1994
Annual Compensation Awards Payouts
<TABLE>
<CAPTION>
(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
- -------- ----- ------- --------- --- ---------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Surinder Rametra 6/30/96 $156,000 5,680(10)
6/30/95 $150,850 21,624(2) NONE NONE NONE
6/30/94 $89,000 $80,000(3) 17,456(4) NONE NONE NONE
Ashok Rametra 6/30/96 $150,020 6,508(11)
6/30/95 $180,520 8,113(5) NONE NONE NONE
6/30/94 $52,700 180,000 8,777(6) NONE NONE NONE
Robert Matire(1) 6/30/96
6/30/95
6/30/94 $52,000
Balwinder Singh
Bathla 6/30/96 $135,000 51,723(12)
6/30/95 $58,650 $86,470(7) 14,177(8) See (7) NONE NONE NONE
12/31/94 $31,200 $75,000 44,921(9) 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. 18 for additional information
regarding payments to Mr. Martire.)
(2) Life Insurance $16,415, Major Medical $5,209
(3) Bonus of $55,000 from MCS
(4) Major Medical $5,309, Life Insurance $12,147
(5) Major Medical $1,129, Leased Auto $6,984
(6) Major Medical $1,793, Leased Auto $6,984
(7) Represents 70,768 shares of Common Stock issued pursuant to Mr.
Bathla's Employment Agreement.
(8) Major Medical $2,185, Interest Income $11,992
(9) Represents $16,000 in commissions, $9,600 in rent received, $19,321 as
an S-Corporation dividend
(10) Major medical $5,680
(11) Major medical $3,799, Leased Auto $2,710
(12) Major medical $4,465, Leased Auto $9,000, Interest income $38,258
13
<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, profit sharing plan and health benefits. The agreements expire
on June 30, 1997. Surinder Rametra's employment agreement also provides for a
mandatory stock bonus equal to 5% of the issued and outstanding shares of the
Company's Common Stock on June 30, 1995. 50% of this bonus is contingent upon
the Company's reporting combined revenues for MCS and SCSI of at least
$24,200,000 for the fiscal year ending June 30, 1995 or the fiscal year ending
June 30, 1996. The remaining 50% will be payable provided that the revenue
contingency noted above is satisfied and combined pre-tax net earnings for MCS
and SCSI are at least $825,000 during either the year ended June 30, 1995 or
1996. No stock bonus was earned for the years ended June 30, 1995 or 1996.
In 1995, the Company's wholly owned subsidiary ACS entered into an
employment agreement with Balwinder Singh Bathla, the Company's President,
pursuant to which ACS employed Mr. Bathla as ACS' president through December 31,
1997 at an annual base salary of $135,000 as well as fringe benefits including
discretionary cash and stock bonuses, pension, profit sharing and health
benefits. The following mandatory stock bonuses have been or will be paid to Mr.
Bathla:
(i) The Employee received Series G Preferred Stock which was convertible
into $86,470 worth of ATEC's Common Stock based upon ACS reporting
$10,959,000 in revenues for the period from July 1, 1994 through December
31, 1994. The series G stock was converted into 70,768 shares of Common
Stock.
(ii) For every $1,000,000 in annual revenues as reported on the Company's
audited financial statements for the year ended December 31, 1995 in excess
of the actual revenues reported on the Company's 1994 audited financial
statements, the Employee shall receive $25,000 worth of ATEC's Common Stock
based on the bid and asked prices for shares of ATEC's Common Stock as
reported in the over-the-counter market during the ten day trading period
ended December 31, 1995;
(iii) For every $100,000 in pretax income in excess of $400,000 as reported
on the Company's audited financial statements for the year ended December
31, 1995 the Employee shall receive $25,000 worth of ATEC's Common Stock as
reported in the over-the-counter market during the ten day trading period
ended December 31, 1995.
(iv) For every $1,000,000 in annual revenues as reported on the Company's
audited financial statements for the year ended December 31, 1996 in excess
of the higher of (i) actual revenues reported on the Company's 1995 audited
financial statements or (ii) the actual revenues reported on the Company's
1994 audited financial statements, the Employee shall receive $25,000 worth
of ATEC's Common Stock based on the bid and asked prices for shares of
ATEC's Common Stock as reported in the over-the-counter market during the
ten day trading period ended December 31, 1996;
(v) For every $100,000 in pretax income as reported on the Company's
audited financial statements for the year ended December 31, 1996 in excess
14
<PAGE>
of the higher of (i) actual pre-tax income reported on the Company's 1995
audited financial statements or (ii) actual pre-tax income reported on the
Company's 1994 financial statements, the Employee shall receive $25,000
worth of ATEC's Common Stock as reported in the over-the-counter market
during the ten day trading period ended December 31, 1996;
(vi) For every $1,000,000 in annual revenues as reported on the Company's
audited financial statements for the year ended December 31, 1997 in excess
of the higher of (i) actual revenues reported on the Company's 1996 audited
financial statements; (ii) the actual revenues reported on the Company's
1995 audited financial statements; or (iii) the actual revenues reported on
the Company's 1994 audited financial statements, the Employee shall receive
$25,000 worth of ATEC's Common Stock based on the bid and asked prices for
shares of ATEC's Common Stock as reported in the over-the-counter market
during the ten day trading period ended December 31, 1997; and
(vii) For every $100,000 in pretax income as reported on the Company's
audited financial statements for the year ended December 31, 1997 in excess
of the higher of (i) actual net income reported on the Company's 1996
audited financial statements; (ii) the actual net income reported on the
Company's 1995 audited financial statements, or (iii) the actual net income
reported on the Company's 1994 audited financial statements, the Employee
shall receive $25,000 worth of ATEC's Common Stock as reported in the
over-the-counter market during the ten day trading period ended December
31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of June 26, 1996 certain information with
respect to the beneficial ownership of the Company's voting securities by (i)
any person (including any "group" as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") known by
the Company to be the beneficial owner of more than 5% of the Company's voting
securities, (ii) each director of the Company, (iii) each executive officer
named in the Summary Compensation table appearing herein, and (iv) all executive
officers and directors of the Company as a group. The table also sets forth the
respective general voting power of such persons taking into account the voting
power of the Common Stock and the Preferred Stock combined.
Name and Address Amount and Nature Amount and Nature
of Beneficial of Beneficial of Beneficial Percentage of
Owner Ownership of Ownership of Voting Stock
Outstanding Common Stock Preferred Stock Outstanding(1)
- ----------- ------------ --------------- --------------
Ashok Rametra(2) 1,150,705 300,000 Series J 7.7%
1952 E. Jericho Preferred Shares
Turnpike, 100,000 Series K
E. Northport, Preferred Shares
NY 11731
15
<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 Preferred Stock Outstanding(1)
- ----------- ------------ --------------- --------------
Surinder Rametra(3) 2,724,166 225,000 Series J 15.4%
1952 E. Jericho Preferred Shares
Turnpike, 165,000 Series K
E. Northport, Preferred Shares
NY 11731
Balwinder Singh
Bathla (4)(5) 588,164 200,000 Series D 4.9%
American Computer Preferred Shares
Systems, Inc. 200,000 Series E
43 West 29th Street Preferred Shares
New York, NY 10001
Rajnish Rametra(6) 2,536,104 30,000 Series J 12.7%
90 Adams Avenue Preferred Shares
Hauppauge, NY 11716 10,000 Series K
Preferred Shares
All directors and
executive/officers
as a group (3 persons) 6,999,139 200,000 Series D 40.6%
Preferred Shares
200,000 Series E
Preferred Shares
555,000 Series J
Preferred Shares and
275,000 Series K
Preferred Shares
representing an
aggregate of
1,230,000 votes
(1) Computed based upon a total of 18,433,462 shares of Common Stock, 29,231
shares of Series A Preferred Stock, 1,458 shares of Series B Preferred
Stock, 400,000 shares of Series D Preferred Stock, 200,000 Shares of Series
E Preferred Stock, 800,000 shares of Series J Preferred Stock and 400,000
shares of Series K Preferred Stock. Each share of Common Stock and
Preferred Stock possess one vote per share. Accordingly, the foregoing
represents an aggregate of 20,264,151 votes. All shares in the table have
been adjusted to reflect the Company's September 1994 reverse stock split.
(2) Ashok Rametra is the Treasurer, Chief Financial Officer and a Director of
the Company. Ashok is the brother of Surinder Rametra and Rajnish Rametra.
The foregoing figure includes the ownership of 225,000 Series J Preferred
Shares and 75,000 Series K Preferred Shares owned by Mr. Rametra's
children. Mr. Rametra disclaims beneficial ownership of the following
shares owned by the following members of Mr. Rametra's family: Surinder
Rametra - 2,724,166 Common Shares, 225,000 Series J Preferred Shares and
16
<PAGE>
165,000 Series K Preferred Shares; Munish Rametra - 275,462 Common Shares,
20,000 Series J Preferred Shares and 20,000 Series K Preferred Shares;
Seema Wasil - 141,935 Common Shares, 45,000 Series J Preferred Shares and
45,000 Series K Preferred Shares; Mona Sutaria - 9,032 Common Shares;
Rajnish Rametra - 2,536,104 Common Shares, 30,000 Series J Preferred shares
and 10,000 Series K Preferred Shares; Vijay Rametra - 162,357 Common
Shares, 30,000 Series J Preferred Shares and 10,000 Series K Preferred
Shares and Harry Gupta - 208,333 Common Shares, 150,000 Series J Preferred
Shares and 50,000 Series K Preferred Shares. None of such shares which
aggregate a total of 6,857,389 votes representing 33.8% of the outstanding
voting securities of the Company are reflected in the table above.
(3) Surinder Rametra is the Chief Executive Officer and Chairman of the Board
of the Company. Surinder is the brother of Ashok Rametra and Rajnish
Rametra. The foregoing figure includes the ownership of 603,448 Common
Shares by Nirmala Rametra, Surinder's wife, and 297,865 Common Shares,
35,000 Series J Preferred Shares and 35,000 Series J Preferred Shares owned
by Amit Rametra, Surinder's son. The foregoing figure does not include the
following shares owned by members of Mr. Rametra's family for which Mr.
Rametra disclaims beneficial ownership: Ashok Rametra - 1,150,705 Common
Shares, 300,000 Series J Preferred Shares and 100,000 Series K Preferred
Shares; Munish Rametra - 275,462 Common Shares, 20,000 Series J Preferred
Shares and 20,000 Series K Preferred Shares; Seema Wasil - 141,935 Common
Shares, 45,000 Series J Preferred Shares and 45,000 Series K Preferred
Shares; Mona Sutaria - 9,032 Common Shares; Rajnish Rametra - 2,536,104
Common Shares, 30,000 Series J Preferred shares and 10,000 Series K
Preferred Shares; Vijay Rametra - 162,357 Common Shares, 30,000 Series J
Preferred Shares and 10,000 Series K Preferred Shares; Harry Gupta -
208,333 Common Shares, 150,000 Series J Preferred Shares and 50,000 Series
K Preferred Shares; Priya Rametra - 75,000 Series J Preferred Shares and
25,000 Series K Preferred Shares; Puja Rametra - 75,000 Series J Preferred
Shares and 25,000 Series K Preferred Shares and Sumeet Rametra 75,000
Series J Preferred Shares and 25,000 Series K Preferred Shares. None of
such shares which aggregate a total of 5,593,928 votes representing 27.6%
of the outstanding voting securities of the Company are reflected in the
table above.
(4) Mr. Bathla is the President and a Director of the Company. The foregoing
figure does not include the following shares owned by members of Mr.
Bathla's family for which Mr. Bathla disclaims beneficial ownership:
Nuripinder Kauer Bathla - 10,631 Common Shares; Kamal J. Singh - 176,923
Common Shares and Parmjit Singh - 16,441 Common Shares. None of such shares
which aggregate a total of 203,995 votes representing 1% of the outstanding
voting securities of the Company are reflected in the table above.
(5) Shares of Series D and E Preferred Stock are convertible into shares of
Common Stock based upon the average bid and asked price of the Company's
Common Stock during the six month period commencing February 6, 1997 and
expiring August 6, 1997. Mr. Bathla is also entitled to receive additional
shares of the Company's Preferred Stock and Common Stock over the next two
years (See "Certain Transactions").
(6) Rajnish Rametra is the brother of Surinder Rametra and Ashok Rametra. The
foregoing figure includes shares owned by his wife and children. The
foregoing figure does not include the following shares owned by members of
Mr. Rametra's family for which Mr. Rametra disclaims beneficial ownership:
Surinder Rametra - 2,724,166 Common Shares, 225,000 Series J Preferred
Shares and 165,000 Series K Preferred Shares; Ashok Rametra - 1,150,705
Common Shares, 300,000 Series J Preferred Shares and 100,000 Series K
Preferred Shares; Munish Rametra - 275,462 Common Shares, 20,000 Series J
Preferred Shares and 20,000 Series K Preferred Shares; Seema Wasil -
141,935 Common Shares, 45,000 Series J Preferred Shares and 45,000 Series K
17
<PAGE>
Preferred Shares; Mona Sutaria - 9,032 Common Shares; Vijay Rametra -
162,357 Common Shares, 30,000 Series J Preferred Shares and 10,000 Series K
Preferred Shares; Harry Gupta - 208,333 Common Shares, 150,000 Series J
Preferred Shares and 50,000 Series K Preferred Shares; Priya Rametra -
75,000 Series J Preferred Shares and 25,000 Series K Preferred Shares; Puja
Rametra - 75,000 Series J Preferred Shares and 25,000 Series K Preferred
Shares and Sumeet Rametra 75,000 Series J Preferred Shares and 25,000
Series K Preferred Shares. None of such shares which aggregate a total of
6,131,990 votes representing 30.3% of the outstanding voting securities of
the Company are reflected in the table above.
18
<PAGE>
ITEM 13. CERTAIN TRANSACTIONS
Transactions Between Sun and the Former MCS and
SCSI Shareholders
The following transaction between the Company, Surinder Rametra Ashok
Rametra, MCS and SCSI took place in connection with the Company's acquisition of
MCS and SCSI and the issuance by the Company of in excess of 90% of the
Company's then outstanding voting securities.
Agreements Between Sun, SCSI and MCS Shareholders
In November 1993 Surinder Rametra the Chief Executive Officer and Chairman
of the Company began discussions with Raghbir Lambda, the sole director,
shareholder and controlling person of Sun Corporation (2000) Limited ("Sun").
Mr. Rametra and Mr. Lambda have known each other since 1990. Mr. Rametra at such
time was both shareholder of SCSI and MCS and a member of the Board of Directors
of both of such companies. The Company had been advised that Sun was engaged in
the business of investing in private and public companies. Mr. Rametra and Mr.
Lambda discussed the potential purchase by Sun of 100% of both MCS and SCSI.
Various negotiations ensued between the parties and a verbal agreement was
reached regarding the terms of sale of MCS and SCSI to Sun for an aggregate
maximum purchase price of $10,000,000 payable in securities of a publicly traded
company. In accordance with the verbal agreement, Mr. Rametra on behalf of the
SCSI and MCS Shareholders would have the right to approve or disapprove the
securities of a particular public company as payment for the MCS and SCSI
Shares. Accordingly, during the period from November 1993 through May 1994,
Messrs. Rametra and Lambda discussed potential transactions involving the
delivery by Sun to the MCS and SCSI Shareholders of the Shares of various public
companies. In May 1994 discussions began regarding the sale by Sun of the MCS
and SCSI shares to the Company. Mr. Rametra agreed to accept the securities of
the Company on behalf of the MCS and SCSI Shareholders, as suitable for payment
of the MCS and SCSI purchase price. At such time the verbal agreement reached
between Sun and Mr. Rametra on behalf of the MCS and SCSI shareholders in 1993
was memorialized.
Surinder Rametra and related parties (the "SCSI Shareholders") sold 100% of
the issued and outstanding shares of capital stock of SCSI to Sun. In
consideration for the SCSI Shares, Sun was required to deliver to the SCSI
Shareholders shares of a publicly traded Company's Common Stock ("Public
Shares") with a market value of $2,000,000 over a two year period. Sun is also
required to deliver to the SCSI Shareholders (i) for a period of three years,
Public Shares with a value of $500,000 payable upon SCSI reporting audited
revenues in an amount equal to or greater than $15,000,000 for the first year
and 10% growth thereafter; and (ii) for a period of three years additional
Public Shares with a value of $500,000 payable upon receipt of audited pre-tax
income on behalf of SCSI equal to or greater than $400,000 for the first year
with 10% growth thereafter. Sun agreed that in the event it entered into any
further agreement to sell the SCSI shares prior to the payment of all
compensation to the SCSI Shareholders, Sun would hold the consideration received
by it for the SCSI shares (up to the amount owed to the SCSI Shareholder) for
the benefit of the SCSI shareholders. In the event of a default by Sun in the
payment of any compensation to the SCSI Shareholders all consideration held by
Sun 2000 from the sale of SCSI shares to a third party would be immediately
deliverable to the SCSI Shareholders. In partial satisfaction of its obligations
to the SCSI Shareholders, Sun has delivered shares of Series B Preferred Stock
convertible into shares of Common Stock of the Company to Essential Metals
19
<PAGE>
Industry Inc. ("EMI"), a company that is an affiliate of the SCSI Shareholders
and the Company's President, Ashok Rametra. The shares delivered to EMI were
acquired by Sun upon the sale by Sun to the Company of the SCSI shares as well
as 100% of the issued and outstanding shares of MCS. Sun is required to deliver
to the SCSI Shareholders the balance of the Public Shares described above.
Surinder Rametra, Ashok Rametra, Rajnish Rametra, Vijay Rametra and Harry
L. Gupta (the "MCS Shareholders") sold 100% of the issued and outstanding shares
of capital stock of MCS Inc. ("MCS") to Sun. Ashok Rametra, Rajnish Rametra, and
Vijay Rametra are the brothers of Surinder Rametra. Harry L. Gupta is the
brother-in-law of Surinder and Ashok Rametra. In consideration for the MCS
Shares, Sun was required to deliver to the MCS Shareholders shares of a publicly
traded Company's Common Stock ("Public Shares") with a market value of
$2,000,000 over a two year period. Sun is also required to deliver to the MCS
Shareholders (i) for a period of three years Public Shares with a value of
$500,000 payable upon MCS reporting audited revenues in an amount equal to or
greater than $15,000,000 for the first year and 10% growth thereafter; and (ii)
for a period of three years additional Public Shares with a value of $500,000
payable upon receipt of audited pre-tax income on behalf of MCS equal to or
greater than $400,000 for the first year with 10% growth thereafter. Sun agreed
that in the event it entered into any further agreement to sell the MCS shares
prior to the payment of all compensation to the MCS Shareholders, Sun would hold
the consideration received by it for the MCS shares (up to the amount owed to
MCS Shareholders) for the benefit of the MCS Shareholders. In the event of a
default by Sun in the payment of any compensation to the MCS Shareholders, all
consideration held from the sale of MCS shares to a third party would be
immediately deliverable to the MCS Shareholders. In partial satisfaction of its
obligation to the MCS Shareholders, Sun has delivered shares of Series B
Preferred Stock of the Company convertible into Common Stock of the Company to
EMI, a company that is an affiliate of Ashok Rametra and Surinder Rametra. The
shares delivered to EMI were acquired by Sun upon the sale by Sun to the Company
of the SCSI and MCS shares. Sun is required to deliver to the MCS Shareholders
the balance of the Public Shares described above.
As further partial payments to the MCS and SCSI Shareholders, Sun delivered
to such holders in May 1995 an aggregate of an additional 1,653.8 shares of
Series B Preferred Stock representing 400,000 shares of the Company's Common
Stock. The Company's Board has agreed to exchange these shares of the Company's
Common Stock held by MCS and SCSI Shareholders for a new class of Series I
Preferred Stock with an aggregate par value of $2,000,000. The Series I
Preferred Stock will be convertible into $2,000,000 of the Company's Common
Stock commencing in July 1996 based upon the average of the Company's bid and
asked prices for shares of Common Stock as reported in the over-the-counter
market during the ten day trading period preceding July 1, 1996 ("Exchange
Price"). In the event that the Exchange Price is less than the average of the
bid and asked prices for the Company's Common Stock during the ten day trading
period prior to December 31, 1996, additional Common Shares will be issued so
that an aggregate of $2,000,000 in shares of Common Stock will be delivered upon
conversion of all Series I Shares. Each share of Series I Preferred Stock
possesses one vote. In July 1996, 390,000 of such shares were exchanged for
1,666,665 shares of the Company's Common Stock.
In August 1995, Sun and the MCS and SCSI shareholders entered into an
agreement pursuant to which all obligations owed by Sun to such shareholders
were satisfied by Sun's transfer to the MCS and SCSI shareholders of an
aggregate of 5,312.9 shares of Series B Preferred Stock representing 1,284,978
shares of the Company's Common Stock. These shares were ultimately converted
into 84,978 Common Shares and the right to receive 800,000 shares of a new
Series J Preferred Stock with an aggregate par value of $4,000,000, 400,000
shares of a new class of Series K Preferred Stock with an aggregate par value of
20
<PAGE>
$2,000,000. The Series J Preferred Stock will be convertible into $4,000,000 of
the Company's Common Stock commencing in July 1997 based upon the average of the
bid and ask prices for shares of the Company's Common Stock as reported in the
over-the-counter market during the ten trading days preceding July 1, 1997
("1997 Exchange Price"). In the event that the 1997 Exchange Price is less than
the average of the bid and ask prices for the Company's Common Stock during the
ten day trading period prior to December 31, 1997, additional Common Shares will
be issued so that an aggregate of $4,000,000 in shares of Common Stock will be
delivered upon conversion of all Series J Preferred Stock. The Series K
Preferred Stock will be convertible into $2,000,000 of the Company's Common
Stock commencing in July 1998 based upon the average of the Company's bid and
ask prices for shares of Common Stock as reported in the over-the-counter market
during the ten day trading period preceding July 1, 1998 ("1998 Exchange
Price"). In the event that the 1998 Exchange Price is less than the average of
the bid and ask prices for the Company's Common Stock during the ten day trading
period prior to December 31, 1998, additional Common Shares will be issued so
that an aggregate of $2,000,000 in shares of Common Stock will be delivered upon
conversion of all Series J Shares. Each share of Series J and Series K Preferred
Stock possess one vote.
The Stock Acquisition Agreement
In June 1994 pursuant to a stock acquisition agreement ("Acquisition
Agreement") the Company acquired 100% of the outstanding shares of Common Stock
of SCSI and MCS in exchange for the issuance by the Company of 94,431 shares of
its Common Stock and 30,900 Series B Preferred Stock. Each share of Series B
Preferred Stock is entitled to 241.86 votes per share and is convertible into
Common Stock at the rate of 241.86 shares of Common Stock. Accordingly, the
holders of the Company's Series B Preferred Stock possess voting control over
the Company. Upon closing of the Acquisition Agreement, Surinder Rametra was
appointed Chairman of the Board of the Company, Chief Executive Officer and
Secretary and Surinder's brother, Ashok Rametra became the President, Treasurer,
Chief Financial Officer and a Director of the Company. As described above upon
closing of the Acquisition Agreement EMI received from Sun shares of Series B
Preferred Stock convertible into 1,034,971 shares of the Company's Common Stock.
Transactions with Robert Martire
In connection with the acquisition by the Company of SCSI and MCS, the
Company's prior sole officer and director, Robert Martire agreed to resign his
position with the Company. In connection with his resignation Mr. Martire
received certain payments in satisfaction and termination of his employment
agreement and other obligations with the Company. Mr. Martire's Employment
Agreement required the Company to pay to him an annual salary of $260,000 per
year through July 31, 1997. Accordingly, the Company was obligated to make
further payments to Mr. Martire of approximately $540,000 under the terms of the
Employment Agreement. The Company believed that it was in its best interests to
have the Employment Agreement terminated and make to Mr. Martire the following
payments in settlement of all claims which Mr. Martire possessed against the
Company. Under the terms of the Acquisition Agreement and subsequent
arrangements, the Company paid Mr. Martire the following: (i) the sum of
$100,000; (ii) 88,968 post-split shares of the Company's Common Stock (which
shares the Company agreed to register under an S-8 Registration Statement) at
the time such shares were issued the bid price of the Company's Common Stock was
$3.125; and (iii) 250,000 shares of stock of a NASDAQ Small Cap Market company
valued at $200,000. The Company was required to pay to Mr. Martire the
difference between proceeds realized upon the sale of Sun stock and $150,000.
Since the sales proceeds realized by Mr. Martire on the sale of such securities
21
<PAGE>
were only $77,522, the Company was required to deliver to Mr. Martire an
additional $72,425, $18,475 of such sum was paid on June 1, 1995 and $9,000 on
August 11, 1995. The total dollar figure attributable to payments made to Mr.
Martire (valuing the 88,968 post split shares referred to in (ii) above at
$3.125 per share) was $528,025. In December 1995 the Company and Mr. Martire
agreed to settle all sums due and owning to Mr. Martire through the issuance of
60,000 Shares of the Company's Common Stock, which shares have been registered
for resale.
Transactions with Balwinder Singh Bathla
In connection with the acquisition by the Company of ACS, the Company
agreed to issue to Balwinder Singh Bathla 100,000 shares of Series D Preferred
Stock with an aggregate par value of $500,000 on the day of the closing, 100,000
additional shares of Series D Preferred Stock with an aggregate par value of
$500,000 on the three month anniversary of the closing; 200,000 shares of Series
E Preferred Stock with an aggregate par value of $1,000,000 on the one year
anniversary of the closing; and 66,800 shares of Series F Preferred Stock with
an aggregate par value of $334,000 upon delivery of certain financial
information to the Company. In addition the Company agreed to issue to Mr.
Bathla shares of the Company's Common Stock up to a maximum value of $1,664,000
over a three year period subject to ACS meeting certain performance criteria of
the minimum annual revenues of $12,600,000, plus 10% in annual increases and
minimum annual income before taxes of $315,000, plus 10% in annual increases.
These performance related Common Stock payments will be valued according to the
average of the closing bid and ask prices of the Company's shares during the 10
day trading period preceding December 31 of each year. In connection with the
Stock Purchase Agreement, ACS and Mr. Bathla entered into an employment
agreement whereby Mr. Bathla is to serve as President of ACS through December
31, 1997. Mr. Bathla shall receive an annual base salary at the rate of $135,000
for the first year of employment, which rate shall be increased by 10% per
annum. Mr. Bathla shall be eligible to receive an annual cash and/or stock
bonus, the amount and timing of which will be in the sole discretion of the
Company's Board of Directors. Mr. Bathla shall also be entitled to receive a
mandatory stock bonus payable in connection with the delivery of financial
statements indicating specified levels of annual revenue and pre-tax income on
behalf of ACS. The 1994 mandatory bonus consisted of 1 share of Series G
Preferred Stock, which share has been earned by Mr. Bathla. Mandatory bonuses
for the subsequent years shall be payable in Common Stock of the Company upon
demonstration that ACS meets specified minimum levels of annual revenues and
pre-tax income. In July 1995 Mr. Bathla's Series F and G Preferred Shares were
converted into an aggregate of 344,118 shares of Common Stock.
The Company also guaranteed payment by ACS to Mr. Bathla of an aggregate of
$750,000 together with 10% interest thereon by December 31, 1997. As of June 30,
1996 and 1995, the balance owed by ACS to Mr. Bathla was $228,322 and $396,246
respectively. ACS and the Company entered into a verbal agreement whereby the
Company agreed to provide corporate services such as product purchasing,
customer referrals and general management advisory services on behalf of ACS.
The Company was compensated at the rate of $250 per hour for such services plus
75% of increases in ACS' gross margins which resulted from such services. The
total amount earned by the Company in this regard at December 31, 1994 was
$200,000. Of such amount $120,000 was for general management advisory service
and the balance of $80,000 from improvements to ACS' gross margins. The
agreement continued until the closing of the Company's acquisition of ACS.
22
<PAGE>
Transactions with CONY Shareholders
In connection with the acquisition of CONY, the Company agreed to issue to
Arvinder Gulati, Patrick Hagerty and Kenneth Bohacs (collectively the "CONY
Shareholders") an aggregate of 437,990 shares of the Company's Common Stock and
200,000 shares of Series D $5.00 par value Preferred Stock. 100,000 of the
Series D Shares were delivered to the CONY Shareholders as of the closing and
the balance were delivered six months thereafter. The Company also agreed to
issue to the CONY Shareholders additional shares of the Company's Common Stock
with a maximum value of $1,000,000 over the next three fiscal years subject to
CONY meeting certain minimum revenue and gross profit benchmarks. These
additional shares are to be valued based upon the closing bid and ask price of
the Company's Common Stock as reported during ten trading days prior to the end
of each subject fiscal year.
In connection with the Stock Purchase Agreement, the CONY Shareholders
entered into employment agreements with CONY pursuant to which Mr. Gulati will
serve as the Chief Executive Officer of CONY, Mr. Hagerty will serve as CONY's
President and Mr. Bohacs as CONY's Secretary. Messrs. Gulati and Hagerty will
each receive an annual salary of $120,000 per year subject to annual increases.
Mr. Bohacs will receive an annual salary of $24,000 per year subject to annual
increases. The CONY Shareholders will be entitled to participate in a stock
bonus pool which will entitle them to receive additional shares of the Company's
Common Stock based upon CONY meeting specified levels of revenues and pre-tax
income during CONY's next three fiscal years.
CONY and the Company entered into a verbal agreement whereby the Company
agreed to provide corporate services such as product purchasing, customer
referrals and general management advisory services on behalf of CONY. The
Company was compensated at the rate of $250 per hour for such services plus a
percentage of increases in CONY's gross margins which resulted from such
services. The total amount earned by the Company in this regard from January 1,
1995 through March 31, 1995 was $175,000. 60% of such amount was for general
management advisory service and the balance from improvements to CONY's gross
margins. The agreement continued until the closing of the Company's acquisition
of CONY.
Transactions with Innovative Business Micros Inc.
In June, 1996, the Company acquired 100% of the outstanding capital stock
of Innovative Business Micros, Inc., a computer integrator located in Long
Island. Innovative was formerly owned by Surinder Rametra and Ashok Rametra, the
Company's Principal Executive Officer and Principal Financial Officer
respectively, and Rajnish Rametra the brother of Surinder and Ashok. The
consideration for the acquisition was the issuance by the Company of an
aggregate of 4,900,000 shares of the Company's Common Stock to the former
shareholders of Innovative. The terms of the acquisition were not negotiated in
an arms-length manner and there can be no assurance that an unaffiliated company
would have paid less consideration for Innovative than paid by the Company. The
Acquisition will be accounted for as a pooling of interest. (see "Business
General").
Sale and Purchase of Goods Between SCSI, MCS, ACS, CONY, Innovative and
Affiliates
During the period from July 1, 1995 to June 30, 1996, the Company's
subsidiaries SCSI, MCS, ACS, and Innovative sold and purchased goods to and from
23
<PAGE>
each other as well as Essential Metals Inc., ESCI Inc., Compudata, Empire State
Computer International, Inc. ("Empire") and Micro Systems Leasing and Rental,
Inc. ("MSLR"). These corporations, with the exception of Empire are affiliates
of Surinder Rametra and/or Ashok Rametra. Empire is an affiliate of ACS. These
goods consisted of computer hardware and related products. The following
summarizes these related transactions. The Company believes that the terms of
such transactions were at least as favorable to the Company as would have been
reached with unaffiliated parties.
24
<PAGE>
AMOUNT OF GOODS PURCHASED BY MCS FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 107,016 $ 29,539
SCSI $ 47,909 $ 94,393
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 14,637 $ 8,190
CONY $ 49,963 $ 39,020
Empire State Computer
International, Inc. $ -.- $ -.-
AMOUNT OF GOODS SOLD BY MCS TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 131,811 $ 1,560
SCSI $ 18,012 $ 200,558
ESCI Inc. $ -.- $ 228,310
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 233,952 $ 216,777
CONY $ 6,616 $ 215,190
Empire State Computer International, Inc. $ -.- $ -.-
AMOUNT OF GOODS PURCHASED BY SCSI FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 13,737 $ 14,812
MCS $ 18,012 $ 200,558
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 13,166 $ 4,695
CONY $ 183,920 $ 158,829
Empire State Computer International, Inc. $ -.- $ -.-
25
<PAGE>
AMOUNT OF GOODS SOLD BY SCSI TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ 194,463 $ 471,028
MCS $ 47,909 $ 94,393
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
ACS $ 305,746 $ -.-
CONY $ 665,638 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
MSLR $ 99,004 $ -.-
AMOUNT OF GOODS PURCHASED BY ACS FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 305,746 $ 82,341
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 233,952 $ 216,777
Empire State Computer International, Inc. $ -.- $ -.-
CONY $ 141,409 $ -.-
AMOUNT OF GOODS SOLD BY ACS TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 13,166 $ 4,595
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 14,637 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
CONY $ 20,150 $ 17,204
26
<PAGE>
AMOUNT OF GOODS PURCHASED BY CONY FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 665,638 $ 165,011
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 6,616 $ 215,190
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ 20,150 $ 17,204
AMOUNT OF GOODS SOLD BY CONY TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
Innovative Business Micros Inc. $ -.- $ -.-
SCSI $ 183,920 $ 158,829
ESCI Inc. $ -.- $ -.-
Essential Metals Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 79,963 $ 39,020
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ 141,409 $ -.-
AMOUNT OF GOODS PURCHASED BY INNOVATIVE FROM RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
CONY $ -.- $ -.-
SCSI $ 194,463 $ -.-
ESCI Inc. $ -.- $ -.-
Essential Metals, Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 131,811 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ -.- $ -.-
27
<PAGE>
AMOUNT OF GOODS SOLD BY INNOVATIVE TO RELATED PARTIES
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
NAME AMOUNT AMOUNT
- ---- ------------- -------------
CONY $ -.- $ -.-
SCSI $ 13,737 $ -.-
ESCI Inc. $ -.- $ -.-
Essential Metals Inc. $ -.- $ -.-
Compudata $ -.- $ -.-
MCS $ 107,016 $ -.-
Empire State Computer International, Inc. $ -.- $ -.-
ACS $ -.- $ -.-
As of June 30, 1995 and June 30, 1994 Surinder Rametra was indebted to SCSI
in the amount of $123,169 and $212,195 respectively. Subsequent to June 30,
1995, the loan, with the exception of approximately $16,000, was repaid by Mr.
Rametra.
ACS and Innovative borrowed funds from Ashok Rametra, Balwinder Singh
Bathla and Rajnish Rametra in order to assist the cash flow requirements of ACS
and Innovative. The following loans were outstanding as of dates indicated.
LOANS OWED BY ACS
-----------------
06/30/96 06/30/95 Interest Maturity
Lender Amount Amount Rate Date
- ------ -------- -------- -------- --------
Balwinder Singh Bathla $228,322 $396,246 10% 12/31/97
LOANS OWED BY INNOVATIVE
------------------------
06/30/96 06/30/95 Interest Maturity
Lender Amount Amount Rate Date
- ------ -------- -------- -------- --------
Rajnish Rametra $500,000 $230,000 10% 06/30/97
Ashok Rametra $150,000 $ -.- 10% 06/30/97
In September 1995, S&N Associates, a company controlled by Surinder
Rametra, loaned a total of $50,000 to the Company, bearing interest at the rate
of 10% per annum. The loan was paid on December 27, 1995.
During the year ended June 30, 1995, Surinder Rametra advanced $335,000 to
the Company for working capital purposes. $303,000 of such funds were repaid to
Mr. Rametra. At June 30, 1995, after giving effect to prior year
28
<PAGE>
advance/repayment transactions, Mr. Rametra owed the Company $30,524. This
balance was repaid to the Company subsequent to June 30, 1995.
During the year ended June 30, 1996, Ashok Rametra advanced the Company
$125,000, bearing interest at the rate of 10% per annum. The loan was repaid
prior to March 31, 1996.
Surinder Rametra, Ashok Rametra, Balwinder Singh Bathla, Rajnish Rametra
and the CONY Shareholders have personally guaranteed the respective obligations
owed by SCSI, MCS, ACS, Innovative and CONY to Deutsche Financial Services
("Deutsche") in connection with inventory financing advanced by Deutsche.
MCS's office located in Albany, New York is leased pursuant to a lease
expiring in June 2003. The lease requires annual rental payments of
approximately $96,600 through 1998 and $108,192 thereafter, plus all expenses
and taxes attributable to the operation of the premises. This facility is leased
from 1962 Central Avenue Realty Associates (a partnership) controlled by former
stockholders of MCS and SCSI.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATEC GROUP, INC.
By: /s/ Surinder Rametra
-----------------------------------------
Surinder Rametra, Chief Executive Officer
Dated: October 7, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Surinder Rametra October 7, 1996
- -----------------------------------------
Surinder Rametra, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/ Ashok Rametra October 7, 1996
- -----------------------------------------
Ashok Rametra, Chief Financial Officer, Treasurer,
and Director (Principal Financial Officer and
Principal Accounting Officer)
/s/ Balwinder Singh Bathla October 7, 1996
- -----------------------------------------
Balwinder Singh Bathla, President and Director
30
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT OF WEINICK, SANDERS & CO. LLP................. F-1
INDEPENDENT AUDITOR'S REPORT OF YOHALEM GILLMAN & COMPANY ................. F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
OF BIANCULLI, PASCALE & CO. P.C. .................................. F-3
INDEPENDENT AUDITOR'S REPORT OF GEORGE S. GOLDBERG ........................ F-4
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at June 30, 1996 and 1995 .......... F-5
Consolidated and Combined Statements of Operations
For the Years Ended June 30, 1996, 1995 and 1994 ............... F-6
Combining Statements of Operations of Micro Computer Store, Inc.,
Sun Computer and Software, Inc. and Innovative Business
Micros, Inc.
For the Year Ended June 30, 1994 ............................... F-7
Consolidated and Combined Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994 ............... F-8 - F-10
Combining Statement of Cash Flows of Micro Computer Store, Inc.,
Sun Computer and Software, Inc. and Innovative Business
Micros, Inc.
For the Year Ended June 30, 1994 ............................... F-11 - F-12
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 1994, 1995 and 1996 ............... F-13 - F-16
NOTES TO FINANCIAL STATEMENTS ............................................. F-17 - F-42
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and have therefore been omitted or
the required information is shown in the Financial Statements or the Notes
thereto.
<PAGE>
[Letterhead of Weinick, Sanders & Co. LLP]
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the accompanying consolidated balance sheet of ATEC Group, Inc.
and Subsidiaries (formerly Hillside Bedding, Inc. and Subsidiaries) as at June
30, 1996, and the related consolidated statements of operations, cash flows, and
stockholders' equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ATEC
Group, Inc. and Subsidiaries as at June 30, 1996, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Weinick, Sanders & Co. LLP
New York, New York
August 21, 1996
F-1
<PAGE>
[Letterhead of Yohalem Gillman & Company]
Independent Auditor's Report
Shareholders and Board of Directors
ATEC Group, Inc.
We have audited the consolidated balance sheet of ATEC Group, Inc.
(formerly Hillside Bedding, Inc.) and Subsidiaries as of June 30, 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (before restatement for the 1996
pooling-of-interests, and not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ATEC Group, Inc. and Subsidiaries at June 30, 1995 and the consolidated results
of its operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Yohalem Gillman & Company
New York, New York
October 4, 1995
F-2
<PAGE>
[LETTERHEAD OF BIANCULLI, PASCALE & CO. P.C.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
ATEC Group, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of stockholders'
equity of ATEC Group, Inc. and Subsidiaries (formerly Hillside Bedding, Inc. and
Subsidiaries) as of June 30, 1994 prior to its restatement for the June 14, 1996
pooling of interest discussed below and in the accompanying notes to the
financial statement. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standard require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statement referred to above
presents fairly in all material respects, the consolidated stockholders' equity
of ATEC Group, Inc. and Subsidiaries for the year ended June 30, 1994, in
conformity with generally accepted accounting principles.
As more fully described in the accompanying notes to the financial
statements, on June 23, 1994, Hillside Bedding, Inc. acquired all of the
outstanding common stock of Micro Computer Store, Inc. and Sun Computer and
Software, Inc. These acquisitions have been treated for accounting purposes, as
a consolidation and merger of Micro Computer Store, Inc. and Sun Computer and
Software, Inc. and an acquisition by them of ATEC Group, Inc. and Subsidiaries
because, among other factors, the assets revenues and net earnings of Micro
Computer Store, Inc. and Sun Computer and Software, Inc. significantly exceeded
those of ATEC Group, Inc. and Subsidiaries and the management of these companies
control the Company after the acquisition.
We have also examined the historical statements of operations and cash
flows of Micro Computer Store, Inc. and Sun Computer and Software, Inc. for the
year ended June 30, 1994. These financial statements give effect to the
consolidation and merger of these companies as discussed above and in the notes
to the financial statement, as if their consolidation and merger was effected as
of July 1, 1992. Our examination was made in accordance with standards
established by the American Institute of Certified Public Accountants and,
accordingly, included such procedures as we considered necessary in the
circumstances.
In our opinion, the historical statements of operations and cash flows
described above present fairly, in all material respects, the results of
operations and cash flows for the year ended June 30, 1994 in conformity with
generally accepted accounting principles.
On June 14, 1996, ATEC Group, Inc. and Subsidiaries acquired all of the
stock of Innovative Business Micros, Inc., accounted for under the pooling of
interests method. We previously audited and reported on the consolidated
statement of stockholders' equity of ATEC Group, Inc. and Subsidiaries as of
June 30, 1994. The contribution of ATEC Group, Inc. and Subsidiaries to total
stockholders' equity represented 60.6 percent of the respective restated total.
Separate financial statements of Innovative Business Micros, Inc. included in
the restated consolidated statement of stockholders' equity were audited and
reported on separately by other auditors whose report is separately presented
herein.
/s/ Bianculli, Pascale & Co. P.C.
Farmingdale, NY
September 22, 1994
(Except in regard to the historical
combining statements of operations and
cash flows which date is March 20, 1995)
F-3
<PAGE>
INDEPENDENT AUDITOR'S REPORT OF GEORGE S. GOLDBERG
George S. Goldberg
Certified Public Accountant
To the Board of Directors and Stockholders
Atec Group, Inc.
I have audited the accompanying balance sheets of Innovative Business Micros,
Inc. as of September 30, 1995 and the related statements of income,
stockholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation. I
believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Innovative Business Micros, Inc. as
of September 30, 1995 and the results of their operations and their cash flows
for the two years then ended in conformity with generally accepted accounting
principles.
/s/ George S. Goldberg
George S. Goldberg
Certified Public Accountant
Roslyn Heights, New York
December 12, 1995
F-4
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
June 30,
----------------------------
1996 1995
----------- -----------
Current assets:
Cash $ 1,667,031 $ 919,095
Accounts receivable - net 5,152,005 5,910,749
Inventories 2,813,937 1,726,541
Current portion of note receivable -
officer - 16,218
Due from officers and related parties 6,124 65,791
Deferred taxes 42,773 15,213
Other current assets 413,712 319,982
----------- ----------
Total current assets 10,095,582 8,973,589
Property and equipment - net 514,910 434,624
Goodwill - net 2,614,445 2,108,096
Note receivable - officer - 94,691
Other assets 97,196 113,938
----------- -----------
$13,322,133 $11,724,938
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,085,054 $ 2,960,633
Accounts payable 1,274,896 2,395,601
Notes payable - related parties 650,000 -
Accrued expenses 1,008,154 774,371
Deferred sales tax obligation 553,052 502,052
Due to related parties - 25,000
Other current liabilities 709,188 206,754
----------- ----------
Total current liabilities 6,280,344 6,864,411
Notes payable - related parties 228,322 918,291
----------- -----------
Total liabilities 6,508,666 7,782,702
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stocks 11,353,068 3,338,193
Common stock 218,765 177,321
Additional paid-in capital 5,026,332 2,855,666
Discount on preferred stocks ( 9,361,100) ( 1,167,000)
Deficit ( 423,598) ( 1,261,944)
----------- -----------
Total stockholders' equity 6,813,467 3,942,236
----------- -----------
$13,322,133 $11,724,938
=========== ===========
See accompanying notes to financial statements.
F-5
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ............................ $ 81,812,045 $ 47,565,542 $ 43,474,764
Cost of sales ........................ 74,354,590 42,860,603 39,683,590
------------ ------------ ------------
Gross profit ......................... 7,457,455 4,704,939 3,791,174
------------ ------------ ------------
Operating expenses:
Selling and administrative ........ 5,962,547 4,563,337 4,043,171
Amortization of goodwill -
computer businesses ............ 168,285 52,655 --
Write-off of media advertising
credit ......................... -- 448,011 --
------------ ------------ ------------
Total operating expenses 6,130,832 5,064,003 4,043,171
------------ ------------ ------------
Income (loss) from operations ........ 1,326,623 ( 359,064) ( 251,997)
------------ ------------ ------------
Other income (expense):
Charge-off of goodwill relating to
the acquisition of Hillside .... -- (2,045,628) --
Loss on marketable securities ..... -- ( 4,136) ( 17,577)
(Loss) gain on sale of property
and equipment .................. ( 8,372) 4,432 --
Dividend and interest income ...... 45,866 22,708 59,555
Interest expense .................. ( 150,949) ( 138,553) ( 48,051)
Management fees ................... -- 375,000 --
Other income ...................... 39,718 45,433 104,512
------------ ------------ ------------
Total other income (expense) ......... ( 73,737) ( 1,740,744) 98,439
------------ ------------ ------------
Income (loss) before income taxes .... 1,252,886 ( 2,099,808) ( 153,558)
Provision for income taxes ........... 414,540 151,546 72,521
------------ ------------ ------------
Net income (loss) .................... $ 838,346 ( $ 2,251,354) ($ 226,079)
============ ============ ============
Net earnings (loss) per share:
Primary ........................... $ .04 ($ .25) ($ .04)
============ ============ ============
Fully diluted ..................... $ .04 ($ .25) $ N/A
============ ============ ============
Weighted average number of
shares - primary ............... 20,476,062 8,872,333 5,289,573
============ ============ ============
Weighted average number of
shares - fully diluted ......... 20,476,062 8,872,333 13,136,972
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Innovative
Micro Sun Computer Business
Computer and Software, Micros, Elimina- Combined
Store, Inc. Inc. Inc. tions Total
----------- ------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $13,504,221 $11,977,026 $18,386,621 $393,104 $43,474,764
Cost of sales 12,271,573 11,390,528 16,414,593 393,104 39,683,590
----------- ----------- ----------- -------- -----------
Gross profit 1,232,648 586,498 1,972,028 - 3,791,174
----------- ----------- ----------- -------- -----------
Operating expenses 1,563,741 603,787 1,875,643 - 4,043,171
----------- ----------- ----------- -------- -----------
Income (loss) from
operations ( 331,093) ( 17,289) 96,385 - ( 251,997)
----------- ----------- ---------- -------- -----------
Other income (expense):
Unrealized loss on val-
uation of marketable
securities - ( 15,985) - - ( 15,985)
Net loss on sale of
marketable securities - ( 1,592) - - ( 1,592)
Interest income 4,721 38,126 16,708 - 59,555
Other income - 72,543 31,969 - 104,512
Interest expense ( 14,209) ( 33,842) - - ( 48,051)
----------- ----------- ----------- -------- -----------
Total other income
(expense) ( 9,488) 59,250 48,677 - 98,439
----------- ----------- ---------- -------- -----------
Income (loss) before
income taxes ( 340,581) 41,961 145,062 - ( 153,558)
Provision for income
taxes - 11,271 61,250 - 72,521
----------- ----------- ----------- -------- -----------
Net income (loss) ($ 340,581) $ 30,690 $ 83,812 $ - ($ 226,079)
=========== =========== =========== ======== ===========
Net loss per share:
Primary ($ .04)
===========
Fully diluted N/A
===========
Weighted average number of shares - primary 5,289,573
===========
Weighted average number of shares - fully diluted 13,136,972
===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------
1996 1995 1994
---------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 838,346 ($2,251,354) ($ 226,079)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 104,030 81,837 58,611
Amortization of goodwill - computer
businesses 168,285 52,655 -
Charge-off of goodwill relating to
the acquisition of Hillside - 2,045,628 -
Write-off of media advertising credits - 448,011 -
Expenses incurred and charged to
earnings by issuance of capital
stock 43,000 204,319 -
Loss on sale of marketable securities - 4,136 -
Loss (gain) on sale of property and
equipment 8,372 ( 4,432) -
Unrealized losses on marketable
securities - - 15,985
Changes in assets and liabilities, net
in 1995 of effects from purchase of
ACS and CONY:
Accounts receivable 758,744 ( 99,488) 3,117,406
Receivables from officers and
related parties 59,667 - 14,897
Inventories ( 1,087,396) ( 11,848) ( 64,675)
Deferred taxes ( 27,560) ( 8,928) 4,380
Other current assets ( 93,730) ( 371,029) 347
Other assets 16,742 ( 49,666) -
Revolving inventory line
of credit ( 875,579) 1,800,254 ( 1,302,426)
Accounts payable ( 1,120,705) ( 1,532,065) ( 2,128,464)
Accrued expenses 278,783 3,322 ( 245,006)
Deferred sales tax obligation 51,000 58,840 -
Payables to related parties ( 25,000) - 19,115
Other current liabilities 256,297 ( 99,567) ( 43,383)
---------- ---------- ----------
Net cash (used in) provided by
operating activities ( 646,704) 270,625 ( 779,292)
---------- ---------- ----------
</TABLE>
F-8
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------
1996 1995 1994
---------- ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Addition to goodwill relating to the
acquisition of Hillside $ - ($ 156,475) $ -
Addition to goodwill relating to the
acquisition of ACS and CONY - ( 22,528) -
Purchase of property and equipment ( 206,388) ( 89,733) ( 281,753)
Security deposits - - 1,568
Sales of marketable securities - 6,864 11,917
Sale of property and equipment 13,700 13,195 -
Payments of notes receivable - officer 110,909 ( - ) -
---------- ---------- ----------
Net cash used in investing activities ( 81,779) ( 248,677) ( 268,268)
---------- ---------- ----------
Cash flows from financing activities
Payment of bank overdraft assumed
net of cash acquired in ACS and
CONY acquisitions - ( 112,113) -
Issuance of capital stock 1,250,251 - 25,000
Repayment of bank loan - - ( 150,000)
Proceeds from notes payable -
related party 618,975 -
Repayments from related parties 650,000 - 149,878
Advances from related parties - 928,180 1,045,000
Repayments to related parties ( 689,969) ( 933,101) ( 59,022)
Bank overdraft 266,137 163,134 -
---------- ---------- ----------
Net cash provided by financing
activities 1,476,419 665,075 1,010,856
---------- ---------- ----------
Net increase (decrease) in cash 747,936 687,023 ( 36,704)
Cash - beginning of year 919,095 232,072 (*) 268,092
---------- ---------- ----------
Cash - end of year $1,667,031 $ 919,095 $ 231,388
========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Income taxes $ 292,635 $ 228,559 $ 78,124
========== ========== ==========
Interest $ 103,357 $ 81,121 $ 57,905
========== ========== ==========
</TABLE>
(*) Includes $684 of Hillside Bedding, Inc. as of June 30, 1994
F-9
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental Schedules of
Non-Cash Transactions:
Issuance of common stock for services $ 7,998 $ 24,000 $ 200,000
========== ========== ==========
Issuance of common stock in
satisfaction of debt $ 45,000 $ - $ -
========== ========== ==========
Issuance of common and preferred
stock in lieu of note and loan
repayments $ 20,000 $1,220,223 $ -
========== ========== ==========
Issuance of shares of common and
preferred stock in connection
with the acquisition of all the
outstanding shares of capital
stock of ACS, resulting in the
recording of goodwill $ 283,000 $1,496,000 $ -
========== ========== ==========
Issuance of shares of common and
preferred stock in connection
with the acquisition of all the
outstanding shares of capital
stock of CONY, resulting in the
recording of goodwill $ 391,634 $ 665,000 $ -
========== ========== ==========
Issuance of preferred stock in
settlement of class action suit
against former bedding operation $ 35,000 $ - $ -
========== ========== ==========
Issuance of common stock in exchange
for cancellation of employment
agreement $ - $ 179,716 $ -
========== ========== ==========
Issuance of preferred stock in
satisfaction of terms of an
employment agreement $ - $ 86,470 $ -
========== ========== ==========
Conversion of Series H preferred
stock resulting in additional
stockholders' equity $ - $ 7,517 $ -
========== ========== ==========
Acquisition of all outstanding
shares of common stock of SCSI
and MCS for shares of common and
preferred stock of the Company,
resulting in:
Increase in stockholders' equity $ - $ - $1,142,969
========== ========== ==========
Recording of goodwill $ - $ 836,000 $1,210,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Sun
Computer Innovative
Micro and Business
Computer Software, Micros, Combined
Store, Inc. Inc. Inc. Total
------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 340,581) $ 30,690 $ 83,812 ($ 226,079)
Noncash items included in net
earnings:
Depreciation and amortization 24,556 22,133 11,922 58,611
Unrealized loss on marketable
securities - 15,985 - 15,985
Changes in:
Accounts receivable 2,779,732 205,419 132,255 3,117,406
Accounts receivable -
related party ( 6,186) 14,229 - 8,043
Note receivable - officer - 6,854 - 6,854
Inventory 155,105 ( 266,131) 46,351 ( 64,675)
Prepaid expenses 4,186 3,161 ( 2,620) 4,727
Accounts payable - trade ( 1,110,920) 27,642 ( 1,045,186) ( 2,128,464)
Revolving inventory line of
credit - net ( 1,729,009) ( 32,594) 459,177 ( 1,302,426)
Accounts payable - related party 19,115 - - 19,115
Accrued expenses ( 44,552) ( 153,023) ( 47,431) ( 245,006)
Other current liabilities - - ( 43,383) ( 43,383)
---------- -------- -------- ----------
Net cash used by operating
activities ( 248,554) ( 125,635) ( 405,103) ( 779,292)
---------- -------- -------- ----------
Cash flows from investing activities:
Purchase of property and
equipment ( 271,191) ( 6,762) ( 3,800) ( 281,753)
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 ( 3,800) ( 268,268)
---------- ---------- -------- ----------
Balance (carried forward) ( 519,745) ( 118,912) ( 408,903) ( 1,047,560)
---------- -------- -------- ----------
</TABLE>
F-11
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Sun
Computer Innovative
Micro and Business
Computer Software, Micros, Combined
Store, Inc. Inc. Inc. Total
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Balance Forward ($ 519,745) ($118,912) ($ 408,903) ($1,047,560)
---------- -------- ---------- ----------
Cash flows from financing 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 - 365,000 1,045,000
Repayments to related parties - ( 59,022) - ( 59,022)
---------- -------- -------- ----------
Net cash provided (used) by
financing activities 705,000 ( 59,144) 365,000 1,010,856
---------- -------- -------- ----------
Net increase (decrease) in cash 185,255 ( 178,056) ( 43,903) ( 36,704)
Cash at beginning of period 5,104 209,473 53,515 268,092
---------- -------- -------- ----------
Cash at end of period $ 190,359 $ 31,417 $ 9,612 $ 231,388
========== ======== ======== ==========
Supplemental Disclosures of
Cash Flow Information:
Income taxes $ - $ 3,796 $ 74,328 $ 78,124
========== ======== ======== ==========
Interest $ 14,209 $ 33,842 $ 9,854 $ 57,905
========== ======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stocks
---------------------- -----------------------------
Shares Amount Shares Amount
---------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 184,276 $ 18,427 31,000 $ 3,100
Acquisition of Innovative in a
pooling of interests 4,900,000 49,000 -- --
Sale of common stock for cash 202,811 20,281 -- --
Shares issued as compensation 50,000 5,000 -- --
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
Capital contribution -- -- -- --
Hillside net loss for fiscal 1994 -- -- -- --
Elimination of Hillside deficit -- -- -- --
Paid-in capital and retained earnings
of acquiring companies -- -- -- --
------------ -------- --------- -----------
Balance at June 30, 1994 (carried
forward) 5,434,422 102,441 58,978 5,898
------------ -------- --------- -----------
<CAPTION>
Additional Discount on Retained Total
Paid-in Preferred Earnings Stockholders'
Capital Stock (Deficit) Equity
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 $5,200,210 $ -- ($4,293,218) $ 928,519
Acquisition of Innovative in a
pooling of interests 119,100 -- 503,173 671,273
Sale of common stock for cash 1,760,229 -- -- 1,780,510
Shares issued as compensation 195,000 -- -- 200,000
Conversion of Series A preferred
stock on June 10, 1994 -- -- -- --
June 23, 1994 transactions:
Stock issued for acquisition 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) 507,346 -- 1,086,021 1,701,706
---------- ---------- ---------- ----------
</TABLE>
F-13
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stocks
------------------------- ---------------------------
Shares Amount Shares Amount
---------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994
(brought forward) 5,434,422 $ 102,441 58,978 $ 5,898
Stock dividend on Preferred
Series A -- -- 3,100 310
Conversion of Preferred Series A
for common stock 1,947 20 (1,947) ( 195)
Shares issued for the cancellation
of an employment agreement 88,968 890 -- --
Shares issued for conversion of
Preferred Series B 4,400,609 44,006 (18,196) ( 1,820)
Shares issued on conversion of
notes payable, including interest 181,335 1,813 -- --
Shares issued for services 40,000 400 -- --
Shares of Preferred stock for the
acquisition of American Computer
Systems, Inc.
Series D -- -- 200,000 1,000,000
Series E - issued February 6, 1996 -- -- 200,000 1,000,000
Series F - issued October 6, 1995 -- -- 66,800 334,000
---------- ---------- ---------- ----------
Balance (carried forward) 10,147,281 149,570 508,735 2,338,193
---------- ---------- ---------- ----------
<CAPTION>
Additional Discount on Retained Total
Paid-in Preferred Earnings Stockholders'
Capital Stock (Deficit) Equity
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994
(brought forward) $ 507,346 $ -- $1,086,021 $1,701,706
Stock dividend on Preferred
Series A -- -- ( 310) --
Conversion of Preferred Series A
for common stock 175 -- -- --
Shares issued for the cancellation
of an employment agreement 178,826 -- -- 179,716
Shares issued for conversion of
Preferred Series B ( 42,186) -- -- --
Shares issued on conversion of
notes payable, including interest 453,496 -- -- 455,309
Shares issued for services 23,600 -- -- 24,000
Shares of Preferred stock for the
acquisition of American Computer
Systems, Inc.
Series D -- (500,000) -- 500,000
Series E - issued February 6, 1996 -- -- -- 1,000,000
Series F - issued October 6, 1995 -- (167,000) -- 167,000
---------- --------- ---------- -----------
Balance (carried forward) 1,121,257 (667,000) 1,085,711 4,027,731
---------- --------- ---------- -----------
</TABLE>
F-14
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stocks
---------------------- ---------------------------
Shares Amount Shares Amount
---------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance (brought forward) 10,147,281 $149,570 508,735 $ 2,338,193
Shares issued for conversion
of notes payable 520,000 5,200 -- --
Shares of Preferred Series H - issued
for conversion of notes payable -- -- 83,520 835
Shares issued for the acquisition
of CONY Computer Systems, Inc.:
Common stock 437,990 4,380 -- --
Preferred Series D -- -- 100,000 500,000
Preferred Series D - issued
September 30, 1995 -- -- 100,000 500,000
Shares issued for conversion
of loans payable 981,878 9,819 -- --
Shares of Preferred stock issued for
compensation per employment
agreement:
Series G issued in July 1995 -- -- 1 --
Shares issued for conversion of
Preferred Series H 835,200 8,352 ( 83,520) ( 835)
Net loss for the year -- -- -- --
---------- -------- --------- -----------
Balance at June 30, 1995 12,922,349 177,321 708,736 3,338,193
---------- -------- --------- -----------
<CAPTION>
Additional Discount on Retained Total
Paid-in Preferred Earnings Stockholders'
Capital Stock (Deficit) Equity
---------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance (brought forward) $1,121,257 ($ 667,000) $1,085,711 $4,027,731
Shares issued for conversion
of notes payable 155,875 -- -- 161,075
Shares of Preferred Series H - issued
for conversion of notes payable 449,548 -- -- 450,383
Shares issued for the acquisition
of CONY Computer Systems, Inc.:
Common stock 443,570 -- -- 447,950
Preferred Series D -- ( 250,000) -- 250,000
Preferred Series D - issued
September 30, 1995 -- ( 250,000) -- 250,000
Shares issued for conversion
of loans payable 598,946 -- -- 608,765
Shares of Preferred stock issued for
compensation per employment
agreement:
Series G issued in July 1995 86,470 -- -- 86,470
Shares issued for conversion of
Preferred Series H -- -- -- 7,517
Net loss for the year -- -- ( 2,347,655) ( 2,347,655)
---------- ---------- ---------- ----------
Balance at June 30, 1995 2,855,666 ( 1,167,000) ( 1,261,944) 3,942,236
---------- ---------- ---------- ----------
</TABLE>
F-15
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stocks
Shares Amount Shares Amount
---------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995
(brought forward) 12,922,349 $177,321 708,736 $ 3,338,193
Shares issued for conversion of
Preferred Series F and G 344,119 3,441 ( 66,801) ( 334,000)
Shares issued for services 20,004 200 -- --
Shares issued for conversion of
Preferred Series B 1,119,897 11,199 1,188,754 5,998,875
Shares issued for conversion of
Preferred Series I ( 400,000) ( 4,000) 390,000 2,000,000
Shares issued for satisfaction
of debts 116,281 1,163 -- --
Shares issued in a private placement 1,860,941 18,609 -- --
Expenses of private placement -- -- -- --
Shares issued to shareholder of ACS 352,847 3,528 -- --
Shares issued to shareholders of CONY 430,359 4,304 -- --
Issuance of Series C Preferred -- -- 350,000 350,000
Warrant exercised 300,000 3,000 -- --
Net income for the year -- -- -- --
---------- -------- --------- -----------
Balance at June 30, 1996 17,066,797 $218,765 2,570,689 $11,353,068
========== ======== ========= ===========
<CAPTION>
Additional Discount on Retained Total
Paid-in Preferred Earnings Stockholders'
Capital Stock (Deficit) Equity
---------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1995
(brought forward) $2,855,666 ($1,167,000) ($1,261,944) $3,942,236
Shares issued for conversion of
Preferred Series F and G 213,659 116,900 -- --
Shares issued for services 7,798 -- -- 7,998
Shares issued for conversion of
Preferred Series B ( 10,074) ( 6,000,000) -- --
Shares issued for conversion of
Preferred Series I -- ( 1,996,000) -- --
Shares issued for satisfaction
of debts 63,839 -- -- 65,002
Shares issued in a private placement 1,056,142 -- -- 1,074,751
Expenses of private placement ( 49,500) -- -- ( 49,500)
Shares issued to shareholder of ACS 279,472 -- -- 283,000
Shares issued to shareholders of CONY 387,330 -- -- 391,634
Issuance of Series C Preferred -- ( 315,000) -- 35,000
Warrant exercised 222,000 -- -- 225,000
Net income for the year -- -- 838,346 838,346
---------- ---------- ---------- ----------
Balance at June 30, 1996 $5,026,332 ($9,361,100) ($ 423,598) $6,813,467
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
ATEC GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE 1 - GENERAL AND ACCOUNTING POLICIES.
Organization and Presentation of Financial Statements:
ATEC Group, Inc. (the "Company" or "ATEC") was incorporated under the laws
of the State of Delaware on July 17, 1992 under the name Hillside Bedding, Inc.
("Hillside"). On December 14, 1995, Hillside Bedding, Inc.'s shareholders
approved a change of the Company's name to ATEC Group, Inc. ("ATEC"). This name
change was primarily to reflect the change in the Company's focus from the
operation of retail bedding stores to the operation of stores that specialize in
the sale and service of computer business systems. Prior to February 1994, the
Company operated a chain of retail bedding stores and two franchises. Each store
was operated as a wholly owned subsidiary. In 1994, due to recurring losses and
substantial negative working capital, the Company closed its retail bedding
stores.
On June 23, 1994, the Company acquired, in a stock for stock transaction,
two microcomputer distributors, Sun Computer and Software, Inc. ("SCSI") located
in East Northport, NY and Micro Computer Store, Inc. ("MCS") located in Albany,
NY. For accounting purposes, the acquisition of SCSI and MCS was 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 exceeded those of the Company and the management of MCS
and SCSI controlled the Company subsequent to the acquisition. These
acquisitions resulted in a change in the reporting entity for the Registrant. As
the acquisition constituted a change in the reporting entity, the combined
statements of operations and cash flows of MCS and SCSI for the year ended June
30, 1994 have been presented herein as those of the reporting entity. These
combined statements of operations and cash flows do not include any of the
bedding operations. The consolidated statement of stockholders' equity for the
year ended June 30, 1994 presents the Company's changes in stockholders' equity
for fiscal 1994 and the accounting effects of the change in reporting entity.
F-17
<PAGE>
NOTE 1 - GENERAL AND ACCOUNTING POLICIES . (continued)
Organization and Presentation of Financial Statements:
(continued)
On February 6, 1995, the Company acquired all of the stock of American
Computer Systems, Inc. and its wholly owned subsidiary, Laptop and Office
Solutions, Inc. ("ACS"), located in New York City, NY. On March 31, 1995, the
Company 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 include the accounts of ACS and CONY since their dates
of acquisition.
On June 14, 1996, ATEC acquired all the stock of Innovative Business
Micros, Inc. ("Innovative") located in Hauppauge, NY. The acquisition of
Innovative has been accounted for under the pooling of interests method and,
accordingly, the consolidated and combined financial statements have been
restated to include the accounts and operations of Innovative retroactively to
the beginning of all periods presented.
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, Hauppauge, 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).
Summary of Significant Accounting Policies:
Consolidation Policy:
The accompanying consolidated financial statements include the accounts of
ATEC Group, Inc. and all its wholly owned subsidiaries. All significant
intercompany transactions and balances 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 peripheral, and accessory finished products.
F-18
<PAGE>
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (continued)
Summary of Significant Accounting Policies: (continued)
Property and Equipment:
Property and equipment are carried at cost less accumulated depreciation.
When assets are sold or retired, the cost and related accumulated depreciation
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 either straight-line or accelerated methods
over useful lives ranging from 5 to 10 years. Leasehold improvements are
amortized over the shorter of the useful life of the improvement or the life of
the related lease.
Goodwill:
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.
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 asset or liability is expected to be
settled or realized.
Earnings Per Share:
The primary income (loss) per share for 1996 and 1995 has been calculated
based on the weighted average number of common shares outstanding during the
year. Common stock equivalents were considered in the primary per share data in
1996 and not included in 1995 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 included in 1996
and excluded from the computation of fully diluted per share data in 1995
because the effect of their inclusion would be anti-dilutive. The assumed
exercise of the warrants outstanding were not included in the primary and fully
diluted earnings per share computations as they were not dilutive in 1996 and
anti-dilutive in 1995 and 1994.
F-19
<PAGE>
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (continued)
Summary of Significant Accounting Policies: (continued)
Earnings Per Share: (continued)
Had the conversions of debt and preferred stocks in 1995 taken place at the
beginning of the year, the primary loss per share for 1995 would have been
$(.18).
The per share data for 1994 has been calculated based on the weighted
average shares outstanding (5,289,573 shares) and assuming that the acquisition
shares were outstanding for the full period. Fully diluted earnings per share
(13,136,972 shares) are based on the assumption that all common stock
equivalents were converted as of the beginning of the year. Earnings per share
have been restated for all periods presented to include the acquisition of
Innovative.
Reclassification:
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
Combining Financial Statements and Principles of Combination:
The combining statements of operations and cash flows for 1994 present the
combined results of operations and cash flows of MCS and those of SCSI for the
year ended June 30, 1994 and the results of operations of Innovative for the
year ended September 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, 1993.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions which at times, may be in excess of the FDIC insurance limit.
Concentrations of credit risk with respect to trade accounts receivable are
generally limited due to the large number of customers comprising the Company's
customer base. Management continually reviews its trade receivables credit risk
and has adequately allowed for potential losses.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-20
<PAGE>
NOTE 1 - GENERAL AND ACCOUNTING POLICIES. (continued)
Summary of Significant Accounting Policies: (continued)
New Accounting Standards:
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", effective for the year ended June 30,
1996. This statement establishes accounting standards for the impairment of
long-lived assets (including goodwill) to be held and used as well as those to
be disposed of. The statement requires management to periodically review these
assets in light of certain events or circumstances which may effect the
recoverability or carrying value of said assets and to adjust the value downward
or to dispose of the asset accordingly. The adoption of this standard did not
have a material effect on the Company's financial position or its results of
operations.
Although the Company does not presently have any stock-based compensation
plans, the Company is considering the adoption of SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting and
reporting for stock-based employee compensation plans.
NOTE 2 - ACQUISITIONS.
Sun 2000:
On June 23, 1994, the Company, 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 pre-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 was 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 was 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 controlled the
Company subsequent to the acquisition.
F-21
<PAGE>
NOTE 2 - ACQUISITIONS. (continued)
Sun 2000: (continued)
At the date of acquisition, Hillside had liabilities in excess of its
assets in the amount of approximately $900,000. This amount was, in effect,
Micro Computer Store, Inc. and Sun Computer and Software, Inc.'s cost of the
acquisition. Accordingly, this amount was attributed to goodwill. 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 costs
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. 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, were recorded as
goodwill, which is viewed as organizational costs and were amortized entirely
during the year ended June 30, 1995.
American Computer Systems Corp.:
As of February 6, 1995 (the "Closing"), ATEC, 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 the Company's preferred stock as follows:
1. Shares of Series D Preferred Stock with an aggregate par value of
$1,000,000;
2. Shares of Series F Preferred Stock with an aggregate par value of $334,000;
3. Shares of Series E Preferred Stock with an aggregate par value of
$1,000,000 on the one year anniversary of the Closing.
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.
F-22
<PAGE>
NOTE 2 - ACQUISITIONS. (continued)
American Computer Systems Corp.: (continued)
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 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 ACS acquisition at the closing date 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 has been recorded as goodwill.
Pursuant to the terms of the stock purchase agreement and based on the
achievement of certain revenue and profitability criteria, the Company issued an
additional 352,847 shares of its common stock valued at $283,000. This
additional cost of the acquisition has been recorded as goodwill.
CONY Computer Systems, Inc.:
On March 31, 1995 (the "Closing"), ATEC, 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 $1,000,000.
The preferred shares have been valued based on the specified dollar amount
equivalents of common stock of the Company into which it is 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 $1,000,000 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 fair
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.
F-23
<PAGE>
NOTE 2 - ACQUISITIONS. (continued)
CONY Computer Systems, Inc.: (continued)
Pursuant to a Board of Directors resolution in June 1996, the Company
issued 77,512 shares of its common stock valued at $108,634 to the former
stockholders of CONY as an adjustment of the original purchase price.
Additionally, pursuant to the terms of the stock purchase agreement and based on
the achievement of certain revenue and profitability criteria, the Board
authorized the issuance of an additional 352,847 shares valued at $283,000. The
total additional cost of the acquisition of $391,634 has been recorded as
goodwill.
Innovative Business Micros, Inc.:
On June 14, 1996, (the "closing"), the Company, pursuant to the terms of a
stock purchase agreement, issued 4,900,000 shares of its common stock in
exchange for all of the outstanding common stock of Innovative Business Micros,
Inc. ("Innovative"). The acquisition has been accounted for under the pooling of
interests method and, accordingly, the Company's consolidated and combined
financial statements have been restated to include the accounts and operations
of Innovative for the nine months ended June 30, 1996 and for the years ended
September 30, 1995 and 1994.
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 also
includes the results of operations of Innovative for the years ended September
30, 1995 and 1994. 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 $70,865,000 $82,420,000
Net loss ($ 539,000) ($ 2,402,000)
Net loss per share - Primary ($ .06) ($ .42)
The pro forma results are not necessarily indicative of what actually would
have occurred 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-24
<PAGE>
NOTE 3 - NONMONETARY TRANSACTION.
In February 1994, the Company entered into an agreement 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 were recorded based on the cost of the the Company's inventory
(management's estimate of the credits' fair market value) of $548,000 less the
cash paid by Intrac of $100,000. These credits were to be used by the Company to
purchase various business items including advertising in various media. The
terms of the agreement called for the Company to first reimburse Intrac for
Intrac's wholesale cost of the advertising purchased; the Company could 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 would either utilize these credits
(requiring an estimated $2,250,000 in cash outlays) or sell them over the next
several years.
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 concluded that it
would not be economically feasible to devote the effort necessary to utilize or
sell these credits and therefore the credits were worthless. Accordingly, they
were written off as a direct charge to operations in 1995. In May 1996, the
Company sold the media advertising credits for $5,000.
NOTE 4 - DEFERRED SALES TAX OBLIGATION.
In April, 1994, the Company 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 required an initial payment of $400,000 (which was paid on April
26, 1994) and subsequent monthly payments of $500 per month commencing on
November 15, 1994 (of which $3,000 and $-0- was paid in fiscal years 1996 and
1995). Interest at 10% 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, 1996 and 1995 amounted to $553,052 and
$502,052, including accrued interest of $112,840 and $61,840, respectively.
NOTE 5 - EQUITY SECURITIES.
Reverse Stock Split:
On September 9, 1994, the Company split its 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 as if it had occurred at the beginning of
all periods persented.
F-25
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Capital Stock:
The Company's capital stock consists of the following:
<TABLE>
<CAPTION>
Amount
(including
Shares Shares to shares to
Issued be Issued be issued
Shares and for for
Authorized Outstanding Acquisition acquisition)
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
June 30, 1996
Preferred Stocks:
Series A cumulative
convertible 29,233 29,231 - $ 2,923
Series B convertible 12,704 1,458 - 145
Series C convertible 350,000 350,000 - 350,000
Series D convertible 400,000 400,000 - 2,000,000
Series E convertible 200,000 200,000 - 1,000,000
Series F convertible 66,800 - - -
Series G convertible 1 - - -
Series H convertible - - - -
Series I convertible 390,000 390,000 - 2,000,000
Series J convertible 800,000 800,000 - 4,000,000
Series K convertible 400,000 400,000 - 2,000,000
---------- ------- -----------
Total preferred 2,570,689 - 11,353,068
---------- ------- -----------
Common stock 70,000,000 17,066,797 - 218,765
---------- ------- -----------
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 85,000 - - -
Series I convertible 390,000 - - -
---------- ------- ----------
Total preferred 541,935 166,801 3,338,193
---------- ------- ----------
Common stock 70,000,000 12,922,349 - 177,321
---------- ------- ----------
</TABLE>
On December 14, 1995, the Company's board of directors unanimously approved
the increase of the number of authorized shares of the Company's common stock to
70,000,000 shares and preferred stock to 10,000,000 shares. The par value of the
common stock is $.01.
Series A Cumulative Preferred Stock:
On February 2, 1993, the Company's board of directors adopted a resolution
providing for the issuance of a Series A 10% cumulative convertible preferred
stock, par value $.01.
F-26
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Series A Cumulative Preferred Stock: (continued)
Outlined below is a summary of the more significant rights associated with
these shares:
o 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 and thereafter in cash.
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. At June 30, 1996, the dividends in arrears aggregated
$585.
o Voting rights - Each share has the right to one vote.
o Dissolution rights - On liquidation of the Company, each preferred
stockholder would be entitled to $100 per share plus any dividend
arrearage.
o Conversion - Commencing February 11, 1994, each stockholder may
convert each share into one share of common stock.
o Redemption - Commencing February 11, 1994, the Company may, but shall
not be obligated to, redeem shares at a rate of $100 per share
provided among other criteria that the trading price of the Company's
common stock equals or exceeds $120 per share.
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:
o Dividend rights - The shareholders have a stated annual non-cumulative
dividend rate of $1 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.
o Voting rights - Until the second anniversary of the date of issuance,
each preferred stockholder had the right to 241.86 votes for each
share, thereafter each share has the right to one vote.
o Dissolution rights - Until the second anniversary of the date of
issuance, each stockholder was 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 per share.
F-27
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Series B Convertible Preferred Stock: (continued)
o Conversion - At the holder's option, each stockholder could 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.
These shares rank junior to the Company's Series A 10% cumulative
convertible preferred stock.
The Company's board of directors unaminously approved the decrease in the
number of authorized shares of the Company's Series B preferred stock from
30,900 to 12,704.
Series C Convertible Preferred Stock:
On April 17, 1996, the Company's board of directors adopted a resolution
providing for the issuance of 350,000 shares of Series C preferred stock, par
value $1. Outlined below is a summary of the more significant rights associated
with these shares:
o 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.
o Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5 per share plus any
accrued dividends.
o Conversions - The holders of these shares may convert ten shares into
one share of the common stock of the Company.
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. 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. Outlined below is a summary of the more significant rights
associated with these shares:
o 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.
o Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
F-28
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Series D Convertible Preferred Stock: (continued)
o Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5 per share plus any
accrued dividends.
o 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 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. Outlined below is a summary of the more significant rights associated
with these shares:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
o Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5 per share plus any
accrued dividends.
o 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. Outlined below is a summary of the more significant rights associated
with these shares:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
o Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5 per share plus any
accrued dividends.
F-29
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Series F Convertible Preferred Stock: (continued)
o Conversion - Commencing July 1, 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. In August 1995, the shares
were converted to common stock.
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
these shares:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the board of
directors of the Company.
o Voting rights - The holders of these shares have one vote per share at
all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the Company,
each preferred stockholder would be entitled to $5. per share plus any
accrued dividends.
o Conversion - Commencing July 1, 1995 through July 31, 1995, this share
may be exchangeable into shares of common stock of the Company 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. In August 1995, the share was converted to
common stock.
F-30
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Series H Convertible Preferred Stock:
On February 6, 1995, the Company's board of directors adopted a resolution
providing for the issuance of 85,000 shares of Series H preferred stock, par
value $.01. Outlined below is a summary of the more significant rights
associated with these shares:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the
board of directors of the Company.
o Voting rights - The holders of these shares have one vote per
share at all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the
Company, each preferred stockholder would be entitled to $.625
per share plus any accrued dividends.
o 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.
The Company's board of directors unanimously approved the decrease in the
number of authorized shares of the Company's Series H Preferred Stock from
85,000 to -0-.
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:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the
board of directors of the Company.
o Voting rights - The holders of these shares have one vote per
share at all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the
Company, each preferred stockholder would be entitled to $5 per
share plus any accrued dividends.
o 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. The shares have been converted to
common stock subsequent to year end.
During July 1996, 390,000 shares of Series I Preferred Stock were converted
to 1,666,665 shares of the Company's common stock.
F-31
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Series J Convertible Preferred Stock:
In August 1995, the Company's board of directors adopted a resolution
providing for the issuance of 800,000 shares of a Series J preferred stock, par
value $5. Outlined below is a summary of the more significant rights associated
with these shares:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the
board of directors of the Company.
o Voting rights - The holders of these shares have one vote per
share at all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the
Company, each preferred stockholder would be entitled to $5 per
share plus any accrued dividends.
o Conversion - Commencing July 1, 1996 through December 31, 1997,
these shares may be exchangeable into shares of common stock of
the Company with an aggregate market value of $4,000,000.
Series K Convertible Preferred Stock:
In August 1995, the Company's board of directors adopted a resolution
providing for the issuance of 400,000 shares of a Series K preferred stock, par
value $5. Outlined below is a summary of the more significant rights associated
with these shares:
o Dividend rights - The stockholders shall not be entitled to any
dividends except as authorized at the sole discretion of the
board of directors of the Company.
o Voting rights - The holders of these shares have one vote per
share at all meetings of the shareholders.
o Dissolution rights - On the liquidation or dissolution of the
Company, each preferred stockholder would be entitled to $5 per
share plus any accrued dividends.
o Conversion - Commencing July 1, 1998 through December 31, 1998,
these shares may be exchangeable into shares of common stock of
the Company with an aggregate market value of $2,000,000.
F-32
<PAGE>
NOTE 5 - EQUITY SECURITIES. (continued)
Warrants:
At June 30, 1996, the Company had outstanding warrants entitling the
holders to purchase common stock as follows:
Number of Excercise Expiration
Class Shares Price Date
----- --------- --------- ----------
X 925,000 $1.00 August 31, 1996
Y 425,000 1.25 October 31, 1996
Z 625,000 1.50 December 31, 1996
- 620,000 84.00 February, 1998
The warrants are not valued in the financial statements because the amounts
are immaterial.
NOTE 6 - OPERATING LEASES.
The Company conducts its operations under six noncancellable operating
leases expiring at various dates through 2003. Future minimum rent payments are
as follows:
<TABLE>
<CAPTION>
For the
Year
Ending
June 30, MCS SCSI CONY ACS Innovative Total
---------- ------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 96,600 $34,590 $19,350 $40,800 $40,090 $231,430
1998 96,600 5,765 13,500 34,000 24,053 173,918
1999 108,192 - - - - 108,192
2000 108,192 - - - - 108,192
2001 108,192 - - - - 108,192
Thereafter 216,384 - - - - 216,384
-------- ------- ------- ------- ------- --------
$734,160 $40,355 $32,850 $74,800 $64,143 $946,308
======== ======= ======= ======= ======= ========
</TABLE>
MCS leases its premises from a stockholder of the company under a triple
net lease arrangement.
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 the years ended June 30, 1996, 1995 and 1994
amounted to $264,000, $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 which expire on June 30, 1997. These
individuals who are the Company's treasurer and CEO/chairman are to receive:
A salary of $150,000 with annual increases based on increases in the
consumer price index.
F-33
<PAGE>
NOTE 7 - EMPLOYMENT AGREEMENTS. (continued)
MCS and SCSI: (continued)
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 agreements as
of June 30, 1996.
The agreements also provide for various fringe benefits including
discretionary bonuses, pension and profit sharing participation and other fringe
benefits.
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:
A 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 was 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
bonuses were paid for 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 statement.
No bonus was earned under the agreement for the year ended June 30, 1996.
F-34
<PAGE>
NOTE 7 - EMPLOYMENT AGREEMENTS. (continued)
ACS: (continued)
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.
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 annual salaries of $120,000 and the third $24,000 annually, 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
employee 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. These employees had previously agreed to forego any
of their rights to the aforementioned shares for the year ended June 30,
1996.
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 statements for the year ended December 31,
1996 in excess of the higher of the actual revenues reported on the 1995 or
1994 financial statements of $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 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 and 1994 financial statements or $300,000.
F-35
<PAGE>
NOTE 8 - REVOLVING LINE OF CREDIT.
MCS, SCSI, CONY, ACS and Innovative each have agreements with Deutsche
Financial Services, (formerly ITT Financial Services) whereby certain inventory
purchases 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, $500,000 for CONY, and $1,500,000 for
Innovative. 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, 1996 and 1995, the following amounts were outstanding under
the terms of these agreements:
1996 1995
---------- ----------
MCS $ 362,225 $ 405,948
SCSI 55,169 279,033
CONY 27,522 45,558
ACS 726,878 937,832
Innovative 913,260 1,292,262
---------- ----------
$2,085,054 $2,960,633
========== ==========
NOTE 9 - LITIGATION.
An action was commenced by Steinback Braff, Inc. for breach of contract
involving an inventory dispute whereby the plaintiff demands $61,100 plus
interest. The matter is in the discovery stages. Management and its counsel have
no opinion as to its ultimate disposition.
During 1990, a competitor of the Company 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 the Company interfered with and
impaired the competitor's business relations. Management believes that there is
no merit to this action. The action has been virtually inactive since
commencement.
A third party lawsuit was commenced against the Company by Mid Hudson
Clarklift as a result of a claim filed against them by a former employee of the
Company 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 discovery stages.
Management and its counsel have no opinion as to its ultimate disposition.
F-36
<PAGE>
NOTE 9 - LITIGATION. (continued)
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.
The Company is a defendant in various other lawsuits for which certain
provisions have been made in the financial statements. Management is of the
opinion that the ultimate resolution of these actions will not have a
significant effect on the Company's financial statements.
NOTE 10 - INCOME TAXES.
The Company's income tax provision consists of the following:
1996 1995 1994
------- ------- -------
Current tax provision
Federal $223,386 $112,013 $53,873
State 218,714 48,461 23,028
-------- -------- -------
442,100 160,474 76,901
Deferred tax benefit relating
to temporary differences ( 27,560) ( 8,928) ( 4,380)
-------- -------- -------
Income tax provision $414,540 $151,546 $72,521
======== ======== =======
A reconciliation of the above effective tax rate to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory 34.0% $426,000 (34.0%) ($713,900) (34.0%) ($ 52,200)
State income tax, net of
federal tax benefit ( 4.1) ( 51,284) ( 7.8) ( 164,500) ( 4.8) ( 7,300)
Effect of nondeducti-
bility of:
Amortization and charge
off of goodwill
relating to Hillside
acquisition 4.6 57,217 39.9 838,450 75.4 115,798
Media advertising
credits written off - - 8.7 183,685 - -
Tax loss limitations - - ( .4) ( 8,521) 10.8 16,571
Other ( 1.4) ( 17,393) .8 16,332 ( .2) ( 348)
---- -------- ---- -------- ---- --------
33.1% $414,540 7.2% $151,546 47.2% $ 72,521
==== ======== ==== ======== ==== ========
</TABLE>
The Company's deferred tax assets at June 30, 1996 and 1995 amounted to
approximately $42,773 and $15,213, respectively, which resulted from the
temporary differences relating to the allowance for doubtful accounts.
F-37
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS.
Receivable from Officers:
During September 1990, SCSI advanced $202,675 to its former sole
stockholder, who now serves of 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, the balance due the
Company amounted to $110,909. 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, 1996 and 1995 amounted to $6,124 and $30,524,
respectively.
Interest income on these loans for the years ended June 30, 1996, 1995 and
1994, amounted to approximately $-0-, $12,022 and $20,999, 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 borrowed $380,000
during fiscal 1994 from the Company's vice president who also is a member of the
board of directors. In addition, SCSI borrowed $174,755 from family members of
the Company's 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 converted their loan balances,
including unpaid interest for fiscal year 1995, into common shares of the
Company with an aggregate market value, discounted for restrictions placed on
the shares, of approximately $609,000.
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, 1996 and 1995 amounted to $228,322 and
$396,246, respectively. Interest attributable to this loan amounted to $38,258,
$11,992 and $-0-, for the years ended June 30, 1996, 1995 and 1994,
respectively.
F-38
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS. (continued)
Leases:
MCS leases its premises from a stockholder. Rent charged to operations
under this lease amounted to $96,600 for fiscal 1996, 1995 and 1994.
Purchases and Sales:
During the normal course of business, the Company buys and sells from
entities owned by officers of the Company. For the years ended June 30, 1996,
1995 and 1994 the amounts were immaterial
NOTE 12 - OTHER FINANCIAL INFORMATION.
Accounts Receivable - Net.
Accounts receivable, net at June 30, 1996 and 1995 consists of the
following:
1996 1995
---------- ----------
Accounts receivable $5,257,805 $6,016,549
Allowance for doubtful accounts
reserves for returns and
discounts ( 105,800) ( 105,800)
---------- ----------
$5,152,005 $5,910,749
========== ==========
For the years ended June 30, 1996 and 1995, $164,487 and $65,000,
respectively, was charged to bad debt expense. There was no charge for the year
ended June 30, 1994.
Other Current Assets:
Other current assets consist of the following at June 30, 1996 and 1995:
1996 1995
-------- --------
Receivable from suppliers $199,409 $143,168
Marketable securities 33 33
Prepaid expenses 154,232 121,862
Prepaid income taxes - 54,919
Sundry loans 60,038 -
-------- --------
$413,712 $319,982
======== ========
F-39
<PAGE>
NOTE 12 - OTHER FINANCIAL INFORMATION. (continued)
Goodwill - Net:
Goodwill, net at June 30, 1996 and 1995 consists of the following:
1996 1995
-------- --------
Goodwill relating to computer
businesses acquired $2,835,385 $2,160,751
Accumulated amortization 220,940 52,655
---------- ----------
$2,614,445 $2,108,096
========== ==========
Amortization charged to operations for the years ended June 30, 1996 and
1995 amounted to $168,285 and $52,655, respectively. There was no amortization
charged to operations for the year ended June 30, 1994.
Property and Equipment:
Property and equipment are carried at cost and consisted of the following
at June 30, 1996 and 1995:
1996 1995
---------- --------
Leasehold improvements $ 483,884 $369,194
Furniture and fixtures 202,534 129,003
Office equipment 322,142 102,756
Automobiles 113,144 159,702
---------- --------
1,121,704 760,655
Less: Accumulated depreciation
and amortization 606,794 326,031
---------- --------
$ 514,910 $434,624
========== ========
Depreciation charged to operations for the years ended June 30, 1996, 1995
and 1994 amounted to $104,030, $81,837, and $58,611, respectively.
Other Assets:
Other assets consist of the following at June 30, 1996 and 1995:
1996 1995
------- --------
Bid deposits $39,100 $ 74,360
Investment 12,000 12,000
Deposits and other assets 46,096 27,578
------- --------
$97,196 $113,938
======= ========
Other Current Liabilities:
Other current liabilities consist of the following at June 30, 1996 and
1995:
1996 1995
-------- --------
Bank overdraft $429,271 $163,134
Loans payable - 10,000
Income taxes payable 278,600 -
Sundry 1,317 33,620
-------- --------
$709,188 $206,754
======== ========
F-40
<PAGE>
NOTE 12 - OTHER FINANCIAL INFORMATION. (continued)
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, were evidenced by 90 day promissory notes bearing interest
at 12% per annum and were convertible into shares of common stock of the
Company. 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.
Notes Payable:
During June 1994 and November 1994, the Company borrowed approximately
$752,000 from six foreign stockholders. The obligations were 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 the Company 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 consolidated statements 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.
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 five locations
in Suffolk County, NY (2), Albany, NY, Norwalk, CT and New York City. Accounts
receivable at June 30, 1996 were concentrated in the Long Island (58%), New York
City (22%) and Albany (14%) areas. Accounts receivable at June 30, 1995 were
concentrated in the Long Island (34%) and Albany (39%) areas. Retail sales are
made on a "cash and carry basis".
F-41
<PAGE>
NOTE 12 - OTHER FINANCIAL INFORMATION. (continued)
Settlement with Pre-Acquisition CEO:
Pursuant to arrangements with the pre-acquisition CEO, he was given, in
1994, shares of 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 11% of the Company's net sales. No one customer accounted for 10%
or more of the Company's net sales for the year ended June 30, 1996.
The Company buys a significant portion of its merchandise from one
supplier, Computerland Corporation ("Computerland"). ACS, MCS and Innovative are
franchisees of Computerland (ACS and MCS since October 1995 and Innovative for
all periods presented). SCSI is an aggregator for Computerland. Purchases by the
Company from Computerland amounted to approximately $31,200,000 and $18,995,000
for the years ended June 30, 1996 and 1995, respectively.
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.
Deferred Compensation Plan:
Certain of the Company's wholly-owned subsidiaries have pre-existing 401(k)
deferred compensation plans to which the Company may make discretionary
contributions. One of these subsidiaries made a contribution to its plan
amounting to approximately $16,000 for the year ended June 30, 1996. There were
no contributions by the Company for the years ended June 30, 1995 and 1994.
NOTE 13 - SUBSEQUENT EVENT.
In July 1996, 390,000 shares of the Company's Series I preferred stock were
converted to 1,666,665 shares of the Company's common stock.
F-42
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,667,031
<SECURITIES> 0
<RECEIVABLES> 5,257,805
<ALLOWANCES> (105,800)
<INVENTORY> 2,813,937
<CURRENT-ASSETS> 10,095,582
<PP&E> 1,121,704
<DEPRECIATION> (606,794)
<TOTAL-ASSETS> 13,322,133
<CURRENT-LIABILITIES> 6,280,344
<BONDS> 0
0
11,353,068
<COMMON> 218,765
<OTHER-SE> (4,758,366)
<TOTAL-LIABILITY-AND-EQUITY> 13,322,133
<SALES> 81,812,045
<TOTAL-REVENUES> 81,812,045
<CGS> 74,354,590
<TOTAL-COSTS> 5,966,345
<OTHER-EXPENSES> (77,212)
<LOSS-PROVISION> 164,487
<INTEREST-EXPENSE> 150,949
<INCOME-PRETAX> 1,252,886
<INCOME-TAX> 414,540
<INCOME-CONTINUING> 838,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 838,346
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
